NOTE 1 – Summary of Significant Accounting Policies
Basis of Presentation
This Quarterly Report on Form 10-Q is a combined report of CH Energy Group, Inc. (“CH Energy Group”) and its regulated electric and natural gas subsidiary, Central Hudson Gas & Electric Corporation (“Central Hudson”). The Notes to the Consolidated Financial Statements apply to both CH Energy Group and Central Hudson. CH Energy Group’s Consolidated Financial Statements include the accounts of CH Energy Group and its wholly owned subsidiaries, which include Central Hudson and CH Energy Group’s non-utility subsidiary, Central Hudson Enterprises Corporation (“CHEC”). Operating results of CHEC include its wholly owned subsidiaries, Griffith Energy Services, Inc. (“Griffith”), CH-Auburn Energy, LLC (“CH-Auburn”), CH-Greentree, LLC (“CH-Greentree”), CH Shirley Wind, LLC (“CH Shirley Wind”), CH-Lyonsdale, LLC (“CH-Lyonsdale”) and Lyonsdale Biomass, LLC (“Lyonsdale”) prior to the sale of Lyonsdale effective on May 1, 2011, and its majority owned subsidiary Shirley Wind (Delaware), LLC (“Shirley Delaware”). The non-controlling interest shown on CH Energy Group’s Consolidated Financial Statements represents the minority owner’s proportionate share of the income and equity of Shirley Delaware for 2011 and 2010 and Lyonsdale for 2010 prior to the purchase of the minority owner’s interest on October 1, 2010. On May 24, 2011, Shirley Delaware entered into an agreement to sell Shirley Wind, LLC. Accordingly, the assets and liabilities of Shirley Wind are presented separately as held for sale in the CH Energy Group consolidated balance sheet. Inter-company balances and transactions have been eliminated in consolidation. See Note 5 – “Acquisitions, Divestitures and Investments” for further information.
The Financial Statements were prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which for regulated public utilities, includes specific accounting guidance for regulated operations. For additional information regarding regulatory accounting, see Note 2 - “Regulatory Matters.”
Unaudited Financial Statements
The accompanying Consolidated Financial Statements of CH Energy Group and Financial Statements of Central Hudson are unaudited but, in the opinion of Management, reflect adjustments (which include normal recurring adjustments) necessary for a fair statement of the results for the interim periods presented. These unaudited quarterly Financial Statements do not contain all footnote disclosures concerning accounting policies and other matters which would be included in annual Financial Statements and, accordingly, should be read in conjunction with the audited Financial Statements (including the Notes thereto) included in the combined CH Energy Group/Central Hudson Annual Report on Form 10-K for the year ended December 31, 2010 (the “Corporations’ 10-K Annual Report”).
CH Energy Group’s and Central Hudson’s balance sheet as of June 30, 2010 is not required to be included in this Quarterly Report on Form 10-Q; however, this balance sheet is included for supplemental analysis purposes.
Reclassification
Certain amounts in the 2010 Financial Statements have been reclassified to conform to the 2011 presentation. For more information regarding reclassification of discontinued operations and assets held for sale, see Note 5 – “Acquisition, Divestitures and Investments.”
Consolidation of Variable Interest Entities
CH Energy Group and its subsidiaries do not have any interests in special purpose entities and do not have material affiliations with any variable interest entities which were not consolidated.
Revenue Recognition
CH Energy Group’s deferred revenue balances as of June 30, 2011, December 31, 2010 and June 30, 2010 were $3.6 million, $4.7 million and $3.6 million, respectively. The deferred revenue balance will be recognized in CH Energy Group’s operating revenues over the 12-month term of the respective customer contract.
As required by the PSC, Central Hudson records gross receipts tax revenues and expenses on a gross income statement presentation basis (i.e., included in both revenue and expenses). Sales and use taxes for both Central Hudson and Griffith are accounted for on a net basis (excluded from revenue).
Fuel, Materials & Supplies
The following is a summary of CH Energy Group’s and Central Hudson’s inventories (In Thousands):
| | | June 30, | | | December 31, | | | June 30, | |
| | | 2011 | | | 2010 | | | 2010 | |
| Natural gas | | $ | 8,436 | | | $ | 10,803 | | | $ | 9,786 | |
| Petroleum products and propane | | | 1,495 | | | | 3,831 | | | | 1,515 | |
| Fuel used in electric generation | | | 263 | | | | 820 | | | | 826 | |
| Materials and supplies | | | 10,268 | | | | 9,993 | | | | 10,279 | |
| Total | | $ | 20,462 | | | $ | 25,447 | | | $ | 22,406 | |
| | | June 30, | | | December 31, | | | June 30, | |
| | | 2011 | | | 2010 | | | 2010 | |
| Natural gas | | $ | 8,436 | | | $ | 10,803 | | | $ | 9,786 | |
| Petroleum products and propane | | | 519 | | | | 519 | | | | 525 | |
| Fuel used in electric generation | | | 263 | | | | 271 | | | | 293 | |
| Materials and supplies | | | 8,915 | | | | 8,434 | | | | 9,073 | |
| Total | | $ | 18,133 | | | $ | 20,027 | | | $ | 19,677 | |
Depreciation and Amortization
Current accounting guidance related to asset retirements precludes the recognition of expected future retirement obligations as a component of depreciation expense or accumulated depreciation. Central Hudson, however, is required to use depreciation methods and rates approved by the PSC under regulatory accounting. These depreciation rates include a charge for the cost of future removal and retirement of fixed assets. In accordance with current accounting guidance for regulated operations, Central Hudson continues to accrue for the future cost of removal for its rate-regulated natural gas and electric utility assets. In accordance with current accounting guidance related to asset retirements, Central Hudson has classified $53.0 million, $46.9 million, and $46.6 million of cost of removal as regulatory liabilities as of June 30, 2011, December 31, 2010, and June 30, 2010, respectively. This liability represents the portion of the cost of removal charge in excess of the amount reported as an Asset Retirement Obligation under GAAP.
See Note 6 - “Goodwill and Other Intangible Assets” for further discussion of amortization of intangibles (other than goodwill).
Earnings Per Share
In the calculation of earnings per share (basic and diluted) of CH Energy Group’s Common Stock, earnings for CH Energy Group are reduced by the Preferred Stock dividends of Central Hudson.
The average dilutive effect of CH Energy Group’s stock options, performance shares and restricted shares are as follows (In Shares):
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2011 | | 2010 | | 2011 | | 2010 |
| 198,077 | | 137,793 | | 197,589 | | 137,793 |
Certain stock options are excluded from the calculation of diluted earnings per share because the exercise price of those options were greater than the average market price per share of Common Stock. Options excluded are as follows (In Shares):
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2011 | | 2010 | | 2011 | | 2010 |
| - | | 35,980 | | - | | 35,980 |
For additional information regarding stock options, performance shares and restricted shares, see Note 11 - "Equity-Based Compensation."
Parental Guarantees
CH Energy Group and CHEC have issued guarantees to counterparties to assure the payment, when due, of certain obligations incurred by CH Energy Group subsidiaries, in physical and financial transactions.
| | | June 30, 2011 | |
| Transaction Description | | Maximum Potential Payments | | | Outstanding Liabilities(1) | |
| Heating oil, propane, other petroleum products, weather and commodity hedges | | $ | 33,750 | | | $ | 4,327 | |
| Certain equipment supply and construction agreements | | $ | 5 | | | $ | 5 | |
| (1) | Balances included in CH Energy Group's Consolidated Balance Sheet |
Management is not aware of any existing condition that would require payment under the guarantees.
Common Stock Dividends
CH Energy Group’s ability to pay dividends is affected by the ability of its subsidiaries to pay dividends. The Federal Power Act limits the payment of dividends by Central Hudson to its retained earnings. More restrictive is the PSC’s limit on the dividends Central Hudson may pay to CH Energy Group which is 100% of the average annual income available for common stock, calculated on a two-year rolling average basis. Based on this calculation, Central Hudson was restricted to a maximum payment of $38.5 million in dividends to CH Energy Group for the year ended December 31, 2010. Central Hudson’s dividend would be reduced to 75% of its average annual income in the event of a downgrade of its senior debt rating below “BBB+” by more than one rating agency if the stated reason for the downgrade is related to any of CH Energy Group’s or Central Hudson’s affiliates. Further restrictions are imposed for any downgrades below this level. As of June 30, 2011, Central Hudson had declared and paid dividends of $22.0 million to parent CH Energy Group in 2011, of which $11.0 million was paid during the three months ended June 30, 2011. CH Energy Group’s other subsidiaries do not have express restrictions on their ability to pay dividends.
On June 2, 2011, the Board of Directors of CH Energy Group declared a quarterly dividend of $0.54 per share, payable August 1, 2011, to shareholders of record as of July 11, 2011.
