VVC
#Thanks, <UNK>, and thanks for joining us on the call today.
We look forward to providing highlights from our very successful year-end 2017 as well as a review of expectations for 2018 and an update on our generation transition plan.
Turning to Slide 5 and 6.
I am pleased to share that 2017 marked our 58th consecutive year of dividend increases, a record we are very proud of, and that was extended in November when we raised the dividend 7.1% in line with our long-term target.
2017 was also another year of earnings growth for Vectren, building on our goal of delivering consistent earnings growth to shareholders and marking our seventh straight year growing earnings and at a compound growth rate of just under 7%.
2017 earnings per share were right on track with our expectations of $2.60, the midpoint of the guidance range we offered a year ago.
When taking into account the headwinds to growth that we faced in 2017, including unfavorable weather, the expected loss margin in cogeneration at one of our largest customers and the expiration of 179D tax deductions in 2016, I'm very pleased with our $0.05 improvement in EPS over 2016 results.
At Utility, we're also able to extend our streak to 6 years of earning our overall allowed ROE.
These accomplishments can only have been achieved by a continued focus by all of our employees on executing our key strategies.
Highlighting a few other achievements in 2017, I'll start with the significant progress made by the Utility Group on several ongoing regulatory initiatives, including a successful start to our 7-year electric grid modernization plan.
In addition, VISCO and VESCO each had record years for revenue in 2017.
Strong demand continues across the country for distribution and transmission pipe work as well as for projects relating to energy efficiency, energy security and sustainable infrastructure.
We believe these trends are very long-term as the nation continues to focus on a safer and more efficient use of energy.
Finally, as 2017 came to a close, we witnessed the passage of the first major tax bill in the United States in 30 years.
<UNK> will discuss it further, but I'll comment briefly on 2 fronts.
First, we appreciate the opportunity this tax reform provides in order to help our utility customers by lowering customer bills to reflect the reduced tax expense.
Second, the required revaluation of our [grade] nonregulated deferred taxes at December 31, 2017, to the lowered 21% corporate tax rate resulted in a $0.55 per share increase in results for Vectren.
As we have had in the past, we took advantage of the one-time benefit to make a sizable contribution to Vectren's charitable foundation.
Coupled the with existing funding, this charge taken in 2017 should allow us to avoid earnings impacts for the next decade or so related to funding the foundation, which we typically do on an annual basis.
The details of these transactions are provided in the Appendix on Slide 36.
As it relates to the lower corporate tax rate for our utilities, we will pass on those savings to our customers.
Regulators in both Indiana and Ohio have initiated proceedings to accomplish this.
<UNK> will provide more details later in the call.
Slide 7 highlights the significant accomplishments by our utility team on our key regulatory initiatives.
As you can see, we completed almost all key initiatives, including the Certificate of Need filing made yesterday with the Indiana Commission, a major milestone in our generation transition process.
These accomplishments were achieved through outstanding efforts from our utility team and in collaboration with several of our key stakeholders.
They also demonstrate once again the very constructive regulatory and legislative environment in which we operate for both of our utilities in Indiana and our gas utility in Ohio.
Up next is our request to the Indiana Commission to add another 50 megawatts of universal solar which we will file in the next few months.
We expect the commission to issue orders in the first half of 2019 for both our CPCN and solar filings.
Turning to Slide 8 where we are initiating our 2018 guidance in the range of $2.80 to $2.90 per share.
The midpoint of this guidance range of $2.85 per share is roughly 10% higher than 2017 earnings and includes an $0.11 per share expected benefit at our Nonutility Group from the Tax Cuts and Jobs Act reflecting the lower corporate tax rate.
We're also affirming our long-term consolidated EPS and dividend growth targets of 6% to 8% and utility growth target of 5% to 7%.
We view tax reform as a potential upside to our long-term growth potential but have opted to hold our long-term growth targets in check while we monitor our Nonutility operations and their ability to retain this uplift to earnings.
Later on the call, <UNK> will provide more details as it relates to tax reform and its impact on our Utility and Nonutility operations.
Utility EPS guidance is in the range of $2.20 to $2.25 per share and Nonutility ranges $0.60 to $0.65 per share.
