UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
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x
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
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Commission
File Number
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Registrant, State of Incorporation
Address and Telephone Number
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IRS Employer
Identification No.
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0-30512
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CH Energy Group, Inc.
(Incorporated in New York)
284 South Avenue
Poughkeepsie, New York 12601-4839
(845) 452-2000
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14-1804460
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1-3268
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Central Hudson Gas & Electric Corporation
(Incorporated in New York)
284 South Avenue
Poughkeepsie, New York 12601-4839
(845) 452-2000
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14-0555980
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered
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CH Energy Group, Inc.
Common Stock, $0.10 par value
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
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Title of each class
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Central Hudson Gas & Electric Corporation Cumulative Preferred Stock
4.50% Series
4.75% Series
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Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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CH Energy Group, Inc.
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Yes þ
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No o
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Central Hudson Gas & Electric Corporation
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Yes o
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No þ
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Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
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CH Energy Group, Inc.
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Yes o
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No þ
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Central Hudson Gas & Electric Corporation
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Yes o
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No þ
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Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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CH Energy Group, Inc.
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Yes þ
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No o
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Central Hudson Gas & Electric Corporation
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Yes þ
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No o
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Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
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CH Energy Group, Inc.
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Yes þ
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No o
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Central Hudson Gas & Electric Corporation
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Yes þ
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No o
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants’ knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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CH Energy Group, Inc.
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Central Hudson Gas & Electric Corporation
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Large Accelerated Filer þ
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Large Accelerated Filer o
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Accelerated Filer o
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Accelerated Filer o
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Non-Accelerated Filer o
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Non-Accelerated Filer þ
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Smaller Reporting Company o
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Smaller Reporting Company o
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
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CH Energy Group, Inc.
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Yes o
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No þ
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Central Hudson Gas & Electric Corporation
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Yes o
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No þ
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The aggregate market value of the voting and non-voting common equity of CH Energy Group held by non-affiliates as of February 1, 2012, was $860,353,783 based upon the price at which CH Energy Group’s Common Stock was last traded on that date, as reported on the New York Stock Exchange listing of composite transactions.
The aggregate market value of the voting and non-voting common equity of CH Energy Group held by non-affiliates as of June 30, 2011, the last business day of CH Energy Group’s most recently completed second fiscal quarter, was $821,719,300 computed by reference to the price at which CH Energy Group’s Common Stock was last traded on that date, as reported on the New York Stock Exchange listing of composite transactions.
The aggregate market value of the voting and non-voting common equity of Central Hudson held by non-affiliates as of June 30, 2011 was zero.
The number of shares outstanding of CH Energy Group’s Common Stock, as of February 1, 2012, was 14,897,901.
The number of shares outstanding of Central Hudson’s Common Stock, as of February 1, 2012, was 16,862,087. All such shares are owned by CH Energy Group.
CENTRAL HUDSON MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS (I)(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION (I)(2).
DOCUMENTS INCORPORATED BY REFERENCE
CH Energy Group’s definitive Proxy Statement to be used in connection with its Annual Meeting of Shareholders to be held on April 24, 2012, is incorporated by reference in Part III hereof. Information required by Part III hereof with respect to Central Hudson has been omitted pursuant to General Instruction (I)(2)(c) of Form 10-K.
GLOSSARY OF TERMS
The following is a glossary of frequently used abbreviations or acronyms used herein.
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CH Energy Group Companies and Investments
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CHEC
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Central Hudson Enterprises Corporation (the parent company of Griffith Energy Services, Inc. (not regulated by the PSC) and wholly owned subsidiary of CH Energy Group)
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Griffith
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Griffith Energy Services, Inc. (a wholly owned subsidiary of CHEC)
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Lyonsdale
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Lyonsdale Biomass, LLC (a formerly wholly owned subsidiary of CHEC)
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CH-Auburn
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CH-Auburn Energy, LLC (a formerly wholly owned subsidiary of CHEC)
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CH-Greentree
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CH-Greentree, LLC (a formerly wholly owned subsidiary of CHEC)
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CH Shirley Wind
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CH Shirley Wind, LLC (a formerly wholly owned subsidiary of CHEC which owned 90% controlling interest in Shirley Delaware, which owned 100% interest in Shirley Wind)
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Shirley Delaware
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Shirley Wind (Delaware), LLC (100% owner of Shirley Wind)
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Shirley Wind
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Shirley Wind, LLC (a 20 megawatt wind project)
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Cornhusker Holdings
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Cornhusker Energy Lexington Holdings, LLC (a CHEC investment)
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JB Wind
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JB Wind Holdings, LLC (a CH-Community Wind investee company)
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Regulators
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NYS
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New York State
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PSC
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NYS Public Service Commission
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FERC
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Federal Energy Regulatory Commission
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DEC
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NYS Department of Environmental Conservation
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Terms Related to Business Operations Used By CH Energy Group
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1993 PSC Policy
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PSC’s 1993 Statement of Policy regarding pension and other post-employment benefits
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2006 Rate Order
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Order Establishing Rate Plan issued by the PSC to Central Hudson on July 24, 2006
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(i)
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2009 Rate Order
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Order Establishing Rate Plan issued by the PSC to Central Hudson on June 22, 2009
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2010 Rate Order
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Order Establishing Rate Plan issued by the PSC to Central Hudson on June 18, 2010
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Dth
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Decatherms
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Distributed Generation
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An electrical generating facility located at a customer’s point of delivery which may be connected in parallel operation to the utility system
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kWh
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Kilowatt-hour(s)
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Mcf
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Thousand Cubic Feet
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MGP
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Manufactured Gas Plant
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MW / MWh
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Megawatt(s) / Megawatt-hour(s)
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OPEB
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Other Post-Employment Benefits
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RDMs
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Revenue Decoupling Mechanisms
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Retirement Plan
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Central Hudson’s Non-Contributory Defined Benefit Retirement Income Plan
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ROE
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Return on Equity
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ROW
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Right-of-Way
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Settlement Agreement
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Amended and Restated Settlement Agreement dated January 2, 1998, and thereafter amended, among Central Hudson, PSC Staff, and Certain Other Parties
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Temporary State
Assessment
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New York State Temporary State Energy and Utility Service Conservation Assessment required to be collected from April 4, 2009 to March 31, 2014
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Other
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COSO
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Committee of Sponsoring Organizations of the Treadway Commission
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EITF
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FASB Emerging Issues Task Force
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Exchange Act
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Securities Exchange Act of 1934
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GAAP
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Accounting Principles Generally Accepted in the United States of America
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NYISO
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New York Independent System Operator
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NYSERDA
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New York State Energy Research and Development Authority
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Registrants
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CH Energy Group and Central Hudson
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(ii)
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PART I
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PAGE
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BUSINESS
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2
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RISK FACTORS
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11
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UNRESOLVED STAFF COMMENTS
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14
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PROPERTIES
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14
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LEGAL PROCEEDINGS
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16
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| ITEM 4 | MINE SAFETY DISCLOSURES | 16 |
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PART II
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MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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16
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SELECTED FINANCIAL DATA OF CH ENERGY GROUP AND ITS SUBSIDIARIES
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20
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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22
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QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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84
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FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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86
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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
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192
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CONTROLS AND PROCEDURES
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192
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OTHER INFORMATION
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192
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PART III
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DIRECTORS AND EXECUTIVE OFFICERS OF CH ENERGY GROUP
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193
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EXECUTIVE COMPENSATION
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194
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
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194
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
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194
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PRINCIPAL ACCOUNTANT FEES AND SERVICES
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195
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PART IV
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EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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195
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PART I
FILING FORMAT
This 10-K Annual Report for the fiscal year ended December 31, 2011, is a combined report being filed by two different Registrants: CH Energy Group and Central Hudson. Any references in this 10-K Annual Report to CH Energy Group include all subsidiaries of CH Energy Group, including Central Hudson, except where the context clearly indicates otherwise. Central Hudson makes no representation as to the information contained in this 10-K Annual Report in relation to CH Energy Group and its subsidiaries other than Central Hudson. When this 10-K Annual Report is incorporated by reference into any filing with the SEC made by Central Hudson, the portions of this 10-K Annual Report that relate to CH Energy Group and its subsidiaries, other than Central Hudson, are not incorporated by reference therein.
CH Energy Group’s wholly owned subsidiaries include Central Hudson and CHEC. For additional information, see the sub-caption “CHEC and Its Subsidiaries and Investments” in Item 1 - “Business” under the caption “Subsidiaries of CH Energy Group.”
FORWARD-LOOKING STATEMENTS
Statements included in this Annual Report on Form 10-K and any documents incorporated by reference which are not historical in nature are intended to be, and are hereby identified as, “forward-looking statements” for purposes of the safe harbor provided by Section 21E of the Exchange Act. Forward-looking statements may be identified by words including “anticipates,” “intends,” “estimates,” “believes,” “projects,” “expects,” “plans,” “assumes,” “seeks,” and similar expressions. Forward-looking statements including, without limitation, those relating to CH Energy Group’s and Central Hudson’s future business prospects, revenues, proceeds, working capital, investment valuations, liquidity, income, and margins, are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements, due to several important factors, including those identified from time-to-time in the forward-looking statements. Those factors include, but are not limited to: deviations from normal seasonal weather and storm activity; fuel prices; energy supply and demand; potential future acquisitions; legislative, regulatory, and competitive developments; interest rates; access to capital; market risks; electric and natural gas industry restructuring and cost recovery; the ability to obtain adequate and timely rate relief; changes in fuel supply or costs including future market prices for energy, capacity, and ancillary services; the success of strategies to satisfy electricity, natural gas, fuel oil, and propane requirements; the outcome of pending litigation and certain environmental matters, particularly the status of inactive hazardous waste disposal sites and waste site remediation requirements; and certain presently unknown or unforeseen factors, including, but not limited to, acts of terrorism. CH Energy Group and Central Hudson undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.
Given these uncertainties, undue reliance should not be placed on the forward-looking statements.
CORPORATE STRUCTURE
CH Energy Group is the holding company parent corporation of two principal, wholly owned subsidiaries, Central Hudson and CHEC. Central Hudson is a regulated electric and natural gas subsidiary. CHEC, the parent company of CH Energy Group’s unregulated businesses and investments, has one wholly owned subsidiary, Griffith Energy Services, Inc. (“Griffith”). CHEC also has ownership interests in certain subsidiaries that are less than 100% owned. For more information, see sub-caption “Other Subsidiaries and Investments” under caption “CHEC and Its Subsidiaries and Investments.” For information concerning revenues, certain expenses, earnings per share, and information regarding assets of Central Hudson’s regulated electric and regulated natural gas segments and of Griffith, see Note 13 - “Segments and Related Information.”