NOTE 2 – Regulatory Matters
Summary of Regulatory Assets and Liabilities
The following table sets forth Central Hudson’s regulatory assets and liabilities (In Thousands):
| | | | | | | June 30, | | | December 31, | | June 30, | |
| | | 2011 | | | 2010 | | 2010 | |
| Regulatory Assets (Debits): | | | | | | | | | | | |
| | Current: | | | | | | | | | | | |
| | | Deferred purchased electric and natural gas costs | | $ | 6,522 | | | $ | 30,320 | | $ | 23,651 | |
| | | Deferred unrealized losses on derivatives | | | 16,293 | | | | 24,847 | | | 23,619 | |
| | | PSC General and Temporary State Assessment and carrying charges | | | 7,710 | | | | 9,891 | | | 10,975 | |
| | | RDM and carrying charges | | | - | | | | 3,966 | | | 5,793 | |
| | | Residual natural gas deferred balances | | | 4,554 | | | | 4,554 | | | 4,554 | |
| | | Deferred storm costs and carrying charges | | | - | (1) | | | 19,985 | | | - | |
| | | Uncollectible deferral and carrying charges | | | - | (1) | | | 2,638 | | | - | |
| | | Other | | | 290 | | | | 290 | | | 289 | |
| | | | | | | | 35,369 | | | | 96,491 | | | 68,881 | |
| | Long-term: | | | | | | | | | | | |
| | | Deferred pension costs | | | 127,401 | | | | 142,647 | | | 151,589 | (2) |
| | | Carrying charges - pension reserve | | | 3,006 | | | | 1,144 | | | - | (2) |
| | | Deferred and accrued costs - MGP site remediation and carrying charges | | | 17,539 | | | | 10,364 | | | 12,251 | |
| | | Deferred debt expense on re-acquired debt | | | 5,799 | | | | 6,084 | | | 4,623 | |
| | | Deferred Medicare Subsidy taxes | | | 7,031 | | | | 6,740 | | | 6,442 | |
| | | Residual natural gas deferred balances and carrying charges | | | 11,384 | | | | 14,121 | | | 15,617 | (2) |
| | | Income taxes recoverable through future rates | | | 34,745 | | | | 35,903 | | | 33,122 | (2) |
| | | Uncollectible deferral and carrying charges | | | - | | | | - | | | 2,605 | (2) |
| | | Deferred storm costs and carrying charges | | | - | | | | - | | | 19,701 | |
| | | Other | | | 9,835 | | | | 9,322 | | | 7,583 | (2) |
| | | | | | | | 216,740 | | | | 226,325 | | | 253,533 | |
| | | | Total Regulatory Assets | | $ | 252,109 | | | $ | 322,816 | | $ | 322,414 | |
| | | | | | | | | | | | | | | | |
| Regulatory Liabilities (Credits): | | | | | | | | | | | |
| | Current: | | | | | | | | | | | |
| | | Excess electric depreciation reserve and carrying charges | | $ | 3,229 | | | $ | 7,366 | | $ | 12,177 | |
| | | RDM and carrying charges | | | 3,746 | | | | - | | | - | |
| | | Income taxes refundable through future rates | | | 4,533 | | | | 5,128 | | | 5,600 | |
| | | Deferred unbilled gas revenues | | | 1,948 | | | | 6,102 | | | 1,815 | |
| | | | | | | | 13,456 | | | | 18,596 | | | 19,592 | |
| | Long-term: | | | | | | | | | | | |
| | | Customer benefit fund | | | 3,397 | | | | 3,468 | | | 3,734 | |
| | | Deferred cost of removal | | | 52,991 | | | | 46,938 | | | 46,610 | |
| | | Rate base impact of tax repair project | | | 9,862 | (1) | | | - | | | - | |
| | | Excess electric depreciation reserve and carrying charges | | | 3,072 | | | | 4,889 | | | 4,521 | |
| | | Income taxes refundable through future rates | | | 23,826 | | | | 33,820 | | | 25,832 | (2) |
| | | Deferred OPEB costs | | | 10,494 | | | | 6,976 | | | 3,696 | (2) |
| | | Carrying charges - OPEB reserve | | | 3,401 | | | | 1,599 | | | - | (2) |
| | | Other | | | 13,718 | | | | 9,079 | | | 7,389 | (2) |
| | | | | | | | 120,761 | | | | 106,769 | | | 91,782 | |
| | | | Total Regulatory Liabilities | | $ | 134,217 | | | $ | 125,365 | | $ | 111,374 | |
| | | | | | | | | | | | | | | | |
| | | | | Net Regulatory Assets | | $ | 117,892 | | | $ | 197,451 | | $ | 211,040 | |
| (1) | Central Hudson offset deferred storm costs and incremental bad debt expense and associated carrying charges, in accordance with the PSC prescribed Order issued on April 14, 2011. Additionally, a regulatory liability was established for the future benefit of the customers based on the remaining balance of tax refund after these offsets. | |
| (2) | Central Hudson offset all or a portion of certain regulatory assets and liabilities, including full offset of the June 30, 2010 balances for Carrying charges - OPEB reserve, Carrying charges - pension reserve, in accordance with the PSC prescribed 2010 Rate Order ("2010 Rate Order") issued on June 18, 2010. | |
2010 Rate Order
From July 1, 2010 through June 30, 2013, Central Hudson operates under the terms of the 2010 Rate Order, which provides for the following:
| Description | | 2010 Rate Order |
| Electric delivery revenue increases | | $11.8 million(1) 7/1/10 $9.3 million(1) 7/1/11 $9.0 million 7/1/12 |
| Natural gas delivery revenue increases | | $5.7 million 7/1/10 $2.4 million 7/1/11 $1.6 million 7/1/12 |
| ROE | | 10.0% |
| Earnings sharing | | Yes(2) |
| Capital structure – common equity | | 48% |
| Targets with true-up provisions - % of revenue requirement to defer for shortfalls | | |
| Net plant balances | | 100% |
| Transmission and distribution ROW maintenance | | 100% |
RDMs – electric and natural gas(3) | | Yes |
| New deferral accounting for full recovery | | |
| Fixed debt costs | | Yes(4) |
| Transmission sag mitigation | | Yes |
| New York State Temporary Assessment | | Yes |
Material regulatory actions(5) | | Yes(5) |
| Property taxes – Deferral for 90% of excess/deficiency relative to revenue requirement | | Yes(6) |
| (1) | Moderated by $12 million and $4 million bill credits, respectively. |
| (2) | ROE > 10.5%, 50% to customers, > 11.0%, 80% to customers, > 11.5%, 90% to customers. |
| (3) | Electric is based on revenue dollars; gas is based on usage per customer. |
| (4) | Deferral authorization in RY2 and RY3 only. |
| (5) | Legislative, governmental or regulatory actions with individual impacts greater than or equal to 2% of net income of the applicable department. |
| (6) | The Company’s pre-tax gain or loss limited to $0.7 million per rate year. |
Other PSC Proceedings
On April 14, 2011, the Commission issued an Order authorizing deferral of $18.8 million of the incremental electric storm restoration expense and the $2.6 million of incremental bad debt expense and denying deferral of the Company’s $2.6 million of incremental electric and gas property tax expense. The PSC also approved the ratemaking treatment proposed by the Company in its petition filed on September 23, 2010. The offsets have been recorded as of March 31, 2011. The remaining balance of the tax refund not subject to offset has been established as a regulatory liability for the benefit of customers totaling $9.6 million. On May 13, 2011, Central Hudson filed a Petition for Clarification and Rehearing on the PSC’s April 14, 2011 Order. The petition seeks clarification concerning recovery of the costs to achieve and rehearing for reconsideration and recovery of a portion of certain costs denied by the Commission for deferral accounting treatment proposed by the Company in its September 23, 2010 petition filing related to the incremental electric storm restoration expense. Central Hudson cannot predict the final outcome of this proceeding.
NOTE 3 - New Accounting Guidance
Newly adopted and soon to be adopted accounting guidance is summarized below, and explanations of the underlying information for all guidance (except that which is not currently applicable) that is expected to have a material impact on CH Energy Group and its subsidiaries.
| Impact | | Category | | Accounting Reference | | Title | | Issued Date | | Effective Date |
| 1 | | Comprehensive Income (Topic 220) | | ASU No. 2011-05 | | Presentation of Comprehensive Income | | Jun-11 | | Jan-12 |
| 2 | | Fair Value Measurements and Disclosures (Topic 820) | | ASU No. 2011-04 | | Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in US GAAP and IFRS | | May-11 | | Jan-12 |
| Impact Key: | | | | | | | | |
| (1) | No anticipated impact on the financial condition, results of operations and cash flows of CH Energy Group and its subsidiaries upon future adoption. |
| (2) | No current impact on the financial condition, results of operations and cash flows of CH Energy Group and its subsidiaries when adopted on the effective date noted. |
NOTE 4 – Income Tax
In September of 2010, Central Hudson filed a request with the Internal Revenue Service (“IRS”) to change the Company’s tax accounting method related to costs to repair and maintain utility assets. The change was effective for the tax year ending December 31, 2009. This change allows Central Hudson to take a current tax deduction for a significant amount of repair costs that were previously capitalized for tax purposes.
There are no uncertain tax positions other than that related to the Company’s accounting method change; the activity of which is summarized below (In Thousands):
| | | Three Months Ended | | | Six Months Ended | |
| | | June 30, | | | June 30, | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| Balance at the beginning of the period | | $ | 11,952 | | | $ | - | | | $ | 11,486 | | | $ | - | |
| Adjustment related to tax accounting method change | | | (1,018 | ) | | | - | | | | (552 | ) | | | - | |
| Settlement of uncertain tax positions with tax authorities | | | - | | | | - | | | | - | | | | - | |
| Lapse of statute of limitations related to uncertain tax positions | | | - | | | | - | | | | - | | | | - | |
| Balance at the end of the period | | $ | 10,934 | | | $ | - | | | $ | 10,934 | | | $ | - | |
| Jurisdiction | | Tax Years Open for Audit |
Federal(1) | | 2007, 2008 and 2009 |
| New York State | | 2007, 2008 and 2009 |
(1) Federal tax filings for the years 2007, 2008 and 2009 are currently under audit.
