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Vectren Corp  (NYSE:VVC)
Q3 2018 Earnings Conference Call
Nov. 06, 2018, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the Vectren Corporation Third Quarter 2018 Earnings Call and Webcast. All participants will be in listen-only mode. (Operator Instructions) After today's presentation there will be an opportunity to ask questions. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Dave Parker, Director of IR. Please go ahead.

Dave Parker -- Director, Investor Relations

Thank you, Chad. Good afternoon, and thanks for joining us on today's call. Yesterday afternoon, we released our 2018 third quarter results, and this morning we filed our Form 10-Q with the SEC.

You can access these two items as well as today's earnings call slide presentation through our Investor Relations homepage investors. vectren.com.

This call is being webcast, and shortly following its conclusion, a replay will be available on our Investor Relations homepage. As described on slides three to five, many of our statements we will make on this call are forward-looking statements. Actual results may differ materially from those discussed in this presentation.

Carl Chapman, Vectren's Chairman, President and CEO, will provide today's opening comments on the consolidated third quarter and year-to-date 2018 results, our firm consolidated EPS guidance and updates to segment guidance and an overview of the status of the merger with CentrePoint Energy.

Susan Hardwick, Executive Vice President and CFO, will then provide an update on Utility Regulatory Activity and Non-utility results followed by a few closing remarks. Also joining us on today's call is Ron Christian, Executive Vice President and Chief Legal and External Affairs Officer.

Following our prepared remarks, we'll be glad to answer questions you may have.

With that, I'll turn the call over to Carl.

Carl Chapman -- Chairman, President and Chief Executive Officer

Thanks, Dave, and thanks for joining us on our call today. Turning to slide six. Yesterday we reported consolidated third quarter 2018 net income of $59.2 million or $0.71 per share excluding reconciling items compared to consolidated net income of 61.9 million or $0.75 per share in the third quarter of 2017.

Reconciling items for the quarter include 8.8 million after tax or $0.10 per share of expenses booked in the quarter related to the proposed merger with CenterPoint. Year-to-date consolidated 2018 net income was 164.5 million or $1.98 per share excluding reconciling items compared to 154.8 million or $1.87 per share for the nine months ended September 30, 2017.

Reconciling items year-to-date include 20.2 million or $0. 24 per share of expenses related to the merger and after-tax charge of 13.1 million or $0.16 per share reported in Q2 2018 related to ProLiance's investment in LA Storage a joint venture with Sempra and a gas storage facility and a 4.9 million or $0.06 per share of 179D tax benefits.

During remainder of this call we will exclude these items when discussing financial results. A reconciliation of reported GAAP results to non-GAAP results reflecting the merger-related costs and the ProLiance investment impairment charge is included in the appendix.

Moving on to slide seven. For the year-to-date period, Utility results were $0.13 per share over 2017 continuing to reflect strong earnings from infrastructure investments and a favorable impact of weather in 2018 as compared to 2017 partially offset by increased depreciation from investments without accelerated recovery and the impact from power plant maintenance year-over-year.

Non-utility earnings were down $0.01 per share compared to the prior year reflecting the approximately $200 million Ohio pipeline project completed in 2017 partially offset by lower corporate tax rate in 2018. Turning to slide eight, we are affirming our consolidated 2018 guidance in the range of $2.80 to $2.90 per share.

And we remain on track to achieve the midpoint of this range reflecting the strong financial performance realized year-to-date and the outlook for the fourth quarter. With favorable weather realized to-date, Utility EPS is now expected to be within the range of $2.25 to $2.30 per share, while Non-utility Group/Corporate and other EPS is now expected to be within the range of $0.55 to $0.60 per share due largely to the timing of large transmission project work.