HOLDING COMPANY REGULATION
CH Energy Group is a “holding company” under Public Utility Holding Company Act of 2005 (“PUHCA 2005”) because of its ownership interests in Central Hudson and CHEC. CH Energy Group, however, is exempt from regulation as a holding company under PUHCA 2005, because it derives substantially all of its public utility company revenues from business conducted within a single state, the State of New York. At the present time, CH Energy Group cannot predict whether and when its circumstances may change such that it no longer qualifies for exemption from PUHCA 2005.
SUBSIDIARIES OF CH ENERGY GROUP
Central Hudson
Central Hudson is a New York State natural gas and electric corporation formed in 1926. Central Hudson purchases, sells at wholesale, and distributes electricity and natural gas at retail in portions of New York State. Central Hudson also generates a small portion of its electricity requirements.
Central Hudson serves a territory comprising approximately 2,600 square miles in the Hudson Valley, with a population estimated at 680,000. Electric service is available throughout the territory, and natural gas service is provided in and about the cities of Poughkeepsie, Beacon, Newburgh, and Kingston, New York, and in certain outlying and intervening territories. The number of Central Hudson employees at December 31, 2011, was 838.
Central Hudson’s territory reflects a diversified economy, including manufacturing industries, governmental agencies, public and private institutions, wholesale and retail trade operations, research firms, farms and resorts.
Seasonality and Other Weather Impacts
Central Hudson’s delivery revenues have historically varied seasonally in response to weather. Sales of electricity are highest during the summer months, primarily due to the use of air-conditioning and other cooling equipment. Sales of natural gas are highest during the winter months, primarily due to space heating usage. Central Hudson’s rates are developed based on forecasts of annual sales volumes. Effective July 1, 2009 and continuing in the 2010 Rate Order through June 30, 2013, Central Hudson’s delivery rate structure includes RDMs, which provide the ability to record revenues equal to those forecasted in the development of current rates for most of Central Hudson’s customers. As a result, fluctuations in actual sales volumes as a result of weather or other factors as compared to those forecasted in rate proceedings no longer have a significant impact on earnings. However, variations between actual expenses incurred due to storm activity and the amount set in rates may impact Central Hudson’s earnings. Central Hudson has the ability to request regulatory recovery of significant incremental costs incurred if certain criteria are met as defined by the PSC and, as such, any adverse impact on earnings for higher storm expenses should be limited to non-material amounts, as long as the other criteria for deferral accounting are met.
Competition
Central Hudson is a regulated utility with a legal obligation to deliver electricity and natural gas within its PSC-approved franchise territory. Central Hudson has no direct competitors in its electricity distribution business; indirect competitors include distributed generation systems, including net metered systems. Central Hudson’s natural gas business competes with other fuels, especially fuel oil and propane. The competitive marketplace continues to develop for electric and natural gas supply markets, and Central Hudson’s electric and natural gas customers may purchase energy and related services from other providers. Central Hudson’s rate making structure neutralizes any earnings impact of customers’ decisions to purchase electricity and natural gas from other providers.
Regulation
Central Hudson is subject to regulation by the PSC regarding, among other things, services rendered (including the rates charged), major transmission facility siting, accounting treatment of certain items, and issuance of securities. For certain restrictions imposed by the Settlement Agreement, see Note 2 - “Regulatory Matters.”
Certain activities of Central Hudson, including accounting and the acquisition and disposition of property, are subject to regulation by FERC under the Federal Power Act.
Central Hudson is not subject to the provisions of the Natural Gas Act. Central Hudson’s hydroelectric facilities are not required to be licensed under the Federal Power Act but are regulated by the DEC.
Central Hudson is subject to regulation by the North American Electric Reliability Corporation regarding its ownership, operation and use of bulk power system.
Rates
General: The electric and natural gas rates charged by Central Hudson applicable to service supplied to retail customers within New York State are regulated by the PSC. Costs of service, both for electric and gas delivery service and for electric and gas supply costs, are recovered from customers through PSC approved tariffs, subject to a standard of prudency. Both transmission rates and rates for electricity sold for resale which involve interstate commerce are regulated by FERC.
Since July 2009, Central Hudson’s rates have included RDMs which are intended to minimize the earnings impact resulting from reduced energy consumption as energy efficiency programs are implemented by breaking the link between energy sales and utility revenues and profits. Central Hudson’s RDMs allow the Company to recognize electric delivery revenues and gas sales per customer at the levels approved in rates for most of Central Hudson’s electric and gas customer classes.
Central Hudson’s retail electricity rate structure consists of various service classifications covering delivery service and full service (which includes electricity supply) for residential, commercial, and industrial customers. Retail rates for delivery and supply are shown separately on retail bills to allow customers to see the costs associated with their commodity supply, and thus facilitate retail competition. During 2011, the average price of electricity for full service customers was 14.48 cents per kWh as compared to an average of 14.94 cents per kWh in 2010. The PSC has authorized Central Hudson to recover the costs of the electric commodity from customers, without earning a profit on the commodity costs. The average delivery price in 2011 was 5.60 cents per kWh and 5.26 cents per kWh in 2010. The increase in delivery price was primarily due to the implementation of new rates as part of the 2010 Rate Order. The average delivery price in 2011 also includes a surcharge resulting from the Electric RDM.
Central Hudson’s retail natural gas rate structure consists of various service classifications covering transport, retail access service, and full service (which includes natural gas supply) for residential, commercial, and industrial customers. During 2011, the average price of natural gas for full-service customers was $15.50 per Mcf as compared to an average of $14.86 per Mcf in 2010. The PSC has authorized Central Hudson to recover the costs of the gas commodity from customers, without earning a profit on the commodity costs. The average delivery price for natural gas for retail and full service in 2011 was $6.94 per Mcf and $6.67 per Mcf in 2010. The increase in delivery price was primarily due to the implementation of new rates as part of the 2010 Rate Order and increases associated with surcharges to cover additional assessments from New York State agencies. The average delivery price in 2011 includes a surcharge resulting from the Gas RDM.
For further information regarding the terms of the 2006 Rate Order, 2009 Rate Order and 2010 Rate Order under which Central Hudson operated during the current reporting period, see Note 2 - “Regulatory Matters” under the caption “2006, 2009 and 2010 Rate Orders.”
Cost Adjustment Clauses and RDMs: For information regarding Central Hudson’s electric and natural gas cost adjustment clauses and RDMs, see Note 1 - “Summary of Significant Accounting Policies” under the caption “Rates, Revenues and Cost Adjustment Clauses.”
Capital Expenditures and Financing
For estimates of future capital expenditures for Central Hudson, see the sub-caption “Anticipated Sources and Uses of Cash” in Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this 10-K Annual Report under the caption “Capital Resources and Liquidity.”
Central Hudson’s Certificate of Incorporation and its various debt instruments do not contain any limitations upon the issuance of authorized, but unissued, Preferred Stock or unsecured short-term debt.
Central Hudson has in place certain credit facilities with financial covenants that limit the amount of indebtedness Central Hudson may incur. Additionally, Central Hudson’s ability to issue debt securities is limited by authority granted by the PSC. Central Hudson believes these limitations will not impair its ability to issue any or all of the debt described under the sub-caption “Financing Program” in Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this 10-K Annual Report under the caption “Capital Resources and Liquidity.”
Purchased Power and Generation Costs
For the year ended December 31, 2011, the sources and related costs of purchased electricity and electric generation for Central Hudson were as follows (In Thousands):
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Sources of Energy
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Aggregate Percentage of Energy Requirements
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Costs in 2011
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Purchased Electricity
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96.8 | % | $ | 196,009 | ||||
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Hydroelectric and Other
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3.2 | % | 374 | |||||
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100.0 | % | ||||||
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Deferred Electricity Cost
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9,777 | |||||||
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Total
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$ | 206,160 | ||||||
Research and Development
Central Hudson is engaged in the conduct and support of research and development (“R&D”) activities, which are focused on the improvement of existing energy technologies and the development of new technologies for the delivery and customer use of energy. Central Hudson’s R&D expenditures were $2.1 million in 2011, $3.1 million in 2010 and $3.9 million in 2009. These expenditures were for internal research programs and for contributions to research administered by New York State Energy Research and Development Authority (“NYSERDA”), the Electric Power Research Institute, and other industry organizations. The decrease in total R&D expenditures in 2011 as compared to the prior two periods is a result of a PSC Order to cease the collection from customers and payment to NYSERDA of certain energy efficiency research funds in the current year. There is no impact on earnings related to this change and the collections and payments have resumed in 2012. R&D expenditures are provided for in Central Hudson’s rates charged to customers for electric and natural gas delivery service, with any differences between R&D expense and the rate allowances deferred for future recovery from or return to customers.
Other Central Hudson Matters
Labor Relations: Central Hudson has an agreement with Local 320 of the International Brotherhood of Electrical Workers for its 519 unionized employees, representing construction and maintenance employees, customer service representatives, service workers, and clerical employees (excluding persons in managerial, professional, or supervisory positions). This agreement became effective on May 1, 2011, and remains effective through April 30, 2016.
CHEC and Its Subsidiaries and Investments
CHEC, a New York corporation, is a wholly owned subsidiary of CH Energy Group. CHEC’s wholly owned subsidiary Griffith is engaged in the business of marketing petroleum products and related services to retail and wholesale customers. For further discussion of certain energy-related projects within other subsidiaries and investments, see Note 5 - “Acquisitions, Divestitures and Investments.”
Griffith
Griffith is an energy services company engaged in fuel distribution, including heating oil, gasoline, diesel fuel, kerosene, and propane, and the installation and maintenance of heating, ventilating, and air conditioning equipment. The number of Griffith employees at December 31, 2011 was 403.
Other Subsidiaries and Investments
Pursuant to the strategy shift announced in 2010, during 2011, CH Energy Group sold its four largest renewable energy investments; Lyonsdale, Shirley Wind, CH-Auburn and the molecular gate owned by CH-Greentree. See Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the caption "Executive Summary" for further discussion.