Reconciliation - CH Energy Group
The following is a reconciliation between the amount of federal income tax computed on income before taxes at the statutory rate and the amount reported in CH Energy Group’s Consolidated Statement of Income (In Thousands):
| | | Three Months Ended June 30, | | | Six Months Ended June 30, |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| Net income attributable to CH Energy Group | | $ | 5,955 | | | $ | 6,765 | | | $ | 22,902 | | | $ | 27,203 | |
| Preferred Stock dividends of Central Hudson | | | 242 | | | | 242 | | | | 485 | | | | 485 | |
| Non-controlling interest in subsidiary | | | - | | | | (419) | | | | - | | | | (385) | |
| Federal income tax | | | (325) | | | | (859) | | | | 678 | | | | (4,727) | |
| State income tax | | | (77) | | | | (776) | | | | 271 | | | | (1,501) | |
| Deferred federal income tax | | | 3,519 | | | | 4,820 | | | | 12,071 | | | | 21,118 | |
| Deferred state income tax | | | (174) | | | | 836 | | | | 572 | | | | 3,164 | |
| Income before taxes | | $ | 9,140 | | | $ | 10,609 | | | $ | 36,979 | | | $ | 45,357 | |
| | | | | | | | | | | | | | | | | |
| Computed federal tax at 35% statutory rate | | $ | 3,199 | | | $ | 3,713 | | | $ | 12,942 | | | $ | 15,875 | |
| State income tax net of federal tax benefit | | | (24) | | | | 248 | | | | 964 | | | | 2,022 | |
| Depreciation flow-through | | | 777 | | | | 643 | | | | 1,565 | | | | 1,309 | |
| Cost of Removal | | | (458) | | | | (369) | | | | (915) | | | | (735) | |
| Production tax credits | | | (63) | | | | (75) | | | | (98) | | | | (136) | |
| Other | | | (488) | | | | (139) | | | | (866) | | | | (281) | |
| Total income tax | | $ | 2,943 | | | $ | 4,021 | | | $ | 13,592 | | | $ | 18,054 | |
| | | | | | | | | | | | | | | | | |
| Effective tax rate - federal | | | 34.9 | % | | | 37.3 | % | | | 34.5 | % | | | 36.1 | % |
| Effective tax rate - state | | | (2.7) | % | | | 0.6 | % | | | 2.2 | % | | | 3.7 | % |
| Effective tax rate - combined | | | 32.2 | % | | | 37.9 | % | | | 36.7 | % | | | 39.8 | % |
| | | | | | | | | | | | | | | | | |
Reconciliation - Central Hudson
The following is a reconciliation between the amount of federal income tax computed on income before taxes at the statutory rate and the amount reported in Central Hudson’s Statement of Income (In Thousands):
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| Net income | | $ | 7,371 | | | $ | 9,989 | | | $ | 20,011 | | | $ | 26,634 | |
| Federal income tax | | | 145 | | | | 1,703 | | | | 215 | | | | (3,398 | ) |
| State income tax | | | 147 | | | | 82 | | | | 317 | | | | (868 | ) |
| Deferred federal income tax | | | 4,064 | | | | 3,953 | | | | 11,281 | | | | 19,394 | |
| Deferred state income tax | | | 399 | | | | 596 | | | | 1,191 | | | | 2,686 | |
| Income before taxes | | $ | 12,126 | | | $ | 16,323 | | | $ | 33,015 | | | $ | 44,448 | |
| | | | | | | | | | | | | | | | | |
| Computed federal tax at 35% statutory rate | | $ | 4,244 | | | $ | 5,713 | | | $ | 11,555 | | | $ | 15,557 | |
| State income tax net of federal tax benefit | | | 495 | | | | 649 | | | | 1,398 | | | | 2,121 | |
| Depreciation flow-through | | | 777 | | | | 643 | | | | 1,565 | | | | 1,309 | |
| Cost of Removal | | | (458 | ) | | | (369 | ) | | | (915 | ) | | | (735 | ) |
| Other | | | (303 | ) | | | (302 | ) | | | (599 | ) | | | (438 | ) |
| Total income tax | | $ | 4,755 | | | $ | 6,334 | | | $ | 13,004 | | | $ | 17,814 | |
| | | | | | | | | | | | | | | | | |
| Effective tax rate - federal | | | 34.7 | % | | | 34.7 | % | | | 34.8 | % | | | 36.0 | % |
| Effective tax rate - state | | | 4.5 | % | | | 4.2 | % | | | 4.6 | % | | | 4.1 | % |
| Effective tax rate - combined | | | 39.2 | % | | | 38.9 | % | | | 39.4 | % | | | 40.1 | % |
NOTE 5 – Acquisitions, Divestitures and Investments
Acquisitions
During the six months ended June 30, 2011, Griffith acquired fuel distribution companies as follows (Dollars in Thousands):
| | | # of | | | | | Total | | | | | Total |
| | | Acquired | | Purchase | | Intangible | | | | | Tangible |
| Quarter Ended | | Companies | | Price | | Assets(1) | | Goodwill | | Assets |
| March 31, 2011 | | 2 | | $ | 1,961 | | $ | 1,936 | | $ | 515 | | $ | 25 |
| June 30, 2011 | | - | | | - | | | - | | | - | | | - |
| Total | | 2 | | $ | 1,961 | | $ | 1,936 | | $ | 515 | | $ | 25 |
Amortizable intangible assets acquired in the current year consist of customer relationships, which will be amortized over a 15-year period, and covenants not to compete, which will be amortized over a 5-year period. The weighted average amortization period of amortizable intangible assets acquired in the current year is 13.95 years.
Divestitures
In the first quarter of 2011, Griffith reduced its environmental reserve by $0.6 million based on the completion of an environmental study. The reserve adjustment related to the 2009 divestiture of operations in certain geographic locations. In the second quarter of 2011, Griffith recorded an expense adjustment of $0.1 million relating to divested operations. As such, income of $0.3 million, net of tax, has been reflected in income from discontinued operations in the CH Energy Group Consolidated Income Statement for the six months ended June 30, 2011.
On March 31, 2011, CHEC entered into an agreement to sell Lyonsdale, which owns a wood-burning electric generating facility in Lyons Falls, New York. Effective May 1, 2011, the sale was completed at a selling price not materially different than the carrying value of the net assets at March 31, 2011. The results of operations of Lyonsdale for current and prior periods are presented in discontinued operations in the CH Energy Group Consolidated Statement of Income.
On May 24, 2011, Shirley Delaware, a majority-owned subsidiary of CHEC, entered into an agreement to sell Shirley Wind, which owns a wind project in Glenmore, Wisconsin. Upon Board approval of the terms for the sale agreement, the results of operations of Shirley Wind were reclassified to be presented in discontinued operations in the CH Energy Group Consolidated Statement of Income for the current and prior periods. The assets and liabilities of Shirley Wind are presented separately as held for sale in the CH Energy Group Consolidated Balance Sheet. Management updated its test for recoverability from year-end assuming a sale transaction, noting the cash flows indicated by the purchase price payable under the purchase agreement together with the receipt of federal grants, on an undiscounted basis, exceed the net book value of the investment in Shirley Wind at June 30, 2011. Therefore, no impairment is indicated.
Management has elected to include cash flows from discontinued operations of Lyonsdale and Shirley Wind with those from continuing operations in the CH Energy Group Consolidated Statement of Cash Flows.
The table below provides additional detail of the financial results of the discontinued operations (In Thousands):
| | | Three Months Ended | | | Six Months Ended | |
| | | June 30, | | | June 30, | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| Revenues from discontinued operations | | $ | 1,512 | | | $ | 1,538 | | | $ | 4,375 | | | $ | 4,208 | |
| Income (loss) from discontinued operations before tax | | | (28 | ) | | | (1,762 | ) | | | 366 | | | | (1,652 | ) |
| Loss from sale of discontinued operations | | | (92 | ) | | | - | | | | (543 | ) | | | - | |
| Income tax benefit from discontinued operations | | | (47 | ) | | | (578 | ) | | | (73 | ) | | | (577 | ) |
The carrying amounts of the major classes of assets and liabilities classified as held for sale in CH Energy Group's Consolidated Balance Sheet are as follows (In Thousands):
| | | June 30, | |
| | | 2011 | |
| Assets | | | |
| Current Assets | | $ | 1,985 | |
| | | | | |
| Other Assets | | | 459 | |
| | | | | |
| Property, Plant and Equipment | | | | |
| Property, plant and equipment | | | 45,724 | |
| Less: Accumulated depreciation | | | 656 | |
| Total property, plant and equipment, net | | | 45,068 | |
| | | | | |
| Assets held for sale | | $ | 47,512 | |
| | | | | |
| Liabilities | | | | |
| Current Liabilities | | $ | 474 | |
| | | | | |
| Liabilities held for sale | | $ | 474 | |
Investments
CHEC's current investments at June 30, 2011 include the following (In Thousands):
| CHEC Investment | | Description | | Intercompany Debt | | | Equity Investment | | | Total | |
| Griffith Energy Services | | 100% controlling interest in a fuel distribution business | | $ | 36,500 | | | $ | 34,465 | | | $ | 70,965 | |
| CH-Greentree | | 100% equity interest in a molecular gate used to remove nitrogen from landfill gas | | | - | | | | 4,868 | | | | 4,868 | |
| CH-Auburn | | 100% equity interest in a 3-megawatt electric generating plant that utilizes landfill gas to produce electricity | | | 2,500 | | | | 1,621 | | | | 4,121 | |
| CH-Community Wind | | 50% equity interest in a joint venture that owns 18% interest in two operating wind projects | | | - | | | | 3,720 | | | | 3,720 | |
| CH Shirley Wind | | 100% ownership of CH Shirley Wind, which owns 90% controlling interest in Shirley Delaware, which owns 100% interest in Shirley Wind, a 20 megawatt wind project | | | 25,000 | | | | 21,241 | | | | 46,241 | |
| Other | | Other renewable energy projects and partnerships and an energy sector venture capital fund | | | - | | | | 2,964 | | | | 2,964 | |
| | | | | $ | 64,000 | | | $ | 68,879 | | | $ | 132,879 | |
NOTE 6 – Goodwill and Other Intangible Assets
The components of amortizable intangible assets of CH Energy Group are summarized as follows (In Thousands):
| | | June 30, 2011 | | | December 31, 2010 | | | June 30, 2010 | |
| | | Gross Carrying Amount | | | Accumulated Amortization | | | Gross Carrying Amount | | | Accumulated Amortization | | | Gross Carrying Amount | | | Accumulated Amortization | |
| Customer relationships | | $ | 35,341 | | | $ | 22,389 | | | $ | 34,063 | | | $ | 21,214 | | | $ | 33,745 | | | $ | 20,082 | |
| Covenants not to compete | | | 256 | | | | 114 | | | | 113 | | | | 95 | | | | 100 | | | | 85 | |
| Total Amortizable Intangibles | | $ | 35,597 | | | $ | 22,503 | | | $ | 34,176 | | | $ | 21,309 | | | $ | 33,845 | | | $ | 20,167 | |
| (In Thousands) | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| Amortization Expense | | $ | 597 | | | $ | 567 | | | $ | 1,194 | | | $ | 1,135 | |
The estimated annual amortization expense for each of the next five years, assuming no new acquisitions or divestitures, is approximately $2.0 million.
NOTE 7 – Short-Term Borrowing Arrangements
CH Energy Group and Central Hudson’s borrowings under a revolving credit facility are as follows (In Thousands):
| | | June 30, 2011 | | | December 31, 2010 | | | June 30, 2010 | |
| CH Energy Group Holding Company Short-term borrowings | | $ | 12,000 | | | $ | - | | | $ | - | |
| Central Hudson Short-term borrowings | | | - | | | | - | | | | 3,000 | |
| CH Energy Group Consolidated | | $ | 12,000 | | | $ | - | | | $ | 3,000 | |
NOTE 8 – Capitalization – Common and Preferred Stock
For a schedule of activity related to common stock, paid-in capital and capital stock, see the Consolidated Statement of Equity for CH Energy Group and Central Hudson.
Effective July 31, 2007, CH Energy Group’s Board of Directors extended and amended the Common Stock Repurchase Program of the Company (the “Repurchase Program”), which was originally authorized in 2002. As amended, the Repurchase Program authorizes the repurchase of up to 2,000,000 shares (excluding shares repurchased before July 31, 2007) or approximately 13% of CH Energy Group’s outstanding Common Stock, from time to time, through July 31, 2012. As of June 30, 2011, CH Energy Group had purchased 394,659 shares under the Repurchase Program of which 192,314 shares were purchased during the three months ended June 30, 2011. Subsequent to June 30, 2011 and through July 29, 2011, CH Energy Group has purchased no additional shares under the Repurchase Program. CH Energy Group intends to purchase additional shares under the Program during the remainder of 2011. CH Energy Group intends to set repurchase targets, if any, from time to time based on then prevailing circumstances. Management’s repurchase of shares does not represent a retirement or constructive retirement of shares and accordingly, has been presented as an increase to treasury stock in CH Energy Group’s Consolidated Balance Sheet.
There were no repurchases of preferred stock in the three and six months ended June 30, 2011 and 2010.
As of June 30, 2011, Central Hudson had made $22.0 million in dividend payments in 2011 to parent CH Energy Group of which $11.0 million was paid during the three months ended June 30, 2011.
NOTE 9 – Capitalization – Long-Term Debt
NYSERDA
Central Hudson’s Series B NYSERDA Bonds total $33.7 million at June 30, 2011. 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. As a result, variations in interest rates 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, 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 and will expire on April 1, 2012. 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.
