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CHG > SEC Filings for CHG > Form 10-Q on 9-Nov-2012All Recent SEC Filings

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Form 10-Q for CH ENERGY GROUP INC


9-Nov-2012

Quarterly Report


ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

EXECUTIVE SUMMARY

This MD&A should be read in conjunction with the third quarter Financial Statements and the notes thereto and the MD&A in Item 7 of the Companies' combined Annual Report on Form 10-K for the year ended December 31, 2011; and the MD&A in Part I, Item 2 of the Companies' combined Quarterly Report on Form 10-Q for the period ending March 31, 2012 and June 30, 2012.

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;

Other Businesses and Investments:
(4) CHEC's renewable energy investments and the holding company's activities, which consist primarily of financing its subsidiaries.

CH Energy Group's objective is to deliver value to its shareholders through current income, in the form of quarterly dividend payments, and through share appreciation that is expected to result from earnings and dividend growth over the long term.

On February 21, 2012, CH Energy Group announced that it had entered into an agreement and plan of merger under which it agreed, subject to shareholder approval and the approval of applicable regulatory authorities, to be acquired by Fortis Inc. ("Fortis") for $65 per share of common stock in cash. On June 19, 2012, shareholders of CH Energy Group approved the proposed acquisition of the Company by Fortis. The only outstanding approval needed for the transaction to close is from the New York State Public Service Commission ("NYS PSC").
Fortis' strategy includes the expansion of its utility operations, which are currently concentrated in Canada, into the U.S. CH Energy Group's mission and strategy remains unchanged as discussed in more detail below.

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Mission and Strategy

CH Energy Group's mission is to provide electricity, natural gas, petroleum and related services to an expanding customer base in a safe, reliable, courteous and affordable manner; to produce growing financial returns for shareholders; to foster a culture that encourages employees to reach their full potential; and to be a good corporate citizen.

CH Energy Group endeavors to fulfill its mission, providing an attractive risk adjusted return to CH Energy Group shareholders, by executing our plan to:
Concentrate on energy distribution through Central Hudson in the Mid-Hudson Valley and through Griffith in the Mid-Atlantic region

Invest primarily in utility electric and natural gas transmission and distribution

Focus on risk management

- Limit commodity exposure

- Manage regulatory affairs effectively

- Maintain a financial profile that supports a credit rating in the "A" category

Target stable and predictable earnings, with growth trend expectations of 5% or more per year off a 2009 base

Provide an annualized dividend that is approximately 65% to 70% of annual earnings

Strategy Execution

Following the 2011 successful implementation and transition to the current strategy, CH Energy Group's management believes that it is well positioned to achieve its goal of a 5% earnings growth trend starting with 2009 as a base year.

Management continues to focus on Central Hudson's electric and natural gas infrastructure as the core growth drivers of CH Energy Group. Central Hudson's capital expenditure program is on course to achieve its targets under its three year rate plan and management anticipates earning a return approximately equal to its allowed return in 2012. The unseasonably warm winter resulted in significantly lower volumes of petroleum products being delivered to Griffith's customers, especially its residential customers. While not typical, the price of fuel oil products rose during the warmer than normal winter period.
Customers responded to these escalating prices by reducing their usage from what it otherwise would have been, given the actual weather experienced.

Griffith continued its focus on cost management in 2012 in an effort to moderate the impact of lower volumes as well as increased wages and the effects that higher commodity costs had on Griffith's cost of doing business. Griffith was able to increase margins in an environment of contracting customer demand for petroleum products to improve overall results. Additionally, Griffith successfully acquired and tucked-in two business units in 2012, which are expected to be accretive in 2013. However, the decrease in core earnings year over year coupled with the increased capital invested for acquisitions has resulted in a decline in the return on investment for Griffith.

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Griffith's financial results in 2012 have been impacted by an extremely mild winter and escalating wholesale prices, which further dampened demand for its products. Griffith has offset a portion of the resulting effect of reduced sales volume through margin management and cost management, but its return on investment has fallen for the year to date.

Business unit contributions to operating revenues and net income for the three and nine months ended September 30, 2012 and 2011 are discussed in more detail in the Results of Operations section of this Management's Discussion and Analysis.

Information Regarding the Fortis Transaction

Since the announcement of the proposed acquisition by Fortis, CH Energy Group and Fortis have been working cooperatively toward a successful closing. On June 19, 2012, shareholders of CH Energy Group approved the proposed acquisition of the Company by Fortis. The transaction is expected to be completed shortly after NYS PSC approval is obtained. This is the only outstanding approval needed to close the transaction. Management continues to believe that PSC approval will be obtained and the transaction will close during the first quarter of 2013.

