Edgar Filing: CENTRAL HUDSON GAS & ELECTRIC CORP

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K


(Mark One)
x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended ___________________________________________________ December 31, 2008

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________________ to _______________________


Commission File Number	Registrant, State of Incorporation Address and Telephone Number	IRS Employer Identification No.


0-30512	CH Energy Group, Inc. (Incorporated in New York) 284 South Avenue Poughkeepsie, New York 12601-4839 (845) 452-2000	14-1804460

1-3268	Central Hudson Gas & Electric Corporation (Incorporated in New York) 284 South Avenue Poughkeepsie, New York 12601-4839 (845) 452-2000	14-0555980

Securities registered pursuant to Section 12(b) of the Act:


Title of each class		Name of each exchange on which registered


CH Energy Group, Inc. Common Stock, $0.10 par value		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:


	Title of each class


Central Hudson Gas & Electric Corporation Cumulative Preferred Stock

	4.50% Series
	4.75% Series

Indicate by check mark if CH Energy Group, Inc. (“CH Energy Group”) is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes x No o

Indicate by check mark if Central Hudson Gas & Electric Corporation (“Central Hudson”) is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o No x

Indicate by check mark if CH Energy Group is not required to file reports pursuant to Section 13 or Section 15(d) of the Act

Yes o No x

Indicate by check mark if Central Hudson is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o No x

Indicate by check mark whether the Registrants (1) have 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 Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.

Yes x No o

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 CH Energy Group 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):


	Large Accelerated Filer o	Accelerated Filer x

	Non-Accelerated Filer o	Smaller Reporting Company o

Indicate by check mark whether Central Hudson 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):


	Large Accelerated Filer o	Accelerated Filer o

	Non-Accelerated Filer x	Smaller Reporting Company o

Indicate by check mark whether CH Energy Group is a shell company (as defined in Rule 12b-2 of the Act).

Yes o No x

Indicate by check mark whether Central Hudson is a shell company (as defined in Rule 12b-2 of the Act).

Yes o No x

The aggregate market value of the voting and non-voting common equity of CH Energy Group held by non-affiliates as of February 2, 2009, was $818,811,820 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, 2008, the last business day of CH Energy Group’s most recently completed second fiscal quarter, was $561,393,271 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, 2008 was zero.

The number of shares outstanding of CH Energy Group’s Common Stock, as of February 2, 2009, was 15,782,803.

The number of shares outstanding of Central Hudson’s Common Stock, as of February 2, 2009, 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 28, 2009, 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 of the Securities Exchange Act of 1934, as amended.

GLOSSARY OF TERMS

The following is a glossary of frequently used abbreviations or acronyms used herein.


CH Energy Group Companies and Investments

CHEC		Central Hudson Enterprises Corporation (the unregulated parent company of Griffith and wholly owned subsidiary of CH Energy Group)
Cornhusker Holdings		Cornhusker Energy Lexington Holdings, LLC (a CHEC investee company)
JB Wind		JB Wind Holdings, LLC (a CH-Community Wind investee company)

Regulators

NYS		New York State
PSC		NYS Public Service Commission
DEC		NYS Department of Environmental Conservation

Terms Related to Business Operations Used by CH Energy Group

1993 PSC Policy		PSC’s 1993 Statement of Policy regarding pension and other post-employment benefits
2006 Rate Order		Order Establishing Rate Plan issued by the PSC to Central Hudson on July 24, 2006
Distributed Generation		An electrical generating facility located at a customer’s point of delivery which may be connected in parallel operation to the utility system
kWh		Kilowatt-hour(s)
Mcf		Thousand Cubic Feet
MGP		Manufactured Gas Plant
MW / MWh		Megawatt(s) / Megawatt-hour(s)
OPEB		Other Post-Employment Benefits
Retirement Plan		Central Hudson’s Non-Contributory Defined Benefit Retirement Income Plan
ROE		Return on Equity
ROW		Right-of-Way
Settlement Agreement		Amended and Restated Settlement Agreement dated January 2, 1998, and thereafter amended, among Central Hudson, PSC Staff, and Certain Other Parties

Other

COSO		Committee of Sponsoring Organizations of the Treadway Commission
EITF		FASB Emerging Issues Task Force
Exchange Act		Securities Exchange Act of 1934
FASB		Financial Accounting Standards Board

(i)


FIN		FASB Interpretation Number
GAAP		Accounting Principles Generally Accepted in the United States of America
NYISO		New York Independent System Operator
NYSERDA		New York State Energy Research and Development Authority
Registrants		CH Energy Group and Central Hudson
SAB		SEC Staff Accounting Bulletin
SFAS		Statement of Financial Accounting Standards

(ii)

TABLE OF CONTENTS


		Page


	PART I

ITEM 1	BUSINESS	2

ITEM 1A	RISK FACTORS	14

ITEM 1B	UNRESOLVED STAFF COMMENTS	17

ITEM 2	PROPERTIES	18

ITEM 3	LEGAL PROCEEDINGS	20

ITEM 4	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	20

	PART II

ITEM 5	MARKET FOR CH ENERGY GROUP’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	20

ITEM 6	SELECTED FINANCIAL DATA OF CH ENERGY GROUP AND ITS SUBSIDIARIES	22

ITEM 7	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	24

ITEM 7A	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	85

ITEM 8	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	87

ITEM 9	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	189

ITEM 9A	CONTROLS AND PROCEDURES	189

ITEM 9B	OTHER INFORMATION	189

(iii)


	PART III

ITEM 10	DIRECTORS AND EXECUTIVE OFFICERS OF CH ENERGY GROUP	190

ITEM 11	EXECUTIVE COMPENSATION	190

ITEM 12	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	191

ITEM 13	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE	191

ITEM 14	PRINCIPAL ACCOUNTANT FEES AND SERVICES	191

	PART IV

ITEM 15	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	193

(iv)

PART I

FILING FORMAT

This 10-K Annual Report for the fiscal year ended December 31, 2008 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. CH Energy Group’s subsidiaries are each directly or indirectly wholly owned by CH Energy Group. 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.

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, 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; plant capacity factors; energy supply and demand; potential future acquisitions; legislative, regulatory, and competitive developments; interest rates; access to capital; market risks; corn and ethanol prices; 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.

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ITEM 1 -	BUSINESS

CORPORATE STRUCTURE

CH Energy Group is the holding company parent corporation of two principal, wholly owned subsidiaries, Central Hudson and CHEC. Central Hudson, the regulated electric and natural gas subsidiary, has one wholly owned subsidiary, Phoenix Development Company, Inc. CHEC, the parent company of CH Energy Group’s unregulated businesses and investments, has two wholly owned subsidiaries, Griffith and CH-Auburn.

For a discussion of CH Energy Group’s and its subsidiaries’ capital structure and financing program, see Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this 10-K Annual Report under the subcaptions “Capital Structure” and “Financing Program” under the caption “Capital Resources and Liquidity.” For a discussion of short-term borrowing, capitalization, and long-term debt, see Note 7 – “Short-Term Borrowing Arrangements,” Note 8 – “Capitalization – Common and Preferred Stock,” and Note 9 – “Capitalization – Long-Term Debt,” respectively, to the financial statements contained in Item 8 – “Financial Statements and Supplementary Data” of this 10-K Annual Report (each Note being hereinafter called a “Note”). For information concerning revenues, certain expenses, earnings per share, and information regarding assets for Central Hudson’s regulated electric and regulated natural gas segments and for Griffith, see Note 13 – “Segments and Related Information.”

HOLDING COMPANY REGULATION

CH Energy Group is generally exempt from regulation under Public Utility Holding Company Act of 2005 (“PUHCA 2005”) under its intrastate exemption provisions, except for the requirement to obtain prior SEC approvals for certain direct or indirect acquisitions of the securities of any electric or gas utility company. CH Energy Group is a “holding company” under PUHCA 2005 because of its ownership interests in Central Hudson and CHEC and CH Energy Group’s indirect ownership interests in Lyonsdale and JB Wind. 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. CH Energy Group will retain this exemption until such time as it derives more than 13% of its public utility revenues from businesses conducted outside of the State of New York. Under FERC’s regulations implementing PUHCA 2005, revenues received from Lyonsdale and JB Wind are excluded from this determination because these entities are either a “qualifying facility” under the Public Utility Regulatory Policies Act of 1978, as amended, or an “exempt wholesale generator” under PUHCA 2005. Griffith’s qualified gross sales of propane exceeded an average annual amount of $5 million calculated on a rolling basis over the preceding three calendar years and, as such, is now included in the analysis of utility revenues. However, Griffith’s propane revenues represent approximately 1% of CH Energy Group’s public utility revenues and therefore do not cause CH Energy Group to derive more than 13% of its public utility revenues

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from outside of New York State. 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 or whether regulation under PUHCA 2005 would have a material impact on its financial condition.

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 sold its interests in its Roseton Electric Generating Plant, Danskammer Point Steam Electric Generating Station, and Unit No. 2 of the Nine Mile Point Nuclear Generating Station in 2001, pursuant to a PSC order.

Central Hudson serves a territory extending about 85 miles along the Hudson River and about 25 to 40 miles east and west of the Hudson River. The southern end of the territory is about 25 miles north of New York City and the northern end is about 10 miles south of the City of Albany. The territory, comprising approximately 2,600 square miles, has a population estimated at 690,000. 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, 2008 was 825.

Central Hudson’s territory reflects a diversified economy, including manufacturing industries, research firms, farms, governmental agencies, public and private institutions, resorts, and wholesale and retail trade operations.

Seasonality

Central Hudson’s delivery revenues vary seasonally in response to weather. Sales of electricity are usually 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.

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 may include distributed generation systems, including net metered systems, which could bypass the electric delivery system. To date, the primary source of penetration is solar power, which is currently capped for residential net metering at 10 MW. Central Hudson is authorized by the PSC to defer lost revenues attributable to Photovoltaic net metering

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through June 30, 2009 under an order issued in Case 07-E-0437 on October 19, 2007. 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.

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 the 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.

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 received from customers through PSC approved tarifs, subject to a standard of prudency. Transmission rates and rates for electricity sold for resale in interstate commerce by Central Hudson are regulated by the FERC.

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 were separated to allow customers to see the costs associated with their commodity supply in order to facilitate retail competition. During 2008, the average price of electricity for full service customers was 14.88 cents per kWh as compared to an average of 11.86 cents per kWh for 2007. The average delivery price for 2008 was 3.25 cents per kWh and 3.26 cents per kWh for 2007.

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 2008, the average price of natural gas for full service customers was $16.78 per Mcf as compared to an average of $15.00 per Mcf for 2007. The average delivery price for natural gas in 2008 was $4.60 per Mcf and $4.19 per Mcf for 2007. The increase in delivery price was due to the implementation of new rates as part of the 2006 Rate Order.

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For further information regarding the terms of the 2006 Rate Order which Central Hudson currently operates under, see Note 2 – “Regulatory Matters” under the caption “2006 Rate Order”.

Rate Proceedings - Electric and Natural Gas: For information regarding Central Hudson’s most recent electric and natural gas rate proceeding filed with the PSC in July 2008, see Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this 10-K Annual Report under the caption “Regulatory Matters.

Cost Adjustment Clauses: For information regarding Central Hudson’s electric and natural gas cost adjustment clauses, 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 subcaption “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 subcaption “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.”

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Purchased Power and Generation Costs

For the year ended December 31, 2008, the sources and related costs of purchased electricity and electric generation for Central Hudson were as follows:


Sources of Energy	Aggregate Percentage of Energy Requirements			Costs in 2008 ($000)


Purchased Electricity		98.0	%	$	378,357
Hydroelectric and Other		2.0	%		69

		100.0	%

Deferred Electricity Cost					(12,599	)

Total				$	365,827

Research and Development

Central Hudson is engaged in the conduct and support of R&D activities, which are focused on the improvement of existing energy technologies and the development of new technologies, including renewable energy sources, for the delivery and use of energy. Central Hudson’s R&D expenditures were $3.9 million in 2008, $3.5 million in 2007, and $3.2 million in 2006. These expenditures were for internal research programs and for contributions to research administered by NYSERDA, the Electric Power Research Institute, and other industry organizations. Recovery of expenditures for R&D is provided for in Central Hudson’s rates charged to customers for electric and natural gas delivery service. In addition, any differences between R&D expense and the rate allowances covering these costs are deferred, pursuant to PSC authorization, 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 523 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, 2008, and remains effective through April 30, 2011. It provides for an average annual general wage increase of 3.83% and changes to fringe benefits.