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.
NOTE 10 – Post-Employment Benefits
Central Hudson provides certain health care and life insurance benefits for retired employees through its post-retirement benefit plans.
Post-retirement benefit plans at Central Hudson do not have any adverse impact on earnings. The following information is provided in accordance with current accounting requirements.
The following are the components of Central Hudson’s net periodic benefit costs for its pension and OPEB plans for the three and six months ended June 30, 2011 and 2010 (In Thousands):
| | | Pension Benefits | | | OPEB(1) | |
| | | Three Months Ended June 30, | | | Three Months Ended June 30, | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| Service cost | | $ | 2,449 | | | $ | 2,272 | | | $ | 673 | | | $ | 531 | |
| Interest cost | | | 6,537 | | | | 6,571 | | | | 1,732 | | | | 1,712 | |
| Expected return on plan assets | | | (6,860 | ) | | | (6,225 | ) | | | (1,711 | ) | | | (1,267 | ) |
| Amortization of: | | | | | | | | | | | | | | | | |
| Prior service cost (credit) | | | 536 | | | | 544 | | | | (1,466 | ) | | | (1,467 | ) |
| Transitional obligation (asset) | | | - | | | | - | | | | 642 | | | | 641 | |
| Recognized actuarial loss | | | 6,523 | | | | 7,377 | | | | 2,688 | | | | 2,073 | |
| | | | | | | | | | | | | | | | | |
| Net Periodic Benefit Cost | | $ | 9,185 | | | $ | 10,539 | | | $ | 2,558 | | | $ | 2,223 | |
| | | Pension Benefits | | | OPEB(1) | |
| | | Six Months Ended June 30, | | | Six Months Ended June 30, | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| Service cost | | $ | 4,897 | | | $ | 4,544 | | | $ | 1,346 | | | $ | 1,062 | |
| Interest cost | | | 13,074 | | | | 13,142 | | | | 3,464 | | | | 3,424 | |
| Expected return on plan assets | | | (13,720 | ) | | | (12,450 | ) | | | (3,422 | ) | | | (2,534 | ) |
| Amortization of: | | | | | | | | | | | | | | | | |
| Prior service cost (credit) | | | 1,072 | | | | 1,088 | | | | (2,932 | ) | | | (2,934 | ) |
| Transitional obligation (asset) | | | - | | | | - | | | | 1,283 | | | | 1,282 | |
| Recognized actuarial loss | | | 13,046 | | | | 14,754 | | | | 5,376 | | | | 4,146 | |
| | | | | | | | | | | | | | | | | |
| Net Periodic Benefit Cost | | $ | 18,369 | | | $ | 21,078 | | | $ | 5,115 | | | $ | 4,446 | |
| (1) | The OPEB amounts for both years reflect the effect of the Medicare Prescription Drug Improvement and Modernization Act of 2003. |
The balance of Central Hudson's accrued pension costs (i.e., the under-funded status) is as follows (In Thousands):
| | | June 30, | | | December 31, | | | June 30, | |
| | | 2011 | | | 2010 | | | 2010 | |
| Accrued pension costs | | $ | 75,148 | | | $ | 103,227 | | | $ | 126,544 | |
These balances include the difference between the projected benefit obligation (“PBO”) for pensions and the market value of the pension assets, and the liability for non-qualified executive plans. In addition to the Retirement Plan, a portion of CH Energy Group's and Central Hudson's executives are covered under a non-qualified Supplemental Executive Retirement Plan.
The following reflects the impact of the recording of funding status adjustments on the Balance Sheets of CH Energy Group and Central Hudson (In Thousands):
| | | June 30, | | | December 31, | | | June 30, | |
| | | 2011 | | | 2010 | | | 2010 | |
| Prefunded pension costs prior to funding status adjustment | | $ | 48,267 | | | $ | 34,307 | | | $ | 22,257 | |
| Additional liability required | | | (123,415 | ) | | | (137,534 | ) | | | (148,801 | ) |
| Total accrued pension costs | | $ | (75,148 | ) | | $ | (103,227 | ) | | $ | (126,544 | ) |
| Total offset to additional liability - Regulatory assets - Pension Plan | | $ | 123,415 | | | $ | 137,534 | | | $ | 148,801 | |
Gains or losses and prior service costs or credits that arise during the period but that are not recognized as components of net periodic pension cost would typically be recognized as a component of other comprehensive income, net of tax. However, Central Hudson has PSC approval to record regulatory assets rather than adjusting comprehensive income to offset the additional liability.
Contribution levels for the Retirement Income Plan and Post-Employment Benefit plans are determined by various factors including the discount rate, expected return on plan assets, benefit changes, and corporate resources. In addition, OPEB plan contribution levels are also impacted by medical claims assumptions used and mortality assumptions used. Contributions to the Retirement Plan during the six months ended June 30, 2011 and 2010 were $32.0 million and $31.4 million, respectively. Contributions to the OPEB Plan during the six months ended June 30, 2011 and 2010 were $1.2 million and $3.8 million, respectively.
Retirement Plan Policy and Strategy
Central Hudson’s Retirement Plan investment policy seeks to achieve long-term growth and income to match the long-term nature of its funding obligations. During the first quarter of 2010, Management began a transition to a long-duration investment (“LDI”) strategy for its pension plan assets. Management’s objective is to minimize the plan’s funded status volatility and the level of contributions by more closely aligning the characteristics of plan assets with liabilities.
Asset allocation targets in effect as of June 30, 2011, expressed as a percentage of the market value of the Retirement Plan’s assets, are summarized in the table below:
| Asset Class | | Minimum | | | Target Average | | | Maximum | |
| Equity Securities | | | 47 | % | | | 52 | % | | | 57 | % |
| Debt Securities | | | 43 | % | | | 48 | % | | | 53 | % |
Alternative Investments(1) | | | - | % | | | - | % | | | 5 | % |
(1) Includes Real Estate
Central Hudson plans to continue the transition to an LDI strategy in 2011, resulting in an asset allocation of approximately 50% equity and 50% long duration fixed income assets by year-end. The targeted benchmark index during the transition to long-duration investment strategy is comprised of 28% Russell 1000 Stock Index; 10% Russell 2500 Stock Index; 12% Morgan Stanley Capital International Europe, Australasia and Far East (MSCI EAFE) International Stock Index (Net) and 50% BC Long Government Credit Index.
Due to market value fluctuations, Retirement Plan assets will require rebalancing from time-to-time to maintain the target asset allocation.
Central Hudson cannot assure that the Retirement Plan’s return objectives or funded status objectives will be achieved.
NOTE 11 – Equity-Based Compensation
CH Energy Group has adopted the 2011 Long-Term Equity Incentive Plan (the “2011 Plan”) to replace the 2006 Plan. The 2011 Plan was approved by shareholders on April 26, 2011. The 2006 Plan has been terminated, with no new awards to be granted under such plan. Outstanding awards granted under the 2006 Plan will continue in accordance with their terms and the provisions of the 2006 Plan.
The 2011 Plan reserves for awards to be granted up to a maximum of 400,000 shares of Common Stock plus any shares remaining available under the 2006 Plan as of April 26, 2011 and any shares that are subject to awards granted under the 2006 Plan that are forfeited, cancelled, surrendered or otherwise terminated without the issuance of shares on or after that date. Awards may consist of incentive stock options, nonqualified stock options, stock appreciation rights, restricted shares, restricted share units, performance shares, dividend equivalents and other awards that CH Energy Group may authorize.
The 2011 Plan will continue in effect until February 9, 2021, unless sooner terminated by the Board of Directors. Termination will not affect grants and awards then outstanding.
A summary of the status of outstanding performance shares granted to executives under the 2006 Plan is as follows:
| | | | | | | | Performance Shares |
| | | Grant Date | | Performance Shares | | Outstanding at |
| Grant Date | | Fair Value | | Granted | | June 30, 2011 |
| January 26, 2009 | | $ | 49.29 | | 36,730 | | 32,810 |
| February 8, 2010 | | $ | 38.62 | | 48,740 | | 48,740 |
| February 7, 2011 | | $ | 49.77 | | 40,320 | | 40,320 |
The ultimate number of shares earned under the awards is based on metrics established by the Compensation Committee at the beginning of the award cycle. Compensation expense is recorded as performance shares are earned over the relevant three-year life of the performance share grant prior to its award. The portion of the compensation expense related to an employee who retires during the performance period is the amount recognized up to the date of retirement.
In May 2011, performance shares earned as of December 31, 2010 for the award cycle with a grant date of January 24, 2008 were issued to participants. Additionally, due to the retirement of one of Central Hudson’s executive officers on January 1, 2011, a pro-rated number of shares under the January 26, 2009 and February 8, 2010 grants were paid to this individual on July 6, 2011. For the pro-rata payout, 2,374 shares were issued from CH Energy Group’s treasury stock on this date in satisfaction of these awards.
Restricted Shares and Restricted Stock Units
The following table summarizes information concerning restricted shares and stock units outstanding as of June 30, 2011:
| Grant Date | | Type of Award | | Shares or Stock Units Granted | | Grant Date Fair Value | | Vesting Terms | | Unvested Shares Outstanding at June 30, 2011 | |
| January 26, 2009 | | Shares | | 2,930 | | $ | 49.29 | | End of 3 years | | 2,320 | (1) |
| October 1, 2009 | | Shares | | 14,375 | | $ | 43.86 | | Ratably over 5 years | | 11,500 | |
| November 20, 2009 | | Stock Units | | 13,900 | | $ | 41.43 | | 1/3 each year in Years 5, 6 and 7 | | 13,900 | |
| February 8, 2010 | | Shares | | 3,060 | | $ | 38.62 | | End of 3 years | | 2,655 | (2) |
| February 10, 2010 | | Shares | | 5,200 | | $ | 38.89 | | End of 3 years | | 5,200 | |
| November 15, 2010 | | Shares | | 3,000 | | $ | 46.53 | | Ratably over 3 years | | 3,000 | |
| February 7, 2011 | | Shares | | 1,500 | | $ | 49.77 | | 1/3 each year in Years 3, 4 and 5 | | 1,500 | |
| February 7, 2011 | | Shares | | 2,230 | | $ | 49.77 | | End of 3 years | | 2,230 | |
| (1) | The vesting of 250 shares was accelerated upon a change in control for an individual resulting from the sale of certain assets of Griffith and the vesting of 360 shares was accelerated as approved by the Board of Directors. |
| (2) | The vesting of 405 shares was accelerated as approved by the Board of Directors. |
Compensation Expense
The following table summarizes expense for equity-based compensation by award type for the three and six months ended June 30, 2011 and 2010 (In Thousands):
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| Performance shares | | $ | 864 | | | $ | 150 | | | $ | 1,553 | | | $ | 754 | |
| Restricted shares and stock units | | $ | 116 | | | $ | 133 | | | $ | 218 | | | $ | 266 | |
| Recognized tax benefit of restricted shares and stock units | | $ | 43 | | | $ | 50 | | | $ | 84 | | | $ | 100 | |
Compensation expense for performance shares is recognized over the three year performance period based on the fair value of the awards at the end of each reporting period and the time elapsed within each grant's performance period. Compensation expense for restricted shares and stock options is recognized over the defined vesting periods based on the grant date fair value of the awards.
