Central Hudson’s net cash provided by operations was $11.2 million and $43.0 million for the three months ended March 31, 2012 and 2011, respectively. Cash provided by sales exceeded the period’s expenses and working capital needs in the first quarter of 2012 and 2011. However, in 2012 contributions to Central Hudson’s pension plans were higher at $28.2 million compared to $8.2 million in contributions for the three months ended March 31, 2011. Recovery of previously deferred electric and natural gas costs had a favorable impact on net cash provided by operations during the first three months of 2012 and 2011 of $7.9 million and $25.3 million, respectively, with the decrease year over year due to a significant decrease in wholesale prices first occurring in 2011 which continued into 2012. Also, the inclusion of $5.1 million of storm restoration costs incurred in the latter portion of 2011 but paid during the first three months of 2012 with no comparative payments in the first three months of 2011 added to a decreased amount of net cash provided by operations. However, net cash provided by operating activities at CH Energy Group was positively impacted during the three months ended March 31, 2012 due to a decrease in Griffith’s customer accounts receivables compared to the prior period which was primarily driven by decreased sales volumes and customer conservation attributed to the warmer than normal weather and increase in commodity pricing.
Central Hudson’s net cash used in investing activities of $26.6 million and $16.6 million in the three months ended March 31, 2012 and 2011, respectively, was primarily for investments in Central Hudson’s electric and natural gas transmission and distribution systems.
Central Hudson’s net cash provided by (used in) financing activities was $68.7 million and ($11.5) million, respectively, for the three months ended March 31, 2012 and 2011. At the end of the first quarter of 2012, Central Hudson undertook additional short-term borrowings of $36.0 million from uncommitted lines of credit to fund the repayment of Series D Medium Term Notes that matured on March 28, 2012. On March 30, 2012, Central Hudson issued $48.0 million of its Series G Medium Term Notes. The proceeds of the sale of the additional notes were used by Central Hudson to refinance short-term borrowings on April 2, 2012, and under the lines of credit will also be used to fund the redemption of its Cumulative Preferred Stock (4.35% Series D Cumulative Preferred Stock and 4.96% Series E Cumulative Preferred Stock) with an aggregate redemption price of approximately $12 million. Other short-term borrowings will be used for anticipated working capital requirements and other corporate uses. Also, during the first three months of 2012 no dividends were paid to parent while comparatively in the first three months of 2011 Central Hudson paid dividends of $11.0 million to parent CH Energy Group. From time to time Central Hudson borrows from its parent CH Energy Group on an intercompany demand note and as of March 31, 2012 the outstanding balance under this program was $20.0 million with no comparable transactions in the prior year. In addition, the current year final settlement cost associated with the ASR program was $3.0 million compared to 2011 when CH Energy Group’s financing activities were partially reduced by $8.5 million for the repurchases of CH Energy Group Common Stock while also being impacted by $16.5 million of short-term borrowings in the three months ended March 31, 2011.
Capitalization – Issuance of Treasury Stock
Effective July 1, 2011, employer matching contributions to an eligible employee’s Savings Incentive Plan (“SIP”) could be paid in either cash or in CH Energy Group Common Stock and CH Energy Group chose to meet its matching obligation in Common Stock. As of March 1, 2012 the Company has been providing cash for all of its matching obligations, except for matching associated with classified employees of Central Hudson. The classified employees will continue to receive matching in CH Energy Group Common Stock. As of March 31, 2012, 38,058 shares were issued from treasury related to the employer matching contribution, of which 18,502 were issued during the first quarter of 2012.
For information regarding equity compensation and the purchase of treasury shares, see Note 11 - “Equity Based Compensation” of this Quarterly Report on Form 10-Q.
Contractual Obligations
Other contractual obligations and commitments of CH Energy Group are disclosed in Note 12 – “Commitments and Contingencies” of this Quarterly Report on Form 10-Q under the caption “Electric Purchase Commitments.”
Central Hudson determines the amount it will contribute to its pension plan (the “Retirement Plan”) based on several factors, including the value of plan assets relative to plan liabilities, the discount rate, expected return on plan assets, legislative requirements, regulatory considerations and available corporate resources. The amount of the Retirement Plan’s liabilities is affected by the discount rate used to determine benefit obligations and the accrual of additional benefits. Funding for the Retirement Plan totaled $28.0 million and $8.0 million for the three months ended March 31, 2012 and 2011, respectively. No additional funding of the plan is expected for the remainder of 2012.