Subsidiary of Central Hudson – Phoenix Development Company, Inc.: Phoenix Development Company, Inc., a New York corporation, is a wholly owned subsidiary of Central Hudson. Phoenix was incorporated in 1950 to hold or lease real property for future use by Central Hudson and to participate in energy-related ventures. Currently, Phoenix’s assets are not significant.

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CHEC AND ITS SUBSIDIARIES AND INVESTMENTS

CHEC, a New York corporation, is a wholly owned subsidiary of CH Energy Group. CHEC and its subsidiaries have been engaged in the business of marketing petroleum products and related services to retail and wholesale customers and providing service and maintenance of energy conservation measures and generation systems for private businesses, institutions, and government entities. CHEC has also participated in cogeneration, wind generation, biomass energy projects, and alternate fuel and energy production projects in Connecticut, New Jersey, New Hampshire, New York, and Pennsylvania, and a fuel ethanol production plant in Nebraska. For further discussion of certain of these energy-related projects, see Note 5 – “Acquisitions and Investments.”

CHEC’s subsidiaries and investments are shown below. Ownership interests are 100% unless otherwise noted.

(FLOW CHART)

Griffith, a New York Corporation, 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 in Virginia, West Virginia, Maryland, Delaware, Pennsylvania, Rhode Island, Washington, D.C., Connecticut, Massachusetts, New Jersey and New York.

Since being acquired by CHEC in November 2000, Griffith has acquired the assets of 44 regional fuel oil, propane, and related services companies.

The number of Griffith employees at December 31, 2008 was 715.

CH-Auburn, a New York limited liability company, plans to construct and operate a 3-megawatt electric generating plant that will burn gas derived from wastewater sludge and a landfill to supply a portion of the energy needs of the City of Auburn, NY with renewable energy.

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Seasonality

A substantial portion of CHEC’s revenues vary seasonally, as Griffith fuel deliveries are directly related to use for space heating and are highest during the winter months.

Competition

CHEC and Griffith participate in competitive industries that are subject to different risks than those found in the businesses of the regulated utility, Central Hudson. As an unregulated competitor in the fuel distribution business, 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, Griffith, CH-Auburn and Lyonsdale 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, Griffith, CH-Auburn and/or Lyonsdale 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, Griffith, CH-Auburn and Lyonsdale 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, toxic substances 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 2008.

Air Quality: The Clean Air Act Amendments of 1990 address attainment and maintenance of national air quality standards, including control of particulate emissions from fossil-fueled electric generating plants and emissions that affect “acid rain” and ozone. The impacted facilities are listed below. 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.

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Central Hudson


	§	The South Cairo and Coxsackie, NY electric generating facilities have Air State Facility permits regulating their combustion turbines’ Nitrogen Oxide emissions.

	Lyonsdale

	§	The Lyonsdale electric generating plant has a Title V Permit regulating certain gas emissions including Carbon Monoxide and Nitrogen Oxide.

	CH-Auburn

	§	CH-Auburn has applied for a Title V air permit and is in the process of modifying the application to conform with requested changes from the New York State DEC.

Water Quality: The Clean Water Act addresses the discharge of pollutants into waterways and ground water.

	State Pollution Discharge Elimination System Permits – The following locations have permits regulating pollutant discharges:

	Central Hudson

	§	Eltings Corners, NY maintenance and warehouse facility

	§	Rifton, NY Training and Recreation Center

	§	Kingston, NY District Office

	Griffith

	§	Bulk storage plants in Frederick, Westminster and Edgewater, MD

	§	The customer service office in Cheverly, MD

	Lyonsdale

	§	Lyonsdale electric generating plant

	Other Permits and Certifications – Griffith and Lyonsdale have additional permits and certifications regulating their water usage and pollutant discharges.

	Griffith has General Storm Water Discharge Permits issued by various states for bulk storage plants in Charlestown and Martinsburg, WV, and Winsted, CT.

	Lyonsdale has a Great Lakes Water Withdrawal Certificate allowing water withdrawal from the Moose River.

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	Other Requirements – Central Hudson is subject to drinking water monitoring and reporting requirements at the following facilities:

	§	Eltings Corners, NY maintenance and warehouse facility

	§	Rifton, NY Training and Recreation Center

Toxic Substances and Industrial and Hazardous Wastes: Central Hudson, Griffith, CH-Auburn and Lyonsdale 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, CH-Auburn or Lyonsdale. The Central Hudson permitted facilities and equipment are noted below. See Note 12 – “Commitments and Contingencies” under the caption “Environmental Matters” for additional discussion regarding, among other things, Central Hudson’s former MGP facilities, Little Britain Road, and Newburgh Consolidated Iron Works.


	Central Hudson

	§	NYS Part 373 Permit Hazardous Waste Storage Facility at Eltings Corners

	§	Waste Transportation Permits for certain vehicles

	§	Petroleum Bulk Storage Certificates for the South Cairo and Coxsackie combustion turbines and Catskill, Poughkeepsie, Fishkill, Newburgh, Kingston, Eltings Corners and Standfordville facilities

Other Permits – Lyonsdale also has permits for the use of wood as fuel and the use of ash as fertilizer.

Environmental Expenditures – 2008 actual and 2009 estimated expenditures attributable in whole or in substantial part to environmental considerations are detailed in the table below:


Central Hudson	Griffith	CH-Auburn	Lyonsdale

2008 – $4.9 million	2008 – $0.2 million	2008 – not material	2008 – not material
2009 – $6.1 million	2009 – $0.2 million	2009 – not material	2009 – not material

Central Hudson, Griffith, CH-Auburn and Lyonsdale 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, Griffith, CH-Auburn, nor Lyonsdale are involved as

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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 files annual, quarterly, and current reports, proxy statements, and other information with the SEC. Central Hudson files annual, quarterly, and current reports and other information with the SEC. 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 makes available free of charge on or through its Internet website at www.CHEnergyGroup.com its proxy statements, 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. Central Hudson’s 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 are also available on this site. CH Energy Group’s governance guidelines, Code of Business Conduct and Ethics, and the charters of its Audit, Compensation, Governance and Nominating, and Strategy and Finance Committees are available on CH Energy Group’s Internet website 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.

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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 relationships among any of the executive officers of CH Energy Group or its subsidiaries. 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, 2008) are as follows:


			Date Commenced

Executive Officers	Age	*Current* and Prior Positions	CH Energy Group	Central Hudson	CHEC

Steven V. Lant	51	*Chairman of the Board*	*April 2004*	*May 2004*	*May 2004*
		*Chief Executive Officer*	*July 2003*	*July 2003*	*July 2003*
		*President*	*July 2003*		*July 2003*
		*Director*	*February 2002*	*December 1999*	*December 1999*

Carl E. Meyer	61	President Director Chief Operating Officer		*December 1999*
		*Executive Vice President*	*November 1999*

Joseph J. DeVirgilio, Jr.	57	*Director*		*March 2005*	*April 2003*
		*Executive Vice President – Corporate Services and Administration*	*January 2005*	*January 2005*
		*Executive Vice President*			*January 2003*
		Senior Vice President	October 2002		October 2002
		Senior Vice President – Corporate Services and Administration		November 1998

Christopher M. Capone	46	*Executive Vice President*	*December 2006*
		*Director*		*March 2005*
		*Chief Financial Officer*	*September 2003*	*September 2003*	*September 2003*
		Treasurer	April 2003	June 2001	April 2003

Denise D. VanBuren	47	*Vice President – Public Affairs and Energy Efficiency*	*August 2007*	*August 2007*
		Vice President – Corporate	November 2000	November 2000
		Communications and Community Relations

- 12 -


			Date Commenced

Executive Officers	Age	*Current* and Prior Positions	CH Energy Group	Central Hudson	CHEC

Charles A. Freni, Jr.	49	*Senior Vice President – Customer Services*		*January 2005*
		Vice President – Customer Services		February 2004
		Vice President – Engineering and Environmental Affairs		November 2000

W. Randolph Groft	47	*Executive Vice President*			*January 2003*
		*Director*			*January 2003*

Kimberly J. Wright	41	*Vice President – Accounting and Controller*	*May 2008*
		*Controller*		*October 2006*

- 13 -


ITEM 1A -	RISK FACTORS

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 and pipeline 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:

		o	Storms, natural disasters, wars, terrorist acts, failure of major equipment and other catastrophic events occurring both within and outside Central Hudson’s and Griffith’s service territories.

		o	Unfavorable developments in the world oil markets could impact Griffith.

		o	Third-party facility owner or supplier financial distress.

		o	Unfavorable governmental actions or judicial orders.

		o	Bulk power system and gas transmission pipeline system capacity constraints could impact Central Hudson.

	*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.

*Unusual Temperatures in Central Hudson and Griffith’s Service Territories Could Adversely Impact Earnings*

	*Description and Sources of Risk*: Central Hudson’s service territory is the Mid-Hudson Valley region of New York State. Griffith serves the Mid-Atlantic region and northeastern United States. These areas experience seasonal fluctuations in temperature. A considerable portion of Central Hudson’s and 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*: The companies could experience lower delivery volumes in periods of mild weather, leading to lower earnings and reduced cash flows.

- 14 -

Central Hudson’s Rates Limit its Ability to Recover Increased Costs from its Customers; If Central Hudson’s Sales Are Below Levels Reflected in its Rates or Its Rates Are Modified by State Regulatory Authorities, Central Hudson’s Earnings and Cash Flows May Be Lower Than Expected


*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 lower sales volumes and/or 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.

The following could unfavorably impact Central Hudson’s financial results:

	o	Lower sales than forecasted in the current rate agreement. Lower sales can occur, for example, as a result of changes in usage patterns driven by customer responses to product prices, customer use of distributed generation, economic conditions, energy efficiency programs, or due to the loss of major customers or addition of fewer new customers than the levels reflected in the current rates.

	o	Higher expenses, including carrying costs on capital invested, than reflected in current rates. Higher expenses could result from, among other things, storm restoration expense, or other expense components such as labor, health care benefits or higher levels of uncollectible receivables from customers.

	o	Higher electric and natural gas capital project costs resulting from escalation of material and equipment prices, as well as potential delays in the siting and legislative and/or regulatory approval requirements associated with these projects.

	o	A determination by the PSC that the cost to place a project in service is above a level which is deemed prudent.

	o	Penalties imposed by the PSC for the failure to achieve performance metrics established in rate proceedings.

*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 such lower sales and/or higher costs.

*Additional Information*: See Note 2 – “Regulatory Matters” of this 10-K Annual Report.

- 15 -

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, court decisions and settlements resulting from this litigation could reduce earnings and cash flows.

	*Additional Information*: See Note 12 – “Commitments and Contingencies” and in particular the subcaptions in Note 12 regarding “Asbestos Litigation” and “Former Manufactured Gas Plant Facilities” under the caption “Environmental Matters.”

*Griffith’s Ability to Attract New Customers, Retain Existing Customers, Maintain Sales Volumes, and Maintain Margins*

	*Description and Sources of Risk*: Griffith’s management believes that lower sales can occur for various reasons, including the following:

		•	Changes in customers’ usage patterns driven by customer responses to product prices,

		•	Economic conditions,

		•	Energy efficiency programs, and/or

		•	The loss of major customers, the loss of a large number of customers, or the addition of fewer new customers than expected.

