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| CHG > SEC Filings for CHG > Form 10-Q on 4-Aug-2009 | All Recent SEC Filings |
4-Aug-2009
Quarterly Report
EXECUTIVE SUMMARY
BUSINESS OVERVIEW
CH Energy Group is a holding company with four business units:
Business Segments
(1) Central Hudson's regulated electric utility business;
(2) Central Hudson's regulated natural gas utility business;
(3) Griffith's fuel distribution business; and
Other Businesses and Investments
(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 $200.2 million and $313.7 million for the three months ended June 30, 2009 and 2008, respectively, is illustrated below.
[[Image Removed: Graph 1]]
(1) 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 2nd Quarter 2009: 25% cost recovery revenues + 29% other revenues = 54%
Electric 2nd Quarter 2008: 28% cost recovery revenues + 18% other revenues = 46%
Natural gas 2nd Quarter 2009: 10% cost recovery revenues + 6% other revenues =
16%
Natural gas 2nd Quarter 2008: 10% cost recovery revenues + 4% other revenues =
14%
Griffith 2nd Quarter 2009: 25% commodity costs + 4% other revenues = 29%
Griffith 2nd Quarter 2008: 36% commodity costs + 3% other revenues = 39%
A breakdown by business unit of CH Energy Group's operating revenues of $578.7 million and $723.4 million for the six months ended June 30, 2009 and 2008.
[[Image Removed: Graph 2]]
(1) 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 YTD 2009: 24% cost recovery revenues + 21% other revenues = 45% Electric YTD 2008: 24% cost recovery revenues + 16% other revenues = 40% Natural gas YTD 2009: 15% cost recovery revenues + 6% other revenues = 21% Natural gas YTD 2008: 12% cost recovery revenues + 5% other revenues = 17% Griffith YTD 2009: 30% commodity costs + 3% other revenues = 33% Griffith YTD 2008: 40% commodity costs + 2% other revenues = 42%
A breakdown by business unit of CH Energy Group's net (loss)/income of $(1.5) million and $1.7 million for the three months ended June 30, 2009 and 2008, respectively, is illustrated below. The results for the three-month periods reflect the seasonality of Central Hudson's natural gas business and Griffith's fuel oil distribution business.
[[Image Removed: Graph 3]]
A breakdown by business unit of CH Energy Group's net income of $21.7 million and $21.0 million for the six months ended June 30, 2009 and 2008, respectively, is illustrated below.
[[Image Removed: Graph 4]]
A breakdown by segment of CH Energy Group's total assets of $1,699 million as of June 30, 2009 is illustrated below.
[[Image Removed: Graph 5]]
As the graphs above indicate, as of June 30, 2009, 86% 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 14% of its assets are employed in non-regulated businesses. Due to the seasonality of the fuel distribution and natural gas businesses, each business unit's relative contribution to total earnings can vary significantly from quarter to quarter. As such, a more meaningful view of results can be seen on a rolling twelve month basis. For the twelve months ended June 30, 2009, CH Energy Group derived 67% of its net income from the regulated electric and natural gas business and 33% of its net income from the non-regulated businesses The unregulated businesses' contribution to earnings has increased over the past few years primarily due to the increased earnings of Griffith combined with Central Hudson's lower earnings which have resulted from actual sales volumes falling significantly below the projected levels in the 2006 Rate Order. The large relative proportion of the regulated utility business is supportive of stability of earnings over the long-term. 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 all or portions of existing lines of business. The mix of strategies or relative emphasis on each strategy evolves over time, based on the expected contribution of each strategy to shareholder value. CH Energy Group also believes managing risk is another important component of its strategy to deliver value to shareholders, and emphasizes earnings and cash flow stability and creditworthiness.