NOTE 12 – Commitments and Contingencies
Electricity Purchase Commitments
On March 6, 2007, Central Hudson entered into an agreement with Entergy Nuclear Power Marketing, LLC to purchase electricity (but not capacity) on a unit-contingent basis at defined prices from January 1, 2008 through December 31, 2010. During this period, the electricity purchased through this Entergy contract represented approximately 23% of Central Hudson’s full-service customer requirements on an annual basis. For the six months ended June 30, 2010, energy supplied under this agreement cost approximately $28.1 million. On June 30, 2010 and September 9, 2010, Central Hudson entered into additional agreements with Entergy Nuclear Power Marketing, LLC to purchase electricity on a unit-contingent basis at defined prices from January 1, 2011 through December 31, 2013. The electricity purchased under these current contracts with Entergy is generated from the Indian Point and FitzPatrick nuclear power facilities and is estimated to represent approximately 13% of Central Hudson’s full-service customer requirements on an annual basis. For the six months ended June 30, 2011, energy supplied under this agreement cost approximately $9.3 million.
In the event the above noted counterparty is unable to fulfill its commitment to deliver under the terms of the agreements, Central Hudson would obtain the supply from the NYISO market, and under Central Hudson’s current ratemaking treatment, recover the full cost from customers. As such, there would be no impact on earnings.
Central Hudson must also acquire sufficient peak load capacity to meet the peak load requirements of its full service customers. This capacity is made up of contracts with capacity providers, purchases from the NYISO capacity market and its own generating capacity.
Environmental Matters
Central Hudson
In October 1999, Central Hudson was informed by the New York State Attorney General (“Attorney General”) that the Danskammer Point Steam Electric Generating Station (“Danskammer Plant”) was included in an investigation by the Attorney General’s Office into the compliance of eight older New York State coal-fired power plants with federal and state air emissions rules. Specifically, the Attorney General alleged that Central Hudson “may have constructed, and continues to operate, major modifications to the Danskammer Plant without obtaining certain requisite preconstruction permits.” In March 2000, the Environmental Protection Agency (“EPA”) assumed responsibility for the investigation. Central Hudson has completed its production of documents requested by the Attorney General, the New York State Department of Environmental Conservation (“DEC”), and the EPA, and believes any permits required for these projects were obtained in a timely manner. Central Hudson sold the Danskammer Plant on January 30, 2001. In March 2009, Dynegy notified Central Hudson that Dynegy had received an information request pursuant to the Clean Air Act from the EPA for the Danskammer Plant covering the period beginning January 2000 to present. At that time, Dynegy also submitted to Central Hudson a demand for indemnification for any fines, penalties or other losses that may be incurred by Dynegy arising from the period that Central Hudson owned the Danskammer Plant. While Central Hudson could have retained liability after the sale, depending on the type of remedy, Central Hudson believes that the statutes of limitation relating to any alleged violation of air emissions rules have lapsed.
| · | Former Manufactured Gas Plant Facilities |
Central Hudson and its predecessors owned and operated manufactured gas plants (“MGPs”) to serve their customers’ heating and lighting needs. MGPs manufactured gas from coal and oil. This process produced certain by-products that may pose risks to human health and the environment.
The DEC, which regulates the timing and extent of remediation of MGP sites in New York State, has notified Central Hudson that it believes Central Hudson or its predecessors at one time owned and/or operated MGPs at seven sites in Central Hudson’s franchise territory. The DEC has further requested that Central Hudson investigate and, if necessary, remediate these sites under a Consent Order, Voluntary Cleanup Agreement, or Brownfield Cleanup Agreement. The DEC has placed all seven of these sites on the New York State Environmental Site Remediation Database. A number of the sites are now owned by third parties and have been redeveloped for other uses. The status of the seven MGP sites are as follows:
| Site | Status |
| #1 | Beacon, NY | Remediation work complete. Final Report approved by the DEC. A revised Site Management Plan (“SMP”) was submitted by Central Hudson to the DEC on September 20, 2010. The Deed Restriction has been sent to Metropolitan Transportation Authority (“MTA”) for signature and final execution. Central Hudson has been advised that MTA is in the process of approving the Deed Restriction. |
| #2 | Newburgh, NY | The DEC has approved the Construction Completion Report (“CCR”) for the remediation that was completed at Area A of the site. Remediation for the other two areas at the site, Areas B and C, was completed in December 2010. The remaining site restoration work was completed in the spring of 2011. Central Hudson has prepared a draft Final Engineering Report, which was submitted to the DEC on June 17. |
| #3 | Laurel Street Poughkeepsie, NY | Remediation work is complete. The CCR was approved by the DEC. As requested by the DEC, fifteen additional monitoring wells were installed and the last of the four quarterly groundwater sampling events was conducted in January 2011. Central Hudson submitted a letter work plan to DEC on May 17 for additional site investigation work required by DEC. DEC approved the work plan in a May 19 response letter. Central Hudson is currently reviewing the response from bidders for conducting this work. |
| #4 | North Water Street Poughkeepsie, NY | As requested by the DEC, additional land and river investigations were conducted. The final monitoring event for the reactive cap pilot study was completed and the cap removed. Central Hudson has submitted a Remedial Investigation (“RI”) Report to the DEC to which DEC sent an RI approval letter dated May 12. Central Hudson is currently defining the areas where further investigations as part of the Remedial Alternative Analyses (“RAA”) will be required. |
| Site | Status |
| #5 | Kingston, NY | Central Hudson is planning to continue the RI work later this summer. Previously, a license agreement with a private party and Central Hudson had allowed the presence and mooring of tug boats and a “Dry Dock” in front of the Kingston site. All tugs have been removed by the owner, but the Dry Dock remains in place and is an obstacle to completing remediation of the river bed under it. Central Hudson is currently involved in legal proceedings seeking to obtain judicial authorization to have the Dry Dock removed. The outcome of the proceedings is uncertain. |
| #6 | Catskill, NY | Site investigation has been completed under the DEC-approved Brownfield Cleanup Agreement. A RI Report was approved. A RAA was submitted to the DEC on February 8, 2011. The DEC has verbally approved the RAA report as Central Hudson awaits written confirmation. The DEC has completed a draft Decision Document for the site to which Central Hudson has commented. Once the Department of Health has approved the Decision Document, Central Hudson will be notified in writing by DEC. |
| #7 | Bayeaux Street Poughkeepsie, NY | Per the DEC, no further investigation or remedial action is required at this time. |
In the second quarter of 2008, Central Hudson updated the estimate of possible remediation and future operating, maintenance, and monitoring costs for sites #2, 3, 4, 5 and 6, indicating the total cost for the five sites could range from amounts currently accrued up to $166 million over the next 30 years. Currently, Central Hudson is in the process of reviewing and updating this estimate. Amounts are subject to change based on current investigations, final remedial design (and associated engineering estimates), DEC and NYS Department of Health ("NYSDOH") comments and requests, remedial design changes/negotiations, and changed or unforeseen conditions during the remediation or additional requirements following the remediation. Central Hudson has accrued for estimated investigation costs and remedial design costs for those sites still in the investigation phase. Upon completion of the investigation phase and the filing of results with the DEC, Central Hudson accrues for estimated remediation costs based on DEC approved methods, including an estimate of post-remediation operation, maintenance and monitoring costs.
Information for sites #2 through #6 are detailed in the chart below (In Thousands):
| Site # | | Estimate | | | Liability Recorded as of 12/31/10 | | | Amounts Spent in 2011(3) | | | Liability Adjustment | | | Liability Recorded as of 6/30/11 | | | Current Portion of Liability at 6/30/11 | | | Long term portion of Liability at 6/30/11 | |
| 2, 3(1) | | $ | 44,700 | | | $ | 1,766 | | | $ | 584 | | | $ | 4,463 | | | $ | 5,645 | | | $ | 373 | | | $ | 5,272 | |
| 4, 5, 6(2) | | | 121,000 | | | | 1,479 | | | | 120 | | | | 6,167 | | | | 7,526 | | | | 2,014 | | | | 5,512 | |
| | | $ | 165,700 | | | $ | 3,245 | | | $ | 704 | | | $ | 10,630 | | | $ | 13,171 | | | $ | 2,387 | | | $ | 10,784 | |
| (1) | The estimates for sites #2 and 3 are currently based on the actual completed or contracted remediation costs. However, these estimates are subject to change. The estimated liability recorded for sites #2 and 3 are based on estimates of remediation costs for the proposed clean-up plans. |
| (2) | No amounts have been recorded in connection with physical remediation for sites #4, 5 and 6. Absent DEC-approved remediation plans, Management cannot reasonably estimate what cost, if any, will actually be incurred. The estimated liability for sites #4, 5 and 6 are based on the latest forecast of activities at these sites in connection with preliminary investigations, site testing and development of remediation plans for these sites. For additional discussion of estimates, see paragraphs below. |
| (3) | Amounts spent in 2011 as shown above do not include legal fees of approximately $7 thousand. |
The estimates for sites #4, 5 and 6 were based on partially completed remedial investigations and current DEC and NYSDOH preferences related to site remediation, and are considered conceptual and preliminary. The cost estimate involves assumptions relating to investigation expenses, remediation costs, potential future liabilities, and post-remedial operating, maintenance and monitoring costs, and is based on a variety of factors including projections regarding the amount and extent of contamination, the location, size and use of the sites, proximity to sensitive resources, status of regulatory investigations, and information regarding remediation activities at other MGP sites in New York State. The cost estimate also assumes that proposed or anticipated remediation techniques are technically feasible and that proposed remediation plans receive DEC and NYSDOH approval. Further, the updated estimate could change materially based on changes to technology relating to remedial alternatives and changes to current laws and regulations.
As authorized by the PSC, Central Hudson is currently permitted to defer for future recovery the differences between actual costs for MGP site investigation and remediation and the associated rate allowances, with carrying charges to be accrued on the deferred balances at the authorized pre-tax rate of return. Central Hudson spent $0.3 million and $1.0 million for the three and six months ended June 30, 2011, related to site investigation and remediation for sites #2, 3, 4, 5 and 6. On July 1, 2007, Central Hudson started recovering through a rate allowance for MGP Site Investigation and Remediation Costs. The 2010 Rate Order provided for an increase in this rate allowance to an amount of $13.6 million over the three year settlement period ending June 30, 2013. As authorized in the 2009 Rate Order, Central Hudson also received deferral authority and subsequent recovery for amounts spent over the rate allowance from a net electric regulatory liability balance during the three year settlement period ending June 30, 2010. The total MGP Site Investigation and Remediation costs recovered from July 1, 2007 through June 30, 2011 was approximately $19.2 million, with $2.7 million recovered in the second quarter of 2011 totaling $3.9 million recovered in 2011.