		Griffith’s management also believes that unfavorable activity in the domestic and/or foreign markets resulting in significant volatility in wholesale oil prices could negatively impact margins and/or cause current and/or prospective full service customers to decide to purchase fuel from discount distributors.


*Potential Impacts*: Any one or more of the following could result from these events:

	o	An adverse impact on Griffith’s ability to attract new full service residential customers and, to a lesser extent, retain existing full service residential customers resulting in lower earnings and reduced cash flows.

	o	Further sales volume reductions, and/or compressed margins resulting in lower earnings and reduced cash flows.

These events could materially reduce profitability and cash flow which could, in turn, lead to an impairment of Griffith’s goodwill.

- 16 -


	Additionally, if customer attrition were to accelerate significantly, the value of Griffith’s customer relationships could be impaired or subject to faster amortization.

*The Profitability of CHEC’s Investments in Ethanol Projects May Be Adversely Impacted by Commodity Price Changes or the Lack of Capital Available to Project Developers to Complete New Projects*

	*Description and Sources of Risk:* CHEC’s management believes that increases in wholesale corn prices and/or natural gas prices and/or decreases in ethanol prices and/or distillers grains are caused by a variety of factors, including, but not limited to the following:

		o	Actions by the federal government that reduce the demand for, or increase the supply of, ethanol. Such actions could include, but are not limited to, a reduction in the required level of ethanol blending, decreases in tax credits to refiners and/or reductions in tariffs on imported ethanol.

		o	Imbalances in the supply of and demand for corn. This could be caused by, among other things (1) drought or other acts of nature, (2) increased construction of new ethanol production facilities, (3) governmental actions that discourage raising corn for use in ethanol production (such as providing tax credits for corn grown for human consumption) or (4) changes in agricultural markets, technology or regulations.

		o	Volatility in domestic and/or foreign markets.

Potential Impacts: Prolonged periods of high corn and/or natural gas prices and/or depressed ethanol and/or distillers grain prices could result in reduced net margins and have a material adverse impact on the earnings of Cornhusker Holdings that could, in turn, lead to an impairment of CHEC’s investment in the company.

Additionally, the adverse conditions described above could reduce cash flows of Cornhusker Holdings which, in turn, could lead to loan defaults. CHEC holds subordinated notes totaling $9.5 million, including interest, and has an equity investment of $3.0 million in Cornhusker as of December 31, 2008. CHEC also has an outstanding loan to Buckeye Biopower, LLC in the amount of $1.2 million for the development of a 110 million gallon per year corn ethanol plant. The above market forces could lead to a loan default. Loan defaults could adversely impact CHEC’s level of investments, cash flows or future earnings.


ITEM 1B -	UNRESOLVED STAFF COMMENTS

None.

- 17 -


ITEM 2 -	PROPERTIES

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.


Type of Electric Generating Plant	Year Placed in Service/Rehabilitated	MW* Net Capability

Hydroelectric (3 stations)	1920-1986	23.0
Gas turbine (2 stations)	1969-1970	46.0

Total		69.0


*	Reflects maximum one-hour net capability (winter rating as of December 31, 2008) of Central Hudson’s electric generating plants and therefore does not include firm purchases or sales.

Central Hudson owns substations having an aggregate transformer capacity of 5.3 million kilovolt amps. Central Hudson’s electric transmission system consists of 629 pole miles of line. The electric distribution system consists of 8,078 pole miles of overhead lines and 1,371 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, 2008 occurred on June 10, 2008 and amounted to 1,187 MW. Central Hudson’s maximum one-hour demand for electricity within its own territory for that part of the 2008-2009 winter capability period through January 15, 2009, occurred on December 11, 2008 and amounted to 911 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 163 miles of transmission pipelines and 1,163 miles of distribution pipelines, as well as customer service lines and meters. For the year ended December 31, 2008, the total amount of natural gas purchased by Central Hudson from all sources was 11,846,829 Mcf. Central Hudson owns two propane-air mixing facilities for emergency and peak-shaving purposes, one located in Poughkeepsie, New York, and the other in Newburgh, New York. These facilities, in aggregate, are capable of supplying 8,000 Mcf per day with propane storage capability adequate to provide maximum facility output for up to six consecutive days.

- 18 -

The peak daily demand for natural gas of Central Hudson’s customers for the year ended December 31, 2008, and for that part of the 2008-2009 heating season through January 18, 2009, occurred on January 16, 2009 and amounted to 112,826 Mcf. Central Hudson’s firm peak day natural gas capability in the 2008-2009 heating season was 143,110 Mcf, which excludes approximately 6,000 Mcf of transport customer deliveries.

Other Central Hudson Matters: Central Hudson’s corporate headquarters is located in Poughkeepsie, New York. 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, 2008, Central Hudson made gross property additions of $245.3 million and property retirements and adjustments of $42.1 million, resulting in a net increase (including Construction Work in Progress) in gross utility plant of $203.2 million, or 18%.

CHEC

As of December 31, 2008, Griffith owned or leased several office, warehouse, and bulk petroleum storage facilities. These facilities are located in Connecticut, Delaware, Maryland, Pennsylvania, Rhode Island, Virginia, and West Virginia. The bulk petroleum storage facilities have capacities from 60,000 gallons up to in excess of 1.2 million gallons. Griffith’s corporate headquarters is located in Columbia, Maryland.

As of December 31, 2008, CHEC owned a 100% interest in CH-Auburn, a 75% interest in Lyonsdale, a minority interest in Cornhusker Holdings and a 50% ownership interest in CH-Community Wind.

- 19 -


ITEM 3 -	LEGAL PROCEEDINGS

For information about developments regarding certain legal proceedings, see Note 12 – “Commitments and Contingencies” of this 10-K Annual Report.

Central Hudson:


	Former Manufactured Gas Plant Facilities
	Little Britain Road
	Newburgh Consolidated Iron Works
	Asbestos Litigation


ITEM 4 -	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2008.

PART II


ITEM 5 -	MARKET FOR CH ENERGY GROUP’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

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 captions “Capital Resources and Liquidity – Financing Program” and “Common Stock Dividends and Price Ranges” and Note 8 – “Capitalization – Common and Preferred Stock.”

Under applicable statutes and their respective Certificates of Incorporation, CH Energy Group may pay dividends on shares of 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”) as a Corporation-determined peer comparison, which consists of a combination of natural gas and electric investor-owned utilities. Shareholder return is the sum of the dividends paid and the change in the market price of stock.

- 20 -

(LINE GRAPH)


	Base Period Dec 2003		INDEXED RETURNS
			Years Ending
Company / Index			Dec 2004		Dec 2005		Dec 2006		Dec 2007		Dec 2008

CH Energy Group, Inc.	$	100	$	107.43	$	107.50	$	129.21	$	114.05	$	139.29
S&P 500 Index	$	100	$	110.88	$	116.33	$	134.70	$	142.10	$	89.53
EEI Index	$	100	$	122.84	$	142.56	$	172.14	$	200.65	$	148.68

- 21 -


ITEM 6 -	SELECTED FINANCIAL DATA OF CH ENERGY GROUP AND ITS SUBSIDIARIES

FIVE-YEAR SUMMARY OF CONSOLIDATED OPERATIONS AND SELECTED FINANCIAL DATA* (CH ENERGY GROUP)
(In Thousands, except per share data)


	2008		2007		2006		2005		2004

Operating Revenues
Electric	$	608,161	$	616,839	$	503,908	$	520,994	$	430,575
Natural Gas		189,546		165,449		155,272		155,602		125,230
Competitive business subsidiaries		535,144		414,469		334,253		295,910		235,707

Total		1,332,851		1,196,757		993,433		972,506		791,512

Operating Income		78,706		79,268		77,480		79,025		75,133

Cumulative Preferred Stock dividends of Subsidiary		970		970		970		970		970

Income from continuing operations		35,081		42,636		43,084		44,291		42,423
Net Income		35,081		42,636		43,084		44,291		42,423
Dividends Declared on Common Stock		34,086		34,052		34,046		34,046		34,046

Change in Retained Earnings		995		8,584		9,038		10,245		8,377
Retained Earnings - beginning of year		215,639		207,055		198,017		187,772		179,395

Retained Earnings - end of year	$	216,634	$	215,639	$	207,055	$	198,017	$	187,772

Common Stock
Average shares outstanding - basic		15,768		15,762		15,762		15,762		15,762
Average shares outstanding - diluted		15,805		15,779		15,779		15,767		15,771
Earnings per share on average shares outstanding - basic	$	2.22	$	2.70	$	2.73	$	2.81	$	2.69
Earnings per share on average shares outstanding - diluted	$	2.22	$	2.70	$	2.73	$	2.81	$	2.69
Dividends declared per share	$	2.16	$	2.16	$	2.16	$	2.16	$	2.16
Book value per share (at year-end)	$	33.17	$	33.19	$	32.54	$	31.97	$	31.31

Total Assets (at year-end)	$	1,730,183	$	1,494,748	$	1,460,532	$	1,384,280	$	1,287,807
Long-term Debt (at year-end)**		413,894		403,892		337,889		343,886		319,883
Cumulative Preferred Stock (at year-end)		21,027		21,027		21,027		21,027		21,030
Common Shareholders’ Equity (at year-end)		523,534		523,148		512,862		503,833		493,465


*	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.

**	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 and Investments “ of Item 8 – “Financial Statements and Supplementary Data” of this 10-K Annual Report.

- 22 -

FIVE-YEAR SUMMARY OF CONSOLIDATED OPERATIONS AND SELECTED FINANCIAL DATA* (CENTRAL HUDSON)
(In Thousands)


	2008		2007		2006		2005		2004

Operating Revenues
Electric	$	608,161	$	616,839	$	503,908	$	520,994	$	430,575
Natural Gas		189,546		165,449		155,272		155,602		125,230

Total		797,707		782,288		659,180		676,596		555,805

Operating Income		67,344		71,406		70,956		70,791		68,293

Net Income		27,238		33,436		34,871		35,635		38,648

Dividends Declared on Cumulative Preferred Stock		970		970		970		970		970


Income Available for Common Stock		26,268		32,466		33,901		34,665		37,678
Dividends Declared to Parent - CH Energy Group		—		8,500		8,500		17,000		25,500

Change in Retained Earnings		26,268		23,966		25,401		17,665		12,178
Retained Earnings - beginning of year		92,676		68,710		43,309		25,644		13,466

Retained Earnings - end of year	$	118,944	$	92,676	$	68,710	$	43,309	$	25,644


Total Assets (at year -end)	$	1,492,196	$	1,252,694	$	1,215,823	$	1,126,106	$	1,029,442
Long-term Debt (at year-end)**		413,894		403,892		337,889		343,886		319,883
Cumulative Preferred Stock (at year-end)		21,027		21,027		21,027		21,027		21,030
Common Shareholder’s Equity (at year-end)		373,274		347,006		323,040		297,639		279,974


*	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.

**	Net of current maturities of long-term debt.

- 23 -


ITEM 7 -	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is 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; and

	Other Businesses and Investments

	(4)	CHEC’s investments in renewable energy supply, ethanol production, energy efficiency, an energy sector venture capital fund, and the holding company’s earnings, which consist primarily of inter-company interest income.

- 24 -

A breakdown by segment of CH Energy Group’s operating revenues of $1,333 million and $1,197 million for the years ended December 31, 2008 and 2007, respectively, is illustrated below.

CH Energy Group 2008 and 2007 Revenue by Segment

(BAR CHART)


	*	A portion of the electric and natural gas revenues above represent amounts collected from customers for the recovery of purchased electric and natural gas costs and therefore have no material impact on net income. A breakout of these components is as follows:

		Electric 2008: 28% cost recovery revenues + 18% other revenues = 46%

		Electric 2007: 32% cost recovery revenues + 20% other revenues = 52%

		Natural gas 2008: 10% cost recovery revenues + 4% other revenues = 14%

		Natural gas 2007: 9% cost recovery revenues + 5% other revenues = 14%

A breakdown by segment of CH Energy Group’s net income of $35 million and $43 million for the years ended December 31, 2008 and 2007, respectively, is illustrated below.