Seasonality
A substantial portion of CHEC’s revenues vary seasonally, as Griffith’s fuel oil deliveries are directly related to use for space heating and are highest during the winter months.
Competition
Griffith participates in a competitive fuel distribution industry that is subject to different risks than those found in the businesses of the regulated utility, Central Hudson. Griffith faces competition from other fuel distribution companies and from companies supplying other fuels for heating, such as natural gas and propane. For a discussion of Griffith’s operating revenues and operating income, see the caption “Results of Operations” in Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this 10-K Annual Report.
ENVIRONMENTAL QUALITY REGULATION
Central Hudson and Griffith are subject to regulation by federal, state, and local authorities with respect to the environmental effects of their operations. Environmental matters may expose Central Hudson and Griffith to potential liability, which, in certain instances, may be imposed without regard to fault or may be premised on historical activities that were lawful at the time they occurred.
Central Hudson and Griffith each monitor their activities in order to determine their impact on the environment and to comply with applicable environmental laws and regulations.
The principal environmental areas relevant to these companies (air, water and industrial and hazardous wastes, other) are described below. Unless otherwise noted, all required permits and certifications have been obtained by the applicable company. Management believes that each company was in material compliance with these permits and certifications during 2011, except as noted in Note 12 – “Commitments and Contingencies” under the caption “Environmental Matters” of this 10-K Annual Report.
Air Quality
The Clean Air Act Amendments of 1990 address attainment and maintenance of national air quality standards and impact Central Hudson electric generating facilities in South Cairo and Coxsackie, NY. See Note 12 – “Commitments and Contingencies” under the caption “Environmental Matters” regarding the investigation by the EPA into the compliance of a former major Central Hudson generating asset.
Prior to the sale of CH-Auburn, a Notice of Violation of its air permit was received from the NYS DEC in 2010. CH-Auburn reached an agreement with the NYS DEC to resolve this issue and paid a civil penalty of approximately $30,000 in the first quarter of 2011. There were no outstanding violations at the time of sale.
Water Quality
The Clean Water Act established the basic framework for federal and state regulation of water pollution control and requires facilities that discharge waste or storm water into the waters of the United States to obtain permits. Central Hudson and Griffith have permits regulating pollutant discharges for relevant locations.
Industrial & Hazardous Substances and Wastes
Central Hudson and Griffith are subject to federal, state and local laws and regulations relating to the use, handling, storage, treatment, transportation, and disposal of industrial, hazardous, and toxic wastes. Currently, there are no permit or certification requirements for Griffith. See Note 12 − “Commitments and Contingencies” under the caption “Environmental Matters” for additional discussion regarding, among other things, Central Hudson’s former MGP facilities and Little Britain Road.
Environmental Expenditures
2011 actual and 2012 estimated expenditures attributable in whole or in substantial part to environmental considerations are detailed in the table below:
| Central Hudson | Griffith | |||
| 2011 - $2.1 million | 2011 - $0.8 million | |||
| 2012 - $6.8 million | 2012 - $0.5 million |
Prior to their sale in 2011, actual environmental expenditures by CH-Auburn and Lyonsdale were not material.
Central Hudson and Griffith are also subject to regulation with respect to other environmental matters, such as noise levels, protection of vegetation and wildlife, and limitations on land use, and are in compliance with regulations in these areas.
Regarding environmental matters, except as described in Note 12 - “Commitments and Contingencies” under the caption “Environmental Matters,” neither CH Energy Group, Central Hudson nor Griffith are involved as defendants in any material litigation, administrative proceeding, or investigation and, to the best of their knowledge, no such matters are threatened against any of them.
AVAILABLE INFORMATION
CH Energy Group and Central Hudson file annual, quarterly, and current reports and other information with the SEC. CH Energy Group also files proxy statements. The public may read and copy any of the documents each company files at the SEC’s Public Reference Room at 100 F Street N.E., Room 1580, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. SEC filings are also available to the public from the SEC’s Internet website at www.sec.gov.
CH Energy Group and Central Hudson make available free of charge at www.CHEnergyGroup.com their annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the SEC. CH Energy Group’s proxy statements, governance guidelines, Code of Business Conduct and Ethics, and the charters of its Audit, Compensation, Governance and Nominating, and Strategy and Finance Committees are also available at www.CHEnergyGroup.com. The governance guidelines, the Code of Business Conduct and Ethics, and the charters may also be obtained by writing to the Corporate Secretary, CH Energy Group, Inc., 284 South Avenue, Poughkeepsie, New York 12601-4839.
EXECUTIVE OFFICERS OF CH ENERGY GROUP
All executive officers of CH Energy Group are elected or appointed annually by its Board of Directors. There are no family relationship among any of the executive officers of CH Energy Group. The names of the current executive officers of CH Energy Group, their positions held and business experience during the past five years, and ages (at December 31, 2011) are as follows:
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Date Commenced
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Executive Officers
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Age
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Current
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and Prior Positions
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CH Energy Group
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Central Hudson
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CHEC
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Steven V. Lant
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54
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Chairman of the Board
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Apr 2004
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May 2004
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May 2004
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Chief Executive Officer
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Jul 2003
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Jul 2003
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Jul 2003
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President
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Jul 2003
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Jul 2003
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Director
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Feb 2002
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Dec 1999
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Dec 1999
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James P. Laurito(1)
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55
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President
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Jan 2010
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Executive Vice President
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Nov 2009
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Nov 2009
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Director
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Nov 2009
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Nov 2009
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Christopher M. Capone
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49
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President
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Sep 2010
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Executive Vice President
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Jan 2007
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Jan 2007
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Director
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Mar 2005
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Mar 2007
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Chief Financial Officer
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Sep 2003
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Sep 2003
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Sep 2003
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Treasurer
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Apr 2003
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Jun 2001
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Apr 2003
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John E. Gould(2)
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67
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Executive Vice President and General Counsel
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Oct 2009
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Jan 2010
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Jan 2010
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Secretary
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Mar 2007
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Jun 2007
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Jun 2007
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Assistant Secretary
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Nov 1999
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Jan 2000
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Denise D. VanBuren
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50
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Secretary
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Dec 2009
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Jan 2010
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Jan 2010
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Vice President - Corporate Communications
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Dec 2009
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Jan 2010
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Vice President - Public Affairs and Energy Efficiency
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Aug 2007
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Aug 2007
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Vice President - Corporate Communications and Community Relations
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Nov 2000
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Nov 2000
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Charles A. Freni, Jr.
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52
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Director
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Mar 2011
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Senior Vice President - Customer Services
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Jan 2005 | |||||||||||
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W. Randolph Groft
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50
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Executive Vice President
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Jan 2003
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Director
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Jan 2003
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Kimberly J. Wright
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44
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Vice President - Accounting and Controller
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May 2008
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Controller
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Oct 2006
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(1)
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From 2003 to August 2009, served as the President and Chief Executive Officer of New York State Electric and Gas Corporation and of Rochester Gas and Electric Corporation; both companies are gas and electric utilities.
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(2)
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Before October 2009, served as a partner of the law firm of Thompson Hine LLP.
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STORMS AND OTHER EVENTS BEYOND CENTRAL HUDSON’S AND GRIFFITH’S CONTROL MAY INTERFERE WITH THEIR OPERATIONS
Description and Sources of Risk
In order to conduct their businesses, (1) Central Hudson must have access to natural gas and electric supplies and be able to utilize its electric and natural gas infrastructure, and (2) Griffith needs access to petroleum supplies from storage facilities in its service territories. Central Hudson has designed its electric and natural gas systems to serve customers under various contingencies in accordance with good utility practice.
However, any one or more of the following could impact either or both of the companies’ ability to access supplies and/or utilize critical facilities:
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Storms, natural disasters, wars, terrorist acts, failure of critical equipment and other catastrophic events occurring both within and outside Central Hudson’s and Griffith’s service territories.
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Bulk power system and gas transmission pipeline system capacity constraints could impact Central Hudson.
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Unfavorable developments in the world oil markets could impact Griffith.
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Third-party facility owner or supplier financial distress.
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Unfavorable governmental actions or judicial orders.
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Potential Impacts
The companies could experience service disruptions leading to lower earnings and/or reduced cash flows if the situation is not resolved in a timely manner or the financial impacts of restoration are not alleviated through insurance policies, regulated rate recovery for Central Hudson or higher sales prices for Griffith.
CENTRAL HUDSON’S RATES LIMIT ITS ABILITY TO RECOVER ITS COSTS FROM ITS CUSTOMERS
Description and Sources of Risk
Central Hudson’s retail rates are regulated by the PSC. Rates generally may not be changed during their respective terms. Therefore, rates cannot be modified for higher expenses than those assumed in the current rates, absent circumstances such as an increase in expenses that meet the PSC’s threshold requirements for filing for approval of deferral accounting. Central Hudson is operating under a three year rate order plan approved by the PSC effective July 1, 2010. The following could unfavorably impact Central Hudson’s financial results:
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·
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Higher expenses than reflected in current rates. Higher expenses could result from, among other things, increases in taxes and assessments, unrecoverable storm restoration expense, labor, health care benefits or other expense components.
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Penalties imposed by the PSC for the failure to achieve performance metrics established in rate proceedings, or violation of PSC Orders.
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Higher electric and natural gas capital project costs resulting from escalation of labor, material and equipment prices, as well as potential delays in the siting and legislative and/or regulatory approval requirements associated with these projects.
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A determination by the PSC that the cost to place a project in service is above a level which is deemed prudent.
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Potential Impacts
Central Hudson could have lower earnings and/or reduced cash flows if cost management and/or regulatory relief are not sufficient to alleviate the impact of higher costs.
Additional Information
See Note 2 - “Regulatory Matters” of this 10-K Annual Report.
UNUSUAL TEMPERATURES IN GRIFFITH’S SERVICE TERRITORIES MAY ADVERSELY IMPACT EARNINGS
Description and Sources of Risk
Griffith serves the Mid-Atlantic region of the United States. This area experiences seasonal fluctuations in temperature. A considerable portion of Griffith’s earnings is derived directly or indirectly from the weather-sensitive end uses of space heating and air conditioning. As a result, sales volumes fluctuate and vary from normal expected levels based on variations in weather from historically normal seasonal levels. Such variations could significantly reduce sales volumes.
Potential Impacts
Griffith could experience lower delivery volumes in periods of milder than normal weather, leading to lower earnings and reduced cash flows.