EARNINGS PER SHARE AND OVERVIEW OF THIRD QUARTER AND YEAR TO DATE RESULTS The following discussion and analyses include explanations of significant changes in revenues and expenses between the three and nine months ended September 30, 2012 and 2011 for Central Hudson's regulated electric and natural gas businesses, Griffith, and the Other Businesses and Investments.

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The discussions and tables below present the change in earnings of CH Energy Group's business units in terms of earnings for each outstanding share of CH Energy Group's Common Stock. Management believes that expressing the results in terms of the impact on shares of CH Energy Group is useful to investors because it shows the relative contribution of the various business units to CH Energy Group's earnings. 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. Additionally, management believes that the disclosure of Significant Events within each business unit provides investors with the context around the Company's results that is important in enabling them to ascertain the likelihood that past performance is indicative of future performance. A reconciliation of each business unit's earnings per share to CH Energy Group's earnings per share, determined on a consolidated basis, is included in the table below.

CH Energy Group Consolidated

Earnings per Share (Basic)

                            Three Months Ended                          Nine Months Ended
                               September 30,                              September 30,
                            2012           2011         Change          2012          2011         Change
Central Hudson -
Electric                 $     0.89      $    0.79     $    0.10     $     1.90     $    1.54     $    0.36
Central Hudson -
Natural Gas                   (0.07 )        (0.03 )       (0.04 )         0.44          0.47         (0.03 )
Griffith                      (0.13 )        (0.15 )        0.02          (0.06 )        0.03         (0.09 )
Other Businesses and
Investments                   (0.08 )        (0.06 )       (0.02 )        (0.58 )       (0.01 )       (0.57 )
Total CH Energy Group
Consolidated Earnings,
as reported              $     0.61      $    0.55     $    0.06     $     1.70     $    2.03     $   (0.33 )

Significant Events:
Central Hudson           $        -      $   (0.02 )   $    0.02     $    (0.13 )   $   (0.15 )   $    0.02
Griffith                          -              -             -          (0.11 )        0.03         (0.14 )
Other Businesses and
Investments                   (0.07 )        (0.02 )       (0.05 )        (0.61 )       (0.06 )       (0.55 )
Total Significant
Events                   $    (0.07 )    $   (0.04 )   $   (0.03 )   $    (0.85 )   $   (0.18 )   $   (0.67 )

CH Energy Group
Consolidated
Adjusted Earnings Per
Share (non-GAAP):
Central Hudson           $     0.82      $    0.78     $    0.04     $     2.47     $    2.16     $    0.31
Griffith                      (0.13 )        (0.15 )        0.02           0.05             -          0.05
Other Businesses and
Investments                   (0.01 )        (0.04 )        0.03           0.03          0.05         (0.02 )
Total CH Energy Group
Consolidated Adjusted
Earnings Per Share
(non-GAAP)               $     0.68      $    0.59     $    0.09     $     2.55     $    2.21     $    0.34

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Details by business unit were as follows:

Central Hudson

Earnings per Share (Basic)

                           Three Months Ended                          Nine Months Ended
                              September 30,                              September 30,
                           2012           2011         Change          2012          2011         Change
Central Hudson -
Electric                $     0.89      $    0.79     $    0.10     $     1.90     $    1.54     $    0.36
Central Hudson -
Natural Gas                  (0.07 )        (0.03 )       (0.04 )         0.44          0.47         (0.03 )
Total Central Hudson
Earnings                $     0.82      $    0.76     $    0.06     $     2.34     $    2.01     $    0.33

Significant Events:
Storm deferral
adjustment              $        -      $       -     $       -     $    (0.13 )   $   (0.03 )   $   (0.10 )
Higher weather
related restoration
costs(1)                         -          (0.02 )        0.02              -         (0.12 )        0.12
Central Hudson
Adjusted Earnings Per
Share                   $     0.82      $    0.78     $    0.04     $     2.47     $    2.16     $    0.31

                                                       Change                                     Change
Delivery revenue                                      $    0.14                                  $    0.35
Higher property and
other taxes                                               (0.04 )                                    (0.08 )
Higher depreciation                                       (0.04 )                                    (0.10 )
Higher maintenance
costs for capital
projects                                                      -                                      (0.07 )
(Higher) Lower
trimming costs                                            (0.02 )                                     0.11
Share accretion                                               -                                       0.08
Other                                                         -                                       0.02
                                                      $    0.04                                  $    0.31

(1) Amount represents incremental costs incurred for weather related service restoration, including costs for outside contractor assistance in restoration efforts and higher than average internal expenses (such as overtime and materials), which did not meet the PSC criteria for deferral and therefore have not been deferred for future recovery from customers.