CH Energy Group 2008 and 2007 Net Income by Segment

(BAR CHART)

- 25 -

A breakdown by segment of CH Energy Group’s total assets of $1,730 million as of December 31, 2008 is illustrated below.

CH Energy Group Assets at December 31, 2008 by Segment

(PIE CHART)

As the graphs above indicate, CH Energy Group is comprised of 85% electric and natural gas assets which are subject to regulation by the PSC (as discussed in more detail below) and 15% non-regulated assets. The corresponding net income profile is 75% regulated electric and natural gas and 25% non-regulated businesses. The large relative proportion of the regulated utility business is supportive of stability of earnings. CH Energy Group believes that this business profile appeals to the risk appetite and return expectations of its shareholder base.

CH Energy Group’s objective is to deliver value to its shareholders through current income, in the form of quarterly dividend payments, and share price appreciation over time, which should result from earnings growth over the long-term. CH Energy Group seeks to employ its resources in a manner that supports this objective. The Company regularly considers a range of strategies that include: merger and acquisition opportunities, alternative financial structures, operating efficiency improvements, allocation of capital between business units, entry into new lines of business, and divesting existing lines of business. The mix of strategies or relative emphasis on each strategy evolves over time, based on the circumstances the Company faces and the expected contribution each strategy can make to shareholder value.

Over the past year, the Company has shifted its targeted business profile more toward investing in the regulated electric and natural gas businesses of Central Hudson. In the second quarter of 2008, acquisitions by Griffith were suspended pending completion of a strategic review that evaluates (1) the appropriate size of Griffith in CH Energy Group’s portfolio, (2) the future attractiveness of Griffith’s product lines, and (3) the markets in which Griffith currently does business. Concurrently, Central Hudson has pursued additional opportunities for investment in its infrastructure, as well as expanded opportunities in electric and gas transmission, renewable energy production and energy efficiency services. Additional investments by CHEC in unregulated

- 26 -

businesses are currently being pursued, with a heightened focus on investments with stable and predictable income streams and cash flow. Based on current market conditions, the Company does not expect to invest in new ethanol projects.

CH Energy Group believes managing risk is another important component of its strategy to deliver value to shareholders, and emphasizes earnings and cash flow stability, creditworthiness, and access to liquidity as fundamentals of long-term success. As we discuss in further detail in the section on Capital Resources and Liquidity, CH Energy Group is carefully evaluating the introduction of long-term debt at the holding company level as a source of capital to meet its financing needs in 2009. Currently, there is no long-term debt outstanding at CHEC or at the CH Energy Group holding company level. With the continued growth of Central Hudson and with success in developing new opportunities at CHEC, it may also be appropriate at some point in the next few years to issue additional shares of common equity as part of the Company’s financing program. While this may be appropriate and desirable, CH Energy Group will also consider selling assets in its portfolio to raise cash and avoid, reduce, or postpone an issuance of additional shares of common stock.

Central Hudson

Business Overview and Source of Earnings

Central Hudson delivers electricity and natural gas to approximately 300,000 electric customers and 74,000 natural gas customers in a defined service territory in the Mid-Hudson Valley region of New York State.

The rates Central Hudson charges its customers are set by the PSC. These rates are designed to recover the cost of providing safe and reliable service to Central Hudson’s customers and to provide a fair and reasonable return on the capital invested by shareholders.

Central Hudson’s earnings are derived primarily from the revenue it generates from delivering energy to its customers. Central Hudson also procures supplies of electricity and natural gas for customers who have not chosen to utilize an independent third party supplier. The PSC has authorized Central Hudson to recover the costs of the electric and gas commodities from customers, without earning a profit on the commodity costs.

Strategic Overview

Central Hudson’s Management seeks to increase shareholder value through obtaining current recovery of its costs of doing business, increasing its rate base, and obtaining an allowed Return on Equity (“ROE”) that provides a fair and reasonable return for providers of equity capital. Management is committed to providing safe and reliable service, to customer satisfaction, and to promoting positive customer and regulatory relations; Management believes these commitments are important in its efforts to obtain full cost recovery and reasonable returns for shareholders.

- 27 -

Management’s strategies include effectively managing costs, requesting rate increases to align the revenues from customers with the cost of providing service, and investing in its energy delivery infrastructure.

Cost Management

Central Hudson’s business requires a large skilled labor force. During 2008, total payroll expense constituted 11.6% of its total operating expenses (or 35.6% of its operating expenses, excluding commodity costs). As the largest component of Central Hudson’s non-commodity operating expenses, control over labor-related costs is a critical objective.

In May 2008, Central Hudson completed labor negotiations with IBEW, Local 320 on a new three-year agreement that continues through April 30, 2011. Central Hudson negotiated changes to benefit programs which are intended to increase employees’ participation in contributing toward future health care cost escalation and reduce the growth in defined benefit plan liabilities going forward. Similar cost controls were also implemented for management employees in 2008. These changes lowered expenses for 2008 and the future.

Rate Relief

During 2008, Central Hudson experienced significantly lower sales volumes than those anticipated in the Company’s current delivery rates, particularly with respect to natural gas. Management believes this was driven by the overall deterioration of the economy during 2008 and by customers conserving energy in response to the volatility of energy prices. Given the high fixed-cost nature of Central Hudson’s business, Management is limited in its ability to significantly offset the impact of these lower sales volumes through cost reductions. Higher energy costs and the weak economy have also affected our customers’ ability to pay their bills, resulting in higher bad debt expense.

Central Hudson’s lower sales levels, higher bad debt expense, and declining levels of ROE allowed by the PSC (from 10.6% to 9.6% over 12 years and 3 rate cases) reduced Central Hudson’s earnings in 2008 and 2007. In 2008, Central Hudson’s actual 2008 ROE was 6.6%; significantly lower than both its 2007 ROE of 8.1%, and its 9.6% allowed ROE. This decline occurred despite growth of 0.9% in its customer base and 7.5% in its rate base.

As a result of the factors driving the lower earnings, Management concluded that filing for a rate increase was necessary for achieving satisfactory improvement in Central Hudson’s earnings and align delivery revenues with the cost of providing service. Central Hudson requested an increase in its electric and natural gas delivery rates in order to align the rates with the lower projected sales volumes and the projected costs of providing electric and gas service to our customers.

The filing includes a proposal to implement revenue decoupling mechanisms (“RDM”) for electric and gas delivery revenues, which are intended to eliminate the

- 28 -

disincentive to provide energy efficiency associated with the current delivery rate structure. An RDM is a fundamental change in the way Central Hudson’s rates are structured because it breaks the link between sales volumes and earnings; it establishes rates based on the revenues necessary to cover the fixed costs to operate and maintain the system and to provide reasonable returns on shareholders’ investments through periodic adjustments (up or down) to delivery rates. The filing also includes a number of energy efficiency programs that are designed to reduce customers’ energy usage and provide additional earnings for shareholders.

In an effort to reduce the impact of the rate increase on customers, Central Hudson proposed to reduce the rate increase by 60% by using a portion of the liabilities Central Hudson owes its customers as a credit to their electric bills. Management was also able to reduce the amount of the increase it requested as a result of savings from operating efficiencies and the significant reductions in benefit costs discussed above that resulted from Central Hudson’s successful efforts to restructure compensation and benefits to align with the market.

A summary of the most significant aspects of the requested rate increase are shown in the table below. The table also includes the amounts reflected in Central Hudson’s current rates as well as the recommendations from the PSC Staff.


	Common Equity Ratio		Allowed ROE		Revenue Increase

2006 Rate Order	45-47	%	9.6	%

Company Request	48%		10.25	%		$	50.1

PSC Staff Recommendation	45%		9.45	%		$	23.7

A PSC Order establishing new rates will not take effect until July 2009. No prediction can be made as to the final outcome of the rate filing. While new rates could contribute to improved earnings for the second half of 2009, economic conditions and a continued shortfall in energy usage per customer relative to the sales levels reflected in its current rates will create a challenging earnings environment for Central Hudson during the first half of 2009.

Rate Base Growth

Management continually pursues opportunities to increase its rate base to support earnings growth. Management anticipates considerable change in energy policy at both the federal and state levels during 2009. Attempts by government to stimulate the economy by funding or incenting infrastructure investment, as well as efforts to increase energy efficiency and the proportion of electric generation from renewable sources are potential sources of opportunity for Central Hudson.

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Central Hudson is actively engaged in the New York State energy planning process with the goal of achieving political and regulatory support for improving the state’s energy delivery infrastructure. One of Central Hudson’s actions in this regard is its lead role among the New York state transmission owners in planning the enhancement of the state’s bulk transmission system. The current system needs to be modernized and expanded, which will require significant investments for many years.

Central Hudson is also seeking to increase utility involvement in energy efficiency and renewable electricity production. Specifically, Central Hudson is seeking authorization for regulated utilities to own electric generation facilities powered by renewable resources. Such investments would increase the rate base upon which shareholders earn a return. As discussed in more detail under “Regulatory Matters,” Central Hudson is actively involved in the state’s efforts to increase energy efficiency, and the PSC has recently authorized Central Hudson to implement two of its programs proposed in the energy efficiency proceeding discussed under “Regulatory Matters.” These programs provide the opportunity to earn $1.8 million of pre-tax incentives over the next three years, but also subject Central Hudson to possible penalties for non-performance of approximately the same amount.

These opportunities, while long term in nature, represent an important avenue for Central Hudson to expand its scale and scope. Central Hudson’s familiarity with its customers’ energy needs and behaviors, along with its long-established experience at building, owning, and operating electric generation plants uniquely positions it to add value for shareholders and customers through proactive participation in these areas.

Access to Capital

The capital intensive nature of Central Hudson’s business and its obligation to serve all customers in its franchise area require continuous access to capital on reasonable terms. Central Hudson has historically maintained a strong capital structure and access to capital through committed and uncommitted lines of credit. During 2008, Central Hudson was able to access both its $125 million committed credit and its uncommitted credit lines at reasonable interest rates, despite the difficult market conditions prevalent during 2008. Access to capital remains a vital component of Central Hudson’s long-term strategy to invest in its energy delivery infrastructure and achieve rate base growth. Central Hudson’s strategy is intended to serve customer needs and provide opportunities for increasing earnings for shareholders.

Griffith

Business Overview and Source of Earnings

Griffith provides petroleum products and services to approximately 111,000 customers in a market area comprised primarily of parts of Connecticut, Delaware, Washington, D.C., Maryland, Massachusetts, New Jersey, New York, Pennsylvania, Rhode Island, Virginia, and West Virginia. Griffith’s revenues, cash flows, and earnings are derived from the sale and delivery of heating oil, gasoline, diesel fuel, kerosene, and

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propane and from the installation and maintenance of heating, ventilating, and air conditioning equipment.

Below is a breakdown of Griffith’s gross profit of $94 million and $78 million by petroleum product and by service and installations for the years ended December 31, 2008 and 2007, respectively.

Griffith 2008 and 2007 Gross Profit by Product & Service Line

(BAR CHART)

Strategic Overview

Griffith’s Management seeks to increase shareholder value primarily through increased earnings as a result of continued improvements in operations and by providing its free cash flow to CH Energy Group. Management’s strategies to achieve these goals include effectively managing costs and expanding margins.

Earnings and Cash Flow

2008 Results

Griffith experienced a challenging year in 2008 but was able to achieve an increase in earnings of 30%, contributing $0.26 to CH Energy Group’s earnings, despite difficult circumstances. During the first three quarters of the year, rapidly rising wholesale prices drove customer conservation beyond what was anticipated, and contributed to higher costs associated with customers not being able to pay their bills. During the fourth quarter, rapidly falling wholesale prices allowed for a recovery in margins, which combined with significant cost reductions, resulted in improved profitability by year end.