During the second quarter of 2009, the Company continued its business focus on investing in the regulated electric and natural gas businesses of Central Hudson. 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. Acquisitions by Griffith have remained suspended through the second quarter of 2009, pending completion of Management's strategic review of this business. During the second quarter of 2009, CHEC invested in a landfill gas project which is expected to provide stable and predictable income streams and cash flow. This investment is discussed in more detail under Other Businesses and Investments. CHEC continues to pursue additional investments with similar characteristics. Based on current market conditions, the Company does not expect to invest in new ethanol projects.
CH Energy Group believes access to liquidity is fundamental to its long-term success. In the second quarter of 2009, CH Energy Group privately placed $50 million of senior unsecured notes, at an interest rate of 6.58%, for the first time introducing long-term debt that is expected to be serviced by non-utility operations and investments. 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, as conditions warrant.
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 earning 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. A final, amended, Order was issued by the PSC on June 26, 2009, for rates beginning July 1, 2009. The Order includes a $39.6 million and $13.8 million increase in electric and gas delivery rates, respectively (of which $20 million is non-cash), a 10.0% allowed return on equity ("ROE") and a common equity layer of 47%. Additionally, the Order approved electric and gas Revenue Decoupling Mechanisms ("RDM") which should serve to prevent the significant revenue shortfall such as that which occurred during the last three years. Although the PSC recognized Central Hudson's efforts and performance in terms of high quality of service, productivity improvements and strong cost management, the PSC's Order included less than full recovery for certain elements of cost, which could result in Central Hudson earning less than the 10.0% authorized ROE. First, the PSC disallowed portions of Central Hudson's labor expense and insurance costs. Second, the approved rates reflected a $3 million "austerity" adjustment that the PSC stated was necessary to reduce the impact on customers' bills in light of the weakness in the financial markets and rising unemployment. As discussed in more detail under PSC Proceedings, Central Hudson has filed a Petition for Rehearing on certain of the disallowed costs. Although the outcome of this petition cannot be predicted, it is not expected to have a material impact on Central Hudson's earnings or cash flows. Central Hudson's Management will seek to control its costs in a manner that will minimize the impact that the cost disallowances and austerity adjustment have imposed on Central Hudson's ability to earn its 10.0% authorized ROE.
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 111,000 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 $15.6 million and $15.8 million by petroleum product and by service and installations for the three months ended June 30, 2009 and 2008, respectively.
[[Image Removed: Graph 6]]
Below is a breakdown of Griffith's gross profit of $55.8 million and $48.9 million by petroleum product and by service and installations for the six months ended June 30, 2009 and 2008, respectively.
[[Image Removed: Graph 7]]
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, minimizing commodity risk 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 CHEC's 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's subsidiary, CH-Greentree, 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 currently operating landfill gas processing plant at the Greentree landfill facility in western, Pennsylvania. The molecular gate will be used to remove nitrogen from landfill gas produced by the Greentree facility thereby increasing its energy content and allowing Beacon to sell more of its gas output. The term of the lease is seven years and construction was substantially complete on June 30, 2009. This investment is expected to provide stable, predictable earnings and cash flow as the quarterly lease payments are fixed for the next seven years and CH-Greentree does not have any operational responsibilities that would impact earnings or cash flows.
OVERVIEW OF SECOND QUARTER RESULTS
Losses for CH Energy Group totaled $0.09 per share in the second quarter of 2009, versus earnings of $0.11 per share in the same period of 2008. Year-to-date earnings were $1.37 per share, as compared to $1.33 per share during the first half of 2008.
Second quarter 2009 results by business were as follows:
Central Hudson
Central Hudson's contribution to earnings per share was $0.06, $0.19 per share lower than the second quarter of 2008. Results were driven by a 5% decline in weather-normalized sales and a 12% increase in the number of uncollectible accounts, both indicative of the weaker economy that prevailed during the quarter. Higher operating expenses also combined with other factors to reduce quarterly earnings.
Year-to-date, Central Hudson has earned $0.84 per share compared to $0.98 per share posted for the first six months of 2008. The favorable impacts of weather from the first quarter of 2009 partially offset the decline in sales volume and higher expenses incurred in the first half of 2009.