Earnings from Central Hudson's electric and natural gas operations increased in both the three and nine months ended September 30, 2012 compared to the same periods in 2011. In December 2011 and during the first half of 2012, Central Hudson reduced its deferred storm costs associated with the significant snow storm event in late October 2011 ("SnowFall") by $0.03 and $0.13, respectively.
After adjusting Central Hudson's earnings per share for these deferral adjustments and other incremental weather related restoration costs experienced in 2011, earnings were $0.04 per share higher in the third quarter, and $0.31 per share higher in the first nine months, year over year. Both periods were favorably impacted by higher delivery revenues resulting primarily from the delivery rate increase that went into effect in July 2011 and was needed to address the cost of capital, as we continued to make significant investments in our system, as well as higher operating expenses. The nine month period was also favorably impacted by lower tree trimming costs and share accretion compared to the same period in 2011. The lower trimming cost was due to the acceleration of trimming in the first half of 2011 to take advantage of crew availability and favorable contract pricing. Favorable share accretion on a year-to-date basis is attributable to CH Energy Group's repurchase of nearly $49 million of common stock during 2011.

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Griffith

Earnings per Share (Basic)

                           Three Months Ended                           Nine Months Ended
                              September 30,                               September 30,
                           2012           2011         Change          2012           2011         Change
Griffith - Fuel
Distribution Earnings   $    (0.13 )    $   (0.15 )   $    0.02     $    (0.06 )    $    0.03     $   (0.09 )

Significant Events:
Weather impact on
sales                   $        -      $       -     $       -     $    (0.11 )    $    0.01     $   (0.12 )
Discontinued
operations                       -              -             -              -           0.02         (0.02 )
Griffith Adjusted
Earnings Per Share      $    (0.13 )    $   (0.15 )   $    0.02     $     0.05      $       -     $    0.05

                                                       Change                                      Change
Weather-normalized
sales (including
conservation)                                         $   (0.02 )                                 $   (0.05 )
Gross margin on
petroleum sales                                            0.01                                        0.04
Operating expenses                                         0.02                                        0.04
Other                                                      0.01                                        0.02
                                                      $    0.02                                   $    0.05

Griffith's earnings increased $0.02 per share in the three months ended September 30, 2012 compared to the same period in 2011 primarily due to margins and effective cost management.

For the nine months ended September 30, 2012, compared to the same period in 2011, Griffith's earnings were $0.09 lower primarily due to lower volumes resulting from the unusually warm winter season in 2012 compared to the colder than normal winter season in 2011. In addition, Griffith's 2011 earnings benefited from reducing the environmental reserve associated with the 2009 divestiture. Excluding the impact of these items, Griffith's weather-normalized core earnings through September were $0.05 higher than the same period last year. This increase reflects higher margins and effective cost management as well as lower weather-normalized sales volumes. The lower core volumes were primarily due to customer conservation in response to high commodity prices.

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Other Businesses and Investments

Earnings per Share (Basic)

                           Three Months Ended                          Nine Months Ended
                              September 30,                              September 30,
                           2012           2011         Change          2012          2011         Change
Other Businesses &
Investments Earnings    $    (0.08 )    $   (0.06 )   $   (0.02 )   $    (0.58 )   $   (0.01 )   $   (0.57 )


Significant Events:
Renewable
Investments:
Operations              $        -      $   (0.05 )   $    0.05     $        -     $   (0.09 )   $    0.09
Gain on sales                    -           0.12         (0.12 )            -          0.12         (0.12 )
Federal tax grant
benefit in 2011                  -           0.17         (0.17 )            -          0.17         (0.17 )
Payment for early
retirement of debt
following 2011
divestiture                      -          (0.12 )        0.12              -         (0.12 )        0.12
Wind investment
impairment in 2011               -          (0.14 )        0.14              -         (0.14 )        0.14
Merger related costs         (0.07 )            -         (0.07 )        (0.61 )           -         (0.61 )
Other Businesses and
Investments Adjusted
Earnings Per Share      $    (0.01 )    $   (0.04 )   $    0.03     $     0.03     $    0.05     $   (0.02 )