The waterfall chart at the bottom of this slide highlights drivers of the expected EPS improvement from 2017.
In 2018, infrastructure investment programs will continue to be the key EPS growth driver and now include our electric grid modernization program approved by the Indiana Commission in 2017.
Slightly tempering Utility growth will be higher scheduled outage, related O&M at our power plants and completion of other 2017 maintenance activities that could be safely moved to 2018 as part of our successful effort to offset the negative EPS impact of mild weather in 2017.
On the Nonutility side, our operations are positioned to achieve strong revenues in 2018 of both VISCO and VESCO as they continue to see great opportunities in their respective markets.
For VISCO, our confidence is supported by our backlog going into 2018.
Equal to our backlog at the same time last year, when you recall, included a large pipeline project in Ohio.
Miller Pipeline, one of the largest gas distribution construction groups in the country, continues to successfully compete for gas utility infrastructure work.
Additionally, as more large-scale pipeline construction projects are approved across the nation, VISCO's transmission group expects to win additional projects as they continue to focus their efforts primarily on recurring pipeline maintenance and repair work.
I want to note that we have tempered VISCO's 2018 EPS growth expectations by $0.05 due to extremes in both cold and wet weather conditions experienced year-to-date in most of the markets served by our construction operations.
One last point, as part of the recent 2-year budget deal signed earlier this month, Congress retroactively extended 179D deductions for 1 year, 2017.
Because of the extension, we currently expect to record an estimated $0.05 to $0.07 earnings in 2018 related to the 2017 179D deductions.
As you'll recall, 179D benefits had expired at the end of 2016 and, therefore, [2000] (sic) [2018] EPS did not include an EPS benefit related to 2017 179D deductions.
While we continue to pursue a long-term extension of 179D benefits, in the meantime, we have excluded these earnings in our 2018 guidance and long-term growth goals.
With that, I'll turn the call over to Rick to discuss a few details around our generation transition plan and our regulatory activity.
As <UNK> mentioned, Rick, of course, is our Chief Operating Officer, having been with Vectren and predecessor companies for nearly 25 years.
Rick.
Thanks, <UNK>.
I'm happy to be on the call today to provide a few more details around our generation plan as we continue to transform our utility for a smart energy future for our stakeholders.
Let's turn to Slide 10 for a high-level review of the utility investment story.
I won't spend much time today discussing our gas infrastructure and grid modernization programs since they have been covered extensively in the past.
I'd simply say these programs continue to operate very well.
Also, I do want to highlight that our investment in AMI across our electric footprint is expected to be complete by the end of 2018.
We expect the investment will greatly enhance our customers' experience.
Turning to Slide 11 and 12.
As <UNK> mentioned earlier, we filed yesterday with the Indiana Commission our plan to transition our generation fleet.
As you can see on Slide 11, the graph at the bottom, we expect to significantly diversify our generation portfolio over the next 7 years as we replace our aging coal-fired fleet with efficient, cleaner and diverse energy sources.
To accomplish this, in the next 10 years, we plan to invest about $1 billion to add 800- and 900-megawatt generation from the combined-cycle natural gas plant and a total of 54 megawatt of universal solar generation.
At the same time, we will continue to provide robust energy efficiency programs to our customers, such as the ones recently approved through 2020, and retire over 800 megawatts of mostly coal-fired generation.
As a result, we are pleased to have a generation plan that, once approved and executed, will achieve a reduction in carbon emissions of 60% by 2024 from 2005 levels.
The 60% carbon emission reduction will represent another significant step-up from the over 30% carbon emissions reduction through 2017 from 2005 levels achieved through energy efficiency programs, exiting purchase power agreements with neighboring municipal utilities, retirement of a small coal-fired unit and improved efficiency of our generation turbines.
On Slide 12, we provide additional details related to the 2 key elements of the generation transmission plan as well as the time line of key regulatory steps.
After evaluating multiple options to serve our electric customers' long-term energy needs, including an RFP conducted by an independent third-party, we have filed to self-build, an 800- to 900-megawatt combined-cycle national gas plant that we will own and operate.
We expect that plant and the infrastructure upgrade to serve the plant, including new natural gas pipeline, will cost approximately $900 million.