During the three months ended March 31, 2012 and 2011 there were no employer contributions for OPEB plans. The determination of future funding depends on a number of factors, including the discount rate, expected return on plan assets, medical claims assumptions used, benefit changes, regulatory considerations and corporate resources. On April 13, 2012, a $3.3 million contribution was made to the OPEB plan and no further funding is expected for the remainder of 2012.
Management has transitioned to a long-duration investment strategy that is intended to reduce the year-to-year volatility of the funded status of the plan and of the level of contributions by more closely aligning the characteristics of plan assets with liabilities. Management cannot currently predict what impact future financial market volatility may have on the funded status of the plan or future funding decisions.
Under the policy of the PSC regarding pension and OPEB costs, Central Hudson recovers these costs through customer rates with differences between actual cost and rate allowances deferred for future recovery from or return to customers. Based on the current policy, Central Hudson expects to fully recover its net periodic pension and OPEB costs over time.
During the first quarter of 2012, CH Energy Group incurred costs of $5.2 million related to the agreement and plan of merger under which CH Energy Group agreed to be acquired by Fortis. CH Energy Group estimates additional merger-related costs of approximately $3.0 million upon the receipt of shareholder approval and approximately $8.0 million in connection with the closing of the merger transaction. Costs incurred in connection with the closing include additional expense to be recognized associated with the accelerated vesting of equity-based compensation immediately prior to the closing of the acquistion by Fortis as defined in the merger agreement.
Merger-related transaction costs that are facilitative in nature are considered nondeductible for tax purposes. Merger-related transaction costs incurred in the three months ended March 31, 2012 totaling $4.3 million have been determined to be facilitative and therefore nondeductible.
Financing Program
CH Energy Group believes that it is well positioned with a strong balance sheet and strong liquidity. Significant capacity is available on CH Energy Group’s and Central Hudson’s committed credit facilities. Central Hudson’s investment-grade credit ratings help facilitate access to long-term debt. However, management can make no assurance in regards to the continued availability of financing or the terms and costs. With the exception of the issuance of treasury shares to satisfy its obligations under certain employee benefit plans and compensation plans, no equity issuance is currently planned for 2012.
At March 31, 2012, CH Energy Group and its subsidiaries maintained credit facilities with JPMorgan Chase Bank, N.A., Bank of America, N.A., HSBC Bank USA, N.A. and KeyBank National Association. On October 19, 2011, Central Hudson entered into a new $150 million committed revolving credit facility with JPMorgan Chase Bank, N.A., Bank of America, N.A., HSBC Bank USA, N.A., KeyBank National Association and RBS Citizens Bank, N.A. as the participating banks. The new credit facility has a term of up to five years. The existing $125 million facility was terminated as of the effective date of the new agreement. If these lenders are unable to fulfill their commitment under these facilities, funding may not be available as needed.
Central Hudson’s short-term borrowings include $36 million undertaken at the end of the first quarter of 2012 from uncommitted lines of credit to fund the repayment of maturing debt on March 28, 2012. On March 30, 2012, Central Hudson finalized its issuance of Series G Medium Term Notes and the $36 million of short-term borrowings from uncommitted lines of credit were paid on April 2, 2012.
Central Hudson’s current senior unsecured debt rating/outlook is ‘A’/CreditWatch negative by Standard & Poor’s Rating Services (“Standard & Poor’s”), ‘A’/stable by Fitch Ratings and ‘A3’/stable by Moody’s Investors Service (“Moody’s”)1.
On February 22, 2012, Standard & Poor’s placed its ratings of Central Hudson on CreditWatch with negative implications, following the February 21, 2012 announcement that CH Energy Group had agreed to be acquired by Fortis. Standard & Poor’s stated that they expect to resolve the CreditWatch listing as the merger nears completion and additional information is available. CH Energy Group is unable to predict the outcome of that resolution. The CreditWatch listing is not expected to have a material impact on Central Hudson’s financial performance.
