INDIANA ENERGY
2000 Earnings Guidance
Moderator: Jeff Whiteside
November 22, 1999
11:15 a.m. EST
Jeff Whiteside: Thank you and good morning. As the operator
mentioned I'm Jeff Whiteside, and we're pleased that you could
join the Indiana Energy Teleconference this morning. We have
concluded our quiet period and now we are in a position to
provide you comments on Fiscal Year 2000.
On October 29, 1999, we released our Fourth Quarter 1999 summary
financial information. If needed, copies may be obtained
immediately by calling 1-800-366-9831.
Joining me on behalf of Indiana Energy this morning are Niel
Ellerbrook, President and CEO, and Carl Chapman, Senior Vice
President and CFO. Niel will provide a general update regarding
our announced merger with SIGCORP to form Vectren Corporation, as
well as information regarding Indiana Energy's efforts to achieve
its previously announced growth strategy. Following Niel, Carl
will provide information regarding Fiscal Year 2000.
Also joining us today are Jerry Benkert, Vice President and
Controller; Ron Christian, Vice President and General Counsel;
and Steve Schein, Vice President and Treasurer.
As usual, we will allow time at the conclusion of our remarks for
questions and answers.
Today, we're going to be discussing certain subjects, including
subjects pertaining to our growth strategy that may contain
forward-looking statements. I would caution you that actual
results could differ materially from those that we will be
projecting in our discussions. Additional detailed information
concerning a number of factors that could cause actual results to
differ materially from the information that's provided to you is
readily available in our report on Form 8-K, filed with the
Securities and Exchange Commission on August 11, 1997, and was
most recently restated in our report on Form 10-Q, filed with the
Securities and Exchange Commission on August 12, 1999. If you'd
like copies, please contact me after the teleconference.
And with that, I will ask Niel to begin his remarks.
Niel Ellerbrook: Thanks Jeff, and good morning.
As Jeff mentioned, we have ended the quiet period, and I did want
to take a few minutes to brief you regarding further progress
that has occurred relating to the Vectren transaction since our
last teleconference on November 1, 1999.
The Indiana Energy and SIGCORP joint proxy statement/prospectus
was mailed last week to both companies' shareholders of record as
of October 25th. Separate shareholder meetings are set for
December 17th, in Indianapolis and Evansville.
Regarding pending regulatory proceedings, I would first like to
remind you that closing the Vectren transaction does not require
Indiana Utility Regulatory Commission approval. Notwithstanding
this, together with SIGCORP, we concluded that it was sensible to
provide the IURC with a forum to review and consider the effect
of the merger on Indiana Gas Company and Southern Indiana Gas and
Electric Company, which is SIGCORP's public utility subsidiary.
Currently, we have pending before the IURC a request to conduct
an investigation regarding the merger, and for approval to defer
and amortize merger-related costs.
We continue to be engaged in discussions with the Indiana Office
of Utility Consumer Counselor in an effort to resolve the case
outside of the litigation process. As a result, we recently
agreed with the OUCC to extend the hearing date by about a month
to afford additional time for discussions. We are very focused
in our efforts to reach an accord that would resolve this case
outside of the litigation process. If litigation is required,
the OUCC and intervenors will have to file their cases in early
December, and the hearing will occur in mid-January.
While IURC approval is not required, FERC approval is required.
In mid-August, Indiana Energy, SIGECO and Vectren filed an
application with the FERC for approval of the merger. Two
parties the OUCC and the City of Huntingburg, a SIGECO wholesale
electric customer-filed protests in response to the application.
We continue to believe that the matters raised in the protests
are not properly considered in a merger proceeding, and have no
merit.
In our case, we expect the FERC will adhere to its informal
policy by issuing a decision on the merger application within
approximately 150 days of the filing of the application. Recent
action by the FERC demonstrating this policy are the decisions in
the Consolidated Natural/Dominion Resources and Illinova/Dynegy
merger cases, where the FERC ruled in 155 and 109 days,
respectively. Applying the FERC's policy to our case, we
anticipate receiving a decision by mid-January.