Griffith
Griffith posted a loss of $0.14 per share in the second quarter of 2009, a $0.03 per share improvement over the second quarter of 2008. Griffith's reduction in loss was due primarily to a reduction in operating costs. This quarterly loss was expected due to the seasonality of Griffith's fuel delivery business.
Year-to-date, Griffith has earned $0.50 per share compared to $0.20 per share posted for the first six months of 2008. Griffith's 150% improvement in earnings was due primarily to increased margins on the sale of petroleum products and reduced operating expenses, partially offset by a reduction in sales volume. The reduction in sales volume was mitigated by colder weather in 2009 than in 2008.
Other Businesses and Investments
CH Energy Group (the holding company) and CHEC's partnerships and other investments posted a loss of $0.01 toward corporate earnings per share in the second quarter of 2009, a decrease of $0.04 per share from the same period in 2008. This quarterly loss was primarily a result of an equipment repair that necessitated taking the Lyonsdale facility off line for several weeks. Currently, the plant is back on line with an improved capacity factor as a result of the repair.
Year-to-date earnings per share for these units totaled $0.03 per share compared to $0.15 per share posted for the first six months of 2008. Year-to-date earnings were also impacted $0.05 by a reserve recorded in the first quarter of 2009 related to a development project of CHEC. 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. Additionally, outages at the Lyonsdale facility lowered earnings by $0.04 year-to-date.
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.
Final Order: On June 22, 2009, the PSC issued its Order Adopting Recommended
Decision with Modifications which was subsequently modified with an Errata
Notice issued on June 26, 2009 ("2009 Rate Order"). Components of the 2009 Rate
Order include:
† Electric and gas delivery increases effective July 1, 2009 of $39.6 million
and $13.8 million, respectively. The electric rate increase will be moderated
by a $20.0 million customer bill credit from an excess depreciation reserve.
† Common equity layer of 47% of permanent capital
† Base return on equity ("ROE") of 10.0% return on equity
† Revenue Decoupling Mechanisms ("RDMs") for both electric and gas delivery service. While the primary purpose of the RDMs is to remove a disincentive for the Company to promote energy efficiency to its customers, they should also serve to prevent a significant revenue shortfall such as that which occurred during the three year period of the rate plan which ended on June 30, 2009.
† An austerity expense savings imputation of $3.0 million ($2.4 million electric and $0.6 million gas, respectively). The 2009 Rate Order required the Company to supplement its June 15 austerity filing to identify specific capital and expense reductions that will be used to implement its austerity program (which is further discussed below in Case 09-M-0435).
† Continued funding for the full recovery of the Company's current pension and OPEB costs and continues deferral authorization for pensions, OPEBs, research and development costs, stray voltage testing, MGP site remediation expenditures and electric and gas supply cost recovery and variable rate debt.
† New deferral authorizations for: fixed debt costs; the costs to bring electric lines into compliance with height above ground requirements; and the recently enacted New York State Temporary State Assessment.
† Continuation, with minor modifications, of the Company's Electric Reliability, Gas Safety and Customer Service performance mechanisms
† Recovery through offset against a deferred liability account (non-cash) of the $3.3 million in incremental storm restoration costs incurred from the December 2008 ice storm (which is further discussed below).
PETITION FOR REHEARING
(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 22, 2009, Central Hudson filed a Petition for Rehearing on certain portions of the 2009 Rate Order. In addition to a technical correction and request for clarification on the application of carrying charges, the petition sought rehearing on the following:
† The accounting treatment and level of expense associated with the cost of removal for gas main replacements.
† The disallowance of 50% of Central Hudson's Directors and Officers insurance.
† Inadequate recovery of non-MGP environmental expenses.
† Inconsistency of the carrying charge rate for RDMs relative to other comparable deferred items.
† Central Hudson pointed out that the impact of the above items results in Central Hudson not having a reasonable opportunity to earn the allowed ROE approved in the 2009 Rate Order.
Potential Impacts: No prediction can be made regarding the outcome to this proceeding at this time.
NEW ELECTRIC AND NATURAL GAS RATE FILING REQUEST
Background: On July 31, 2009, Central Hudson filed an electric and natural gas rate case with the PSC. Central Hudson is seeking to increase electric and natural gas delivery rates, which have been in effect since July 1, 2009.
Central Hudson has proposed a one-year increase of $15.2 million and $3.9 million of electric and natural gas delivery rates, respectively. The filing is being made in order to align electric and natural gas delivery rates with the projected costs of providing electric and gas service to our customers. Factors contributing to the need for an increase in rates are higher operating costs, regulatory mandates, the ongoing need for electric and natural gas system infrastructure improvements, increased prices for materials and supplies and rising property taxes. The filing also seeks to recover projected expenditures associated with MGP site remediation, stray voltage testing of Central Hudson owned and municipally owned electric facilities, as well as distribution line tree trimming and enhanced electric transmission right of way management practices.
Central Hudson has requested a common equity layer of 48% and a base return on equity ("ROE") of 10.0%. The current Rate Order permits a common equity layer of 47% with an allowed base ROE of 10.0%.
It is anticipated that the PSC will suspend the filing and requested delivery rate increases and initiate a full review of the filing. A PSC Order establishing new rates is not expected until the second quarter of 2010. No prediction can be made as to the final outcome of the rate filing.
NEW YORK STATE TEMPORARY ASSESSMENT
(Case 09-M-0311 - Implementation of Chapter 59 of the Laws of 2009 Establishing
a Temporary Annual Assessment Pursuant to Public Service Law §18-a(6)
Background: On April 7, 2009, NYS enacted the NYS Budget of 2009-2010, which in part requires the PSC to collect a Temporary State Energy and Utility Service Conservation Assessment ("Temporary State Assessment") from April 4, 2009 to March 31, 2014. On June 19, 2009, an Order was issued in the above proceeding authorizing recovery by utilities of the revenues required for payments of the Temporary State Assessment, including carrying charges, subject to reconciliation over five years, July 1, 2009 through June 30, 2014. The Temporary State Assessment imposes a charge of 2% of gross intrastate operating revenues, less the amounts assessed for the PSC General Assessment to be collected from customers in a separately stated surcharge on customer bills effective July 1, 2009. The Company submitted its compliance filing in this proceeding on June 29, 2009.
DEVELOPMENT OF UTILITY AUSTERITY PROGRAMS
(Case 09-M-0435 - Proceeding on the Motion of the Commission Regarding the
Development of Utility Austerity Programs)
Background: On May 15, 2009, the PSC issued a Notice directing each utility to closely examine its capital expenditures, operation and maintenance expenses and any other expense area over which it has discretion, to identify costs that may be reduced without impairing the ability to provide safe and adequate service. The Notice also directed each utility to report to the PSC by June 15, 2009 concerning actions taken by the utility since September 2008 to respond to the need for austerity, the utility's plans for austerity in the future, the appropriate allocation of the austerity cost savings between customers and shareholders, and the mechanisms proposed to deliver the customer portion of the savings to customers as promptly as possible.
Notable Activity:
2009
† June 15, 2009 - Central Hudson filed its response, describing the financial austerity conditions it had been operating under throughout the term of the 2006 Rate Order, and identifying capital costs it may avoid or defer to the next year and expense reductions that could be taken as further austerity measures.
† June 22, 2009 - The PSC incorporated $3 million in austerity reductions into Central Hudson's rates that were approved in the 2009 Rate Order for rates beginning July 1, 2009.
† July 7, 2009 - Central Hudson filed its required Supplemental Austerity filing identifying electric, gas and common capital reductions that equate to $980,000 of the $2.4 million electric and $360,000 of the $600,000 Economic Austerity Imputations established in the 2009 Rate Order. To address the balance of the austerity imputation, Central Hudson proposed expense reductions to research and development activities; executive salary freezes . . .
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