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| CHG > SEC Filings for CHG > Form 10-Q on 4-May-2009 | All Recent SEC Filings |
4-May-2009
Quarterly Report
EXECUTIVE SUMMARY
BUSINESS OVERVIEW
CH Energy Group is a holding company with four business units:
(1) Central Hudson's regulated electric utility business;
(2) Central Hudson's regulated natural gas utility business;
(3) Griffith's fuel distribution business; and
(4) CHEC's investments in renewable energy supply, ethanol production, energy efficiency, an energy sector venture capital fund, and the holding company's earnings, which consist primarily of inter-company interest income.
A breakdown by business unit of CH Energy Group's operating revenues of $378.5 million and $409.8 million for the three months ended March 31, 2009 and March 31, 2008, respectively, is illustrated below.
Note: A portion of the revenues above represent amounts collected from customers for the recovery of purchased electric and natural gas costs at Central Hudson and the cost of purchased petroleum products at Griffith and therefore have no material impact on net income. A breakout of these components is as follows:
Electric 1st Quarter 2009: 24% cost recovery revenues + 17% other
revenues = 41%
Electric 1st Quarter 2008: 20% cost recovery revenues + 15% other
revenues = 35%
Natural gas 1st Quarter 2009: 17% cost recovery revenues + 7% other
revenues = 24%
Natural gas 1st Quarter 2008: 13% cost recovery revenues + 6% other
revenues = 19%
Griffith 1st Quarter 2009: 23% commodity costs + 11% other revenues =
34%
Griffith 1st Quarter 2008: 37% commodity costs + 8% other revenues =
45%
A breakdown by business unit of CH Energy Group's net income of $23.1 million and $19.3 million for the three months ended March 31, 2009 and March 31, 2008, respectively, is illustrated below.
A breakdown by segment of CH Energy Group's total assets of $1,747 million as of March 31, 2009 is illustrated below.
As the graphs above indicate, as of March 31, 2009, 87% of CH Energy Group's assets are employed in the electric and natural gas businesses, which are subject to regulation by the PSC (as discussed in more detail below), and the remaining 13% of its assets are employed in non-regulated businesses. Additionally, CH Energy Group derived 70% of its net income from the regulated electric and natural gas business and 30% of its net income from the non-regulated businesses for the twelve months ended March 31, 2009. Due to the seasonality of the fuel distribution business, this percentage can vary from quarter to quarter, but has been relatively consistent on an
annual basis in recent years. The large relative proportion of the regulated utility business is supportive of stability of earnings. CH Energy Group believes that this business profile appeals to the risk appetite and return expectations of its shareholder base.
CH Energy Group's objective is to deliver value to its shareholders through current income, in the form of quarterly dividend payments, and share price appreciation over time, which should result from earnings growth over the long-term. CH Energy Group seeks to employ its resources in a manner that supports this objective. The Company regularly considers a range of strategies that include: acquisitions, alternative financial structures, operating efficiency improvements, allocation of capital between business units, entry into new lines of business, and divesting existing lines of business. The mix of strategies or relative emphasis on each strategy evolves over time, based on current circumstances and the expected contribution of each strategy to shareholder value.
During the first quarter of 2009, the Company continued its business focus on investing in the regulated electric and natural gas businesses of Central Hudson. Acquisitions by Griffith have remained suspended through the first quarter of 2009, pending completion of Management's strategic review of this business. Central Hudson continued to pursue additional opportunities for investment in its infrastructure, as well as expanded opportunities in electric and gas transmission, renewable energy production and energy efficiency services. Additional investments by CHEC in unregulated businesses are also being pursued, with a heightened focus on investments with stable and predictable income streams and cash flow. Based on current market conditions, the Company does not expect to invest in new ethanol projects.
CH Energy Group believes managing risk is another important component of its strategy to deliver value to shareholders, and emphasizes earnings and cash flow stability, creditworthiness, and access to liquidity as fundamentals of long-term success. On April 17, 2009, CH Energy Group entered into a Note Purchase Agreement to issue and sell $50 million of senior unsecured notes, at an interest rate of 6.58%, due April 17, 2014. CH Energy Group completed the sale of $35 million in principal amount of the notes on April 17, 2009, and the remaining $15 million in principal amount of the notes will be issued and sold on June 15, 2009. The proceeds will be used to refinance short-term debt and for general corporate purposes. With the continued growth of Central Hudson and with success in developing new opportunities at CHEC, the Company believes that it may also be appropriate at some point in the next few years to issue additional shares of common equity as part of the Company's financing program. CH Energy Group also expects to consider selling assets in its portfolio to raise cash and avoid, reduce, or postpone an issuance of additional shares of common stock.