CH Energy Group and Central Hudson believe they will be able to meet their short-term and long-term cash requirements, assuming that Central Hudson’s future rate plans reflect the costs of service, including a reasonable return on invested capital.
1 These ratings reflect only the views of the rating agency issuing the rating, are not recommendations to buy, sell, or hold securities of Central Hudson and may be subject to revision or withdrawal at any time by the rating agency issuing the rating. Each rating should be evaluated independently of any other rating.
NYSERDA
Central Hudson’s outstanding Series B NYSERDA Bonds total $33.7 million at March 31, 2012. These bonds are tax-exempt multi-modal bonds that are currently in a variable rate mode. In its Orders, the PSC has authorized deferral accounting treatment for variations in the interest costs from these bonds. As such, variations between the actual interest rates on these bonds and the interest rate included in the current delivery rate structure for these bonds are deferred for future recovery from or refund to customers and do not have any impact on earnings.
To mitigate the potential cash flow impact from unexpected increases in short-term interest rates on Series B Bonds, on March 26, 2012, Central Hudson purchased an interest rate cap based on an index of short-term tax-exempt debt. The rate cap is two years in length with a notional amount aligned with Series B Bonds and will expire on April 1, 2014. The cap is based on the monthly weighted average of an index of tax-exempt variable rate debt, multiplied by 175%. Central Hudson would receive a payout if the adjusted index exceeds 5.0% for a given month. The new rate cap replaces an expiring rate cap with substantially similar terms.
Central Hudson is currently evaluating what actions, if any, it may take in the future in connection with its Series B NYSERDA Bonds. Potential actions may include converting the debt to another interest rate mode or refinancing with taxable bonds.
On March 30, 2012, Central Hudson issued $48.0 million of its Series G registered unsecured Medium Term Notes. The notes bear interest at the rate of 4.776% per annum on a principal amount of $48.0 million and mature on April 1, 2042.
The proceeds of the sale of the Notes were used by Central Hudson to repay the short-term borrowings of $36.0 million incurred to refinance its 6.64% Series D Medium Term Notes that matured March 28, 2012, and will be used to redeem its Cumulative Preferred Stock, Series D, with an aggregate redemption price of $6.1 million, and its 4.96% Cumulative Preferred Stock, Series E, with an aggregate redemption price of $6.1 million.
On April 16, 2012, Central Hudson Gas & Electric Corporation called for redemption on May 18, 2012 of two of its four outstanding series of preferred stock. Registered holders of the Cumulative Preferred Stock, Series D (4.35%) will receive $102.00 per share plus accrued and unpaid dividends in the amount of $0.57 per share, for a total redemption price of $102.57 per share. Registered holders of the 4.96% Cumulative Preferred Stock, Series E will receive $101.00 per share plus accrued and unpaid dividends in the amount of $0.65 per share, for a total redemption price of $101.65 per share.
For additional information related to CH Energy Group’s and Central Hudson’s financing program, please see Note 7 – “Short-term Borrowing Arrangements,” Note 8 – “Capitalization – Common and Preferred Stock” and Note 9 – “Capitalization – Long-term Debt” to the Financial Statements of the Corporations’ 10-K Annual Report.
REGULATORY MATTERS – PSC PROCEEDINGS
Management Audit
(Case 09-M-0764 – Comprehensive Management Audit of Central Hudson Gas & Electric Business)
Background: The PSC is required to audit New York utilities every five years. In February 2010, the PSC selected NorthStar Consulting Group (“NorthStar”) as the independent third-party consultant to conduct a comprehensive management audit of Central Hudson’s construction planning processes and operational efficiencies of its electric and gas businesses.
Notable Activity:
| · | A final report to the PSC of NorthStar’s findings and recommendations was completed February 28, 2011. On March 25, 2011, Central Hudson filed its audit comment letter with the PSC. |
| · | On May 20, 2011, the Commission accepted NorthStar’s Audit Report and issued its Order directing Central Hudson to file an implementation plan based on the report’s twenty recommendations. |
| · | Central Hudson submitted its implementation plan to the Commission on July 1, 2011 and Update Reports as required by the Order on November 1, 2011 and March 1, 2012. With the March 2012 update, the Company has reported the completion of eight recommendations, with the remaining balance of twelve all on schedule with the originally filed plan. |
Potential Impacts: The PSC has accepted three of the eight recommendations as complete and the PSC staff continues its review and discovery of the filed reports. No prediction can be made regarding the outcome of the matter at this time.