Central Hudson has put its insurers on notice and intends to seek reimbursement from its insurers for the costs of any liabilities. Certain of these insurers have denied coverage.
Future remediation activities, including operating, maintenance and monitoring and related costs may vary significantly from the assumptions used in Central Hudson's current cost estimates, and these costs could have a material adverse effect (the extent of which cannot be reasonably determined) on the financial condition, results of operations and cash flows of CH Energy Group and Central Hudson if Central Hudson were unable to recover all or a substantial portion of these costs via collection in rates from customers and/or through insurance.
| · | Little Britain Road property owned by Central Hudson |
In 2000, Central Hudson and the DEC entered into a Voluntary Cleanup Agreement (“VCA”) whereby Central Hudson removed approximately 3,100 tons of soil and conducted groundwater sampling. Central Hudson believes that it has fulfilled its obligations under the VCA and should receive the release provided for in the VCA, but the DEC has proposed that additional ground water work be done to address groundwater sampling results that showed the presence of certain contaminants at levels exceeding DEC criteria. Central Hudson believes that such work is not necessary and has completed a soil vapor intrusion study showing that indoor air at the facility met Occupational Safety and Health Administration (“OSHA”) and NYSDOH standards; in addition, in 2008, it also installed an indoor air vapor mitigation system (that continues to operate).
In September 2010, NYSDEC personnel orally advised that Central Hudson would likely receive a letter from the NYSDEC proposing closure of the VCA, and inclusion of the site into the Brownfield Cleanup Program (“BCP”). To date that letter has not been received.
At this time Central Hudson does not have sufficient information to estimate the need for additional remediation or potential remediation costs. Central Hudson has put its insurers on notice regarding this matter and intends to seek reimbursement from its insurers for amounts, if any, for which it may become liable. Central Hudson cannot predict the outcome of this matter.
Central Hudson owns and operates a maintenance and warehouse facility located in Lloyd, NY. In the course of Central Hudson’s recent hazardous waste permit renewal process for this facility, sediment contamination was discovered within the wetland area across the street from the main property. In cooperation with NYSDEC, Central Hudson continues to investigate the nature and extent of the contamination. The extent of the contamination, as well as the timing and costs for continued investigation and future remediation efforts, cannot be reasonably estimated at this time.
As of June 30, 2011, of the 3,327 asbestos cases brought against Central Hudson, 1,164 remain pending. Of the cases no longer pending against Central Hudson, 2,008 have been dismissed or discontinued without payment by Central Hudson, and Central Hudson has settled 155 cases. Central Hudson is presently unable to assess the validity of the remaining asbestos lawsuits; however, based on information known to Central Hudson at this time, including Central Hudson’s experience in settling asbestos cases and in obtaining dismissals of asbestos cases, Central Hudson believes that the costs which may be incurred in connection with the remaining lawsuits will not have a material adverse effect on the financial position, results of operations or cash flows of either CH Energy Group or Central Hudson.
CHEC
During the six months ended June 30, 2011, Griffith spent $0.1 million on remediation efforts in Maryland, Virginia and Connecticut.
Griffith’s reserve for environmental remediation is $2.6 million as of June 30, 2011, of which $1.3 million is expected to be spent in the next twelve months.
In connection with the 2009 sale of operations in certain geographic locations, Griffith agreed to indemnify the purchaser for certain claims, losses and expenses arising out of any breach by Griffith of the representations, warranties and covenants Griffith made in the sale agreement, certain environmental matters and all liabilities retained by Griffith. Griffith’s indemnification obligation is subject to a number of limitations, including time limits within which certain claims must be brought, an aggregate deductible of $0.8 million applicable to certain types of non-environmental claims and other deductibles applicable to certain specific environmental claims, and caps on Griffith’s liability with respect to certain of the indemnification obligations. The sale agreement includes an aggregate cap of $5.7 million on Griffith’s obligation to indemnify the purchaser for breaches of many of Griffith’s representations and warranties and for certain environmental liabilities. In 2009, the Company reserved $2.6 million for environmental remediation costs it may be obligated to pay based on its indemnification obligations under the sale agreement. To date, Griffith has paid approximately $0.2 million under its environmental remediation cost obligation. In the first quarter of 2011, Griffith reduced the reserve by $0.6 million based on the completion of an environmental study. The reserve balance as of June 30, 2011 related to the divestiture is $1.8 million. Management believes this is the most likely amount Griffith would pay with respect to its indemnification obligations under the sale agreement.
Other Matters
Central Hudson and Griffith are involved in various other legal and administrative proceedings incidental to their businesses, which are in various stages. While these matters collectively could involve substantial amounts, based on the facts currently known, it is the opinion of Management that their ultimate resolution will not have a material adverse effect on either of CH Energy Group’s or the individual segment’s financial positions, results of operations or cash flows.
CH Energy Group and Central Hudson expense legal costs as incurred.
NOTE 13 – Segments and Related Information
CH Energy Group's reportable operating segments are the regulated electric utility business and regulated natural gas utility business of Central Hudson and the unregulated fuel distribution business of Griffith. Other activities of CH Energy Group, which do not constitute a business segment include CHEC’s renewable energy investments and the holding company’s activities, which consist primarily of financing its subsidiaries and are reported under the heading “Other Businesses and Investments.”
Certain additional information regarding these segments is set forth in the following tables. General corporate expenses and Central Hudson’s property common to both electric and natural gas segments have been allocated in accordance with practices established for regulatory purposes.
Central Hudson’s and Griffith’s operations are seasonal in nature and weather-sensitive and, as a result, financial results for interim periods are not necessarily indicative of trends for a twelve-month period. Demand for electricity typically peaks during the summer, while demand for natural gas and heating oil typically peaks during the winter.
In the following segment charts for CH Energy Group, information related to Griffith represents continuing operations unless otherwise noted.
CH Energy Group Segment Disclosure
| | | Three Months Ended June 30, 2011 | |
| | | Segments | | | | Other | | | | | | | | | |
| | | Central Hudson | | | | | | | Businesses | | | | | | | | | |
| | | | | | Natural | | | | | | | and | | | | | | | | | |
| | | Electric | | | Gas | | | Griffith | | | | Investments | | | | Eliminations | | | | Total | |
| Revenues from external customers | | $ | 114,235 | | | $ | 33,997 | | | $ | 58,835 | | | | $ | 585 | | | | $ | - | | | | $ | 207,652 | |
| Intersegment revenues | | | 5 | | | | 39 | | | | - | | | | | - | | | | | (44 | ) | | | | - | |
| Total revenues | | | 114,240 | | | | 34,036 | | | | 58,835 | | | | | 585 | | | | | (44 | ) | | | | 207,652 | |
| Operating income (loss) | | | 14,213 | | | | 3,824 | | | | (2,015 | ) | | | | 173 | | | | | - | | | | | 16,195 | |
| Interest and investment income | | | 1,215 | | | | 356 | | | | - | | | | | 794 | | | | | (784 | ) | (1) | | | 1,581 | |
| Interest charges | | | 5,892 | | | | 1,520 | | | | 737 | | | | | 899 | | | | | (784 | ) | (1) | | | 8,264 | |
| Income (loss) before income taxes | | | 9,452 | | | | 2,674 | | | | (2,754 | ) | | | | (112 | ) | | | | - | | | | | 9,260 | |
| Net income (loss) attributable to CH Energy Group | | | 5,682 | | | | 1,447 | | | | (1,674 | ) | (3) | | | 500 | | (2) | | | - | | | | | 5,955 | |
| Segment assets at June 30 | | | 1,168,839 | | | | 351,227 | | | | 103,893 | | | | | 84,867 | | | | | (4,514 | ) | | | | 1,704,312 | |
| (1) | This represents the elimination of inter-company interest income (expense) generated from lending activities between CH Energy Group (the holding company), and its subsidiaries (CHEC and Griffith). |
| (2) | Includes loss from discontinued operations of $24. |
| (3) | Includes loss from discontinued operations of $49. |
CH Energy Group Segment Disclosure
| | | Three Months Ended June 30, 2010 | |
| | | Segments | | | | Other | | | | | | | | | |
| | | Central Hudson | | | | | | | Businesses | | | | | | | | | |
| | | | | | Natural | | | | | | | and | | | | | | | | | |
| | | Electric | | | Gas | | | Griffith | | | | Investments | | | | Eliminations | | | | Total | |
| Revenues from external customers | | $ | 125,096 | | | $ | 32,461 | | | $ | 42,111 | | | | $ | 570 | | | | $ | - | | | | $ | 200,238 | |
| Intersegment revenues | | | 1 | | | | 26 | | | | - | | | | | - | | | | | (27 | ) | | | | - | |
| Total revenues | | | 125,097 | | | | 32,487 | | | | 42,111 | | | | | 570 | | | | | (27 | ) | | | | 200,238 | |
| Operating income (loss) | | | 16,135 | | | | 4,944 | | | | (2,170 | ) | | | | 75 | | | | | - | | | | | 18,984 | |
| Interest and investment income | | | 1,127 | | | | 381 | | | | - | | | | | 612 | | | | | (612 | ) | (1) | | | 1,508 | |
| Interest charges | | | 5,038 | | | | 1,263 | | | | 577 | | | | | 871 | | | | | (612 | ) | (1) | | | 7,137 | |
| Income (loss) before income taxes | | | 12,321 | | | | 4,002 | | | | (2,714 | ) | | | | (1,238 | ) | | | | - | | | | | 12,371 | |