GRIFFITH’S ABILITY TO ATTRACT NEW CUSTOMERS, RETAIN EXISTING CUSTOMERS, MAINTAIN SALES VOLUMES, AND MAINTAIN MARGINS MAY ADVERSELY IMPACT EARNINGS
Description and Sources of Risk
Lower sales can occur for various reasons, including the following:
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Changes in customers’ usage patterns driven by customer responses to product prices,
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·
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Economic conditions,
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Energy efficiency programs, and/or
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·
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The loss of major customers, the loss of a large number of residential customers, or the addition of fewer new customers than expected.
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Significant volatility in wholesale oil prices could negatively impact margins and/or cause current and/or prospective full service customers to reduce their usage and/or purchase fuel from discount distributors.
Potential Impacts
Any one or more of the following could result from these events:
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·
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An adverse impact on Griffith’s ability to attract new full-service residential customers and retain existing full-service residential customers.
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Further sales volume reductions, and/or compressed margins.
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·
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Increased working capital requirements stemming from an increase in oil and/or propane prices.
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These events could materially reduce Griffith’s contribution to CH Energy Group’s earnings and cash flow.
CENTRAL HUDSON IS SUBJECT TO RISKS RELATING TO ASBESTOS LITIGATION AND MANUFACTURED GAS PLANT FACILITIES
Description and Sources of Risk
Litigation has been commenced by third parties against Central Hudson arising from the use of asbestos at certain of its previously owned electric generating stations, and Central Hudson is involved in a number of matters arising from contamination at former MGP sites.
Potential Impacts
To the extent not covered by insurance or recovered through rates, remediation costs, court decisions and settlements resulting from any litigation could reduce earnings and cash flows.
Additional Information
See Note 12 - “Commitments and Contingencies” and in particular the sub-captions in Note 12 regarding “Asbestos Litigation” and “Former Manufactured Gas Plant Facilities” under the caption “Environmental Matters.”
None.
CH Energy Group has no significant properties other than those of Central Hudson and CHEC.
CENTRAL HUDSON
Electric
Central Hudson owns hydroelectric and gas turbine generating facilities as described below.
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Type of Electric Generating Plant
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Year Placed in Service/Refurbished
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MW(1) Net Capability
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Hydroelectric (3 stations)
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1920-1986
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22.4
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Gas turbine (2 stations)
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1969-1970
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42.5
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Total
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64.9
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(1) Reflects maximum one-hour net capability (winter rating as of December 31, 2011) of Central Hudson’s electric generating plants and therefore does not include firm purchases or sales.
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Central Hudson owns substations having an aggregate transformer capacity of 5.0 million kilovolt amperes. Central Hudson’s electric transmission system consists of 629 pole miles of line. The electric distribution system consists of approximately 7,300 pole miles of overhead lines and 1,400 trench miles of underground lines, as well as customer service lines and meters.
Electric Load and Capacity
Central Hudson’s maximum one-hour demand for electricity within its own territory for the year ended December 31, 2011, occurred on July 22, 2011, and amounted to 1,225 MW. In prior summer periods peak electric demand has reached 1,295 MW which occurred on August 2, 2006. Central Hudson’s maximum one-hour demand for electricity within its own territory for that part of the 2011-2012 winter capability period through January 18, 2012, occurred on December 18, 2011, and amounted to 840 MW.
Central Hudson owns minimal generating capacity and relies on purchased capacity and energy from third-party providers to meet the demands of its full service customers. For more information, see Note 12 - “Commitments and Contingencies.”
Natural Gas
Central Hudson’s natural gas system consists of 164 miles of transmission pipelines and 1,185 miles of distribution pipelines, as well as customer service lines and meters. For the year ended December 31, 2011, the total amount of natural gas purchased by Central Hudson from all sources was 11,456,822 Mcf. Central Hudson owns two propane-air mixing facilities, one located in Poughkeepsie, New York, and the other in Newburgh, New York. As of December 31, 2011, these facilities are no longer in service and are in the process of being dismantled. The cost to be incurred associated with the retirement of these facilities is not expected to be material and will have no impact on earnings.
The peak daily demand for natural gas of Central Hudson’s customers for the year ended December 31, 2011, and for that part of the 2011-2012 heating season through January 30, 2012, occurred on January 23, 2011 and amounted to 115,807 Mcf. In prior years, winter period daily peak demand has reached 125,496 Mcf which occurred on January 27, 2005. Central Hudson’s firm peak day natural gas capability in the 2011-2012 heating season was 134,484 Mcf.
Other Central Hudson Matters
Central Hudson owns its corporate headquarters located in Poughkeepsie, New York, as well as several district offices located throughout the Hudson Valley. Central Hudson’s electric generating plants and important property units are generally held by it in fee simple, except for certain ROW and a portion of the property used in connection with hydroelectric plants consisting of flowage or other riparian rights. Certain of the Central Hudson properties are subject to ROW and easements that do not interfere with Central Hudson’s operations. In the case of certain distribution lines, Central Hudson owns only a partial interest in the poles upon which its wires are installed and the remaining interest is owned by various telecommunications companies. In addition, certain electric and natural gas transmission facilities owned by others are used by Central Hudson under long-term contracts.
During the three-year period ended December 31, 2011, Central Hudson made gross property additions of $244.8 million and property retirements and adjustments of $40.4 million, resulting in a net increase (including construction work in progress) in gross utility plant of $204.4 million, or 16%.
CHEC
As of December 31, 2011, CHEC owned a 100% interest in Griffith. As of December 31, 2011, Griffith owned or leased several office, warehouse, and bulk petroleum storage facilities. These facilities are located in Delaware, Maryland, Virginia, and West Virginia. The bulk petroleum storage facilities have capacities from 60,000 gallons up to 760,000 gallons. Griffith leases its corporate headquarters, which is located in Columbia, Maryland.
For information about developments regarding certain legal proceedings, see Note 12 - “Commitments and Contingencies” of this 10-K Annual Report.
Not applicable.
PART II
For information regarding the market for CH Energy Group’s Common Stock and related stockholder matters, see Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this 10-K Annual Report under the caption “Capital Resources and Liquidity - Financing Program” and Note 8 - “Capitalization - Common and Preferred Stock.”
Under applicable statutes and their respective Certificates of Incorporation, CH Energy Group may pay dividends on its Common Stock and Central Hudson may pay dividends on its Common Stock and its Preferred Stock, in each case only out of surplus.
The line graph set forth below provides a comparison of CH Energy Group’s cumulative total shareholder return on its Common Stock with the Standard and Poor’s 500 Index (“S&P 500”) and with the Edison Electric Institute Index (the “EEI Index”), which consists of the 58 U.S. shareholder-owned electric utilities. Total shareholder return is the sum of the dividends paid and the change in the market price of the stock.
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Indexed Returns
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Base Period
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Years Ending
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Dec
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Dec
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Dec
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Dec
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Dec
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Dec
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||||||||||||||||||
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Company / Index
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2006
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2007
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2008
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2009
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2010
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2011
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CH Energy Group, Inc.
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$ | 100 | $ | 88.27 | $ | 107.80 | $ | 93.44 | $ | 113.08 | $ | 140.76 | ||||||||||||
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S&P 500 Index
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$ | 100 | $ | 105.49 | $ | 66.46 | $ | 84.05 | $ | 96.71 | $ | 98.76 | ||||||||||||
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EEI Index
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$ | 100 | $ | 116.56 | $ | 86.37 | $ | 95.62 | $ | 102.34 | $ | 122.80 | ||||||||||||
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COMMON STOCK DIVIDENDS AND PRICE RANGES
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CH Energy Group and its principal predecessors (including Central Hudson) have paid dividends on their respective Common Stock in each year commencing in 1903, and the Common Stock has been listed on the New York Stock Exchange since 1945. The closing price as of December 31, 2011 and December 31, 2010 was $58.38 and $48.89, respectively. The price ranges and the dividends paid for each quarterly period during the last two fiscal years are as follows:
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2011
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2010
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High
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Low
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Dividend
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High
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Low
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Dividend
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||||||||||||||||||
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1st Quarter
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$ | 50.75 | $ | 47.44 | $ | 0.540 | $ | 43.57 | $ | 38.25 | $ | 0.540 | ||||||||||||
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2nd Quarter
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$ | 54.44 | $ | 48.76 | $ | 0.540 | $ | 43.47 | $ | 37.75 | $ | 0.540 | ||||||||||||
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3rd Quarter
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$ | 57.12 | $ | 48.00 | $ | 0.540 | $ | 44.77 | $ | 38.60 | $ | 0.540 | ||||||||||||
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4th Quarter
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$ | 59.67 | $ | 50.55 | $ | 0.555 | $ | 50.33 | $ | 43.72 | $ | 0.540 | ||||||||||||
In the third and fourth quarters of 2011, the Board of Directors of CH Energy Group declared a quarterly dividend of 55.5 cents per share. This dividend is an increase from the 54 cents per share declared to shareholders each quarter since 1998. This increase is consistent with CH Energy Group’s strategy which targets stable and predictable earnings, with growth trend expectations of 5% or more per year off a base of $2.76 in 2009 and the expectation to provide an annualized common stock dividend that is the higher of $2.22 per share or 65% to 70% of annual earnings. In declaring future dividends, CH Energy Group will evaluate all circumstances at the time of making such decisions, including business, financial, and regulatory considerations.
CH Energy Group’s ability to pay dividends to common shareholders is affected by the ability of its subsidiaries to pay dividends to the parent company. The Federal Power Act limits the payment of dividends by Central Hudson to its retained earnings. More restrictive is the PSC’s limit on the dividends Central Hudson may pay to CH Energy Group which is 100% of the average annual income available for common stock, calculated on a two-year rolling average basis. Based on this calculation as of December 31, 2011, Central Hudson would be able to pay a maximum of $44.6 million in dividends to CH Energy Group without violating the restrictions imposed by the PSC. Central Hudson’s dividend would be reduced to 75% of its average annual income in the event of a downgrade of its senior debt rating below “BBB+” by more than one rating agency if the stated reason for the downgrade is related to CH Energy Group or any of Central Hudson’s affiliates. Further restrictions are imposed for any downgrades below this level. During the year ended December 31, 2011, Central Hudson declared and paid dividends of $43.0 million to CH Energy Group. CH Energy Group’s other subsidiaries do not have express restrictions on their ability to pay dividends.