SIR Proceeding
(Case 11-M-0034 – Proceeding on Motion of the Commission to Commence a Review and Evaluation of the Treatment of the States’ Regulated Utilities’ Site Investigation and Remediation (“SIR”) Costs)
Background: In February 2011, the PSC initiated a proceeding to review and evaluate the treatment of MGP SIR costs. The proceeding began with a data gathering phase from all utilities on the history of sites and efforts and also to address cost control issues, allocation of responsibility and alternate rate treatments.
Notable Activity:
| · | The Administrative Law Judge (“ALJ”) established a case procedure and schedule, adopting a comment oriented proceeding that included issuance of a PSC Staff Policy Whitepaper in June and a Technical Conference in July. |
| · | PSC Staff Whitepaper reported that there does not appear to be any deficiency in utility cost control practices, with adequate controls in place. Staff also found that rate recovery for prudent and verifiable legally imposed clean up costs is a reasonable approach and warned that sharing or less than full recovery will have cost of capital impacts. |
| · | On November 3, 2011, the ALJ issued a Recommended Decision (“RD”) against any generic ratepayer/shareholder cost sharing policy, or any ratemaking cap on expenses based on cost estimates or denying recovery of any carrying charges on deferred balances. It also recommends adoption of additional annual reporting, new independent shareholder funded audits and development of best cost control practices for MGP remediation. |
| · | Briefs on Exceptions were filed on November 23, 2011 and Briefs Opposing Exceptions were filed on December 8, 2011. |
Potential Impacts: A change to the current recovery structure of MGP SIR costs could have an adverse impact on Central Hudson earnings. No prediction can be made regarding the outcome of the matter at this time.
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: New York State has established a goal of substantially reducing electricity usage and created a State Energy Planning Board which is authorized to create and implement a State Energy Plan (“SEP”). 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.
Notable Activity:
| · | On March 22, 2012, the PSC issued an Order establishing a new mechanism for awarding utility financial incentives for the period January 1, 2012 through December 31, 2015. Awards are based on the results of a two-step process with 90% of the total incentive based on an individual utility’s performance and the remaining 10% dependent on all utilities and NYSERDA meeting the 15 x 15 energy savings goal. Formulaic incentives will be awarded on a positive basis only using a sliding scale from 80% to 100% of achievement. |
Potential Impacts: This incentive mechanism could result in opportunities for increased earnings from incentives associated with energy efficiency targets for the 2012-2015 period. No prediction can be made regarding the outcome of the matter at this time.
Petition of Central Hudson Gas & Electric Corporation for Commission Approval of Deferred Incremental Costs Associated with Tropical Storm Irene
(Case 11-E-0651)
Background: On November 28, 2011, Central Hudson filed a petition with the PSC to defer for future recovery with carrying charges $11.4 million of incremental electric storm restoration expense above the respective rate allowance during the twelve months ended June 30, 2012, which is the second rate year established by the PSC in its approval of a Joint Proposal in Case 09-E-0588. These incremental costs represent the amount Central Hudson deferred on its books as of October 31, 2011 based on actual costs incurred, bills received and an estimate for bills outstanding. The Company believes the incremental costs associated with this storm meet the PSC’s criteria for deferral: 1) amount is incremental to the amount in rates; 2) the incremental amount is material and extraordinary in nature; and 3) the utility’s earnings are below the authorized rate of return on common equity.
Potential Impacts: Central Hudson will perform its measure of materiality and utility earnings upon the conclusion of the rate year ending June 30, 2012. No prediction can be made regarding the final outcome of this matter.