Griffith’s acquisition program contributed favorably to 2007 earnings and increased Griffith’s customer base. Management suspended this strategy in 2008 in

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response to the unprecedented oil market volatility, as well as the impact of the economy on both customers’ use and their ability to pay.

In 2008, Griffith successfully reduced its exposure to fixed and capped price marketing programs to reduce the negative impact on margins due to higher hedging costs. To achieve this, Griffith restructured its pricing programs to encourage customers to select variable pricing instead of fixed price contracts. This provided Griffith with more flexibility to adjust to changes in market prices, reducing its total hedging costs.

Griffith’s Management also identified significant cost reductions and implemented operational efficiencies, which increased margins and reduced the company’s cost structure.

Looking Forward

Management believes that, at the appropriate size relative to CH Energy Group’s portfolio, Griffith’s strong brand name, effective cost management practices, and reputation for high quality, dependable service, position it well for future contributions to CH Energy Group’s earnings and cash flows.

Management is reviewing the appropriate size of Griffith in CH Energy Group’s portfolio in light of recent energy price volatility and changes in customer behavior and evaluating each of its products and markets to determine those that Management believes will support the overall shareholder objectives.

Other Businesses and Investments

Business Overview and Source of Earnings

In addition to Griffith, CHEC derives earnings through investments in renewable energy supply, ethanol production, energy efficiency, and an energy sector venture capital fund. This business unit also includes the holding company’s earnings which consist primarily of inter-company interest income.

Strategic Overview

CHEC’s investment objectives are to increase earnings and cash flow with a heightened focus on investments with stable and predictable income streams and cash flows. From a portfolio perspective, Management seeks to limit earnings and cash flow volatility through diversification of its investments. The renewable energy markets provide opportunities that fit well with the Company’s objectives. A summary of CHEC’s current investments is provided below.

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Managing Current Investments

During 2008, CHEC’s investments contributed $0.15 to CH Energy Group’s earnings per share and provided cash flow of $2.4 million before any dividend payments made to CH Energy Group.

Biomass and Wind

During 2008, CHEC’s biomass and wind projects performed well, improving their operating efficiency, as well as their earnings and cash flow contributions. CHEC continues to seek new biomass investments that will generate cash flow.

Ethanol

CHEC’s ethanol projects were challenged by unprecedented high corn prices in 2008; never-the-less, corn prices fell significantly in the later part of the year. Consequently, Cornhusker contributed positively to earnings in 2008, but at a lower level than in 2007.

Increased demand for ethanol under the Energy Independence and Security Act of 2007 is expected to lead to improved margins in 2009. Cornhusker has an increased opportunity to benefit from this higher demand with the expansion of its plant capacity. This expansion is expected to be completed in the second quarter of 2009 and is projected to provide additional gallons of capacity at a competitive cost per gallon.

Regarding CHEC’s investment in Buckeye, Management is optimistic that higher demand for ethanol and a recovery of the credit markets in 2009 will enable the developers to obtain financing for the project. For further information regarding this project see “Other Matters.”

Despite the expected increase in margins, the ethanol industry remains volatile, and CHEC is not planning to become involved in additional ethanol projects going forward, unless volatility can be limited.

Landfill Gas

The high prices of raw materials during 2008 provided challenges to CHEC’s investment in the Auburn project. Management is negotiating to restructure CH-Auburn’s agreements with the City of Auburn to allow for construction of the first phase of the project, but the second phase has been postponed until better project economics can be anticipated. For further information regarding this project see “Other Matters.”

CHEC continues to seek landfill gas projects similar to the Auburn project that can provide stable and predictable income streams and cash flow.

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Other Investments

While CHEC’s other investments in a venture capital fund and other small partnerships performed better than expected in 2008, they are not expected to play a significant role in CH Energy Group’s strategy going forward.

Selecting New Investments

CHEC’s business development efforts were challenged in 2008 by tightening credit markets and the resulting postponements of projects by their developers. CHEC’s efforts were also challenged by competition from other investors for the limited number of projects that were able to move forward. While the number of new projects has been curtailed, CHEC’s access to capital provides a competitive advantage over other investors with lower creditworthiness and appears to have resulted in an increasing level of “deal flow” opportunities for CHEC to review. Management expects this increased level will provide better opportunities for closing on new investments in 2009.

2008 In Review

Annual earnings for CH Energy Group totaled $2.22 per share in 2008, versus the $2.70 per share posted during 2007.

The year 2008 was the most difficult in many years for CH Energy Group. But due to its outstanding financial position and excellent liquidity, CH Energy Group was able to access credit markets to weather the storm thanks to Central Hudson’s solid ‘A’ credit rating and committed credit facilities. Though it was a challenging year, Management believes that it responded well to difficult circumstances and protected the best interests of shareholders and customers.

The worsening economy, which has reduced sales and increased arrears at Central Hudson and Griffith, has impacted CH Energy Group in several respects.

Sales volumes within Central Hudson are well below those projected in the 2006 Rate Order which began on July 1, 2006. Management believes continued customer conservation and a deteriorating economy are the underlying causes behind the shortfall. Additionally, higher write-offs and reserves for uncollectible accounts reduced earnings by $0.17 per share in 2008.

Recognizing that significant steps have already been taken to reduce expenses and increase productivity, Management has determined that a delivery rate increase is necessary to ensure Central Hudson can fulfill its obligation to serve. The decision in Central Hudson’s current rate increase request is due in June, with new rates to take effect July 1, 2009.

Management is particularly encouraged by an increase in the 2008 earnings contribution of Griffith, which rose by 30 percent from that of 2007.

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Central Hudson’s Electric and Natural Gas Businesses

Central Hudson’s contribution to annual earnings per share was $1.67, which was $0.39 lower than that of 2007. As a result of the shortfall in sales, the delivery rate increases that were approved in 2006 and took effect in 2008 did not generate sufficient revenue to meet the higher operating costs that those rates had been designed to cover. In particular, those expenditures included higher tree trimming (reducing earnings per share by $0.08) and depreciation ($0.09). In addition, Central Hudson experienced significantly higher costs associated with customers being unable to pay their bills as a result of the weak economy ($0.17), as well as higher costs associated with restoring electric service following storms ($0.13).

Griffith

Griffith contributed $0.26 to earnings per share in 2008, up from $0.20 in 2007, due largely to higher margins. Favorable margins in the latter part of the year offset margin compression that had reduced profits during the first three quarters of 2008, as well as the weak economy. High oil prices and the weakening economy led to price-induced conservation (reducing earnings per share by $0.16), as well as significantly higher costs from uncollectible accounts ($0.12).

Other Businesses

CH Energy Group (the holding company) and CHEC’s partnerships and other investments contributed $0.29 toward corporate earnings per share in 2008, down $0.15 from 2007 results. The earnings from CHEC’s ethanol investment were lower due to reduced margins, however, the ethanol plant investment, two wind energy installations and an upstate New York biomass plant continued to add positively to earnings as part of a diversified portfolio of investments within the energy industry.

REGULATORY MATTERS

Description of Proceeding: Electric and Natural Gas Rate Increase


	(Cases 08-E-0887 and 08-G-0888 - Proceeding on Motion of the PSC as to the Rates, Charges, Rules and Regulations of Central Hudson Gas & Electric Corporation for Electric and Gas Service)

Background: On July 31, 2008, Central Hudson filed an electric and natural gas rate case with the PSC to increase, effective July 1, 2009, electric and natural gas delivery rates which have been in effect since July 1, 2008, the final term of a three-year rate plan that took effect on July 1, 2006.

A summary of the most significant components of the filing include:


		•	Increases of $35.4 million and $14.7 million of electric and natural gas delivery rates, respectively

		•	Common equity ratio of 48% (the current Rate Order permits a common equity ratio of 45% - 47%)

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		•	Base return on equity (“ROE”) of 10.25% (the current Rate order permits an allowed base ROE of 9.6%)

		•	As required by the PSC, the filing included electric and natural gas RDM proposals.

The filing was made in order to align electric and natural gas delivery rates with the projected costs of providing electric and gas service to customers. Factors contributing to the need for an increase in rates include the following:


		•	Gas and electric sales that are lower than the levels on which current rates are based

		•	Inflationary pressures

		•	Regulatory mandates

		•	The on-going need for electric and natural gas system infrastructure improvements

The filing also seeks to recover projected expenditures associated with the following:


		•	Distribution line tree trimming and enhanced electric transmission right of way management practices

		•	MGP site remediation

		•	Stray voltage testing of Central Hudson owned and municipally owned electric facilities

		•	Gas infrastructure improvements

These cost increases are partially offset by productivity gains and significant reductions in benefit costs as a result of Central Hudson’s successful efforts to restructure compensation and benefits (including modifications to the pension and OPEB plans) to align with the market. In the filing, Central Hudson proposed to pass back to electric customers a net regulatory liability estimated at about $21.2 million during the rate year as an electric bill credit.

Schedule:

2008 – In addition to the filing, notable procedural milestones include the following:


		•	Staff’s and Intervenor’s Direct Testimony was filed November 25^th

		•	Central Hudson’s Rebuttal Testimony was filed December 23^rd

2009


		•	Evidentiary hearings were held January 12^th-15^th

		•	Initial Briefs were filed February 17^th

		•	Reply Briefs are expected to be filed March 11^th

		•	A Recommended Decision by the Administrative Law Judges (“ALJ”) assigned to the proceeding is expected in April

		•	A final Order from the PSC is expected in June

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Potential Impacts: If approved, Central Hudson expects the rate increases to increase its revenue, cash flow and earnings. No prediction can be made as to the final outcome of the rate filing.

Other PSC Proceedings and Administration Initiatives

CH Energy Group and Central Hudson continue to monitor a number of generic and specific regulatory proceedings. Neither CH Energy Group nor Central Hudson can predict the final outcome of New York State’s energy policies, or the following PSC proceedings.

Description of Proceeding: Uncollectible Expense and Arrearages


	(Case 08-M-1312 – Proceeding on Motion of the PSC to Consider the Financial Impacts on New York State Energy Utilities of Changes in Uncollectible Expense and Arrearages in the Current Economic Environment)

Background: In recognition of the financial impacts on utilities of increasing customer arrear balances and uncollectible expense, the PSC has requested comments from energy utilities in the State for the PSC’s purpose of evaluating ratemaking and accounting procedures, which may include consideration of deferral treatment, to address these impacts.

Notable Activity:

2008


		•	PSC Order initiating the proceeding – December 16^th

2009


		•	Comments filed – January 16^th

Potential Impacts: This proceeding could result in deferral of a portion of Central Hudson’s uncollectible expenses, which would result in an increase in earnings and upon future recovery an increase in cash flows. No prediction can be made regarding the final outcome of this matter.

Description of Proceeding: Energy Efficiency Portfolio Standard and State Energy Planning


	(Case 07-M-0548 – Proceeding on Motion of the PSC Regarding an Energy Efficiency Portfolio Standard and Governor Paterson’s Executive Order issued April 9, 2008)

Background: Governor Paterson affirmed his support for the previous administration’s goal of substantially reducing electricity usage. In support of this goal, the PSC is investigating various approaches to reduce customers’ demand for energy and to provide utility incentives for meeting specified energy savings targets.

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Notable Activity:

2008

State Energy Plan


	•	Governor Paterson issued an Executive Order establishing a State Energy Planning Board and authorizing the creation and implementation of a State Energy Plan (“SEP”).

	•	Central Hudson submitted its own comments on the draft scope of the State Energy Plan and joined those submitted by the Energy Association of New York State Member Companies’ comments. Central Hudson also provided briefing papers to the SEP working group on pressing issues facing Central Hudson for consideration in developing the SEP.

PSC


	•	Central Hudson has filed comments with the PSC supporting the opportunity to establish energy efficiency businesses, with corresponding opportunities to contribute to the state energy goal of reducing electricity consumption by 15% by 2015 and provide meaningful earnings for investors from energy efficiency services.