Finally, regarding our Hart-Scott-Rodino Act notification to the
Department of Justice and the Federal Trade Commission, we have
essentially completed the gathering of all of the information
necessary for our response to the DOJ's "second request". By the
middle of this week, we will be in position to certify our
compliance with that request. The effect of that action is that
20 days after certification, the merger can go forward, unless
prior to that time we agree to extend the deadline to afford the
DOJ additional time to consider the information we submitted, or
the DOJ obtains an injunction to prevent the merger. As a
practical matter, HSR reviews of this type often track the
timing of the FERC's decision on the merger, which, as I
mentioned a moment ago, is expected to be received by the middle
of January.
We have previously certified to the DOJ that we have produced all
of the information called for by the Civil Investigative Demand,
or CID on ProLiance. At this time, we believe the information
submitted clearly demonstrates a highly competitive marketplace.
We are optimistic that the ProLiance matter can be brought to
closure at the DOJ in about the same time frame as the HSR review
relating to Vectren.
We intend to make a filing this week with the SEC on behalf of
Vectren where we will ask that Vectren be determined to be an
exempt holding company for purposes of the Public Utility Holding
Company Act. Based upon our understanding of recent SEC action
in this area, we do not anticipate any issues in this proceeding.
While we continue to work diligently toward closing during the
first calendar quarter of 2000 and believe that this is a very
realistic goal, we also remain committed to effectively managing
Indiana Energy. As we have consistently stated, we remain
focused on our average annual EPS growth rate of 10%. Recall
that we introduced this goal to you in 1997, using an EPS base
range of $1.31 - $1.35. I believe at the conclusion of our
conference today you will conclude that Indiana Energy is well
positioned to achieve 2000 EPS of $1.75 - $1.79, which would put
us right on target. Of course, this assumes normal weather and
our realization of anticipated performance, particularly at our
non-regulated entities.
Let me also comment briefly that we are focused on maintaining
our historical policy of above average dividend growth. While I
anticipate our payout as a percentage of consolidated earnings
coming down as non-regulated earnings grow, and we would expect
to continue to grow the dividend at a rate faster than our peers.
And, although it will obviously be subject to approval by the
Vectren board, I would expect that bringing two companies
together with outstanding dividend growth histories will likely
result in a similar policy going forward.
As I have said before, our merger with SIGCORP is a critical step
for both of us in combining two financially strong companies into
one with an exciting future. The similar growth and income
strategies of both companies coupled with the anticipated merger
savings provide ample opportunities and greater assurance for our
announced Vectren 10% growth strategy going forward. As you
probably know, our joint proxy statement outlines the possible
incremental earnings growth of combining the two companies. We
continue to believe that the $200 million in net synergies over
10 years when combining the two companies is an attainable target
as well. The creation of long-term shareholder value was the
reason for announcing this transaction and will continue to be
our focus going forward.
Now, I would like to ask Carl to comment on Fiscal Year 2000.
Carl Chapman: Thanks, Niel.
As we move forward into Fiscal 2000 and the merger becomes more
imminent, we realize you will be increasingly interested in the
expected results for Vectren. However, we felt it was important
that you understand our expectations for Indiana Energy on a
stand-alone basis.
As Niel indicated, we remain on target with the achievement of
our growth strategy. In 1997, we announced a 10 percent average
annual EPS growth strategy starting with a base range of $1.31 to
$1.35 per share. Since weather probably cost us as much as 35
cents per share, 1999 earnings per share of a $1.40 represented a
strong performance for us. On a weather-adjusted basis, we
believe we met that growth objective, even when excluding 1999
non-recurring items.