| Net income (loss) attributable to CH Energy Group | | | 7,578 | | | | 2,169 | | | | (1,601 | ) | | | | (1,381 | ) | (2) | | | - | | | | | 6,765 | |
| Segment assets at June 30 | | | 1,141,625 | | | | 356,156 | | | | 97,210 | | | | | 93,166 | | | | | (2,454 | ) | | | | 1,685,703 | |
| (1) | This represents the elimination of inter-company interest income (expense) generated from lending activities between CH Energy Group (the holding company), and its subsidiaries (CHEC and Griffith). |
| (2) | Includes loss from discontinued operations of $1,184. |
CH Energy Group Segment Disclosure
(In Thousands)
| | | Six Months Ended June 30, 2011 | |
| | | Segments | | | | Other | | | | | | | | | |
| | | Central Hudson | | | | | | | Businesses | | | | | | | | | |
| | | | | | Natural | | | | | | | and | | | | | | | | | |
| | | Electric | | | Gas | | | Griffith | | | | Investments | | | | Eliminations | | | | Total | |
| Revenues from external customers | | $ | 268,805 | | | $ | 109,479 | | | $ | 155,755 | | | | $ | 1,167 | | | | $ | - | | | | $ | 535,206 | |
| Intersegment revenues | | | 10 | | | | 205 | | | | - | | | | | - | | | | | (215 | ) | | | | - | |
| Total revenues | | | 268,815 | | | | 109,684 | | | | 155,755 | | | | | 1,167 | | | | | (215 | ) | | | | 535,206 | |
| Operating income | | | 28,888 | | | | 15,725 | | | | 5,482 | | | | | 314 | | | | | - | | | | | 50,409 | |
| Interest and investment income | | | 2,628 | | | | 809 | | | | - | | | | | 1,595 | | | | | (1,585 | ) | (1) | | | 3,447 | |
| Interest charges | | | 11,749 | | | | 3,036 | | | | 1,491 | | | | | 1,794 | | | | | (1,585 | ) | (1) | | | 16,485 | |
| Income before income taxes | | | 19,539 | | | | 13,476 | | | | 4,061 | | | | | 80 | | | | | - | | | | | 37,156 | |
| Net income attributable to CH Energy Group | | | 11,714 | | | | 7,812 | | | | 2,718 | (3) | | | | 658 | (2) | | | | - | | | | | 22,902 | |
| Segment assets at June 30 | | | 1,168,839 | | | | 351,227 | | | | 103,893 | | | | | 84,867 | | | | | (4,514 | ) | | | | 1,704,312 | |
| (1) | This represents the elimination of inter-company interest income (expense) generated from lending activities between CH Energy Group (the holding company), and its subsidiaries (CHEC and Griffith). |
| (2) | Includes loss from discontinued operations of $426. |
| (3) | Includes income from discontinued operations of $322. | | | | | | | | | | |
CH Energy Group Segment Disclosure
(In Thousands)
| | | Six Months Ended June 30, 2010 | |
| | | Segments | | | | Other | | | | | | | | | |
| | | Central Hudson | | | | | | | Businesses | | | | | | | | | |
| | | | | | Natural | | | | | | | and | | | | | | | | | |
| | | Electric | | | Gas | | | Griffith | | | | Investments | | | | Eliminations | | | | Total | |
| Revenues from external customers | | $ | 271,058 | | | $ | 101,548 | | | $ | 126,578 | | | | $ | 1,026 | | | | $ | - | | | | $ | 500,210 | |
| Intersegment revenues | | | 19 | | | | 201 | | | | - | | | | | - | | | | | (220 | ) | | | | - | |
| Total revenues | | | 271,077 | | | | 101,749 | | | | 126,578 | | | | | 1,026 | | | | | (220 | ) | | | | 500,210 | |
| Operating income | | | 36,262 | | | | 18,576 | | | | 5,173 | | | | | 152 | | | | | - | | | | | 60,163 | |
| Interest and investment income | | | 1,930 | | | | 703 | | | | 1 | | | | | 1,143 | | | | | (1,142 | ) | (1) | | | 2,635 | |
| Interest charges | | | 10,133 | | | | 2,604 | | | | 1,097 | | | | | 1,716 | | | | | (1,142 | ) | (1) | | | 14,408 | |
| Income (loss) before income taxes | | | 27,928 | | | | 16,520 | | | | 4,166 | | | | | (1,605 | ) | | | | - | | | | | 47,009 | |
| Net income (loss) attributable to CH Energy Group | | | 16,688 | | | | 9,461 | | | | 2,458 | | | | | (1,404 | ) | (2) | | | - | | | | | 27,203 | |
| Segment assets at June 30 | | | 1,141,625 | | | | 356,156 | | | | 97,210 | | | | | 93,166 | | | | | (2,454 | ) | | | | 1,685,703 | |
| (1) | This represents the elimination of inter-company interest income (expense) generated from temporary lending activities between CH Energy Group (the holding company), and its subsidiaries (CHEC and Griffith). |
| (2) | Includes loss from discontinued operations of $1,075. |
NOTE 14 - Accounting for Derivative Instruments and Hedging Activities
Accounting for Derivatives
Central Hudson has been authorized to fully recover risk management costs as a component for its natural gas and electricity cost adjustment charge clauses. Risk management costs are defined by the PSC as "costs associated with transactions that are intended to reduce price volatility or reduce overall costs to customers. These costs include transaction costs, and gains and losses associated with risk management instruments." The related gains and losses associated with Central Hudson’s derivatives are included as part of Central Hudson's commodity cost and/or price-reconciled in its natural gas and electricity cost adjustment charge clauses, and are not designated as hedges. Additionally, Central Hudson has been authorized to fully recover the interest costs associated with its variable rate debt, which includes costs and gains or losses associated with its interest rate cap contracts. As a result, these derivative activities at Central Hudson do not impact earnings.
On March 18, 2011, Central Hudson entered into a total return master swap agreement with Bank of America with the intent to enter into future swap contracts to exchange total returns on CH Energy Group, Inc. common stock for fixed payments to Bank of America. The purpose is to reduce the volatility to earnings from phantom shares under CH Energy Group’s Directors and Executives Deferred Compensation Plan. Based on the terms and conditions of the swap agreement, the fair value of the swaps are designated as Level 2 within the fair value hierarchy. Quarterly valuations are made on the last day of the quarter, at which time a net cash settlement will be recorded. Therefore the fair value of these outstanding contracts at any quarter-end is not expected to be material. On June 30, 2011, the swap settled resulting in income of $0.2 million, and the notional amount of the swap to be settled at September 30, 2011 was re-priced. The proceeds are used to offset future obligations of the Deferred Compensation Plan.
Derivative activity related to Griffith’s heating oil contracts is not material.
The percentage of Central Hudson’s electric and gas requirements hedged by derivative contracts is as follows:
| Central Hudson | | % of Requirement Hedged (1) | |
| Electric Derivative Contracts: | | | |
| July 2011 – December 2011 | | | 27.2 | % |
| 2012 | | | 22.4 | % |
| | | | | |
| Natural Gas Derivative Contracts: | | | | |
| November 2011 – March 2012 | | | 19.0 | % |
(1) Projected coverage as of June 30, 2011.
Derivative Risks
The basic types of risks associated with derivatives are market risk (that the value of the derivative will be adversely impacted by changes in the market, primarily the change in interest and exchange rates) and credit risk (that the counterparty will not perform according to the terms of the contract). The market risk of the derivatives generally offset the market risk associated with the hedged commodity.
The majority of Central Hudson and Griffith’s derivative instruments contain provisions that require the company to maintain specified issuer credit ratings and financial strength ratings. Should the company’s ratings fall below these specified levels, it would be in violation of the provisions, and the derivatives’ counterparties could terminate the contracts and request immediate payment.
To help limit the credit exposure of their derivatives, both Central Hudson and Griffith have entered into master netting agreements with counterparties whereby contracts in a gain position can be offset against contracts in a loss position. Of the eighteen total agreements held by both companies, twelve contain credit-risk related contingent features. As of June 30, 2011, there were twelve open derivative contracts in liability positions under these twelve master netting agreements containing credit-risk related contingent features. The circumstances that could trigger these features, the aggregate fair value of the derivative contracts that contain contingent features and the amount that would be required to settle these instruments on June 30, 2011 if the contingent features were triggered, are summarized in the table below.
| | | As of June 30, 2011 | |
| Triggering Event | | # of Contracts In A Liability Position Containing the Triggering Feature | | | Gross Fair Value of Contract | | | Cost to Settle if Contingent Feature is Triggered (net of collateral) | |
| Central Hudson: | | | | | | | | | |
| Change in Ownership (CHEG ownership of CHG&E falls below 51%) | | | 3 | | | $ | (35 | ) | | $ | (35 | ) |
| Credit Rating Downgrade (to below BBB-) | | | 9 | | | | (94 | ) | | | (94 | ) |
Adequate Assurance(1) | | | - | | | | - | | | | - | |
| Total Central Hudson | | | 12 | | | $ | (129 | ) | | $ | (129 | ) |
| | | | | | | | | | | | | |
| Griffith: | | | | | | | | | | | | |
| Change in Ownership (CHEG ownership of CHEC falls below 51%) | | | - | | | | - | | | | - | |
Adequate Assurance(1) | | | - | | | | - | | | | - | |
| Total Griffith | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | |
| Total CH Energy Group | | | 12 | | | $ | (129 | ) | | $ | (129 | ) |
| (1) | If the counterparty has reasonable grounds to believe Central Hudson's or Griffith's creditworthiness or performance has become unsatisfactory, it can request collateral in an amount determined by the counterparty, not to exceed the amount required to settle the contract. |
CH Energy Group and Central Hudson have elected gross presentation for their derivative contracts under master netting agreements and collateral positions. On June 30, 2011, neither Central Hudson nor Griffith had collateral posted against the fair value amount of derivatives.
The fair value of CH Energy Group’s and Central Hudson’s derivative instruments and their location in the respective Balance Sheets are summarized in the table below, followed by a summarization of their effect on the respective Statements of Income. For additional information regarding Central Hudson’s physical hedges, see the discussion following the caption “Electricity Purchase Commitments” in Note 12 - “Commitments and Contingencies.”