	•	The PSC established energy efficiency targets to be achieved by individual utilities through 2011 that included three utility administered fast track programs and five fast track programs to be administered by the New York State Energy Research and Development Authority (“NYSERDA”). Central Hudson has filed its plans to implement its programs with the PSC.

	•	Effective October 1, 2008, the PSC ordered the creation of a gas System Benefit Charge and increased electric System Benefit Charges to invest in funding these energy efficiency programs.

	•	The ALJ denied Central Hudson’s request to have its energy efficiency programs addressed in conjunction with its rate case.

2009


	•	On January 7, 2009, Governor Paterson outlined various strategies and policy goals in his State of the State address, including one of the most aggressive clean energy goals in the country, with a goal for New York to meet 45% of its electricity needs by 2015 (45 x15) through improved energy efficiency and clean renewable energy production. This would be accomplished by expanding the Renewable Portfolio Standard from 25% by 2013 to 30% by 2015 and decreasing electric usage by 15% by 2015.

	•	SEP to be completed by June 30, 2009.

	•	The PSC will continue to work on additional issues of the energy efficiency program design with participation by interested parties in various working groups that include utility performance incentives, on-bill financing, demand response and peak reduction and impacts on low-income and rental customers.

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Potential Impacts: This PSC proceeding could result in opportunities for increased earnings from incentives associated with achieving energy efficiency targets or negative rate adjustments if the 70% performance criterion is not met. No prediction can be made regarding the final outcome of this matter.

Description of Proceeding: Electric Reliability and Infrastructure Planning


	(Cases 07-E-1507 and 06-M-1017 Proceeding on Motion of the PSC to Establish a Long-Range Electric Resource Plan and Infrastructure Planning Process and Utility Commodity Supply Service)

Background: The PSC initiated this proceeding as an outflow of the longer-term energy planning issues initially considered in the second phase of the PSC’s proceeding regarding utility commodity supply service and hedging. A collaborative process has been initiated to develop the process, criteria, and standards for the PSC to select backstop projects, if necessary, in order to ensure system reliability in the near term. The PSC is also seeking to establish a long term electric resource plan and planning process to incorporate considerations and policy goals which are not adequately addressed by the existing market structure or planning process. In initiating this process, the PSC reiterated its support for competitive markets and market mechanisms, but noted that regulatory approaches, (including the use of long-term contracts) may be required to address the State’s energy needs and policy goals.

Notable Activity:

2008


		•	Central Hudson filed a petition for clarification and reconsideration regarding utility ownership of generation facilities, long-term contracts, and other planning issues. The PSC denied Central Hudson’s petition, stating that the questions raised could be fully addressed in the collaborative proceeding.

		•	The PSC postponed indefinitely the infrastructure planning portion of this proceeding due to resources and efforts committed to similar work being undertaken in response to the Governor’s SEP discussed above.

		•	The PSC issued a policy statement on backstop project cost recovery and allocation.

		•	The PSC issued a procedural ruling adjourning Phase III, the long range infrastructure plan and planning process of this proceeding, to await the issuance of the State Energy Plan expected in mid-2009, in recognition of the efforts and resources focused on the State Energy Plan.

2009


		•	The proceeding continues in a collaborative format with multiple tracks to address cost allocation and recovery mechanisms for reliability solutions as well as longer-term electric resource and infrastructure planning issues.

Potential Impacts: No prediction can be made regarding the impacts on Central Hudson or the final outcomes of these matters.

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Description of Proceeding: Request for Deferral of Incremental Costs

(Case 07-G-1411 – Petition of Central Hudson Gas & Electric Corporation for Authority to Defer Certain Gas Expenses for the Rate Year Ending June 30, 2007)

Background: In 2007, Central Hudson filed a petition with the PSC seeking approval to defer certain incremental and material non-labor gas expenses that were incurred during Rate Year 1 but were not included in rates under the 2006 Rate Plan. The petition sought PSC authorization to defer $990,000 of incremental expenses and associated carrying charges on the net of tax balances.

In 2008, Central Hudson filed a petition with the PSC seeking approval to defer certain incremental and material storm restoration costs resulting from a severe ice storm in December 2008 that disrupted service to approximately 72,000 of Central Hudson’s customers. The petition sought PSC authorization to defer $3.1 million of incremental expenses.

Notable Activity:

2008

Gas Costs:


	•	The PSC denied Central Hudson’s request, noting that while Central Hudson satisfied the standards for demonstrating the expense items were incremental and Central Hudson had not earned its allowed rate of return, the PSC did not view the expense items as material and extraordinary in nature.

	•	The PSC also denied Central Hudson’s subsequent request for rehearing, reaffirming its previous ruling conclusions regarding materiality and the extraordinary nature of the costs.

Storm Restoration Costs

	•	Central Hudson filed its petition on December 31st.

Potential Impacts: The $990,000 of incremental expenses were reflected in Central Hudson’s earnings and cash flows in 2007. Management does not expect any further impact from this proceeding.

The $3.1 miillion of incremental storm restoration expenses were not reflected in Central Hudson’s earnings in 2008. If the PSC denies recovery of some or all of Central Hudson’s incremental expenses, such expenses would be reflected in its earnings in 2009. The types of incremental costs included in Central Hudson’s petition were consistent with previously approved petitions; however, Central Hudson cannot predict the outcome of this matter.

Description of Proceeding: Competitive Retail Energy Markets


	(Case 07-M-0458 - Proceeding on Motion of the PSC to Review Policies and Practices Intended to Foster the Development of Competitive Retail Energy Markets)

Background: The PSC is seeking comments on existing programs and practices of NYS utilities that promote retail market development focusing on whether programs are still necessary; if market participants are improperly subsidized; if risks and expenses are properly allocated among ratepayers, utilities and market participants; and the need to continue programs or practices to prevent the re-building of barriers to entry in the competitive markets. As part of this process, the PSC also plans to review and evaluate utility specific programs, practices and policies in conjunction with ongoing and future electric and gas rate proceedings.

Notable Activity:

2008


		•	The PSC concluded that retail markets are mature and ratepayers should no longer incur incremental costs related to promotional programs unless a particular program directly benefits ratepayers. In connection with this conclusion, the PSC directed utilities to continue the programs and structures that ensure markets will continue to evolve and authorized utilities to continue recovery of revenues lost due to retail access.

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			However, the PSC also required utilities to obtain funding for the required programs from Energy Supply Companies (“ESCOs”), not ratepayers.

Potential Impacts: Management does not expect the impact of the PSC’s order to have a material impact on Central Hudson.

Description of Proceeding: Revenue Decoupling Mechanisms (“RDM”)


	(Cases 03-E-0640 and 06-G-0746 - Proceeding on Motion of the PSC to Investigate Potential Electric and Gas Delivery Rate Disincentives Against the Promotion of Energy Efficiency, Renewable Technologies and Distributed Generation)

Background: The PSC has directed all NYS utilities to develop proposals for delivery service RDMs for consideration in a next rate case filing.

Notable Activity:

2007


		•	Central Hudson proposed RDMs to true up its forecast and actual delivery service revenues in its energy efficiency filing discussed above.

2008


		•	The ALJ assigned to the case denied Central Hudson’s request to have an RDM considered outside of a rate case.

		•	Central Hudson’s July 31^st rate filing included proposals for electric and gas revenue decoupling mechanisms.

		•	The PSC Staff’s November 25^th testimony proposed electric and gas RDMs that differed in some respects from those proposed by Central Hudson.

Potential Impacts: Central Hudson included RDMs in its rate case filing described above. No prediction can be made regarding the final outcome of RDMs in the rate proceeding.

Description of Proceeding: Renewable Portfolio Standard (“RPS”)


	(Cases 03-E-0188 - Proceeding on Motion of the PSC Regarding Retail Renewable Portfolio Standard)

Background: In 2004, the PSC issued an Order adopting an RPS, with a goal of increasing the proportion of renewable energy used by New York consumers from the then-current 19.3% baseline resources to at least 25% by 2013, and designated NYSERDA as the central procurement administrator of the program.

Notable Activity:

2008


		•	In response to a notice of proposed rulemaking by the PSC for consideration of modifications to the RPS tier allocations, annual targets, and schedule of collections, Central Hudson filed comments. Central Hudson recommends the establishment of a Utility-Sited Tier to include

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			utility-scale photovoltaic projects as a way of advancing the State’s clean energy goals, and further encouraging the growth of the solar industry in New York.

Potential Impacts: No prediction can be made regarding the final outcome or timing of changes to the RPS program at this time.

Non-Utility Land Sales

For further information regarding non-utility land sales, see Note 2 – “Regulatory Matters.”

Electric Reliability Performance

For further information regarding Central Hudson’s electric reliability performance, see Note 2 – “Regulatory Matters.”

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RESULTS OF OPERATIONS

The following discussion and analyses include explanations of significant changes in revenues and expenses between the year ended December 31, 2008, and 2007, and the year ended December 31, 2007, and 2006, for Central Hudson’s regulated electric and natural gas businesses, Griffith, and the other businesses.

The tables below present the change in earnings of CH Energy Group’s business units in terms of earnings per share for each share of CH Energy Group’s Common Stock. Management believes this presentation is useful because these business units are each wholly-owned by CH Energy Group.

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:


	2008			2007			2006

Average shares outstanding (In thousands):
Basic		15,768			15,762			15,762
Diluted		15,805			15,779			15,779

Earnings per share:
Basic	$	2.22		$	2.70		$	2.73
Diluted	$	2.22		$	2.70		$	2.73

Return earned on common equity		6.6	%		8.1	%		8.4	%

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2008 as Compared to 2007

CH Energy Group Consolidated


Earnings per Share (Basic)	Year Ended December 31,

	2008		2007		Change


Central Hudson - Electric	$	1.33	$	1.66	$	(0.33	)
Central Hudson - Natural Gas		0.34		0.40		(0.06	)
Griffith		0.26		0.20		0.06
Other Businesses and Investments		0.29		0.44		(0.15	)

	$	2.22	$	2.70	$	(0.48	)

Note:

This information above is considered a non-GAAP financial measure. This information is not an alternative to earnings per share determined on a consolidated basis, which is the most directly comparable GAAP measure. 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 above.

Earnings for CH Energy Group totaled $2.22 per share in 2008, versus $2.70 per share in 2007. The worsening economy has reduced sales and increased arrears at Central Hudson and Griffith. Sales volumes within Central Hudson are well below those projected in the 2006 Rate Order which began on July 1, 2006. Management believes continued customer conservation and a deteriorating economy are the underlying causes behind the shortfall resulting in the revenue generated from rate increases to be insufficient to meet higher operating costs. Additionally, higher write-offs and reserves for uncollectible accounts reduced earnings by $0.17 per share in 2008.

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Central Hudson


Earnings per Share (Basic)	Year Ended December 31,

	2008		2007		Change



Electric	$	1.33	$	1.66	$	(0.33	)
Natural Gas		0.34		0.40		(0.06	)

	$	1.67	$	2.06	$	(0.39	)

Earnings from Central Hudson’s electric and natural gas operations decreased $0.39 per share in 2008 compared to 2007 due to the following:


Regulatory Mechanisms and Unusual Events:
Shared Earnings Recorded in 2007	$	0.04
Gain on Non-Utility Property Sales in 2007		(0.02	)
Cable Attachment Rents in 2008		0.03

Rate Increases		0.16
Higher Storm Restoration Expense		(0.13	)
Higher Tree Trimming		(0.08	)
Higher Depreciation		(0.09	)
Higher Interest Expense and Carrying Charges		(0.08	)
Higher Property and Other Taxes		(0.06	)
Higher Uncollectible Accounts		(0.17	)
Weather-Normalized Sales Growth Including Conservation		(0.01	)
Other		0.02

	$	(0.39	)

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Griffith


Earnings per Share (Basic)	Year Ended December 31,

	2008		2007		Change

	$	0.26	$	0.20	$	0.06

Griffith’s earnings increased $0.06 per share in 2008 compared to 2007, due to the following:


Acquisitions⁽¹⁾	$	0.07
Margin on Petroleum Sales and Services		0.28
Weather-Normalized Sales Growth (Conservation)		(0.16	)
Higher Uncollectible Accounts		(0.09	)
Operating Expenses		(0.05	)
Weather Impact on Sales (Including Hedging)		(0.01	)
Other		0.02

	$	0.06


(1)	For the purposes of the above charts, “Acquisitions” represents the incremental affect of acquisitions made by Griffith in 2008 and 2007.

