Vectren Earnings Call Nuggets: Infrastructure Services Business and Coal Prices

Vectren Corp (NYSE:VVC) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Infrastructure Services Business

Michael Gaugler – Brean Murray: I guess my first question would be on the Infrastructure Services business. In this pack on Slide 8, I think you were talking about growth in that business in the future. And I’m wondering, given the assets that you have in place there, do you have everything that you want from an operational standpoint, or would you be looking to do – let’s say, augment organic growth with perhaps a smaller tuck-in acquisition for something that you might not have?

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Carl L. Chapman – Chairman, President and CEO: Michael, this is Carl. I think, again, as you know, we’ve grown this business through some acquisitions; small tuck-ins as well as the one large one in Minnesota Limited, and we’re always open to looking at that, but we’re also comfortable with organic growth. So, I would say, we really don’t have a strategy that’s exclusive. We’re really open to both ideas and we keep our eyes open. With a key certainly is, of course, demand which is strong. In addition to that, it’s personnel and equipment and so, perhaps acquisition could be a faster way to do that at times. But on the other hand, we’ve also been successful organically growing this business for a number of years. So, the bottom line is, we’re willing to look at both possibilities.

Michael Gaugler – Brean Murray: Then also taking a look at the guidance here for the Coal Mining business and listening to your comments on costs, I’m wondering is there a point in the future, let’s say that coal end markets slowly recovers and obviously you want to get the business back to breakeven and profitable as quickly as you can, if you look out and that’s kind of the scenario, is there ever a point in time where perhaps you say, look, given the efficiencies from opening Oaktown 2 versus Prosperity, maybe you shift production from Prosperity to Number 2 and then use Prosperity for the (swing tons) as the market recovers?

Carl L. Chapman – Chairman, President and CEO: We’re always looking at the production levels at the various mines. The real key for us though is that there is a fairly significantly sulfur in the coal and we have certain customers that need a bit lower sulfur, we would call it a medium sulfur coal, and that’s Prosperity. Oaktown 2 will be lower than Oaktown 1, but still higher than Prosperity. So, it really is driven by customer need. So, we constantly look at this. I think it’s a very good question you asked, but the key to it really is what the customer demand is. Obviously, over a longer period of time there will be more and more scrubbers installed and that may change the ability to look at the mix. But for right now it’s not as simple as, let’s get Oaktown 2 open and we’ll slow down Prosperity because of the quality.

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Coal Prices

Sarah Akers – Wells Fargo: A handful of questions on coal. First, looking at the 5.8 million tons that are sold at $46, and then the 2013 projection for $43 per ton, does that 7% increase, does that just reflect higher market prices as coal inventories are assumed to come down or are there any other drivers or market dynamics you could point to that kind of support that level of uplift in the coal prices?

Carl L. Chapman – Chairman, President and CEO: That would be a part of it. Also, Sarah, some of it would just when the contracts were entered into, and also another big issue would be this quality issue again, where there really is some difference in price based upon the quality of the coal, so we would get into some differences in mix and the requirements of various customers, so that’s really going to be the big driver. I would say in most coal contracts, there is going to be an inflation, if you will, amount in there before you get to the next reopener. So, it’d really be all of those factors together.

Sarah Akers – Wells Fargo: Then, in terms of the 2014 sales, is that your sense that that plant owners still have a lot of their positions to fill out throughout ’13 or do you think that many acted early and locked in those prices for ’14 over the past six to nine months while coal conditions were a bit weak?

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Carl L. Chapman – Chairman, President and CEO: I think our view would be in our particular markets that they did not act to do a lot of coal bind. We did sell, as you know, quite a bit of coal in the fourth quarter, but that really was just because of when contracts were terminating. And so, it goes without saying, I suppose, but just the further we get along here, contracts will be terminating from various parties, and so we will have opportunities to bid where contracts are up. In addition then, as you said, I think we’ll see them – customers start filling in ’14. I really don’t think we saw a lot filling in ’13 simply because all the customers are just concerned about where the level of gas prices will be and what their burn is going to be.

Sarah Akers – Wells Fargo: And then, as we think about Oaktown 2, can you give us any sense of what level of sales you would need to see in ’14 in order to bring that mine on line, or is it just a matter of kind of the specific customers that would need that quality of coal?

Carl L. Chapman – Chairman, President and CEO: It’s really going to have to be the specific customers, because, again, what we’ll see is the customers will have a particular desire on the quality of the coal and it’s really going to be dependent also then on where prices are at that point. So, really can’t just say a particular volume, because it would be dependent on what the price is and whether we want to open that mine at that point.

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Sarah Akers – Wells Fargo: And then one question on ProLiance, the $13 million reduction in demand cost projected for ’13 versus ’12, was that level always reflected in the plan according to the scheduled contract expirations or does that level reflect kind of recent success in actively reaching out to the counterparties and renegotiating contracts that weren’t necessarily set to expire or reopen?

Carl L. Chapman – Chairman, President and CEO: I would say the largest portion was always planned, but we have been successful in achieving some additional reduction beyond the plan, and that’s actually been the case for about three years. We’ve been able to beat our number, I think, pretty much every year that we’ve laid out.