CENTRAL HUDSON
Central Hudson delivers electricity and natural gas to approximately 300,000 electric customers and 74,000 natural gas customers in a defined service territory in the
Mid-Hudson Valley region of New York State. The rates Central Hudson charges its customers are set by the PSC. These rates are designed to recover the cost of providing safe and reliable service to Central Hudson's customers and to provide a fair and reasonable return on the capital invested by shareholders. Central Hudson's earnings are derived primarily from the revenue it generates from delivering energy to its customers. Central Hudson also procures supplies of electricity and natural gas for customers who have not chosen to utilize an independent third party supplier. The PSC has authorized Central Hudson to recover the costs of the electric and gas commodities from customers, without earning a profit on the commodity costs.
Central Hudson's Management seeks to increase shareholder value through obtaining current recovery of its costs of doing business, increasing its rate base, and obtaining an allowed Return on Equity ("ROE") that provides a fair and reasonable return for providers of equity capital. Management is committed to providing safe and reliable service, to customer satisfaction, and to promoting positive customer and regulatory relations. Management believes these commitments are important in its efforts to obtain full cost recovery and reasonable returns for shareholders. Management's strategies include effectively managing costs, requesting rate increases to align the revenues from customers with the cost of providing service, and investing in its energy delivery infrastructure.
Central Hudson filed a rate increase request with the PSC in July 2008. Evidentiary hearings were held and initial and reply briefs were filed during the first quarter of 2009. A Recommended Decision ("RD") by the Administrative Law Judges ("ALJ") assigned to the proceeding was issued April 10, 2009. Significant aspects of the RD include a $33.6 million and $12.5 million increase in electric and gas delivery rates, respectively, and a 10.05% allowed return on equity and a common equity ratio of 47%. Additionally, the RD adopts the Company's proposed electric and gas Revenue Decoupling Mechanisms ("RDM"). A final Order from the PSC is expected in June 2009 with the new rates taking effect July 1, 2009. No prediction can be made as to the final outcome of the rate increase request.
The capital intensive nature of Central Hudson's business and its obligation to serve all customers in its franchise area require continuous access to capital on reasonable terms. Central Hudson has historically maintained a strong capital structure and access to capital through committed and uncommitted lines of credit.
GRIFFITH
Griffith provides petroleum products and services to approximately 112,000 customers in a market area comprised primarily of parts of Connecticut, Delaware, Washington, D.C., Maryland, Massachusetts, New Jersey, New York, Pennsylvania, Rhode Island, Virginia, and West Virginia. Griffith's revenues, cash flows, and earnings are derived from the sale and delivery of heating oil, gasoline, diesel fuel, kerosene, and propane and from the installation and maintenance of heating, ventilating, and air conditioning equipment.
Below is a breakdown of Griffith's gross profit of $40.2 million and $33.1 million by petroleum product and by service and installations for the three months ended March 31, 2009 and 2008, respectively.
Griffith's Management seeks to increase shareholder value primarily through increased earnings as a result of continued improvements in operations and by providing its free cash flow to CH Energy Group. Management's strategies to achieve these goals include effectively managing costs and expanding margins.
Management believes that Griffith's strong brand name, effective cost management practices, and reputation for high quality, dependable service, position it well for future contributions to CH Energy Group's earnings and cash flows.
Management is conducting a strategic review of Griffith in light of recent energy price volatility and changes in customer behavior and evaluating each of its products and markets to determine the best strategy to deliver long-term value to CH Energy Group shareholders.
OTHER BUSINESSES AND INVESTMENTS
In addition to Griffith, CHEC derives earnings through investments in renewable energy supply, ethanol production, energy efficiency, and an energy sector venture capital fund. This business unit also includes the holding company's earnings, which consist primarily of inter-company interest income.