All guidance excludes the reconciling items I described earlier during the call. The consolidated guidance also reflects minor holding company costs. Turning to slide nine. We were pleased to announce that last week our Board of Directors approved an annualized dividend increase of $0.12 per share or 6.7% that brings our annualized dividend to $1.92 per share. This increase marks the 59th consecutive year that Vectren and its predecessor companies have increased the annual dividends paid. We are very proud to achieve this level of long-term commitment to our shareholders.

Before I turn the call over to Susan let me provide an update on merger-related activities highlighted on slide 10. In late August Vectren's shareholders approved the proposed merger with CenterPoint with over 95% of the votes cast in favor of the transaction. In early October FERC approved the merger. And as we mentioned on last quarter's call clearance under the Hart-Scott-Rodino Act has also been received as well as approval from the SEC.

As we also mentioned last quarter and fully described in the 10-Q seven purported Vectren's shareholders have filed lawsuits under the federal securities laws challenging the adequacy of the disclosures made in our proxy statement in connection with the merger.

We believe these complaints are without merit and do not expect them to impact the timing or the outcome of the proposed merger. The voluntary submittal of information to both Indiana and Ohio commissions is the remaining merger-related regulatory activity. As you may recall the merger does not require change of control approval in either states.

On October 17, the hearing was held with the Indiana Commission to review the merger-related information submitted in mid-June. A post-hearing filing schedule was established wrapping up by December 21st of 2018. We expect the final word from the Indiana Commission in early 2019.

In Ohio, a hearing before the commission is not anticipated and a final order is also expected in early 2019. Subject to the closure of the Indiana and Ohio informational dockets, we continue to anticipate the merger closing will occur no later than the first quarter of 2019.

Preparation for post merger integration continues where we have successfully completed the analysis phase and are progressing well in the design phase.

And with that I'll turn the call over to Susan.

Susan Hardwick -- Executive Vice President and Chief Financial Officer

Thanks, Carl. Slide 11 provides an overview of our very busy regulatory calendar. In mid-October, we completed the Indiana Commission hearing on our generation transition proposal. As you will recall in February we filed a request for the commission related to an 800 to 900 megawatt combined-cycle natural gas plant and require environmental upgrades to our F.B. Culley Unit three generating plant.

As expected the hearings were very thorough with all parties actively participating including consumer advocates and representatives from the coal industry and environmental groups. A post-hearing briefing schedule was adopted, which wraps up at the end of February 2019. We expect the final order to be issued in the first half of 2019 with construction beginning by the end of 2019.

In October, Vectren along with all of the -- one of the parties in the case filed a settlement with the Indiana Commission regarding our request to add 50 megawatts of universal solar generation. A hearing is scheduled for November 19th and we expect to receive a final commission order in the first half of 2019. Construction will begin shortly after with an expected in-service date in 2020.

At the end of September we received the Ohio commission staff report related to our first Ohio rate case filing in more than a decade. While the staff recommended a reduction in our original revenue request, it was supportive of the continuation of our distribution replacement rider and straight, fixed, variable rate design.

The staff's revenue recommendation consisted primarily of a lower ROE, a shift in recovery mechanisms and some lower operating cost. In October, we filed additional testimony to support our filed revenue request. The commission in Ohio has scheduled an evidence hearing to begin on December the 4th with the final order expected in early 2019.

Before I move on to the Non-utility results I'll provide a brief update related to Vectren's credit rating. In October S&P issued new reports on Vectren's subsidiaries noting an unchanged A- credit rating with negative outlook. Also Moody's affirmed their current Vectren Utility Holdings credit rating of A2, but changed the outlook from stable to negative. Actions by both agencies were as expected and reflected the broader impact on the industry from tax reform primarily from lower cash flow due to the use of bonus depreciation and the large capital expenditure program.

Now moving on to our Non-utility results on slide 12. Year-to-date VISCO EPS saw a decline of $0.04 per share compared to 2017 primarily reflecting the large Ohio transmission project that was completed in 2017 and the wet and cold weather in the first quarter of 2018 that delayed the start of the construction season.