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Other Businesses and Investments


Earnings per Share (Basic)	Year Ended December 31,

	2008		2007		Change

	$	0.29	$	0.44	$	(0.15	)

The variation in earnings per share from CH Energy Group (the holding company) and CHEC’s partnership and other investment interests in 2008 compared to 2007 is due to the following:


Cornhusker Investment	$	(0.06	)
Lyonsdale Operations		0.03
Lower Interest and Investment Income		(0.09	)
Other		(0.03	)

	$	(0.15	)

CH Energy Group (the holding company) and CHEC’s partnerships and other investments contributed $0.29 toward corporate earnings per share in 2008, down $0.15 from 2007 results largely due to lower interest and investment income. The earnings from CHEC’s ethanol investment were lower due to reduced margins, however, the ethanol plant investment, two wind energy installations and an upstate New York biomass plant continued to add positively to earnings as part of a diversified portfolio of investments within the energy industry.

2007 as Compared to 2006

CH Energy Group Consolidated


Earnings per Share (Basic)	Year Ended December 31,

	2007		2006		Change


Central Hudson - Electric	$	1.66	$	1.67	$	(0.01	)
Central Hudson - Natural Gas		0.40		0.48		(0.08	)
Griffith		0.20		0.10		0.10
Other Businesses and Investments		0.44		0.48		(0.04	)

	$	2.70	$	2.73	$	(0.03	)

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Details by Segment are as follows:

Central Hudson


Earnings per Share (Basic)	Year Ended December 31,

	2007		2006		Change

Electric	$	1.66	$	1.67	$	(0.01	)
Natural Gas		0.40		0.48		(0.08	)

Total	$	2.06	$	2.15	$	(0.09	)

Earnings from Central Hudson’s electric and natural gas operations decreased $0.09 per share in 2007 as compared to 2006, due to the following:


Regulatory Mechanisms and Unusual Events:
Release of Reserves in 2006	$	(0.21	)
Gain on Non-Utility Property Sales in 2006		(0.08	)
Reversal of Shared Earnings in 2006		(0.08	)
Revenues recorded in 2006 per prior Rate Agreement		(0.14	)
Shared earnings recorded in 2007		(0.04	)
Gain on Non-Utility Property Sales in 2007		0.02

Rate Increases		0.18
Weather Impact on Sales		0.07	^(a)
Weather-Normalized Sales Growth		0.18
Higher Tree Trimming Expense in 2007		(0.03	)
Lower Storm Restoration Expense in 2007		0.15
Interest Expense and Carrying Charges		(0.11	)

	$	(0.09	)


(a)	Includes $0.04 and $0.03 per share due to higher sales volumes for electric and natural gas, respectively, and is net of derivatives.

Central Hudson’s decrease in earnings was primarily the result of changes in regulatory provisions and a number of significant, favorable, unusual items that contributed $0.51 per share to 2006 earnings, but did not recur in 2007. However, the lack of such items of that magnitude in 2007 was largely offset by an increase in rates pursuant to the 2006 Rate Order, higher energy delivery volumes and modest customer growth, and lower storm restoration costs due to fewer and less severe storms and increased tree trimming in 2007.

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Griffith


Earnings per Share (Basic)	Year Ended December 31,

	2007		2006		Change

	$	0.20	$	0.10	$	0.10

Griffith’s earnings increased $0.10 per share in 2007 compared to 2006, due to the following:


Acquisitions⁽¹⁾	$	0.04
Margin on Petroleum Sales and Services		0.18
Operating Expenses		(0.13	)
Weather Impact on Sales		0.02
Reduction in Environmental Remediation Reserve in 2006		(0.04	)
Other		0.03

	$	0.10


(1)	For the purposes of this chart, “Acquisitions” represents the incremental affect of acquisitions made by Griffith in 2007 and 2006.

The increase in earnings at Griffith in 2007 was largely the result of higher gross margins on petroleum products and service contracts which were partially offset by the impact of higher operating costs resulting in net favorable earnings per share impact of $0.05. In addition, the incremental effect of acquisitions in 2006 and 2007 contributed to the higher earnings.

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Other Businesses and Investments


Earnings per Share (Basic)	Year Ended December 31,

	2007		2006		Change

	$	0.44	$	0.48	$	(0.04	)

Earnings from CH Energy Group (the holding company) and CHEC’s partnership and other investment interests decreased $0.04 per share in 2007 as compared to 2006, due to the following:


Unusual Events:
Gain on Sale of Non-Strategic Property in 2006	$	(0.03	)
Release of Reserves of a Former Subsidiary in 2006		(0.07	)
Release of Reserves of a Former Subsidiary in 2007		0.01
Tax Adjustments		0.07
Cornhusker Holdings		(0.04	)
CH-Community Wind		0.02
Lyonsdale Operations		0.02
Other		(0.02	)

	$	(0.04	)

CH Energy Group’s other unregulated businesses decreased their earnings contribution by $0.04 per share from 2006 primarily due to the release of reserves related to a former subsidiary and property sales in 2006, partially offset by favorable tax adjustments. Other investments continue to contribute to earnings, but Cornhusker Holdings’ earnings decreased in 2007 due to unfavorable markets for corn and ethanol.

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Central Hudson

In 2008, Central Hudson’s operating revenues increased $15.4 million while operating expenses increased $19.5 million. The increase in revenue was driven by the dollar-for-dollar recovery of certain expenses authorized by the PSC, not by higher volumes as Central Hudson had lower electric and natural gas deliveries in 2008 compared to the same period in 2007.

In 2007, operating revenues increased $123 million and operating expenses also increased $123 million. This increase was also primarily driven by the need to recover a higher level of expenses. During this period, however, electric and natural gas deliveries were higher compared to 2006 when mild summer and winter weather drove usage down.

Despite the increase in deliveries in 2007, Central Hudson is experiencing an increasing shortfall between its actual deliveries and the forecasted levels upon which Central Hudson’s rates are based, causing unfavorable results in 2007 earnings, which continued through 2008.

Central Hudson
Income Statement Variances


	Year Ended December 31, 2008 Over/(Under) same period in 2007

	Amount (In Thousands)			Percent Change

Operating Revenues	$	15,419			2.0	%

Operating Expenses:
Purchased electric, fuel and natural gas		1,547			0.3	%
Depreciation and Amortization		1,413			5.0	%
Other operating expenses		16,521			8.8	%

Total operating expenses	$	19,481			2.7	%

Operating Income		(4,062	)		(5.7	)%
Other income, net		(670	)		(12.7	)%
Interest Charges		2,519			11.0	%

Income before income taxes		(7,251	)		(13.5	)%
Income Taxes		(1,053	)		(5.2	)%

Net (loss)/income	$	(6,198	)		(18.5	)%

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Central Hudson
Income Statement Variances


	Year Ended December 31, 2007 Over/(Under) same period in 2006

	Amount (In Thousands)			Percent Change

Operating Revenues	$	123,108			18.7	%

Operating Expenses:
Purchased electric, fuel and natural gas		92,662			23.1	%
Depreciation and Amortization		(603	)		(2.1	)%
Other operating expenses		30,599			19.4	%

Total operating expenses	$	122,658			20.9	%

Operating Income		450			1.0	%
Other income, net		(592	)		(10.0	)%
Interest Charges		2,495			12.0	%

Income before income taxes		(2,637	)		(5.0	)%
Income Taxes		(1,202	)		(6.0	)%

Net (loss)/income	$	(1,435	)		(4.0	)%

The following discusses variations and the primary drivers of the changes in operating revenues, operating expenses, volumes delivered, other income, interest charges, and income taxes for Central Hudson’s regulated electric and natural gas businesses.

Delivery Volumes

Delivery volumes for Central Hudson vary in response to weather conditions and customer behavior. Electric deliveries peak in the summer and deliveries of natural gas used for heating purposes peak in the winter. Delivery volumes also vary as customers respond to the price of the particular energy product and changes in local economic conditions.

The following chart reflects the change in the level of electric and natural gas deliveries for Central Hudson in 2008, compared to 2007, and in 2007, compared to 2006. Deliveries of electricity and natural gas to residential and commercial customers contribute the most to Central Hudson’s earnings. Industrial sales and interruptible sales have a negligible impact on earnings.

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	Actual Deliveries

	Year Ended December 31, 2008 Increase (Decrease) from same period in 2007						Year Ended December 31, 2007 Increase (Decrease) from same period in 2006

	Electric			Natural Gas			Electric			Natural Gas

Residential		(2	)%		0	%		4	%		12	%
Commercial		(2	)%		(1	)%		4	%		10	%
Industrial and Other^(a)		(7	)%		(1	)%		(2	)%		5	%

Total Deliveries		(3	)%		(1	)%		2	%		9	%


(a)	Includes interruptible natural gas deliveries.


	Weather Normalized Deliveries

	Year Ended December 31, 2008 Increase (Decrease) from same period in 2007						Year Ended December 31, 2007 Increase (Decrease) from same period in 2006

	Electric			Natural Gas			Electric			Natural Gas

Residential		0	%		(3	)%		3	%		6	%
Commercial		(2	)%		(2	)%		4	%		4	%
Industrial and Other^(a)		(7	)%		(5	)%		(2	)%		5	%

Total Deliveries		(2	)%		(3	)%		2	%		5	%


(a)	Excludes interruptible natural gas deliveries.

Electric deliveries to residential and commercial customers were lower in 2008 due to milder summer weather and price-induced customer conservation, partially offset by modest customer growth.

Residential and commercial natural gas heating degree-days increased 5% and 3%, respectively in 2008. However, the colder weather and modest customer growth did not result in higher delivery volumes for residential and commercial customers due to the effects of customer conservation.

Electric deliveries to residential and commercial customers were higher in 2007 due to colder weather (electric residential heating degree-days increased 3% for the year), an increase in non-weather related usage per customer, and modest customer growth. This increase was partially offset by the impact of cooler summer weather.

Deliveries of natural gas in 2007 also increased due to higher usage per customer, resulting from an increase in residential natural gas heating-degree days of 2% overall for 2007, an increase in non-weather related usage per customer, and some customer growth.

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Revenues

Central Hudson’s revenues consist of two major categories: those which offset specific expenses in the current period (matching revenues), and those that impact earnings. Matching revenues recover Central Hudson’s actual costs for particular expenses. Any difference between these revenues and the actual expenses incurred is deferred for future recovery from or refund to customers and therefore does not impact earnings.

Year Ended December 31, 2008
Increase (Decrease) from same period in 2007
(In Thousands)


	Electric			Natural Gas			Total

Revenues with Matching Offsets:^(a)
Energy cost adjustment	$	(15,903	)	$	7,594		$	(8,309	)
Sales to others for resale		(2,076	)		12,298			10,222
Pension, OPEB and other revenues		3,763			3,260			7,023

Subtotal		(14,216	)		23,152			8,936

Revenues Impacting Earnings:
Customer sales		619			921			1,540
Other regulatory mechanisms		2,481			673			3,154
Pole attachments and other rents		1,022			—			1,022
Finance charges		764			210			974
Other revenues		652			(859	)		(207	)

Subtotal		5,538			945			6,483


Total (Decrease)/Increase in Revenues	$	(8,678	)	$	24,097		$	15,419

(a)

Revenues with matching offsets do not affect earnings since they offset related costs, the most significant being energy cost adjustment revenues, which provide for the recovery of purchased electricity and natural gas costs. Other related costs are pensions, OPEB, and the cost of special programs authorized by the PSC, which are funded with certain available credits. Changes in revenues from electric sales to other utilities also do not affect earnings since any related profits or losses are returned or charged, respectively, to customers. For natural gas sales to other entities for resale, 85% of such profits are returned to customers.