CHEC's investment objectives are to increase earnings and cash flow with a heightened focus on investments with stable and predictable income streams and cash flows. From a portfolio perspective, Management seeks to limit earnings and cash flow
volatility through diversification of its investments. The Company believes that renewable energy markets provide opportunities that fit well with objectives.
CHEC is investing in a project under which it will develop, construct, own and operate a landfill gas to electric project in Auburn, NY. The project will utilize methane gas generated by the City of Auburn landfill to produce and sell electricity to the City.
CHEC has also entered into an agreement in April 2009 to develop, construct and own a molecular gate system to be leased to Beacon Landfill Gas Holdings ("Beacon") and installed and operated at Beacon's landfill gas processing plant at the Greentree landfill facility in Fox Township, Elk County, Pennsylvania. The equipment will be used to remove excess nitrogen from landfill gas produced by the Greentree facility thereby increasing the amount of gas available for sale by Beacon.
OVERVIEW OF FIRST QUARTER RESULTS
Earnings for CH Energy Group totaled $1.47 per share in 2009, versus $1.23 per share in the first quarter of 2008.
First quarter 2009 earnings by business were as follows:
Central Hudson
Central Hudson's contribution to earnings per share was $0.78, $0.05 per share higher than the first quarter of 2008. The impact of weather added $0.09 per share to earnings, with lower restoration costs from fewer storms adding $0.03 per share and increased sales volumes due to colder temperatures adding $0.06 per share. Additionally, rate increases added $0.05 per share to the increase, which were more than offset by higher operating costs and higher uncollectible accounts.
Griffith
Griffith contributed $0.64 to earnings per share in the first quarter of 2009, $0.27 per share higher than in the first quarter of 2008. Griffith's earnings contribution was also due in part to colder weather in 2009. However the increased earnings are also attributable to margin growth, reduced expenses, and acquisitions made in 2008. Although customer conservation dampened earnings by $0.13 per share, colder weather added $0.13 per share, improved margins added $0.22 per share, operating efficiencies added $0.02 per share, and contributions of acquisitions made in 2008 added $0.02 per share to the increase.
Other Businesses and Investments
CH Energy Group (the holding company) and CHEC's partnerships and other investments contributed $0.05 toward corporate earnings per share in the first quarter of 2009, a decrease of $0.08 per share from the same period in 2008. A reserve recorded during the first quarter of 2009 related to a development project of CHEC lowered
earnings by $0.05 per share. The reserve represents the full amount of the note receivable investment for development expenditures and this project represents CHEC's only current early-stage development project. This reserve reflects the impact that the continued credit crisis and compressed crush margins had on the probability of obtaining financing prior to the due date of the loan. Additionally, unplanned outages at Lyonsdale lowered earnings by $0.02 per share.
PSC PROCEEDINGS
ELECTRIC AND NATURAL GAS RATE INCREASE
(Cases 08-E-0887 and 08-G-0888 - Proceeding on Motion of the PSC as to the Rates, Charges, Rules and Regulations of Central Hudson Gas & Electric Corporation for Electric and Gas Service)
Background: On July 31, 2008, Central Hudson filed an electric and natural gas rate case with the PSC to increase, effective July 1, 2009, electric and natural gas delivery rates which have been in effect since July 1, 2008, the final term of a three-year rate plan that took effect on July 1, 2006.
A summary of the most significant components of the filing include:
• Increases of $35.4 million and $14.7 million of electric and natural gas delivery rates, respectively
• Common equity ratio of 48% (the current Rate Order permits a common equity ratio of 45% - 47%)
• Base return on equity ("ROE") of 10.25% (the current Rate Order permits an allowed base ROE of 9.6%)
• As required by the PSC, the filing included electric and natural gas RDM proposals.
The filing was made in order to align electric and natural gas delivery rates with the projected costs of providing electric and gas service to customers. Factors contributing to the need for an increase in rates include the following:
• Gas and electric sales that are lower than the levels on which current rates are based
• Inflationary pressures
• Regulatory mandates
• The on-going need for electric and natural gas system infrastructure improvements
The filing also seeks to recover projected expenditures associated with the following:
• Distribution line tree trimming and enhanced electric transmission right of way management practices
• MGP site remediation
• Stray voltage testing of Central Hudson owned and municipally owned electric facilities
• Gas infrastructure improvements
These cost increases are partially offset by productivity gains and significant reductions in the expected future increase in benefit costs as a result of Central Hudson's successful efforts to restructure compensation and benefits (including modifications to the pension and OPEB plans) to align with the market. In the filing, Central Hudson proposed to pass back to electric customers a net regulatory liability estimated at about $21.2 million during the rate year as an electric bill credit.