I believe $1.75 to $1.79 is a reasonable expectation for Indiana
Energy in 2000 given normal weather. To date we have experienced
slightly warmer than normal weather for the first two months of
the fiscal year. However, the financial impact of this warmer
weather is difficult to quantify with these being shoulder months
and the uncertainty of future weather. Let me briefly discuss
what we may see in 2000 for Indiana Gas and IEI Investments.
Weather, as I said, had a dramatic impact on 1999 earnings. With
the return to more normal weather and with Indiana Gas continuing
to experience strong customer growth at about 2.5 percent, we
should see gross margin increase by 8 to 9 percent over 1999.
You may recall, there were some non-recurring unaccounted-for and
native gas items in 1999 that keeps this increase from being
larger.
Operations and maintenance expenses should be 3-4% below 1999
levels as we continue to aggressively manage our costs.
Depreciation and amortization will likely increase by 8-9 percent
as a result of our technology investments last year and additions
to plant. Capital expenditures should be about $60 million,
which will allow us to keep pace with the above average growth
within our service territory. Taxes other than income, comprised
of property taxes and gross receipt taxes, will increase
approximately 13 percent as a function of additional physical
plant and increased sales from customer growth and the assumption
of normal weather.
Regarding interest expense, we should average about $220 million
in long-term debt. It's possible that level could change
slightly depending on the use of short-term financing, but I
believe it is a reasonable estimate. Short-term borrowings will
likely average around $30 to $35 million, peaking in the winter
months. We would expect interest expense to be around $19
million given increased debt outstanding and current market
rates.
With our tax-advantaged investments, which I will discuss in a
moment, we anticipate a lower effective tax rate of about 28 to
29 percent for 2000.
For IEI Investments, I anticipate a $10 - $10.5 million or 35-
cent contribution to net income of which, approximately $8
million will be reflected as earnings of unconsolidated
affiliates. While these earnings are 50 plus percent increase
over 1999 results, I hope that the following comments will help
you understand why we are reasonably confident in our
expectations.
First, our joint ventures continue to provide excellent returns.
While our 2000 expectations nearly mirror 1999 for ProLiance,
that level would still be an excellent result. I believe 1999
was a banner year for ProLiance, which had profits 25 percent
higher than 1998 while continuing to expand its footprint in the
competitive energy market. As a result, it is a difficult
comparison period because pricing volatility allowed substantial
profits to be realized from our storage hedging strategy. The
high prices throughout the summer of 1999, although not causing
any losses due to our hedging, also will not likely allow similar
profits in 2000. However, the continued growth in the business
should replace those earnings, allowing ProLiance to match its
record 1999 profits.
Niel has already updated you regarding the ProLiance CID. On the
litigation front, there has not been any recent development
relating to ProLiance. As you will recall, on April 22 of this
year, the Indiana Supreme Court unanimously accepted our transfer
of the ProLiance appeal after hearing oral argument the prior
day. By accepting transfer, the Court of Appeals' decision that
reversed the favorable IURC Order was vacated. We believe the
acceptance of transfer was very significant. As we have
previously discussed, assuming the Court finds that alternative
regulation was not required, it seems unlikely that it will
disturb the IURC's decision that the agreements are in the public
interest. Recall that there are some remaining issues still to
be considered by the IURC in a consolidated GCA proceeding
involving Indiana Gas and Citizens Gas. We have previously
discussed those issues with you. No schedule has been set for
that proceeding, and it would seem likely that absent a
resolution of those issues outside of the litigation process, the
proceeding will not start until after the Supreme Court renders
its decision. While there can be no assurance on how the Court
will rule, it is easy to see why we are guardedly optimistic that
we will receive a good decision from the Court.
Even though we are guardedly optimistic about the decision to be
issued by the Court, we are engaged in a dialogue with interested
parties in an effort to find common ground to bring all open
ProLiance issues to closure. Obviously, our goal is to reach an
outcome that is sensible for both customers and shareholders. We
are committed to this dialogue and will continue to work toward
the achievement of our goal.