Petition of Central Hudson Gas & Electric Corporation for Commission Approval of Deferral of October 29, 2011 SnowFall Costs
(Case 12-M-0204)
Background: On October 29, 2011, Central Hudson experienced an unusual winter storm with snow accumulations of up to 20 inches in the service territory, resulting in electric service outages to over 150,000 customers, extensive damage to the electric system and significant restoration costs. Following Tropical Storm Irene, the October snowstorm represents the second extraordinary storm event that has occurred to date within the second rate year established by the PSC in its Rate Plan adopting the terms of a Joint Proposal in Case 09-E-0588. On April 24, 2012, Central Hudson filed a petition with the PSC to defer for future recovery with carrying charges $8.6 million of total incremental electric storm restoration expense. The Company believes that it is entitled to fully recover all of these incremental expenses and has filed its petition with the PSC to reflect that position. However, because the petition requests the PSC to deviate from its prior precedents, the amount the PSC may grant could be lower. Accordingly, management deferred only the portion of the incremental costs that strictly follows Commission practice used in the Company’s previous requests to defer incremental storm costs. Approximately $3.7 million and $1.1 million of incremental storm restoration expense associated with this storm was expensed in December 2011 and March 2012, respectively, so that the projected return on common equity for the twelve months ending June 30, 2012 does not exceed the authorized rate of return of ten percent. Central Hudson plans to finalize its measure of materiality and utility earnings based upon the conclusion of the rate year ending June 30, 2012.
Potential Impacts: Central Hudson will perform its measure of materiality and utility earnings upon the conclusions of the rate year ending June 30, 2012. No prediction can be made regarding the final outcome of this matter.
Central Hudson Gas & Electric Corporation Financing Petition
(Case 12-M-0172 - Petition of Central Hudson Gas & Electric Corporation for Authority to enter into multi-year committed credit agreements and issue and sell long-term debt)
Background: On April 13, 2012, Central Hudson filed a petition with the PSC seeking approval to (a) enter into multi-year committed credit agreements to provide committed funding to meet expected liquidity needs, in amounts not to exceed $175 million in the aggregate and maturities not to exceed five years, and (b) approval to issue and sell long-term debt, commencing immediately upon issuance of an order regarding the petition, and from time to time through December 31, 2015, in an amount not to exceed $250 million in the aggregate.
Potential Impacts: Central Hudson’s ability to seek a higher level of committed credit will enable greater liquidity to support construction forecasts, known seasonality, volatile energy markets, adverse borrowing environments, and other unforeseen events. The approval to issue and sell $250 million of long-term debt will support Central Hudson’s ability to finance its construction expenditures, refund maturing long-term debt, potentially refinance $34 million of multi-modal long-term NYSERDA bonds, and refinance up to $26 million of other securities if economic and appropriate. No prediction can be made as to the final outcome of the filing.
Fortis – Central Hudson Gas & Electric Corporation Section 70 Joint Petition
(Case 12-M-0192 – Proceeding on the Joint Petition for Approval of the Acquisition of CH Energy Group, Inc. by Fortis Inc. and Related Transactions)
Background: On April 20, 2012, CH Energy Group, Central Hudson, Fortis, FortisUS Inc. ("FortisUS"), and Cascade Acquisition Sub Inc. (“Petitioners”), submitted a joint petition to the PSC for approval of the acquisition of CH Energy Group by Fortis and related transactions. The petition describes how the acquisition of Central Hudson by Fortis will produce benefits for constituencies that include customers, employees and communities in Central Hudson’s service territory as well as positive public benefits. The petition categorizes the public benefits into three major areas: 1) FortisUS’ commitments and intention to preserve and build on the existing strength of Central Hudson, 2) mitigation of any potential negative aspects of the merger consistent with the PSC’s disposition of specific issues that have arisen if prior utility merger proceedings in New York State and 3) identifiable monetary benefits resulting from assignment of costs to shareholders and cost savings made possible by the merger. The petition includes proposals and commitments that effectively eliminate any potential risks to Central Hudson’s customers from foreign holding company ownership and rate increase risk. The petitioners have quantified the economic value of the proposals in the merger to be in excess of $20 million.
Potential Impacts: Central Hudson believes the merger is in the public interest and should be approved on the basis of the proposals set forth in the petition. No prediction can be made regarding the outcome of the matter at this time.
Other PSC Proceedings
During the first quarter of 2012, there has been no significant activity related to the following proceedings:
| · | Advanced Metering Infrastructure |
| · | The American Recovery and Reinvestment Act of 2009 |
OTHER MATTERS
Changes in Accounting Standards
See Note 1 – “Summary of Significant Accounting Policies” and Note 3 – “New Accounting Guidance” for discussion of relevant changes, which discussion is incorporated by reference herein.