Once approved, construction is expected to begin in late 2019 with an in-service date sometime in the summer of 2023.
The preferred location of the new generation plant is at our A.
B.
Brown power plant site located just west of Evansville.
Second, in the next few months, we will announce our intent to file a separate rate case requesting to add another 50 megawatt of universal solar generation to be constructed by a third-party and owned by Vectren.
The projected cost is approximately $75 million, and will be located in our service territory in Southwest Indiana.
Once approved, construction is expected to begin in the first half of 2019 with an expected in-service date in the midyear of 2020.
This project will add to the 4 megawatts of universal solar that we are currently building.
As we highlighted at the bottom of Slide 12, yesterday, we began the CPCN filing process with the Indiana Commission to obtain the necessary approvals to continue our generation transition plan.
Final orders are expected by midyear of 2019.
Slide 13 highlights that today, we made a rate case prefiling notification with the Ohio Commission to recover rate base investments made in the past decade.
The full rate case will be filed in the next several weeks.
The rate case filing will include, among other things, a reduced cost associated with the lower corporate tax rate and an extension of the distribution replacement rider.
The request to increase base rates for its Ohio gas delivery charges is the first Vectren has filed in more than a decade.
We continue to expect to grow our utility rate base at 6% over the next decade, providing 5% to 7% EPS growth to Vectren's shareholders.
Slide 14 highlights our significant utility capital expenditure program we continue to execute that will drive future earnings growth.
Over the next 10 years, we anticipate investing $6.5 billion on gas infrastructure improvement, electric grid modernization project and the generation transition plan.
Our capital plan primarily includes investment in our energy delivery systems to ensure that we continue to provide energy service safely and reliably.
And if approved, our generation transition plan will diversify our generation portfolio by replacing aging plants with efficient, clean energy sources.
And with that, let me turn it over to <UNK>.
Thanks, Rick.
Moving on to Slide #15 in our 10-year CapEx plan.
I won't spend a lot of time here as Rick just covered the strategy for you, but this slide should look familiar, and it hasn't changed much from what we shared throughout 2017.
The most notable change is the addition of 2022 in the next 5-year forecast and the previously planned step-up in generation-related CapEx in 2022.
We expect '22 and '23 to be the peak years of generation spending.
Our CapEx plan still includes continued gas infrastructure investments totaling just under $4 billion and roughly $1 billion to modernize the electric grid.
With our goal to diversify our generation portfolio, electric CapEx also includes additional investments in what will be our 1 remaining coal-fired unit to enable compliance with existing environmental regulations.
Slide 16 provides an overview of how we expect to finance this significant capital investment program at the utility.
To set that stage, our financing plan reflects a sound regulatory approach and contemplates any needed long-term debt and equity at the utilities.
Over the next 5 years, we'll need to fund about $3.4 billion in capital investments and the utility share of Vectren dividends of approximately $700 million.
First, we would expect cash from utility operations to fund a majority of the capital program of roughly $2 billion.
Also, we expect to issue between $1 billion and $1.2 billion of incremental debt.
Additionally, we anticipate transferring funds from available nonutility cash flow of between $100 million and $300 million over that 5-year period.
Equity infusion at the utility will finance the remaining investment needs.
We continue to evaluate the best approach to issuing equity publicly, including the use of equity forwards.
That strategy will allow us to deploy equity at the right time for regulatory purposes.
And again, I underscore that any new public equity contemplated in our plan has been reflected in our EPS growth targets.
As many of you know, Vectren has a long history of high investment-grade credit ratings, and we will strive to continue that.
To that end, we expect to issue a balanced mix of debt and equity as needed in an effort to maintain our strong ratings where currently, we have an S&P rating of A- at the corporate level and a Moody's rating of A2 at the utility level, both with stable outlooks.
Turning to Slide 17, the tax reform.
As <UNK> mentioned earlier, we expect the Nonutility Group to benefit by approximately $0.11 per share in 2018 due to the decrease in the federal tax rate from 35% to 21%.
Given the competitive nature of these businesses, it is difficult to predict how much of this benefit is able to be fully retained and over what period of time.
And as such, for now, we're not changing our long-term growth targets, and that might prove to be conservative depending on how the competitive environment impacts the ability of our nonutility companies to retain this tax benefit in the long term.