2008 - In addition to the filing, notable procedural milestones include the following:
• Staff's and Intervenor's Direct Testimony was filed November 25th
• Central Hudson's Rebuttal Testimony was filed December 23rd
2009
• Evidentiary hearings were held January 12th-15th
• Initial Briefs were filed February 17th
• Reply Briefs were filed March 11th
• A Recommended Decision ("RD") by the Administrative Law Judges ("ALJ") assigned to the proceeding was issued April 10, 2009
• The RD includes a $33.6 million and a $12.5 million increase in electric and gas delivery rates, respectively. These increases include a $12.0 million tax on utility operating revenues due to the recent bill enacted by the NYS legislature increasing the tax on utility operating revenues to 2%, which was not part of the Company's request initially. The RD adopts a 10.05% base return on equity and a common equity ratio of 47%. The RD adopts the Company's proposed electric and gas Revenue Decoupling Mechanisms. The RD adopted the Company's proposed electric, gas and common capital expenditures and provided support for operating expense increases. The RD proposes continuation, with minor modifications of the Company's Electric Reliability, Gas Safety and Customer Service Performance Mechanisms. The RD also proposes to pass back to electric customers a net regulatory liability estimated at $16.6 million during the rate year as an electric bill credit.
• Briefs on Exceptions were filed on April 30, 2009 and Briefs Opposing Exceptions are due May 15, 2009.
• A final Order from the PSC is expected in June, with new rates taking effect July 1, 2009.
Potential Impacts: If approved, Central Hudson expects the rate increases to increase its revenue, cash flow and earnings. No prediction can be made as to the final outcome of the rate filing.
OTHER PSC PROCEEDINGS AND ADMINISTRATION INITIATIVES
CH Energy Group and Central Hudson continue to monitor a number of generic and specific regulatory proceedings. Neither CH Energy Group nor Central Hudson can predict the final outcome of New York State's energy policies, or the following PSC proceedings.
ENERGY EFFICIENCY PORTFOLIO STANDARD AND STATE ENERGY PLANNING
(Case 07-M-0548 - Proceeding on Motion of the PSC Regarding an Energy Efficiency Portfolio Standard and Governor Paterson's Executive Order issued April 9, 2008)
Background: Governor Paterson affirmed his support for the previous administration's goal of substantially reducing electricity usage. In support of this goal, the PSC is investigating various approaches to reduce customers' demand for energy and to provide utility incentives for meeting specified energy savings targets.
2008
† State Energy Plan
• Governor Paterson issued an Executive Order establishing a State Energy Planning Board and authorizing the creation and implementation of a State Energy Plan ("SEP").
• Central Hudson submitted its own comments on the draft scope of the State Energy Plan and joined those submitted by the Energy Association of New York State Member Companies' comments. Central Hudson also provided briefing papers to the SEP working group on pressing issues facing Central Hudson for consideration in developing the SEP.
† PSC
• Central Hudson has filed comments with the PSC supporting the opportunity to establish energy efficiency businesses, with corresponding opportunities to contribute to the state energy goal of reducing electricity consumption by 15% by 2015 and provide meaningful earnings for investors from energy efficiency services.
• The PSC established energy efficiency targets to be achieved by individual utilities through 2011 that included three utility administered fast track programs and five fast track programs to be administered by the New York State Energy Research and Development Authority ("NYSERDA"). Central Hudson has filed its plans to implement its programs with the PSC.
• Effective October 1, 2008, the PSC ordered the creation of a gas System Benefit Charge and increased electric System Benefit Charges to invest in funding these energy efficiency programs.
• The ALJ denied Central Hudson's request to have its energy efficiency programs addressed in conjunction with its rate case.
2009
• On January 7, 2009, Governor Paterson outlined various strategies and policy goals in his State of the State address, including one of the most aggressive clean energy goals in the country, with a goal for New York to meet 45% of its electricity needs by 2015 ("45 x 15") through improved energy efficiency and clean renewable energy production. This would be accomplished by expanding the Renewable Portfolio Standard from 25% by 2013 to 30% by 2015 and decreasing electric usage by 15% by 2015.