The number of registered holders of Common Stock of CH Energy Group as of December 31, 2011 was 13,980.
All of the outstanding Common Stock of Central Hudson and all of the outstanding Common Stock of CHEC are held by CH Energy Group.
Beginning in the fourth quarter of 2010 CH Energy Group, using excess liquidity largely related to proceeds from divestitures, repurchased shares of its own common stock. For more information regarding CH Energy Group’s stock repurchase program, see the “Anticipated Sources and Uses of Cash” section of Item 7 - Management Discussion and Analysis.
The following table provides a summary of shares repurchased by CH Energy Group for the quarter ended December 31, 2011:
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Total Number of Shares Purchased
(1)
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Average Price
Paid per Share
(2)
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Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
(3)
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Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs
(3)
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October 1-31, 2011
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1,042
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$
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52.17
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-
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1,051,324
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November 1-30, 2011
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377
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$
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54.58
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-
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1,051,324
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December 1-31, 2011
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-
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$
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-
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-
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1,051,324
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Total
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1,419
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$
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52.81
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-
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(1)
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Consists of shares surrendered to CH Energy Group in satisfaction of tax withholdings on the vesting of restricted shares.
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(2)
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Value at which reacquired shares of CH Energy Group's common stock credited on the date the stock was surrendered.
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(3)
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On July 31, 2007, the Board of Directors authorized the repurchase of up to 2,000,000 shares or approximately 13% of CH Energy Group's outstanding common stock on that date, from time to time, over the five year period ending July 31, 2012.
|
|||||||||
FIVE-YEAR SUMMARY OF CONSOLIDATED OPERATIONS AND SELECTED FINANCIAL DATA(1)
(CH ENERGY GROUP)
(In Thousands, except per share data)
|
2011
|
2010
|
2009
|
2008
|
2007
|
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Operating Revenues
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Electric - Delivery
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$ | 332,388 | $ | 317,023 | $ | 275,167 | $ | 242,334 | $ | 233,033 | ||||||||||
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Electric - Supply
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206,160 | 246,116 | 261,003 | 365,827 | 383,806 | |||||||||||||||
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Natural Gas - Delivery
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85,196 | 81,606 | 66,916 | 59,897 | 55,326 | |||||||||||||||
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Natural Gas - Supply
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76,778 | 75,189 | 107,221 | 129,649 | 110,123 | |||||||||||||||
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Competitive business subsidiaries
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284,998 | 240,174 | 211,250 | 330,254 | 287,882 | |||||||||||||||
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Total
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985,520 | 960,108 | 921,557 | 1,127,961 | 1,070,170 | |||||||||||||||
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Operating Income
|
99,589 | 99,303 | 81,585 | 70,701 | 76,426 | |||||||||||||||
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Income from continuing operations
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43,184 | 40,330 | 33,597 | 30,968 | 41,143 | |||||||||||||||
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Income (Loss) from discontinued operations, net of tax
|
3,126 | (1,128 | ) | 10,681 | 5,186 | 2,343 | ||||||||||||||
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Dividends declared on Preferred Stock of subsidiary
|
970 | 970 | 970 | 970 | 970 | |||||||||||||||
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Net Income attributable to CH Energy Group
|
45,340 | 38,504 | 43,484 | 35,081 | 42,636 | |||||||||||||||
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Dividends Declared on Common Stock
|
33,291 | 34,161 | 34,119 | 34,086 | 34,052 | |||||||||||||||
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Change in Retained Earnings
|
12,049 | 4,343 | 9,365 | 995 | 8,584 | |||||||||||||||
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Retained Earnings - beginning of year
|
230,342 | 225,999 | 216,634 | 215,639 | 207,055 | |||||||||||||||
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Retained Earnings - end of year
|
$ | 242,391 | $ | 230,342 | $ | 225,999 | $ | 216,634 | $ | 215,639 | ||||||||||
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Common Share Data:
|
||||||||||||||||||||
|
Average shares outstanding - basic
|
15,278 | 15,785 | 15,775 | 15,768 | 15,762 | |||||||||||||||
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Income from continuing operations - basic
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$ | 2.77 | $ | 2.51 | $ | 2.08 | $ | 1.89 | $ | 2.55 | ||||||||||
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Income from discontinued operations - basic
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$ | 0.20 | $ | (0.07 | ) | $ | 0.68 | $ | 0.33 | $ | 0.15 | |||||||||
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Net Income attributable to CH Energy Group - basic
|
$ | 2.97 | $ | 2.44 | $ | 2.76 | $ | 2.22 | $ | 2.70 | ||||||||||
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Average shares outstanding - diluted
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15,481 | 15,952 | 15,881 | 15,805 | 15,779 | |||||||||||||||
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Income from continuing operations - diluted
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$ | 2.73 | $ | 2.48 | $ | 2.07 | $ | 1.89 | $ | 1.89 | ||||||||||
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Income from discontinued operations - diluted
|
$ | 0.20 | $ | (0.07 | ) | $ | 0.68 | $ | 0.33 | $ | 0.15 | |||||||||
|
Net Income attributable to CH Energy Group - diluted
|
$ | 2.93 | $ | 2.41 | $ | 2.74 | $ | 2.22 | $ | 2.04 | ||||||||||
|
Dividends declared per share
|
$ | 2.19 | $ | 2.16 | $ | 2.16 | $ | 2.16 | $ | 2.16 | ||||||||||
|
Book value per share (at year-end)
|
$ | 32.88 | $ | 34.03 | $ | 33.76 | $ | 33.17 | $ | 33.19 | ||||||||||
|
Total Assets (at year-end)
|
$ | 1,730,112 | $ | 1,729,275 | $ | 1,697,883 | $ | 1,730,183 | $ | 1,494,748 | ||||||||||
|
Long-term Debt (at year-end)(2)
|
$ | 446,003 | $ | 502,959 | $ | 463,897 | $ | 413,894 | $ | 403,892 | ||||||||||
|
Cumulative Preferred Stock (at year-end)
|
$ | 21,027 | $ | 21,027 | $ | 21,027 | $ | 21,027 | $ | 21,027 | ||||||||||
|
Total CH Energy Group Common Shareholders' Equity (at year-end)
|
$ | 502,248 | $ | 537,804 | $ | 553,502 | $ | 523,534 | $ | 523,148 | ||||||||||
|
(1)
|
This summary should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in Item 8 - “Financial Statements and Supplementary Data” of this
10-K Annual Report.
|
|
(2)
|
Net of current maturities of long-term debt.
|
For additional information related to the impact of acquisitions and dispositions on the above, this summary should be read in conjunction with Item 7 - “Management Discussion and Analysis of Financial Condition and Results of Operations” of this 10-K Annual Report and Note 5 - “Acquisitions, Divestitures and Investments” of Item 8 - “Financial Statements and Supplementary Data” of this 10-K Annual Report.
FIVE-YEAR SUMMARY OF CONSOLIDATED OPERATIONS AND SELECTED FINANCIAL DATA(1)
(CENTRAL HUDSON)
(In Thousands)
|
2011
|
2010
|
2009
|
2008
|
2007
|
||||||||||||||||
|
Operating Revenues
|
|
|
|
|
|
|||||||||||||||
|
Electric - Delivery
|
$ | 332,388 | $ | 317,023 | $ | 275,167 | $ | 242,334 | $ | 233,033 | ||||||||||
|
Electric - Supply
|
206,160 | 246,116 | 261,003 | 365,827 | 383,806 | |||||||||||||||
|
Natural Gas - Delivery
|
85,196 | 81,606 | 66,916 | 59,897 | 55,326 | |||||||||||||||
|
Natural Gas - Supply
|
76,778 | 75,189 | 107,221 | 129,649 | 110,123 | |||||||||||||||
|
Total
|
700,522 | 719,934 | 710,307 | 797,707 | 782,288 | |||||||||||||||
|
Operating Income
|
95,526 | 94,848 | 76,338 | 67,344 | 71,406 | |||||||||||||||
|
Net Income
|
45,037 | 46,118 | 32,776 | 27,238 | 33,436 | |||||||||||||||
|
Dividends Declared on Cumulative Preferred Stock
|
970 | 970 | 970 | 970 | 970 | |||||||||||||||
|
Income Available for Common Stock
|
44,067 | 45,148 | 31,806 | 26,268 | 32,466 | |||||||||||||||
|
Dividends Declared to Parent - CH Energy Group
|
43,000 | 31,000 | - | - | 8,500 | |||||||||||||||
|
Change in Retained Earnings
|
1,067 | 14,148 | 31,806 | 26,268 | 23,966 | |||||||||||||||
|
Retained Earnings - beginning of year
|
164,898 | 150,750 | 118,944 | 92,676 | 68,710 | |||||||||||||||
|
Retained Earnings - end of year
|
$ | 165,965 | $ | 164,898 | $ | 150,750 | $ | 118,944 | $ | 92,676 | ||||||||||
|
Total Assets (at year-end)
|
$ | 1,602,381 | $ | 1,539,074 | $ | 1,485,600 | $ | 1,492,196 | $ | 1,252,694 | ||||||||||
|
Long-term Debt (at year-end)(2)
|
$ | 417,950 | $ | 453,900 | $ | 413,897 | $ | 413,894 | $ | 403,892 | ||||||||||
|
Cumulative Preferred Stock (at year-end)
|
$ | 21,027 | $ | 21,027 | $ | 21,027 | $ | 21,027 | $ | 21,027 | ||||||||||
|
Total Equity (at year-end)
|
$ | 445,295 | $ | 444,228 | $ | 430,080 | $ | 373,274 | $ | 347,006 | ||||||||||
|
(1)
|
This summary should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in Item 8 - “Financial Statements and Supplementary Data” of this 10-K Annual Report.
|
|
(2)
|
Net of current maturities of long-term debt.
|
INTRODUCTION
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations are intended to help the reader understand CH Energy Group and Central Hudson.
Please note that the Executive Summary (below) is provided as a supplement to, and should be read together with, the remainder of this Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the Consolidated Financial Statements, including the Notes thereto, and the other information included in this 10-K Annual 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;
|
|||
|
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.