We will continue to monitor the situation and periodically update investors on this topic as we see how the competitive markets respond.
For the utility, as we've said in prior calls, and as we are now witnessing at the state level of Indiana and Ohio, we expect utility rates to reset in the near term to address the tax changes, a positive for our customers.
We issued a press release separately on Friday, the 16th of February, detailing a bit more of the process to be followed to effect these customer bill reductions in Indiana.
And in Ohio, this should be resolved as part of our Ohio gas rate case.
We think this is a very good outcome for our customers.
Near the end of the appendix to this presentation, we have included a table to illustrate the 2017 impacts on our financial statements from the deferred tax revaluation triggered by the Tax Cuts and Jobs Act and the contribution to Vectren Foundation, all of which <UNK> mentioned earlier.
The revaluation of deferred taxes resulted in a gain of $45.3 million that was recorded in the fourth quarter of '17.
This is the initial step in quantifying the impact of tax reform on results.
And from this point forward, any impact on earnings compared to our original expectations will be largely a result of the lower tax rate on earnings from our nonutility businesses.
Moving on to the nonutility results on Slide 19.
These results reflect a $0.05 per share improvement compared to '16, primarily reflecting strong VISCO performance.
VISCO EPS was up $0.09 per share compared to 2016 on a pickup in large transmission project activity and continued demand from gas utilities for distribution pipework, which produced record annual revenues as illustrated in the VISCO graph at the bottom of that slide.
At VESCO, 2017 EPS was up about $0.05 per share compared to 2016 when excluding 2016 179D deductions, driven by record revenues and overall strong performance.
The year-end sales funnel of $430 million is $85 million higher than at year-end 2016, positioning the business well for new contract signings in 2018.
Turning to Slide 20.
We continue to expect strong growth at VISCO, driven by continued utility distribution activity and recovery in the transmission sector.
Utilities continue to embrace the opportunity to invest in gas pipeline replacement projects.
On the transmission side of the business, we expect federal regulators to approve several large pipeline projects across the nation.
While we may compete for work on some of these projects, we expect our competitors to compete ---+ complete most of this work and thus lay more opportunity for us to perform our preferred repair and maintenance work.
As activity picks up in the transmission market, we expect to see some recovery of our gross margin percentage over time.
As <UNK> mentioned earlier, 2017 year-end backlog is equal to the prior year-end despite the roll-off of the large Ohio project.
We are still very bullish on this business and believe 2018 will be another strong year.
Moving on to VESCO's outlook on Slide 21.
We see strong interest in improving energy efficiency by both public and federal sectors.
Our performance contracting business model continues to provide one of the most effective ways to achieve long-term energy savings while, at the same time, providing cost-effective opportunities to enable infrastructure renewals, such as new HVAC systems, windows and lighting.
As for 2018, we expect solid demand again this year across most of our markets and geographies.
We expect this despite several projects being delayed at the end of last year, which caused year-end backlog to come in lower than expected.
Coupled with a strong funnel, VESCO expects another strong year in 2018, however, slightly down from 2017, reflecting the project delays I previously mentioned as well as tempered expectations on gross margin percentage for the year due to project mix.
As I wrap up, let's turn to Slide 23, which is one of our favorite slides, where we proudly show 58 consecutive years of dividend increases <UNK> previously mentioned.
We're also pleased to be growing the dividend at a higher rate in recent years and fully expect to grow it at the long-term earnings growth rate.
Turning to Slide 24.
The key to our consistent growth over many years has been our disciplined approach to growing the utility, which has been founded in regulatory and legislative strategy execution, effective capital deployment and continuous operational improvement.
Our utility team has demonstrated we can execute on these key themes in order to grow the operations and successfully serve our customers.
Some of our key achievements include managing CapEx spend that now totals nearly $600 million per year, reflecting both gas and electric infrastructure investments.
In Indiana and Ohio, we have worked with legislators and regulators to construct solutions that help our customers manage their bills through modest annual increases that result from current CapEx recovery mechanism.
Execution of this strategy has enabled us to earn our allowed ROEs for now 6 straight years and limit the number of base rate cases.