                                                       Change                                     Change
Lower net interest
income                                                $       -                                  $   (0.03 )
Other                                                      0.03                                       0.01
                                                      $    0.03                                  $   (0.02 )

The earnings of CH Energy Group (the holding company) and CHEC's partnerships and other investments decreased in the three and nine months ended September 30, 2012 compared to the same periods in 2011 primarily due to the costs associated with the Fortis acquisition, which reduced earnings by $0.07 and $0.61 per share, respectively. Excluding the significant events listed above, core earnings increased during the three months and decreased during the nine months ended September 30, 2012 compared to the prior periods. The core earnings increase noted in the third quarter of 2012 compared to the prior period was primarily driven by business development internal labor costs incurred in the third quarter of 2011. The core earnings decrease noted on a year to date basis was largely due to lower net interest income.

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RESULTS OF OPERATIONS

A breakdown by business unit of CH Energy Group's operating revenues (net of
divestitures) and net income for the three and nine months ended September 30,
2012 and 2011 are illustrated below (Dollars in Thousands):

                                       Three Months Ended                                             Three Months Ended
                                       September 30, 2012                                             September 30, 2011
                         Operating            Net Income (Loss) Attributable            Operating            Net Income (Loss) Attributable
Business Unit            Revenues                   to CH Energy Group                  Revenues                   to CH Energy Group
Electric(1)        $ 148,916          68 %   $    13,287                  146 %   $ 149,706          68 %   $    12,060                  144 %
Gas(1)                18,306           8          (1,031 )                (11 )      18,462           8            (637 )                 (8 )
Total Central
Hudson               167,222          76          12,256                  135       168,168          76          11,423                  136
Griffith(1)(2)        51,848          24          (1,930 )                (21 )      52,587          24          (2,269 )                (27 )
Other
Businesses and
Investments(3)             -           -          (1,269 )                (14 )           -           -            (826 )                 (9 )
Total CH Energy
Group              $ 219,070         100 %   $     9,057                  100 %   $ 220,755         100 %   $     8,328                  100 %

(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 2012: 26% cost recovery revenues + 42% other revenues = 68%
Electric 3rd Quarter 2011: 28% cost recovery revenues + 40% other revenues = 68%
Natural gas 3rd Quarter 2012: 3% cost recovery revenues + 5% other revenues = 8%
Natural gas 3rd Quarter 2011: 3% cost recovery revenues + 5% other revenues = 8%
Griffith 3rd Quarter 2012: 20% commodity costs + 4% other revenues = 24% Griffith 3rd Quarter 2011: 20% commodity costs + 4% other revenues = 24%
(2) Net loss for Griffith for the three months ended September 30, 2011 includes a loss from discontinued operations of $12.
(3) Net loss for Other Businesses and Investments for the three months ended September 30, 2011 includes income from discontinued operations of $3,775.

                                       Nine Months Ended                                              Nine Months Ended
                                       September 30, 2012                                             September 30, 2011
                         Operating            Net Income (Loss) Attributable            Operating            Net Income (Loss) Attributable
Business Unit            Revenues                   to CH Energy Group                  Revenues                   to CH Energy Group
Electric(1)        $ 393,617          57 %   $    28,400                  112 %   $ 418,511          55 %   $    23,775                   77 %
Gas(1)               100,276          15           6,500                   26       127,941          17           7,174                   23
Total Central
Hudson               493,893          72          34,900                  138       546,452          72          30,949                  100
Griffith(1)(2)       196,819          28            (886 )                 (4 )     208,342          28             449                    1
Other
Businesses and
Investments(3)             -           -          (8,740 )                (34 )           -           -            (168 )                 (1 )
Total CH Energy
Group              $ 690,712         100 %   $    25,274                  100 %   $ 754,794         100 %   $    31,230                  100 %

(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 2012: 20% cost recovery revenues + 37% other revenues = 57% Electric YTD 2011: 22% cost recovery revenues + 33% other revenues = 55% Natural gas YTD 2012: 5% cost recovery revenues + 10% other revenues = 15%
Natural gas YTD 2011: 8% cost recovery revenues + 9% other revenues = 17% Griffith YTD 2012: 23% commodity costs + 5% other revenues = 28% Griffith YTD 2011: 22% commodity costs + 6% other revenues = 28%
(2) Net income for Griffith for the nine months ended September 30, 2011 includes net income from discontinued operations of $310.
(3) Net loss for Other Businesses and Investments for the nine months ended September 30, 2011 includes a loss from discontinued operations of $3,658.

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