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 base of $2.76 per share in 2009
|
|
·
|
Provide an annualized common stock dividend that is the higher of $2.22 per share or 65% to 70% of annual earnings
|
Implementation and Achievements
CH Energy Group has effectively completed the strategy transition announced in October 2010, reducing earnings risk and volatility while strengthening the foundation for future earnings growth. During 2011, CH Energy Group divested its significant renewable energy investments, repurchased $50 million of CH Energy Group Common Stock, repaid $20 million of CH Energy Group long-term debt, invested over $85 million in Central Hudson’s infrastructure, increased Central Hudson’s core earnings and invested approximately $4.5 million in new tuck-in acquisitions at Griffith. Based on the results of the strategy implementation, the Board of Directors of CH Energy Group approved an increase to the dividend in the third quarter of 2011 by approximately 3%; the first increase since 1998. The following charts depict the asset composition of CH Energy Group as of December 31, 2011 and 2010 which demonstrate the implementation of the announced strategy shift.
CH Energy Group Assets at December 31, 2011 and 2010
| Central Hudson | Griffith | Other Businesses and Investments |
During 2011, CH Energy Group has divested CHEC’s four largest renewable energy investments; Lyonsdale, Shirley Wind, CH-Auburn and CH-Greentree. The sale of these investments increased earnings by $2.3 million in 2011. Proceeds from the sales of these investments were used primarily for the repurchase of outstanding Common Stock of CH Energy Group and debt repayment. During 2011, approximately 949,000 shares, or 6% of CH Energy Group’s outstanding Common Stock, were repurchased. Additionally, a portion of the proceeds from the sale of Shirley Wind was used to pay down $20 million of CH Energy Group private placement debt.
Central Hudson’s electric and natural gas infrastructure are the core growth drivers of CH Energy Group. Central Hudson’s capital expenditures have grown over the past 5 years, totaling approximately $400 million over that period. Central Hudson expects to invest $300 million during the current three-year rate plan between July 1, 2010 and June 30, 2013, and similar or higher levels of capital expenditures beyond the three-year rate agreement.
Additionally, Griffith’s tuck-in acquisitions are expected to increase this business unit’s contributions to CH Energy Group’s earnings. Griffith resumed its acquisition activity at the end of 2010 and has successfully acquired 7 new businesses as of December 31, 2011. Additionally, Griffith was able to effectively manage costs to offset inflation and increase margins in an environment of high commodity prices and contracting customer demand for petroleum products.
With the successful implementation of the strategy transition, 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.
The following information outlines the strategies for each of CH Energy Group’s business units, including a description of the business core competencies, investment opportunities, potential risks, and notable activity during 2011. Business unit contributions to operating revenues and net income for the years ended December 31, 2011, 2010 and 2009 are discussed in the Results of Operations section of this Management’s Discussion and Analysis.
Central Hudson
Business Description and Strategy
Central Hudson’s earnings are derived primarily from the revenue it generates from delivering energy to approximately 300,000 electric customers and 75,000 natural gas customers. The delivery rates Central Hudson charges its customers are set by the PSC and are designed to recover the cost of providing safe and reliable service to Central Hudson’s customers while providing the opportunity to earn a fair and reasonable return on the capital invested by shareholders.
Central Hudson’s strategy is to provide exceptional value to its customers by:
|
-
|
practicing continuous improvement in everything we do;
|
|
-
|
investing in transmission and infrastructure to enhance reliability, improve customer satisfaction and reduce risk;
|
|
-
|
moderating cost pressures that increase customer bill levels and variability; and
|
|
-
|
advocating on behalf of customers and other stakeholders.
|
Central Hudson believes that it has strong competencies in safe and efficient utility operations, financial management, risk management and regulatory affairs which will facilitate the achievement of its strategy. Central Hudson has bolstered its strategic and business planning processes and has formalized the goal alignment throughout all levels of the organization in an effort to meet or exceed the expectations of its key stakeholders.
Opportunities and Risks
Earnings growth is primarily expected to come from increases in net utility plant. Central Hudson invests significant capital on an annual basis to attach new customers to the system and to replace aging infrastructure. Central Hudson’s investments enhance safety and reliability, and improve customer satisfaction and reduce risk. Opportunities to enhance transmission and distribution systems and information systems technologies are evaluated and prioritized based on their designed benefits, projected costs, and estimated risks. Management continually monitors and evaluates its capital expenditure forecasts and project priorities, which include certain long-term investment opportunities in the system’s distribution infrastructure and potentially in gas and electric transmission.
Central Hudson continues to advance its cost management efforts and seek opportunities to improve existing business processes utilizing Lean Six Sigma techniques, which is a data driven approach to eliminating waste as well as improving efficiency and service quality. These incremental process improvements focus on producing more revenue, providing cost savings and creating quality improvements, thereby providing benefits for both CH Energy Group shareholders and Central Hudson customers. Central Hudson also recognizes the importance of innovation and encourages employees to create new value and opportunities to reduce costs and improve quality through event driven activities.
The key risks Management sees in achieving this strategy are the regulatory environment, cost management and the economy in Central Hudson’s service territory.
Central Hudson’s ability to meet its financial objectives is largely dependent on the consistency and appropriateness of the PSC’s ratemaking practices. Risks related to these practices include reduced allowed returns on equity and/or reduced probabilities of achieving allowed returns, an inability to recover the full costs of doing business, declining support for strong capital structures and credit ratings, changes in deferral accounting that increase volatility of earnings and/or defer cash recovery of our costs, elimination of RDMs and changes in the mechanisms currently in place for recovery of our commodity purchases. Additionally, lower interest rates could lead to a decrease in the authorized ROE in a future rate proceeding. Management believes Central Hudson’s commitments to providing safe and reliable service, customer satisfaction, operational excellence and promoting positive customer and regulatory relations are important for supportive regulatory relationships and obtaining full cost recovery and competitive returns for shareholders.
The current three-year rate plan, which commenced on July 1, 2010, reduces uncertainty and risk and supports investment in Central Hudson’s infrastructure to improve the quality of service to customers. The key provisions of the rate plan include an authorized regulatory return on equity of 10.0% and a 48% regulatory equity ratio; the continuation of a RDM; full recovery and deferral provisions for purchased electric and gas, MGP site remediation, pension and OPEB expenses. The rate plan also contains a number of service quality thresholds; performance below these thresholds entails financial penalties. Additionally, PSC staff approved and incorporated in the development of rates, Central Hudson’s capital expenditure budget for the term of the three-year rate plan, subject to the achievement of certain defined Net Plant targets. The PSC’s regulations also provide an opportunity to recover certain extraordinary expenditures that are not reflected in rates. However, the 3-pronged test criteria required for approval may limit Central Hudson from recovering some or all of such costs, reducing earnings for shareholders. Management believes the current rate plan and other regulatory orders under which Central Hudson operates demonstrate a constructive relationship with New York State regulators and the willingness of regulators to enable Central Hudson to earn stable, predictable returns while providing reliable, high quality service and fulfilling New York State energy policy objectives.
The impacts of laws and other regulations represent another risk to the Central Hudson strategy. In addition to the recovery of costs of operation, Central Hudson’s current rate structure includes a return on the utility’s projected rate base. Rate base represents Central Hudson’s investment in its utility infrastructure adjusted for certain required regulatory items. Changes in tax legislation or accounting can reduce the amount of Central Hudson rate base, reducing Central Hudson’s future rates and potential earnings. Central Hudson’s election to utilize bonus depreciation as it has been made available in recent years has had just such an impact. In addition, Central Hudson’s change to the accounting tax method related to costs to repair and maintain utility assets has resulted in an increase in its deferred tax liability and a decrease to rate base. For additional discussion of these tax items, see Note 4 – “Income Tax.”
Another risk is the ability to effectively manage costs, which is a key component of Central Hudson’s strategy. The continued implementation of Lean Six Sigma techniques to create value in existing business processes and innovation to create new value will play critical roles in managing the costs of doing business in a sustainable manner as well as result in continuous improvement in services provided to customers.
The fourth risk, the economy in Central Hudson’s service territory, affects the ability to collect receivables and the growth of utility rate base and earnings through a direct relationship to customer additions and peak demand growth. Management believes the economy in Central Hudson’s service territory has good long-term growth prospects, but unexpected prolonged downturns could inhibit its ability to meet long term business objectives.
Other Notable 2011 Activity
During 2011, Central Hudson experienced several significant weather related events which disrupted service to our customers and resulted in extensive damage to our infrastructure. Central Hudson’s dedicated management team and skilled labor force demonstrated their capabilities in executing organized and efficient emergency response and service restoration, while maintaining a strong focus on safety. Two of these weather related events, Tropical Storm Irene and the late October Snowfall event, were the second and third largest storms in Central Hudson’s history and Management’s current estimate for recoverable incremental costs associated with the electric service restoration efforts of these storms have been deferred for future recovery from customers. Central Hudson also incurred incremental costs associated with weather related gas emergencies early in 2011 and as a result of the impacts of Tropical Storm Irene; however these costs have not been deferred as of December 31, 2011 as they did not individually meet the PSC criteria for deferral accounting. Despite these severe weather events, Central Hudson was able to improve its service quality and customer satisfaction metrics significantly in 2011.
Additionally during 2011, Central Hudson earned energy efficiency incentives of $2.7 million based on calculated energy savings for completed and committed projects with residential and commercial customers compared to 2008-2011 cumulative savings targets as approved and defined by PSC Order through the Energy Efficiency Portfolio Standard (“EEPS”) proceedings.
For further discussions relating to the extraordinary storm events and earned Energy Efficiency Incentives, see Note 2 – “Regulatory Matters.”
Griffith
Business Description and Strategy
Griffith provides fuel distribution products and services to approximately 56,000 customers in Delaware, Washington, D.C., Maryland, Pennsylvania, 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 (“HVAC”) equipment. For a breakdown of Griffith’s gross profit by product and service line for the years ended December 31, 2011, 2010 and 2009, see the chart in the Results of Operations under the caption – “Griffith.”
Griffith’s strategy is to provide premium service to customers and to increase its profitability by:
|
-
|
practicing continuous improvement in everything we do;
|
|
-
|
growing through selective tuck-in acquisitions; and
|
|
-
|
expanding its service offerings.
|
Opportunities and Risks
Griffith has a strong regional brand that Management believes stands for quality, reliability, and value. Griffith intends to continue its marketing efforts and focus on customer satisfaction, which Management believes will help to minimize customer attrition. With reduced commodity-related volatility of earnings and cash flows following the 2009 divestiture of certain of its operations, Management has focused its attention on improving the profitability of operations and expanding products and services in the Mid-Atlantic region.