The distribution portion of the business has continued to perform very well in 2018 achieving the growth we expected year-to-date. However, since the transmission portion of the business had not secured large projects work through October, we lowered VISCO's guidance for the year by $0.05 per share.

Overall, VISCO backlog remains high at $715 million reflecting continued strong demand for construction services. And importantly VISCO is in contract negotiation for an approximate $300 million transmission project. Once brought to closure, work can begin this year with completion of that project expected by end of 2019.

In addition to this project the bidding activity remains very strong with over $500 million in bids outstanding. As we have mentioned in the past VISCO's focus remains on the recurring work in both distribution and transmission. However, opportunities for large transmission pipeline construction projects will continue to be pursued. The large project provides very strong revenues and showcase our capability, but obviously create earnings volatility on a year-over-year basis.

At VESCO, year-to-date 2018 earnings were up $0.03 per share compared to 2017 excluding the 179D benefit recognized in the first quarter of 2018. Demand for performance contracting and sustainable infrastructure opportunities continue to be very strong.

At September 30, 2018 the backlog of signed contracts increased to nearly 220 million compared to 180 million at September 30, 2017. The estimated sales funnel at September 30, 2018 totaled nearly 370 million while 222 million in new orders have been signed year-to-date and that compares to 118 million in the same period last year.

Although signings year-to-date are lower-than-expected we still intend to pay that VESCO will achieve its goals for both earnings and new orders for the year which should result in a very strong start to 2019. Let me wrap up our prepared remarks by noting again that good year-to-date financial results keep us on track to provide yet another year of consistent earnings growth.

In the coming months as we prepare to complete the merger with CenterPoint, we remain focused on successfully executing our key strategic initiatives including executing our regulatory plans in Indiana and Ohio as well as working closely with CenterPoint to wrap up the two remaining state regulatory dockets as quickly as we can.

And with that operator, we'll ask for questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) The first question will be from Ryan Levine with Citi. Please go ahead. Please go ahead, Ryan. Perhaps your line is muted on your end.

Ryan Levine -- Citigroup -- Analyst

Hi, I just wanted to clarify on page 20 of your presentation material. It looks like the backlog on VISCO is declining. And I'm just curious if there's any change to your bidding behavior in light of the pending merger or any change in composition of your -- of what projects you are pursuing in VISCO?

Carl Chapman -- Chairman, President and Chief Executive Officer

No, Ryan. There's really no change because of the merger it's business as usual. And I would say that we still see a lot of bidding activity obviously the blanket numbers are higher. That's a good thing that's continuing work. And on the business side it's just more an issue of timing of projects.

Ryan Levine -- Citigroup -- Analyst

Okay. Are you seeing any change in waiver price, as you are looking to execute on these projects? And any change in contractual provisions regarding labor?

Carl Chapman -- Chairman, President and Chief Executive Officer

I don't think that we are seeing anything of significance there. Obviously, we watch that closely. As you know we are a union shop. We've got great relationship with the unions and continue to have that. So, I don't think we are seeing any big changes. We obviously keep very close watch on it as we bid to make sure we've got the skilled workforce we need, but we've not had any problems.

Ryan Levine -- Citigroup -- Analyst

Okay, thank you.

Carl Chapman -- Chairman, President and Chief Executive Officer

Thank you.

Operator

(Operator Instructions) Ladies and gentlemen this concludes our question-and-answer session. I would like to turn the conference back over to Dave Parker for any closing remarks.

Dave Parker -- Director, Investor Relations

Thank you, Chad. And on behalf of the entire Vectren team I'd like to thank everyone for joining us on the call today. With that we'll conclude our call.

Operator

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 16 minutes

Call participants:

Dave Parker -- Director, Investor Relations

Carl Chapman -- Chairman, President and Chief Executive Officer

Susan Hardwick -- Executive Vice President and Chief Financial Officer

Ryan Levine -- Citigroup -- Analyst

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