• A SEP Interim Report was issued for comment on March 31, 2009. Central Hudson is preparing comments on this Interim Report, which are due May 15, 2009. The SEP schedule has been modified to provide for the issuance of a 2009 Draft SEP on July 15, with a Final 2009 SEP to be issued October 15, 2009.
• The PSC will continue to work on additional issues of the energy efficiency program design with participation by interested parties in various working groups that include utility performance incentives, on-bill financing, demand response and peak reduction and impacts on low-income and rental customers.
Potential Impacts: This PSC proceeding could result in opportunities for increased earnings from incentives associated with achieving energy efficiency targets or negative rate adjustments if the 70% performance criterion is not met. No prediction can be made regarding the final outcome of this matter.
REQUESTS FOR DEFERRAL OF INCREMENTAL COSTS
(Case 09-M-0009 - Petition of Central Hudson Gas & Electric Corporation for Authority to Defer Incremental Costs Related to the December 11, 2008 Ice Storm)
Background: In December 2008, Central Hudson filed a petition with the PSC seeking approval to defer certain incremental and material storm restoration expenses resulting from a severe ice storm in December 2008 that disrupted service to approximately 72,000 of Central Hudson's customers. The initial petition sought PSC authorization to defer $3.1 million of incremental expenses at December 31, 2008. An updated schedule showing total costs incurred at $3.4 million has been provided to the PSC as of March 31, 2009.
(Case 09-M-0140 - Petition of Central Hudson Gas & Electric Corporation for Authority to Defer Bad Debt Net Write-Off Expense for the Year Ended December 31, 2008)
Background: In February 2009, Central Hudson filed a petition with the PSC seeking approval to defer incremental electric and gas net bad debt write-off expense incurred during the twelve months ended December 31, 2008 over the amounts currently provided for in rates.
(Case 09-G-0139 - Petition of Central Hudson Gas & Electric Corporation for Authority to Defer Gas Leak Repairs Expense for the Year Ended December 31, 2008)
Background: In February 2009, Central Hudson filed a petition with the PSC seeking approval to defer incremental gas non-labor expense related to leak repairs incurred during the twelve months ended December 31, 2008 over the amounts currently provided for in rates.
2008
† Storm Restoration Costs:
• Central Hudson filed its petition on December 31, 2008.
2009
† Bad Debt Net Write-off Expense:
• Central Hudson filed its petition on February 11, 2009.
† Gas Leak Repairs Expense:
• Central Hudson filed its petition on February 11, 2009.
Potential Impacts: The $3.1 million of incremental storm restoration expenses were not reflected in Central Hudson's earnings in 2008. If the PSC denies recovery of some or all of Central Hudson's incremental expenses, such expenses would be reflected in its earnings in 2009. The types of incremental costs included in Central Hudson's petition were consistent with previously approved petitions; however, Central Hudson cannot predict the outcome of this matter.
The $1.8 million of incremental net bad debt write-off expenses was reflected in Central Hudson's earnings and cash flows in 2008. This proceeding could result in deferral of these incremental uncollectible expenses which would result in an increase in earnings and upon future recovery, an increase in cash flows. Central Hudson cannot predict the outcome of this matter.
The $479,000 of incremental non-labor gas leak repairs expense was reflected in Central Hudson's earnings and cash flows in 2008. This proceeding could result in deferral of these incremental expenses which would result in an increase in earnings and upon future recovery, an increase in cash flows. The types of incremental costs included in Central Hudson's petition were consistent with costs in petitions previously denied by the PSC; however, Central Hudson cannot predict the outcome of this matter.
ADVANCED METERING INFRASTRUCTURE
(Case 09-M-0074 - Proceeding on Matter of Advanced Metering Infrastructure)
Background: On February 13, 2009, the PSC issued an Order establishing minimum functional requirements for Advanced Metering Infrastructure ("AMI") in New York State and creating a process for the development of a generic approach to the benefit/cost analysis of AMI. The February 13th Order directs Central Hudson to file an AMI pilot program within 60 days. The filing requirements set forth by the PSC in the Order were designed to put utilities on track to potentially receive federal financial assistance that may become available under . . .
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