Electric revenues decreased in the year ended December 31, 2008, as compared to the same period in 2007 primarily due to lower energy cost adjustment revenues driven by lower delivery volumes, partially offset by higher wholesale electricity costs. The increase in revenues from other regulatory mechanisms was driven primarily by the absence of shared earnings in 2008.

Natural gas revenues increased for the year ended December 31, 2008, as compared to the same period in 2007, due to higher energy cost adjustment revenues as a result of higher wholesale costs through the third quarter of 2008, partially offset by lower delivery volumes. The increase for the year was also due to higher revenues from gas sales to others for resale.

- 54 -

Year Ended December 31, 2007
Increase (Decrease) from same period in 2006
(In Thousands)


	Electric			Natural Gas			Total

Revenues with Matching Offsets:^(a)
Energy cost adjustment	$	87,833		$	2,280		$	90,113
Sales to others for resale		349			1,086			1,435
Pension, OPEB and other revenues		19,491			5,850			25,341

Subtotal		107,673			9,216			116,889

Revenues Impacting Earnings:
Customer sales^(b)		9,911			2,389			12,300
Other regulatory mechanisms		(5,090	)		(224	)		(5,314	)
Sales to other utilities		—			270			270
Weather-hedging contracts		440			(150	)		290
Other revenues		(3	)		(1,324	)		(1,327	)

Subtotal		5,258			961			6,219


Total Increase in Revenues	$	112,931		$	10,177		$	123,108


(a)	Revenues with matching offsets do not affect earnings since they offset related costs, the most significant being energy cost adjustment revenues, which provide for the recovery of purchased electricity and natural gas costs. Other related costs are pensions, OPEB, and the cost of special programs authorized by the PSC, which are funded with certain available credits. Changes in revenues from electric sales to other utilities also do not affect earnings since any related profits or losses are returned or charged, respectively, to customers. For natural gas sales to other entities for resale, 85% of such profits are returned to customers.

(b)	Includes and offsetting recovery of amounts related to back-out credits for retail access customers.

Electric and natural gas revenues in 2007 increased when compared to 2006, due largely to an increase in revenues with matching expense offsets. The increases in energy cost adjustment revenues reflect the impact of higher delivery volumes and also higher wholesale costs for electric revenues. Revenues for pension, OPEB and other matched costs resulted from rate changes implemented in accordance with the 2006 Rate Order.

Electric and natural gas revenues from customer sales increased due to higher delivery volumes and the impact of the 2006 Rate Order. Electric revenues from customer sales were partially offset by a decrease in other regulatory mechanisms primarily related to shared earnings and revenues recorded in 2006 in accordance with prior PSC authorization.

Incentive Arrangements

Under certain earnings incentive provisions approved by the PSC, Central Hudson shares with its customers certain revenues and/or cost savings exceeding predetermined levels or is penalized in some cases for shortfalls from certain performance standards.

- 55 -

Earnings sharing arrangements are currently effective for interruptible natural gas deliveries and natural gas capacity release transactions. Performance standards apply to electric service reliability, certain aspects of customer service, natural gas safety, customer satisfaction, and certain aspects of retail market participant satisfaction.

The net results of these and previous earnings sharing arrangements had the effect of increasing pre-tax earnings by $0.7 million in 2008, $0.5 million in 2007, and $0.4 million in 2006.

In addition to the above-noted items, effective July 1, 2006, Central Hudson shared with customers earnings over a base ROE of 10.6% on the equity portion of Central Hudson’s rate base, which was determined in accordance with the criteria set forth in the 2006 Rate Order. In 2008, Central Hudson did not record shared earnings. In 2007, Central Hudson recorded $1.1 million as a regulatory liability for the customer portion of these pre-tax shared earnings. Through June 30, 2006, Central Hudson shared earnings over a base ROE of 10.5% with customers, which was determined in accordance with the criteria set forth in the 2001 Rate Plan. In 2005, Central Hudson recorded $2.4 million as a regulatory liability for the customer portion of these pre-tax shared earnings of which $1.7 million was reversed in 2006 due to lower than anticipated ratemaking operating income in the six months ended June 30, 2006.

See Note 2 – “Regulatory Matters” of this 10-K Annual Report under the caption “2006 Rate Order” for a description of earnings sharing formulas approved by the PSC for Central Hudson.

Operating Expenses

The most significant elements of Central Hudson’s operating expenses are purchased electricity and purchased natural gas; however, changes in these costs do not affect earnings since they are offset by changes in related revenues recovered through Central Hudson’s energy cost adjustment mechanisms. Additionally, there are other costs that are matched to revenues largely from customer billings, notably the cost of pensions and OPEBs.

Total utility operating expenses increased 3% in 2008 compared to 2007 and increased 21% in 2007 compared to 2006. The following summarizes the change in operating expenses:

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	Year Ended December 31, 2008			Year Ended December 31, 2007
	Increase (Decrease) from same period in
	2007			2008

	(In Thousands)
Expenses Currently Matched to Revenues:⁽¹⁾
Purchased electricity	$	(17,979	)	$	88,182
Purchased natural gas		19,892			3,366
Pension		(320	)		15,102
OPEB		(253	)		4,880
New York State energy programs		3,118			2,003
Stray voltage testing program		(50	)		1,125
Residual gas deferred balances		2,791			1,509
Other matched expenses		1,593			1,186

Subtotal		8,792			117,353

Other Expense Variations:
Tree trimming		2,131			797
Disposition of property		—			1,749
Injuries & damages reserve		(317	)		1,390
Uncollectible reserve		3,042			415
Purchased natural gas incentive arrangements		(366	)		1,114
Storm restoration expenses⁽²⁾		3,270			(3,874	)
Property taxes		1,044			677
Other expenses		1,885			3,037

Subtotal		10,689			5,305

Total Increase in Operating Expenses	$	19,481		$	122,658


(1)	Includes expenses that, in accordance with the 2006 Order, are adjusted in the current period to equal the revenues earned for the applicable expenses.

(2)	Does not include $3.1 million in incremental costs related to the December 2008 ice storm deferred for future recovery from customers. See further discussion below.

In addition to the required adjustment to match revenues collected from customers, the variation in purchased electricity expense in 2008 reflects the net effect of lower volumes delivered (due to the switch of industrial customers to delivery service, but also influenced by weather and customer conservation) and higher wholesale prices. The increase in natural gas costs reflects higher wholesale costs partially offset by lower volumes delivered (influenced by customer conservation). The increase in New York State energy program revenues is primarily the result of an increase in gas and electric rates (effective October 1, 2008) under the Energy Efficiency Portfolio Standard pursuant to the State’s efforts to expand and fund energy efficiency programs. The increase in other revenue-matched expenses in 2008 results primarily from higher spending levels associated with certain expenditures as authorized by the 2006 Rate Order.

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The increase in the uncollectible reserve results from higher energy prices and from unfavorable economic conditions, both of which have impacted customers’ ability to pay their bills. The increase in storm restoration costs in 2008 is the result of higher and more severe storm activity this year. This increase does not include $3.1 million in incremental costs related to an ice storm in December 2008 which interrupted service to approximately 72,000 customers. The Company has deferred these restoration costs and has petitioned the PSC for authority to recover these costs in future rates.

Purchased electricity costs increased in 2007 due to higher wholesale costs and volumes purchased, the latter resulting from an increase in usage and customer growth. Natural gas costs increased in 2007 due primarily to an increase in volumes purchased due to increased deliveries and customer growth. The lower storm restoration costs in 2007 resulted from fewer and less severe storms as compared to 2006. Other expenses of operation were also impacted by fewer real property sales in 2007 compared to 2006.

The increase in pensions and OPEBs in 2007 is due to an increase in the level of expense recorded due to a corresponding increase in revenues resulting from the 2006 Rate Order. The increase in tree trimming expenses in 2007 reflects Central Hudson’s continuing efforts to improve system reliability. These costs are covered by the higher revenues resulting from the 2006 Rate Order. Management also believes that the increased tree trimming contributed to the improved system reliability during storms.

Other Income

Other income and deductions for Central Hudson for the year ended December 31, 2008, decreased $0.7 million compared to the same period in 2007, primarily due to lower earnings on the Company’s deferred compensation plan assets and a reduction in regulatory carrying charges on balances due from customers.

Other income and deductions for Central Hudson decreased $0.6 million in 2007 when compared to 2006 primarily due to lower regulatory carrying charges due from customers related to pension costs. This reduction was partially offset by higher interest income on trust assets and higher other regulatory carrying charges due from customers.

Interest Charges

Central Hudson’s interest charges increased by $2.5 million for the year ended December 31, 2008, compared to the same period in 2007 largely due to an increase in long-term debt resulting primarily from the issuance of medium term notes in September 2007 and also from the issuance of medium term notes in November 2008. The proceeds from both issuances were used to finance ongoing investments in Central Hudson’s electric and natural gas systems.

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Interest charges increased in 2007 when compared with 2006 primarily due to the issuance of medium-term notes in November 2006 and September 2007, and an increase in regulatory carrying charges due to customers related to other postretirement benefits. The latter results from an increase in the reserve balances upon which these carrying charges are calculated. Additional long-term debt was issued to supplement operating cash sources for Central Hudson’s capital expenditures, and additional short-term debt was required in 2007 for working capital needs.

The following table sets forth pertinent data on Central Hudson’s outstanding debt.


	2008			2007			2006

	(Dollars In Thousands)

Long-Term Debt:
Debt retired	$	—		$	33,000		$	—
Debt issued	$	30,000		$	66,000		$	27,000
Outstanding at year end:
Amount (including current portion)	$	433,894		$	403,892		$	370,889
Weighted average interest rate		5.43	%		5.49	%		4.88	%
Short-Term Debt:
Average daily amount outstanding	$	32,304		$	32,501		$	27,657
Weighted average interest rate		3.00	%		5.37	%		5.24	%
Overall weighted average interest rate		5.26	%		5.48	%		4.90	%

See Note 7 – “Short-Term Borrowing Arrangements” and Note 9 – “Capitalization – Long-Term Debt” for additional information on short-term and long-term debt of CH Energy Group and/or Central Hudson.

Income Taxes

Income taxes for Central Hudson decreased $1.1 million in 2008 when compared to 2007 due to a decrease in pre-tax book earnings which was partially offset by the unfavorable impacts of flow-through items related to depreciation, reserves (primarily uncollectible customer receivables) and the Medicare Act of 2003 and a reduction in tax-exempt income.

Central Hudson’s income taxes for 2007 decreased by $1.2 million when compared to 2006 primarily due to a decrease in pre-tax book earnings, favorable impacts of items related to utility plant and from the tax benefits of the Medicare Act. These favorable items were partially offset by an unfavorable impact of flow-through items related to reserves.

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CH Energy Group

In addition to the impacts of Central Hudson discussed above, CH Energy Group’s sales volumes, revenues and operating expenses, income taxes and other income were impacted by Griffith and the other businesses described below. The results of Griffith and the other businesses described below exclude intercompany interest income and expense which are eliminated in consolidation.

CH Energy Group
Income Statement Variances


	Year Ended December 31, 2008 Over/(Under) same period in 2007

	Amount (In Thousands)			Percent Change

Operating Revenues	$	136,094			11.4	%

Operating Expenses:
Purchased electric, fuel, natural gas and petroleum		102,165			12.5	%
Depreciation and Amortization		2,375			6.6	%
Other operating expenses		32,116			12.1	%

Total operating expenses	$	133,656			12.2	%

Operating Income		(562	)		(0.7	)%
Other income, net		(3,759	)		(41.7	)%
Interest charges		3,079			13.4	%

Income before income taxes, preferred dividends of subsidiaries, and minority interest		(7,400	)