Off-Balance Sheet Arrangements
CH Energy Group and Central Hudson do not have any off-balance sheet arrangements.
Climate
While it is possible that some form of global climate change program will be adopted at the federal level in 2012, it is too early to determine what impact such program will have on CH Energy Group. It should be noted, however, that the Company's calculated CO2 emission levels are relatively small, mainly because the Company does not generate electricity in significant quantities and the electricity it does generate is primarily from zero emission hydroelectric plants. Therefore, federally mandated greenhouse gas reductions or limits on CO2 emissions are not expected to have a material impact on the Company’s financial position or results of operations. However, the Company can make no prediction as to the outcome of this matter. If the cost of CO2 emissions causes purchased electricity and natural gas costs to rise, such increases are expected to be collected through automatic adjustment clauses. If sales are depressed by higher costs through price elasticity, the RDMs are expected to prevent an earnings impact on the Company.
FORWARD-LOOKING STATEMENTS
Statements included in this Quarterly Report on Form 10-Q and any documents incorporated by reference which are not historical in nature are intended to be, and are hereby identified as, “forward-looking statements” for purposes of the safe harbor provided by Section 21E of the Exchange Act. Forward-looking statements may be identified by words including “anticipates,” “intends,” “estimates,” “believes,” “projects,” “expects,” “plans,” “assumes,” “seeks,” and similar expressions. Forward-looking statements including, without limitation, those relating to CH Energy Group's and Central Hudson’s future business prospects, revenues, proceeds, working capital, investment valuations, liquidity, income, and margins, as well as the timing and consequences of the Fortis acquisition, 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: the possibility that various conditions precedent to the consummation of the Fortis transaction will not be satisfied or waived including shareholder and regulatory approvals and the timing and terms, including cost, thereof; the impact of delay or failure to complete the Fortis transaction on CH Energy Group stock price; deviations from normal seasonal weather and storm activity; fuel prices; energy supply and demand; potential future acquisitions; legislative, regulatory, and competitive developments; interest rates; access to capital; market risks; electric and natural gas industry restructuring and cost recovery; the ability to obtain adequate and timely rate relief; changes in fuel supply or costs including future market prices for energy, capacity, and ancillary services; the success of strategies to satisfy electricity, natural gas, fuel oil, and propane requirements; the outcome of pending litigation and certain environmental matters, particularly the status of inactive hazardous waste disposal sites and waste site remediation requirements; and certain presently unknown or unforeseen factors, including, but not limited to, acts of terrorism. CH Energy Group and Central Hudson undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. Given these uncertainties, undue reliance should not be placed on the forward-looking statements.
Additional Information about the Fortis Transaction and Where to Find It
In connection with the proposed acquisition of CH Energy Group by Fortis, CH Energy Group will file a proxy statement with the SEC, a preliminary version of which was filed with the SEC on April 2, 2012, and intends to file other relevant materials with the SEC as well. Investors and security holders of CH Energy Group are urged to read the proxy statement and other relevant materials filed with the SEC when they become available because they will contain important information about the proposed acquisition and related matters. The final proxy statement will be mailed to CH Energy Group shareholders. Investors and stock shareholders may obtain a free copy of the proxy statement when it becomes available, and other documents filed by CH Energy Group, at the SEC’s Web site, www.sec.gov. These documents (when they are available) can also be obtained by investors and stockholders free of charge from CH Energy Group at CH Energy Group’s website at www.chenergygroup.com, or by contacting CH Energy Group’s Shareholder Relations Department at (845) 486-5204.