Griffith also continues to seek selective “tuck-in” acquisitions to be funded from internally generated cash. This growth strategy focuses on acquiring and retaining customers in geographic areas that overlap Griffith’s existing operations. Griffith expects to generate additional earnings and cash flow as a result of the expansion of its HVAC business. These growth strategies are not expected to result in the growth of CH Energy Group’s total invested capital in Griffith.
Management sees two key risks associated with this strategy. The primary factor that could prevent Griffith from achieving earnings growth is a sustained, significant increase in wholesale oil prices, which could reduce residential sales volumes, put downward pressure on margins and increase bad debt expense. While Management believes that margin expansion would still be possible in this environment as competitors would be forced to increase their prices to cover their costs, Management expects that this result would lag the increase in commodity prices. Additionally, weakness in the economy of the Mid-Atlantic region could limit Griffith’s ability to expand margins since customers’ willingness and ability to pay are typically tied to income levels and unemployment rates. Griffith limits the impact of weather on its business through the purchase of weather derivative instruments.
Notable 2011 Activity
In 2011, Griffith acquired six fuel distribution and service businesses and acquired one additional business effective January 1, 2012. These strategic acquisitions have already begun contributing to Griffith’s earnings and cash flows. However, during 2011 Griffith’s earnings were adversely impacted by both a weak economy and high fuel prices. The combination of both these events is not typical and resulted in increased customer conservation and attrition in 2011. Griffith also experienced a decline in the number of service installations under its expanded HVAC program in 2011, which Management believes resulted from increased installation activity at the end of 2010 driven by the expiration of federal tax credits. Despite the unfavorable environment, Management was successful in continuing its trend of increasing margins. Additionally, Griffith continues to implement effective cost management measures, which have successfully offset inflationary cost pressures. Management believes the current state of the economy and the reduced HVAC installations are temporary situations and that the long-term outlook of the economy in Griffith’s service territory continues to be strong with a stable pool of current and prospective customers that value quality service at a fair price.
Other Businesses and Investments
CHEC’s remaining two investments in renewable energy have zero fair value as of December 31, 2011. CHEC also has investments in 2 cogeneration partnerships and an energy sector venture capital fund totaling approximately $2.8 million as of December 31, 2011. These investments are not considered a part of the core business, are not expected to require significant management oversight, and no further capital investment in them is planned. Management intends to retain these remaining investments, but will continue to monitor market conditions to evaluate the fair market value of these investments and consider whether the opportunity exists to create greater shareholder value through divestitures. For further discussions relating to CHEC’s renewable energy investments, see Note 5 – “Acquisitions, Divestitures and Investments.”
EARNINGS PER SHARE AND OVERVIEW OF YEAR-TO-DATE RESULTS
The following discussion and analyses include explanations of significant changes in revenues and expenses between the year ended December 31, 2011, and 2010 and the year ended December 31, 2010, and 2009, for Central Hudson’s regulated electric and natural gas businesses, Griffith, and the Other Businesses and Investments.
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.
Earnings
Earnings per share (basic and diluted) of CH Energy Group’s Common Stock are computed on the basis of the average number of common shares outstanding (basic and diluted) during the subject year. The number of average shares outstanding of CH Energy Group Common Stock, the earnings per share, and the rate of return earned on average common equity, which is net income as a percentage of a monthly average of common equity, are as follows (Shares In Thousands):
|
|
2011
|
2010
|
2009
|
|||||||||
|
Average shares outstanding:
|
|
|
|
|||||||||
|
Basic
|
15,278 | 15,785 | 15,775 | |||||||||
|
Diluted
|
15,481 | 15,952 | 15,881 | |||||||||
|
|
||||||||||||
|
Earnings per share from continuing operations:
|
||||||||||||
|
Basic
|
$ | 2.77 | $ | 2.51 | $ | 2.08 | ||||||
|
Diluted
|
$ | 2.73 | $ | 2.48 | $ | 2.07 | ||||||
|
|
||||||||||||
|
Earnings per share from discontinued operations:
|
||||||||||||
|
Basic
|
$ | 0.20 | $ | (0.07 | ) | $ | 0.68 | |||||
|
Diluted
|
$ | 0.20 | $ | (0.07 | ) | $ | 0.67 | |||||
|
|
||||||||||||
|
Earnings per share:
|
||||||||||||
|
Basic
|
$ | 2.97 | $ | 2.44 | $ | 2.76 | ||||||
|
Diluted
|
$ | 2.93 | $ | 2.41 | $ | 2.74 | ||||||
|
|
||||||||||||
|
Return earned on average common equity
|
9.1 | % | 7.4 | % | 8.6 | % | ||||||
2011 AS COMPARED TO 2010
CH Energy Group Consolidated
Earnings per Share (Basic)
|
|
Year Ended December 31,
|
|
||||||||||
|
|
2011
|
2010
|
Change
|
|||||||||
|
Central Hudson - Electric
|
$ | 2.22 | $ | 2.10 | $ | 0.12 | ||||||
|
Central Hudson - Natural Gas
|
0.66 | 0.76 | (0.10 | ) | ||||||||
|
Griffith
|
0.10 | 0.11 | (0.01 | ) | ||||||||
|
Other Businesses and Investments
|
(0.01 | ) | (0.53 | ) | 0.52 | |||||||
|
Total CH Energy Group Consolidated Earnings, as reported
|
$ | 2.97 | $ | 2.44 | $ | 0.53 | ||||||
|
|
||||||||||||
|
Significant Events:
|
||||||||||||
|
Central Hudson
|
$ | (0.12 | ) | $ | 0.12 | $ | (0.24 | ) | ||||
|
Griffith
|
- | (0.02 | ) | 0.02 | ||||||||
|
Other Businesses and Investments
|
(0.06 | ) | (0.44 | ) | 0.38 | |||||||
|
Total Significant Events
|
$ | (0.18 | ) | $ | (0.34 | ) | $ | 0.16 | ||||
|
|
||||||||||||
|
CH Energy Group Consolidated Adjusted Earnings Per Share (non-GAAP):
|
||||||||||||
|
Central Hudson
|
$ | 3.00 | $ | 2.74 | $ | 0.26 | ||||||
|
Griffith
|
0.10 | 0.13 | (0.03 | ) | ||||||||
|
Other Businesses and Investments
|
0.05 | (0.09 | ) | 0.14 | ||||||||
|
Total CH Energy Group Consolidated Adjusted Earnings Per Share (non-GAAP)
|
$ | 3.15 | $ | 2.78 | $ | 0.37 | ||||||
Earnings for CH Energy Group totaled $2.97 per share in 2011, an increase of $0.53 per share from the same period in 2010 when earnings had been negatively impacted by impairments on two of its non-utility assets.
Details by business unit were as follows:
Central Hudson
Earnings per Share (Basic)
|
Year Ended December 31,
|
|
||||||||
|
2011
|
2010
|
Change
|
|||||||
|
Central Hudson - Electric
|
$ | 2.22 | $ | 2.10 | $ | 0.12 | |||
|
Central Hudson - Natural Gas
|
0.66 | 0.76 | (0.10 | ) | |||||
|
Total Central Hudson Earnings
|
$ | 2.88 | $ | 2.86 | $ | 0.02 | |||
|
Significant Events:
|
|||||||||
|
Uncollectible deferral in 2010
|
$ | - | $ | 0.12 | $ | (0.12 | ) | ||
|
Higher weather related restoration costs(1)
|
(0.31 | ) | - | (0.31 | ) | ||||
|
Energy efficiency incentives
|
0.10 | - | 0.10 | ||||||
|
Share accretion
|
0.09 | - | 0.09 | ||||||
|
Central Hudson Adjusted Earnings Per Share
|
$ | 3.00 | $ | 2.74 | $ | 0.26 | |||
|
Change
|
|||||||||
|
Delivery revenue
|
$ | 0.42 | |||||||
|
Higher property and other taxes
|
(0.12 | ) | |||||||
|
Higher depreciation
|
(0.11 | ) | |||||||
|
Higher trimming costs
|
(0.02 | ) | |||||||
|
Other
|
0.09 | ||||||||
| $ | 0.26 | ||||||||
|
(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 the year ended December 31, 2011 compared to 2010. After adjusting Central Hudson's earnings per share for the significant items displayed above, including incremental weather related restoration costs, earnings were $0.26 per share higher year-over-year. The single largest driver was an increase in delivery revenue resulting from mid-year delivery rate increases in both 2011 and 2010. This additional revenue was needed for increased operating costs such as those noted above and to provide a reasonable return to shareholders.
Griffith
Earnings per Share (Basic)
|
Year Ended December 31,
|
|
||||||||
|
2011
|
2010
|
Change
|
|||||||
|
Griffith - Fuel Distribution Earnings
|
$ | 0.10 | $ | 0.11 | $ | (0.01 | ) | ||
|
Significant Events:
|
|||||||||
|
Discontinued operations
|
$ | 0.02 | $ | - | $ | 0.02 | |||
|
Weather impact on sales
|
(0.02 | ) | (0.02 | ) | - | ||||
|
Griffith Adjusted Earnings Per Share
|
$ | 0.10 | $ | 0.13 | $ | (0.03 | ) | ||
|
Change
|
|||||||||
|
Weather-normalized sales (including conservation)
|
$ | (0.13 | ) | ||||||
|
Gross margin on petroleum sales
|
0.09 | ||||||||
|
Operating expenses
|
0.03 | ||||||||
|
Other
|
(0.02 | ) | |||||||
| $ | (0.03 | ) | |||||||
Griffith’s earnings decreased for the year ended December 31, 2011 compared to the same period in 2010. This decrease was primarily attributable to contractions in volume due to customer conservation that was brought on by a combination of the continued weak economy and higher wholesale fuel prices. Improved margins and lower operating costs offset a majority of this impact.