Energy Systems Group is succeeding in providing performance
contracting to public school systems, hospitals and large
institutions in a seven-state area. Recall that more than $60
million of contracts were awarded to ESG in late 1998 and through
1999, including the $27 million, two-year project by the
Veteran's Administration Mid-South Health Care Network for work
to begin in 2000. This should allow ESG's contribution to net
income to increase nicely over the prior year.
Reliant Services continues to grow its business by providing
underground facilities locating, construction services and meter
reading services, which it recently added to its offerings.
Reliant began operations in May 1999 and has been profitable from
its inception. It has now grown to 200 employees and serves 14
telecommunication and utility customers in Indiana, Ohio and
Kentucky.
As you know, IEI Investments committed to invest $10 million in
Haddington Energy Partners, and $2 million has been invested to
date. In addition to Haddington's initial investment in a gas
storage project in Lodi, California, we expect additional
investments consistent with their plan to be announced in 2000.
Importantly, although relatively small, Haddington is on pace to
begin providing earnings in 2000 in accordance with our original
expectations.
In addition to these joint ventures and other investments, we
continue to expect superior results from our tax-advantaged
investments. You may recall that Pace Carbon Synfuels produces
synthetic fuel that is eligible for federal tax credits under
Section 29 of the Internal Revenue Code. While experiencing
modest production in 1999, this year looks favorable based on the
current ramped up production mode and project upgrades that are
well underway. Full production of 600,000 tons per year per
plant should be achieved by the end of the first calendar
quarter.
IEI Investments also has six investments in various affordable
housing projects. These investments have enabled us to provide
affordable housing primarily in our service area, while obtaining
tax credits under Section 42 of the Internal Revenue Code.
Combined, Pace and the affordable housing projects should
contribute earnings per share of 10 to 12 cents, although Pace
does reduce equally in earnings, which is more than offset by its
positive impact on taxes..
I would like to bring one other issue to your attention. In the
first quarter of fiscal 2000, Indiana Energy will recognize lower
earnings due to the change in ProLiance's net position on
financial instruments held to hedge storage inventories.
ProLiance's loss for the first quarter will be approximately 6
cents per share. Gains on the related storage inventories
recognized in subsequent quarters will fully offset the losses
that ProLiance incurred on financial instruments. While this is
merely a timing issue since the related physical sale commitments
are already in place, we wanted you to be aware of it as you do
your quarterly estimates.
In closing, I also want to comment on how disappointed we are in
the performance of our stock over the past several months.
Although we recognize the so-called "merger doldrums" have an
impact, we are hopeful that you will conclude that our
expectations for a first calendar quarter merger closing are on
target. Additionally, and very importantly the two companies
have been working closely together over the last several months
detailing combined future operations and we will be ready to
begin implementing plans and harvesting merger benefits
immediately after closing. We also hope that you will conclude
that, given normal weather, Indiana Energy's growth plans are
continuing to be implemented as predicted. While we recognize
that there continues to be some uncertainty regarding ProLiance-
related earnings, the current discount on our stock is
remarkable. As an example, even if we retained only half of our
share of ProLiance's earnings, which we believe to be a very
conservative assumption, a typical P/E ratio of 15 applied to our
current expectations would result in a per share price around
$25. Of course we can provide no guarantees on how the stock
will perform, but I did at least want to comment on what seems to
be a classic market over reaction to some uncertainty.
As you hopefully can tell, we believe the year is shaping up
quite nicely. Although there are obviously many challenges for
us to manage, we should be well positioned to meet our earnings
target. We will continue to aggressively manage Indiana Gas and
IEI Investments, while diligently pursuing the close of the
Vectren merger
With that I will stop and ask for questions.
Jeff Whiteside: As always we appreciate your time and your
interest in Indiana Energy. We look forward to talking with you
in the future and have a great holiday.