Participants in the Solicitation of Proxies
This communication is not a solicitation of a proxy from any security holder of CH Energy Group. However, CH Energy Group, Fortis and certain of their respective directors and executive officers, under SEC rules, may be deemed to be participants in the solicitation of proxies from shareholders of CH Energy Group in connection with the proposed acquisition. Information about CH Energy’s directors and executive officers may be found in its 2011 Annual Report on Form 10-K filed with the SEC on February 16, 2012, and definitive proxy statement relating to its 2012 Annual Meeting of Stockholders filed with the SEC on March 21, 2012. Information about Fortis’ directors and executive officers may be found in its Management Information Circular available on its website at www.fortisinc.com. Additional information regarding the interests of such potential participants in the solicitation of proxies in connection with the merger will be included in CH Energy Group's proxy statement, a preliminary version of which was filed with the SEC on April 2, 2012, and other relevant materials filed with the SEC when they become available.
Reference is made to Part II, Item 7A of the Corporations’ 10-K Annual Report for a discussion of market risk. The practices employed by CH Energy Group and Central Hudson to mitigate these risks - which were discussed in the Corporations’ 10-K Annual Report - continue to operate effectively. For related discussion on this activity, see, in the Financial Statements of the Corporations’ 10-K Annual Report, Note 14 – “Accounting for Derivative Instruments and Hedging Activities” and Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the sub-caption “Capital Resources and Liquidity,” and Note 9 – “Capitalization - Long-Term Debt” and Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the sub-caption “Financing Program” of this Quarterly Report on Form 10-Q.
The Chief Executive Officer and Chief Financial Officer of CH Energy Group and Central Hudson evaluated the effectiveness of the disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q and based on the evaluation, concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, the Corporations’ controls and procedures are effective.
There were no changes to the Corporations’ internal control over financial reporting that occurred during the Corporations’ last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Corporations’ internal control over financial reporting.
For information about developments regarding certain legal proceedings, see Item 3 (“Legal Proceedings”) of the Corporations’ 10-K Annual Report, and Note 12 – “Commitments and Contingencies” of that 10-K and/or Note 12 – “Commitments and Contingencies” of this Quarterly Report on Form 10-Q.
RISKS RELATED TO THE PROPOSED MERGER WITH FORTIS INC.
We May Be Unable to Satisfy the Conditions or Obtain the Approvals Required to Complete the Merger
The Merger is subject to approval by CH Energy Group shareholders and numerous other conditions, including the approval of various government agencies. Governmental agencies may not approve the Merger or may seek to impose conditions on the completion of the Merger, which could cause the conditions to the Merger to not be satisfied or which could delay or increase the cost of the Merger.
The Merger May Not Be Completed, Which May Have an Adverse Effect on Our Share Price
Failure to complete the Merger or an unanticipated delay in doing so could negatively affect our share price. Proposed class actions have been brought against our board of directors on behalf of CH Energy Group common shareholders and may delay or prevent the acquisition or increase its costs. See “Item 1 – Legal Proceedings”, for discussion of pending litigation related to the Merger.
The Termination of the Proposed Merger Transaction with Fortis Could Result in CH Energy Group Being Required to Pay Termination Fees to Fortis
CH Energy Group has agreed to pay FortisUS a termination fee of $19.7 million if FortisUS terminates the agreement because the CH Energy Group board has changed its recommendation in favor of the merger, or CH Energy Group or FortisUS terminates the agreement because CH Energy Group enters into a definitive agreement with respect to a superior proposal.
CH Energy Group will be obligated to reimburse up to $4 million of FortisUS’ expenses if (i) FortisUS or CH Energy Group terminates the merger agreement because the merger has not been completed by the outside date or because the approval of CH Energy Group shareholders was not obtained at the special meeting or FortisUS terminates the merger agreement based on a breach of the merger agreement by CH Energy Group, and (ii) a competing proposal has been made or publicly disclosed and not withdrawn prior to the termination of the merger agreement. In addition, if within twelve months after such termination, a definitive agreement providing for an acquisition transaction is entered into, or an acquisition transaction is consummated by CH Energy Group with, the person who made the acquisition proposal prior to such termination or with any other third party making an acquisition proposal within three months following such termination, CH Energy Group will be obligated to pay FortisUS a termination fee of $19.7 million (less any expense reimbursement previously paid). In no event will more than one termination fee be payable.
For a discussion identifying additional risk factors that could cause actual results to differ materially from those anticipated, see the discussion under “Item 1A – Risk Factors” of the Corporations’ 10-K Annual Report.
The following table provides a summary of shares repurchased by CH Energy Group for the quarter ended March 31, 2012:
