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| CHG > SEC Filings for CHG > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-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
activities, which consist primarily of financing its subsidiaries and
business development.
A breakdown by business unit of CH Energy Group's operating revenues of $213.6 million and $300.8 million for the three months ended September 30, 2009 and 2008, respectively, is illustrated below.
CH Energy Group Revenue by Business Unit
[[Image Removed: Chart 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 3rd Quarter 2009: 28% cost recovery revenues + 37% other revenues = 65%
Electric 3rd Quarter 2008: 39% cost recovery revenues + 21 % other revenues =
60%
Natural gas 3rd Quarter 2009: 3% cost recovery revenues + 5% other revenues = 8%
Natural gas 3rd Quarter 2008: 4% cost recovery revenues + 3% other revenues = 7%
Griffith 3rd Quarter 2009: 22% commodity costs + 4% other revenues = 26%
Griffith 3rd Quarter 2008: 29% commodity costs + 3% other revenues = 32%
A breakdown by business unit of CH Energy Group's operating revenues of $792.3 million and $1,024.2 million for the nine months ended September 30, 2009 and 2008, respectively, is illustrated below.
CH Energy Group Revenue by Business Unit
[[Image Removed: Chart 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: 25% cost recovery revenues + 26% other revenues = 51% Electric YTD 2008: 28% cost recovery revenues + 18% other revenues = 46% Natural gas YTD 2009: 11% cost recovery revenues + 6% other revenues = 17% Natural gas YTD 2008: 10% cost recovery revenues + 4% other revenues = 14% Griffith YTD 2009: 28% commodity costs + 3% other revenues = 31% Griffith YTD 2008: 37% commodity costs + 2% other revenues = 39%
A breakdown by business unit of CH Energy Group's net income of $5.4 million and $2.9 million for the three months ended September 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.
CH Energy Group Net Income by Business Unit
[[Image Removed: Chart 3]]
A breakdown by business unit of CH Energy Group's net income of $27.0 million
and $23.9 million for the nine months ended September 30, 2009 and 2008,
respectively, is illustrated below.
CH Energy Group Net Income by Business Unit
[[Image Removed: Chart 4]]
A breakdown by segment of CH Energy Group's total assets of $1,749 million as of September 30, 2009 is illustrated below.
CH Energy Group Assets at September 30, 2009 by Business Unit
[[Image Removed: Chart 5]]
As the graphs above indicate, as of September 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 Public Service Commission ("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 September 30, 2009, 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. 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. Despite the relative increase in
Griffith's contribution to earnings, 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 third 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 remained suspended through the third quarter of 2009, pending completion of Management's strategic review which began in late 2008. The review was commenced in light of energy price volatility in order to determine the best strategy for Griffith to deliver long-term value to CH Energy Group shareholders. On November 4, 2009, Management announced the completion of this review with the announcement of its planned sale of approximately 43% of Griffith's customer base at a gain. Management believes this divestiture will reduce the impact of volatility that Griffith's operations have on CH Energy Group's earnings and cash flow. Concurrent with this announcement, Management announced its intent to resume its prior acquisition strategy to expand as appropriate through selected "tuck-in" acquisitions in the Mid-Atlantic region.
During the second quarter of 2009, CHEC invested in a landfill gas project which Management believes will be supportive of 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. Additionally, given the volatility of fuel supply prices, the Company does not expect to invest in new biomass projects.
CH Energy Group believes access to capital 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 the development of 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, a 10.0% allowed ROE and a common equity layer of 47%. The impact of the electric rate increase was moderated for customers for the July 1, 2009 to June 30, 2010 rate year with a $20 million electric bill credit recovered from net regulatory electric liability balances which have been set aside for this purpose. Additionally, the Order approved electric and gas Revenue Decoupling Mechanisms ("RDMs") 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 Central Hudson's projected costs, 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 filed a Petition for Rehearing on certain of the disallowed costs. Although the outcome of this position cannot be predicted, it is not expected to have a material impact on Central Hudson's earnings or cash flows. Central Hudson also continues to experience relatively high levels of uncollectible expense. The uncollectible expense incurred by the Company for the first nine months of 2009 was 50% higher than the same period in 2008. A significant portion of this expense is due to bad debt write-offs above those included in rates which Management believes are due to unfavorable economic conditions, particularly the high unemployment rate. This expense is expected to continue to have a direct impact on Central Hudson's earnings, the magnitude of which Management cannot predict. For the rate year ended June 30, 2009, the Company's bad debt write-offs exceeded the amount recovered through rates by $3.3 million. The Company has received approval from the PSC to defer $0.5 million of this amount for future recovery. A petition requesting authority to defer the remaining $2.8 million was filed with the PSC on October 30, 2009. If bad debt write-offs continue to exceed the amount recovered through rates, and the Company believes the PSC's criteria for deferral have been met, Central Hudson intends to continue to file petitions seeking deferral authority for such under recoveries. See further discussion of other such petitions under PSC Proceedings. Central Hudson's Management is working to control its costs in a manner that will minimize the impact that the cost disallowances, austerity adjustment and uncollectible accounts 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 108,000 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 $12.5 million and $12.2 million by petroleum product and by service and installations for the three months ended September 30, 2009 and 2008, respectively.
Griffith Gross Profit by Product & Service Line
[[Image Removed: Chart 6]]
Below is a breakdown of Griffith's gross profit of $68.4 million and $61.1
million by petroleum product and by service and installations for the nine
months ended September 30, 2009 and 2008, respectively.
Griffith Gross Profit by Product & Service Line
[[Image Removed: Chart 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.
During 2008, Management began a strategic review of Griffith in light of recent energy price volatility and changes in customer behavior. The review included an evaluation of each of its products and markets to determine the best strategy for Griffith to deliver long-term value to CH Energy Group shareholders. On November 4, 2009, the Company announced the sale of approximately 43% of Griffith's customer base at a gain. These assets are primarily located in Connecticut, Rhode Island and Pennsylvania. The sale is expected to close in December 2009. With this sale, the Company announced its intention to resume its prior acquisition strategy to expand as appropriate through selected "tuck-in" acquisitions in the Mid-Atlantic region. Management believes this divestiture will reduce the impact of volatility in earnings and cash flows that Griffith's operations have on CH Energy Group.
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 activities, which consist primarily of financing its subsidiaries and business development.
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 use methane gas generated by the City of Auburn landfill to produce electricity and sell to the City. All of the required permits have been received, allowing construction to begin in the third quarter of 2009.
CHEC's wholly-owned 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 THIRD QUARTER RESULTS
The discussion below presents the change in earnings of CH Energy Group's business units in terms of earnings for each share of CH Energy Group's Common Stock. Management believes this presentation is useful because these business units are each wholly owned by CH Energy Group. This information is considered a non-GAAP financial measure and not an alternative to earnings per share determined on a consolidated basis, which is the most directly comparable GAAP measure.
Earnings for CH Energy Group totaled $0.34 per share in the third quarter of 2009, versus earnings of $0.18 per share in the same period of 2008. Year-to-date earnings were $1.71 per share, as compared to $1.51 per share during the first nine months of 2008.
Third quarter 2009 results by business unit were as follows:
Central Hudson
Central Hudson's contribution to earnings per share was $0.55 per share, $0.18 per share higher than the third quarter of 2008. New electric and natural gas delivery rates and the RDMs that took effect July 1, 2009 provided an increase of $0.43 per share over the third quarter of 2008. This increase covered the increased operating expenses and negative impacts that both weather and the weak economy had on sales in the third quarter of 2009 as compared to 2008. Cooler summer weather compared to the same quarter of the prior year resulted in a decrease in earnings of $0.08 per share. Management believes that the decrease in use per customer, which reduced earnings $0.05 per share, and the increase in uncollectible expense which reduced earnings by $0.05 per share are both indicative of the weak economy.
Year-to-date, Central Hudson has earned $1.39 per share compared to $1.35 per share posted for the first nine months of 2008. The positive effect on year-to-date earnings of the rate orders that took effect July 1, 2009 and July 1, 2008, as well as lower storm restoration expenses, was largely offset by higher expenses during the first nine months of 2009 and the impact of lower sales volumes prior to the implementation of the RDMs.
Griffith
Griffith posted a loss of $0.22 per share in the third quarter of 2009, a $0.06 per share improvement over the third quarter of 2008. This quarterly loss is expected due to the seasonal nature of Griffith's fuel delivery business. The improvement in Griffith's results over the same quarter of the prior year was due largely to a reduction in operating expenses.
Year-to-date, Griffith has earned $0.28 per share compared to a loss per share of $0.08 posted for the first nine months of 2008. Griffith's $0.36 per share improvement in earnings was due primarily to increased margins on the sale of petroleum products, colder winter weather and reduced operating expenses in the first nine months of 2009 as compared to 2008, partially offset by a reduction in sales volume as a result of customer conservation.
Other Businesses and Investments
CH Energy Group (the holding company) and CHEC's partnerships and other investments contributed earnings of $0.01 per share toward corporate earnings in the third quarter of 2009, a decrease of $0.08 per share from the same period in 2008. This reduction in earnings is primarily the result of higher income taxes and interest expense incurred by the holding company.
Year-to-date earnings per share for these business units totaled $0.04 per share compared to $0.24 per share posted for the first nine months of 2008. Year-to-date results were impacted by an equipment repair that necessitated taking the Lyonsdale facility off line for several weeks in the second quarter of 2009. The plant is back on line with an improved capacity factor as a result of the repair. Year-to-date earnings were also reduced by $0.05 per share due to a reserve recorded in the first quarter of 2009 related to an ethanol development project of CHEC. The reserve represents the full amount of the note receivable investment for development expenditures and this project represented CHEC's only current early-stage development project. Higher interest expense at the holding company also contributed to the reduction in earnings for the first nine months of 2009 as compared to 2008.
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%
† 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 current height above ground requirements; and the recently enacted New York State Temporary 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.
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