Other Businesses and Investments
Earnings per Share (Basic)
|
|
Year Ended December 31,
|
|
||||||||||
|
|
2011
|
2010
|
Change
|
|||||||||
|
Other Businesses & Investments Earnings
|
$ | (0.01 | ) | $ | (0.53 | ) | $ | 0.52 | ||||
|
|
||||||||||||
|
Significant Events:
|
||||||||||||
|
Renewable Investments:
|
||||||||||||
|
Ethanol investment impairment in 2010
|
$ | - | $ | (0.44 | ) | $ | 0.44 | |||||
|
Biomass impairment in 2010
|
- | (0.08 | ) | 0.08 | ||||||||
|
Wind investment impairment in 2011
|
(0.14 | ) | - | (0.14 | ) | |||||||
|
Gain from sales of renewable investments
|
0.17 | - | 0.17 | |||||||||
|
Pre-payment penalty on early retirement of debt following 2011 divestiture
|
(0.11 | ) | - | (0.11 | ) | |||||||
|
Operations
|
(0.02 | ) | (0.03 | ) | 0.01 | |||||||
|
Tax impacts
|
0.02 | - | 0.02 | |||||||||
|
|
||||||||||||
|
Income taxes related to deductions for prior periods
|
0.02 | 0.11 | (0.09 | ) | ||||||||
|
Other Businesses and Investments Adjusted Earnings Per Share
|
$ | 0.05 | $ | (0.09 | ) | $ | 0.14 | |||||
|
|
||||||||||||
| Change | ||||||||||||
|
Higher interest income
|
$ | 0.05 | ||||||||||
|
Lower interest expense
|
0.02 | |||||||||||
|
Lower income taxes
|
0.05 | |||||||||||
|
Other
|
0.02 | |||||||||||
|
|
$ | 0.14 | ||||||||||
The earnings activity of CH Energy Group (the holding company) and CHEC’s partnerships and other investments increased in the year ended December 31, 2011 compared to the same period in 2010. Net of the impacts of renewable investment activity and prior period income tax adjustments noted above, Other Businesses and Investments adjusted earnings per share increased $0.14 per share. This increase was primarily due to higher interest income related to intercompany debt and lower interest expense related to the pay down of debt with the proceeds from the sale of renewable investments.
2010 AS COMPARED TO 2009
CH Energy Group Consolidated
Earnings per Share (Basic)
|
|
Year Ended December 31,
|
|
||||||||||
|
|
2010
|
2009
|
Change
|
|||||||||
|
Central Hudson - Electric
|
$ | 2.10 | $ | 1.60 | $ | 0.50 | ||||||
|
Central Hudson - Natural Gas
|
0.76 | 0.42 | 0.34 | |||||||||
|
Griffith
|
0.11 | 0.76 | (0.65 | ) | ||||||||
|
Other Businesses and Investments
|
(0.53 | ) | (0.02 | ) | (0.51 | ) | ||||||
|
|
$ | 2.44 | $ | 2.76 | $ | (0.32 | ) | |||||
|
|
||||||||||||
|
Significant Events:
|
||||||||||||
|
Central Hudson
|
$ | 0.12 | $ | 0.26 | $ | (0.14 | ) | |||||
|
Griffith
|
(0.02 | ) | 0.63 | (0.65 | ) | |||||||
|
Other Businesses and Investments
|
(0.41 | ) | (0.06 | ) | (0.35 | ) | ||||||
|
Total CH Energy Group Consolidated Adjusted Earnings Per Share (non-GAAP)
|
$ | 2.75 | $ | 1.93 | $ | 0.82 | ||||||
Earnings for CH Energy Group totaled $2.44 per share in 2010, a decrease of $0.32 per share from the same period in 2009. The decrease in year-over-year earnings per share were driven primarily by the $0.34 2009 gain and $0.23 of discontinued operations from the Griffith divestiture and the 2010 impairments in two renewable energy investments, partially reduced by increased delivery rates at Central Hudson.
Detail by business unit were as follows:
Central Hudson
Earnings per Share (Basic)
|
Year Ended December 31,
|
|
||||||||||
|
2010
|
2009
|
Change
|
|||||||||
|
Central Hudson - Electric
|
$ | 2.10 | $ | 1.60 | $ | 0.50 | |||||
|
Central Hudson - Natural Gas
|
0.76 | 0.42 | 0.34 | ||||||||
|
Total Central Hudson Earnings
|
$ | 2.86 | $ | 2.02 | $ | 0.84 | |||||
|
Significant Events:
|
|||||||||||
|
Uncollectible deferral
|
$ | 0.12 | $ | 0.13 | $ | (0.01 | ) | ||||
|
Weather impact on sales
|
- | 0.13 | (0.13 | ) | |||||||
|
Central Hudson Adjusted Earnings Per Share
|
$ | 2.74 | $ | 1.76 | $ | 0.98 | |||||
|
Change
|
|||||||||||
|
Delivery revenue
|
$ | 1.22 | |||||||||
|
Lower uncollectible reserves
|
0.17 | ||||||||||
|
Higher trimming costs
|
(0.06 | ) | |||||||||
|
Higher storm restoration expense(1)
|
(0.13 | ) | |||||||||
|
Higher depreciation
|
(0.11 | ) | |||||||||
|
Higher property and other taxes
|
(0.17 | ) | |||||||||
|
Other
|
0.06 | ||||||||||
| $ | 0.98 | ||||||||||
|
(1)
|
Excludes incremental costs incurred associated with the severe storms that occurred in late February 2010, which have been deferred for future recovery from customers.
|
Earnings from Central Hudson's electric and natural gas operations increased in the year ended December 31, 2010 compared to 2009 primarily due to the increases in electric and natural gas delivery rates, including the RDM, which became effective July 1, 2009 and 2010. These increases provided revenues that better align with Central Hudson's costs of providing safe and reliable service to customers and provide an opportunity to earn an appropriate return for shareholders. Higher operating expenses partially offset the favorable impacts of delivery rate increases. The net increase in year-over-year results includes the impact of lower earnings during the first six months of 2009 resulting from the sales shortfall under the expiring 2006 Rate Order.
Griffith
Earnings per Share (Basic)
|
Year Ended December 31,
|
|
||||||||||
|
2010
|
2009
|
Change
|
|||||||||
|
Griffith - Fuel Distribution Earnings
|
$ | 0.11 | $ | 0.76 | $ | (0.65 | ) | ||||
|
Significant Events:
|
|||||||||||
|
Discontinued operations
|
$ | - | $ | 0.23 | $ | (0.23 | ) | ||||
| Weather impact on sales (including hedging) | (0.02 | ) | 0.02 | (0.04 | ) | ||||||
|
Gain on sale of Northeast operations(1)
|
- | 0.40 | (0.40 | ) | |||||||
|
Griffith Adjusted Earnings Per Share
|
$ | 0.13 | $ | 0.11 | $ | 0.02 | |||||
|
Change
|
|||||||||||
|
Margin on petroleum sales and services
|
$ | 0.01 | |||||||||
|
Weather normalized sales (including conservation)
|
(0.05 | ) | |||||||||
|
Lower operating expenses
|
0.06 | ||||||||||
|
Lower uncollectible accounts
|
0.04 | ||||||||||
|
Other
|
(0.04 | ) | |||||||||
| $ | 0.02 | ||||||||||
|
(1) See additional taxes owed by CH Energy Group within Other Businesses & Investments
|
Griffith’s earnings decreased for the year ended December 31, 2010 compared to the same period in 2009. This decrease was primarily attributable to the sale of operations in certain geographic locations at the end of 2009. The gain recorded as a result of the sale and the decreased customer base resulted in a decrease in 2010 earnings as compared to 2009. Unfavorable impacts of weather and continued customer conservation also contributed to the decreased earnings, but were offset by lower operating expenses resulting from cost reductions implemented by Management to align its cost structure to its smaller size following the partial divestiture. Lower uncollectible accounts also favorably impacted 2010 results.
Other Businesses and Investments
Earnings per Share (Basic)
|
|
Year Ended December 31,
|
|
|||||||||
|
|
2010
|
2009
|
Change
|
||||||||
|
Other Businesses & Investment Earnings
|
$ | (0.53 | ) | $ | (0.02 | ) | $ | (0.51 | ) | ||
|
|
|||||||||||
|
Significant Events:
|
|||||||||||
|
Ethanol investment impairment
|
$ | (0.44 | ) | $ | - | $ | (0.44 | ) | |||
|
Biomass investment impairment
|
(0.08 | ) | - | (0.08 | ) | ||||||
|
Lower income taxes
|
0.11 | - | 0.11 | ||||||||
|
Holding company's income taxes on Griffith sale
|
- | (0.06 | ) | 0.06 | |||||||
|
Other Businesses and Investments Adjusted Earnings Per Share
|
$ | (0.12 | ) | $ | 0.04 | $ | (0.16 | ) | |||
|
|
|||||||||||
|
|
Change
|
||||||||||
|
Renewable Energy Investments
|
$ | (0.11 | ) | ||||||||
|
Holding company interest expense
|
(0.05 | ) | |||||||||
|
|
$ | (0.16 | ) | ||||||||
The earnings activity of CH Energy Group (the holding company) and CHEC’s partnerships and other investments decreased in the year ended December 31, 2010 compared to the same period in 2009 primarily due to 2010 impairment charges for CHEC's ethanol and biomass investments. The expiration of production tax credits related to CHEC’s biomass investment on December 31, 2009 and a repair to the plant's steam turbine also negatively impacted earnings. CHEC's earnings from its ethanol investment were also lower in 2010 due to lower crush margins and lower prices for one of the byproducts of the production process. These decreases were partially reduced by a favorable change to the effective tax rate of the consolidated entity resulting in overall lower tax expense. The additional taxes in 2009 related to Griffith's partial divestiture.
RESULTS OF OPERATIONS
A breakdown by business unit of CH Energy Group's operating revenues (net of divestitures) and net income for the year ended December 31, 2011 and 2010 are illustrated below (Dollars in Thousands):
|
Year Ended December 31, 2011
|
Year Ended December 31, 2010
|
|||||||||||||||||||||||||||||||
|
Business Unit
|
Operating
Revenues
|
Net Income (loss) attributable to CH Energy Group
|
Operating
Revenues
|
Net Income (loss) attributable to CH Energy Group
|
||||||||||||||||||||||||||||
|
Electric(1)
|
$ | 538,548 | 55 | % | $ | 33,936 | 75 | % | $ | 563,139 | 59 | % | $ | 33,125 | 86 | % | ||||||||||||||||
|
Gas(1)
|
161,974 | 16 | % | 10,131 | 23 | % | 156,795 | 16 | % | 12,023 | 31 | % | ||||||||||||||||||||
|
Total Central Hudson
|
700,522 | 71 | % | 44,067 | 98 | % | 719,934 | 75 | % | 45,148 | 117 | % | ||||||||||||||||||||
|
Griffith(1), (2)
|
284,998 | 29 | ||||||||||||||||||||||||||||||