A lot of time and energy has gone into developing our strategic 10-year infrastructure investment plan, and one key element of this planning process is the continuous evaluation of the impact of these plans on our customers' bills.
One important way we are limiting bill impact is focusing on continuous O&M improvement.
Our culture of performance management and strategic sourcing is embedded in how we operate every day and is at the core of what has allowed us to maintain a controllable O&M growth rate of less than 1% since roughly 2012, of course, excluding the impacts of weather or variability in power plant maintenance work.
On Slide 25, we have a recap of our long-term growth targets as well as a few charts demonstrating the value we've delivered to shareholders over the past 5 years.
Achieving these results can only be accomplished by a team that is intently focused on executing its strategies.
And I'm proud to say that in November of 2017, EEI recognized the entire Vectren team as the top-rated small cap utility for total return over the past 5 years, a great accomplishment by a truly engaged team throughout the company.
To further put that in perspective, we had the second-highest return of all EEI companies in that period.
Finally, on Slide 26, I'd like to close our prepared remarks with the key drivers that help us achieve this strong growth going forward.
You will note that other than the additional positive effects of tax reform, these drivers have been in place for a number of years and have been the keys to the performance I previously covered.
Bottom line, we believe Vectren has a very strong compelling long-term story.
And with that, we'd now be happy to take questions.
<UNK>, could you ---+ I kind of missed your commentary, just margin expectations at VISCO and VESCO absent the benefit of tax reform.
We ---+ I don't believe ---+ if you go back to the metrics, <UNK>, in the back of the slide deck, we have margin expectations there.
We have not given it without the tax implications.
I think we mentioned in the prepared remarks that in '18, we would expect $0.11 coming from the combined businesses.
And any contracts that you signed since tax reform.
Have you seen any pressure at all on the tax issue.
We keep monitoring that very closely, and I would say the answer is no at this point.
And the other thing for 2018, as you think of just ---+ of course, we've got a very large backlog as it relates to what our revenue expectations are.
So an awful lot of the contracts for 2018 are already in place.
And could you give a little background on the 179D, where that is and what the prospects are for that to become more permanent.
Yes, actually, it is permanent for what we will record in 2018.
What was actually done was they extended it for 2017.
And as we understand it, we would book that in 2018 because you have to use the date that Congress actually passed it, which was in '18.
So we'll be booking the tax deductions for '17 and '18.
And then for years beyond that, it's really just the same process where we're starting to sit down with Congress at this point and discuss what the possibilities are.
And there certainly is dialogue that's occurring.
We really can't make a prediction.
And for that reason, since we can't call it recurring right now, we simply showed it as a separate item.
When we look at guidance, didn't put it in our guidance, even though clearly it will be booked.
In '18, we didn't put it in the guidance, and we have not put it in our growth rate.
And, obviously, we'll keep you informed should that change either for, say, 1 more year or if we were able to extend for a longer period of time.
And I apologize ahead of time, but can you comment on M&A.
No.
Our corporate practice, I think really like all public companies, is that we don't comment on market rumors.
Well, I think you've mentioned some very fine companies, that's the first thing I would tell you, companies we know quite well and know they're very fine companies.
We do consider ourselves a premium.
We have talked about this a number of times as we talked to investors.
First of all, we have a 58-year record of increasing our dividend.
We've got a growth rate of 6% to 8%.
And as we like to always say is we have a plan that backs up that 6% to 8%.
So we think with our growth rate, the way we've grown our dividend, our ability to grow our dividend at that same rate and, of course, we probably would put alongside that the progress that we've made in our filings and our approvals with our various ---+ our 2 jurisdictions, Indiana and Ohio, the fact that we're in Indiana and Ohio and we do not have electric in Ohio, we think we're a premium company for sure.
So rather than compared maybe so specifically to any company, I would just give you those basic facts and say we think we have a company that's set up to continue to grow.
And I might add just one more thing, in 2010, we basically said we wanted to provide consistent earnings growth.
We felt that's what would drive consistent dividend growth.
And as we've shared on the call here today and many other times, that's exactly what we've done, grown our allowed returns in our utility 6 years in a row, we've grown our overall business at a compounded growth rate of 7% since 2010, and so we think we've done what we said we would do.
