Vectren 2014 Annual Report Download - page 4

with $43.1 million in net income. Our Energy Services company, Energy Systems Group (ESG), recorded
a loss in 2014, with year-end results at ($3.2) million, compared to earnings of $1 million in 2013. Results
in 2014 were lower mostly due to a reduction in tax deductions associated with energy efficiency projects.
The impact of these tax deductions on 2014 results, net of fees, was $4.4 million, compared to $7.0 million
in 2013. Results in 2014 also reflect an after-tax gain of $8.9 million related to the reversal of the contingent
consideration liability associated with the April 2014 acquisition of the federal business unit of Chevron
Energy Solutions. The contingent liability was reversed due to failure to meet certain earn-out thresholds by
the end of 2014, as a result of delays in closing certain projects currently in the sales funnel. These non-
recurring earnings in 2014 were offset by an after-tax expense of $9.1 million intended to fund the Vectren
Foundation for an extended period. Looking forward, demand for performance contracting and sustainable
infrastructure projects is very favorable. Furthermore, the federal business unit acquisition should aid in efforts
to grow market share in federal government energy efficiency and renewable energy projects. Although ESG
already enjoys an industry-leading position in developing and implementing federal government projects
with 14 utility partners under Utility Energy Services Contracts and through public / private partnerships, the
capabilities gained with this acquisition enable ESG to now access the full spectrum of federal contracting
opportunities.
Key strategies undertaken and/or achieved in 2014 have positioned us very strongly as we look forward over
the next five years. Utility operations are well-positioned due to the 2014 regulatory orders that provide rate
recovery mechanisms for the ongoing gas infrastructure improvement and replacement programs, which are
primarily driven by federal regulations tied to pipeline safety. This gas rate base growth provides the platform
for utility earnings growth for an extended period. The nonutility portfolio has been narrowed to two high-
demand, high-growth businesses in our Infrastructure Services and Energy Services divisions. The sale of our
coal business concludes our efforts to exit commodity-based businesses and provide less volatility and more
predictability in year-over-year financial performance. The culmination of this change in strategic direction will
strengthen our ability to continue to deliver consistent earnings growth, and we expect financial performance
to be even stronger as evidenced by our increasing long-term financial targets. Likewise, we raised our
expectation for dividend growth, and the quarterly dividend declaration in December 2014 represented a
sizable increase of 5.6%.
In a continued effort to control customer rates, our electric system investment strategies are designed to
ensure little to no rate base growth over the planning horizon, which should be attainable given much of
the environmental investment in our generation units has been made. We must, however, invest $80 to
$90 million to upgrade existing emissions control equipment on our coal-fired electric generation units in
southwestern Indiana to comply with more recent Environmental Protection Agency (EPA) mandates. We
received a regulatory order in January 2015 to move forward with the project and to defer for future recovery
of these federally mandated costs.
2014 marked four straight years of improving performance, and I am confident the execution of our corporate
strategy will continue to position Vectren as an ideal investment. Our utility group will remain the primary
driver of earnings, where we’re targeting stronger annual earnings per share growth of 4 to 6% - previously
3% - driven primarily by our gas infrastructure modernization initiatives. It’s important to note Vectren has
among the lowest gas rates in Indiana and Ohio. As modest increases in customer bills occur annually as a
result of required expenditures, the expected short- and long-term favorable outlook on moderate natural gas
price levels should ensure bills remain affordable. Likewise, our efforts to engage customers in conservation
and energy efficiency programs will aid in maintaining manageable bills.
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