Gross Fair Value of Derivative Instruments
Derivative contracts are measured at fair value on a recurring basis. As of June 30, 2011, December 31, 2010 and June 30, 2010, CH Energy Group's and Central Hudson's derivative assets and liabilities by category and hierarchy level follows (In Thousands):
| Asset or Liability Category | | Fair Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
| As of June 30, 2011 | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | |
| Derivative Contracts: | | | | | | | | | | | | |
| Central Hudson - electric | | $ | 47 | | | $ | - | | | $ | - | | | $ | 47 | |
| Central Hudson - natural gas | | | 15 | | | | - | | | | 15 | | | | - | |
| Total CH Energy Group and Central Hudson Assets | | $ | 62 | | | $ | - | | | $ | 15 | | | $ | 47 | |
| | | | | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | | | | | |
| Derivative Contracts: | | | | | | | | | | | | | | | | |
| Central Hudson - electric | | $ | (16,202 | ) | | $ | - | | | $ | - | | | $ | (16,202 | ) |
| Central Hudson - natural gas | | | (153 | ) | | | - | | | | (153 | ) | | | - | |
| Total CH Energy Group and Central Hudson Liabilities | | $ | (16,355 | ) | | $ | - | | | $ | (153 | ) | | $ | (16,202 | ) |
| | | | | | | | | | | | | | | | | |
| As of December 31, 2010 | | | | | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | | | | | |
| Derivative Contracts: | | | | | | | | | | | | | | | | |
| Central Hudson - natural gas | | $ | 34 | | | $ | - | | | $ | 34 | | | $ | - | |
| Total Central Hudson Assets | | $ | 34 | | | $ | - | | | $ | 34 | | | $ | - | |
| | | | | | | | | | | | | | | | | |
| Griffith - heating oil | | $ | 112 | | | $ | - | | | $ | 112 | | | $ | - | |
| Total CH Energy Group Assets | | $ | 146 | | | $ | - | | | $ | 146 | | | $ | - | |
| | | | | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | | | | | |
| Derivative Contracts: | | | | | | | | | | | | | | | | |
| Central Hudson - electric | | $ | (23,872 | ) | | $ | - | | | $ | - | | | $ | (23,872 | ) |
| Central Hudson - natural gas | | | (1,009 | ) | | | - | | | | (1,009 | ) | | | - | |
| Total CH Energy Group and Central Hudson Liabilities | | $ | (24,881 | ) | | $ | - | | | $ | (1,009 | ) | | $ | (23,872 | ) |
| | | | | | | | | | | | | | | | | |
| As of June 30, 2010 | | | | | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | | | | | |
| Derivative Contracts: | | | | | | | | | | | | | | | | |
| Central Hudson - electric | | $ | 1,080 | | | $ | - | | | $ | - | | | $ | 1,080 | |
| Central Hudson - natural gas | | | 30 | | | | - | | | | 30 | | | | - | |
| Total Central Hudson Assets | | $ | 1,110 | | | $ | - | | | $ | 30 | | | $ | 1,080 | |
| | | | | | | | | | | | | | | | | |
| Griffith - heating oil | | $ | 28 | | | $ | - | | | $ | 28 | | | $ | - | |
| Total CH Energy Group Assets | | $ | 1,138 | | | $ | - | | | $ | 58 | | | $ | 1,080 | |
| | | | | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | | | | | |
| Derivative Contracts: | | | | | | | | | | | | | | | | |
| Central Hudson - electric | | $ | (24,556 | ) | | $ | - | | | $ | - | | | $ | (24,556 | ) |
| Central Hudson - natural gas | | | (173 | ) | | | - | | | | (173 | ) | | | - | |
| Total CH Energy Group and Central Hudson Liabilities | | $ | (24,729 | ) | | $ | - | | | $ | (173 | ) | | $ | (24,556 | ) |
The table listed below provides a reconciliation of the beginning and ending net balances for assets and liabilities measured at fair value and classified as Level 3 in the fair value hierarchy (In Thousands):
| | | Three Months Ended | | | Six Months Ended | |
| | | June 30, | | | June 30, | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| Balance at Beginning of Period | | $ | (19,716 | ) | | $ | (36,628 | ) | | $ | (23,872 | ) | | $ | (11,983 | ) |
| Unrealized gains (losses) | | | 3,561 | | | | 13,152 | | | | 7,717 | | | | (11,493 | ) |
| Realized losses | | | (3,499 | ) | | | (3,489 | ) | | | (5,170 | ) | | | (6,339 | ) |
| Purchases | | | - | | | | - | | | | - | | | | - | |
| Issuances | | | - | | | | - | | | | - | | | | - | |
| Sales and settlements | | | 3,499 | | | | 3,489 | | | | 5,170 | | | | 6,339 | |
| Transfers in and/or out of Level 3 | | | - | | | | - | | | | - | | | | - | |
| Balance at End of Period | | $ | (16,155 | ) | | $ | (23,476 | ) | | $ | (16,155 | ) | | $ | (23,476 | ) |
| | | | | | | | | | | | | | | | | |
| The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to derivatives still held at end of period | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
The company did not have any transfers into or out of Levels 1 or 2.
The Effect of Derivative Instruments on the Statements of Income
For the three and six months ended June 30, 2011, all other comprehensive income and income statement activity for Griffith heating oil call option contracts was not material. Effective October 1, 2009, Griffith de-designated all open derivative positions. The loss reclassified from accumulated other comprehensive income in 2010, as these de-designated derivatives have settled, was not material.
For the three and six months ended June 30, 2011, neither CH Energy Group nor Central Hudson had derivatives designated as hedging instruments. The following table summarizes the effects of CH Energy Group and Central Hudson on the statements of income (In Thousands):
| | | Amount of Gain/(Loss) Recognized in the Income Statement | | Location of Gain/(Loss) |
| | | Three Months Ended | | | Six Months Ended | | |
| | | June 30, | | | June 30, | | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | | |
| Central Hudson: | | | | | | | | | | | | | |
| Electricity swap contracts | | $ | (3,499 | ) | | $ | (3,489 | ) | | $ | (5,170 | ) | | $ | (6,339 | ) | Regulatory asset(1) |
| Natural gas swap contracts | | | - | | | | - | | | | (1,385 | ) | | | (1,778 | ) | Regulatory asset(1) |
| Total return swap contracts | | | 187 | | | | - | | | | 187 | | | | - | | Interest on regulatory assets and other interest income |
| Total Central Hudson | | | (3,312 | ) | | | (3,489 | ) | | | (6,368 | ) | | | (8,117 | ) | |
| Griffith: | | | | | | | | | | | | | | | | | |
| Heating oil call option contracts | | | (1 | ) | | | (16 | ) | | | (82 | ) | | | (52 | ) | Purchased petroleum |
| Total Griffith | | | (1 | ) | | | (16 | ) | | | (82 | ) | | | (52 | ) | |
| Total CH Energy Group | | $ | (3,313 | ) | | $ | (3,505 | ) | | $ | (6,450 | ) | | $ | (8,169 | ) | |
| (1) | Realized gains and losses on Central Hudson’s derivative instruments are conveyed to or recovered from customers through PSC authorized deferral accounting mechanisms, with an offset in revenue and on the balance sheet, and no impact on results of operations. |
NOTE 15 – Other Fair Value Measurements
Other Assets Recorded at Fair Value
In addition to the derivatives reported at fair value discussed in Note 14 – “Accounting for Derivative Instruments and Hedging Activities”, CH Energy Group reports certain other assets at fair value in the Consolidated Balance Sheets, including the investments of CH Energy Group’s Directors and Executives Deferred Compensation Plan. The following table summarizes the amount reported at fair value related to these assets as of June 30, 2011, December 31, 2010 and June 30, 2010 (In Thousands):
| Asset Category | | Fair Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
| As of June 30, 2011 | | | | | | | | | | | | |
Other investments(1) | | $ | 4,054 | | | $ | 4,054 | | | $ | - | | | $ | - | |
| As of December 31, 2010 | | | | | | | | | | | | | | | | |
Other investments(1) | | $ | 3,912 | | | $ | 3,912 | | | $ | - | | | $ | - | |
Lyonsdale property and plant(2) | | $ | 6,685 | | | $ | - | | | $ | 6,685 | | | $ | - | |
| As of June 30, 2010 | | | | | | | | | | | | | | | | |
Other investments(1) | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| (1) | Other investments represent trust assets for the funding of CH Energy Group’s Directors and Executives Deferred Compensation Plan and is titled “Other investments” within the Deferred Charges and Other Assets section of the CH Energy Group Consolidated and Central Hudson Balance Sheets. |
| (2) | Lyonsdale property and plant was stated at carrying value prior to December 31, 2010. |
As of June 30, 2011 and December 31, 2010, a portion of the trust assets for the funding of CH Energy Group’s Directors and Executives Deferred Compensation Plan are invested in mutual funds, which are measured at fair value on a recurring basis. These investments are valued at quoted market prices in active markets and as such are Level 1 investments as defined in the fair value hierarchy.
The sale of Lyonsdale was effective May 1, 2011. As a result of an impairment charge recognized in 2010, as of December 31, 2010, Lyonsdale property and plant of $6.7 million was recorded at fair value. As of December 31, 2010, the Company recorded a pre-tax impairment of $2.1 million ($1.3 million after-tax impact on earnings), based on the amount by which the carrying amount exceeded the fair value of the Lyonsdale assets. The fair value of the assets was calculated based on market participant bids for the purchase of Lyonsdale, which were received in early 2011.
CHEC recorded a reserve against the full balance of its $10 million note receivable in Cornhusker Holdings in the third quarter of 2010. As of June 30, 2011, Management believes the fair value of this note receivable remains at zero and therefore appropriately reserved.
Other Fair Value Disclosure
Financial instruments are recorded at carrying value in the financial statements, however, the fair value of these instruments is disclosed below in accordance with current accounting guidance related to financial instruments.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and Cash Equivalents: Carrying amount
Long-term Debt: Quoted market prices for the same or similar issues
Notes Payable: Carrying amount
| | | Three Months Ended | | | | | | Six Months Ended | | | | |
| | | June 30, | | | Increase / | | | June 30, | | | Increase / | |
| | | 2011 | | | 2010 | | | (Decrease) | | | 2011 | | | 2010 | | | (Decrease) | |
Revenues with Matching Expense Offsets:(1) | | | | | | | | | | | | | | | | | | |
| Energy cost adjustment | | $ | 36,668 | | | $ | 51,107 | | | $ | (14,439 | ) | | $ | 105,939 | | | $ | 116,807 | | | $ | (10,868 | ) |
| Sales to others for resale | | | 1,127 | | | | 1,542 | | | | (415 | ) | | | 2,124 | | | | 2,716 | | | | (592 | ) |
| Other revenues with matching offsets | | | 19,936 | | | | 18,022 | | | | 1,914 | | | | 42,484 | | | | 37,506 | | | | 4,978 | |
| Subtotal | | | 57,731 | | | | 70,671 | | | | (12,940 | ) | | | 150,547 | | | | 157,029 | | | | (6,482 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenues Impacting Earnings: | | | | | | | | | | | | | | | | | | | | | | | | |
| Customer sales | | | 52,689 | | | | 49,954 | | | | 2,735 | | | | 113,387 | | | | 105,456 | | | | 7,931 | |
| RDM and other regulatory mechanisms | | | 1,711 | | | | 2,013 | | | | (302 | ) | | | 122 | | | | 3,467 | | | | (3,345 | ) |
| Pole attachments and other rents | | | 973 | | | | 1,069 | | | | (96 | ) | | | 1,905 | | | | 2,098 | | | | (193 | ) |
| Finance charges | | | 837 | | | | 784 | | | | 53 | | | | 1,714 | | | | 1,593 | | | | 121 | |
| Other revenues | | | 294 | | | | 605 | | | | (311 | ) | | | 1,130 | | | | 1,415 | | | | (285 | ) |
| Subtotal | | | 56,504 | | | | 54,425 | | | | 2,079 | | | | 118,258 | | | | 114,029 | | | | 4,229 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Electric Revenues | | $ | 114,235 | | | $ | 125,096 | | | $ | (10,861 | ) | | $ | 268,805 | | | $ | 271,058 | | | $ | (2,253 | ) |
| (1) | 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 costs. Other related costs include authorized business expenses recovered through rates and the cost of special programs authorized by the PSC and 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. |
Change in Central Hudson Revenues - Natural Gas
| | | Three Months Ended | | | | | | Six Months Ended | | | | |
| | | June 30, | | | Increase / | | | June 30, | | | Increase / | |
| | | 2011 | | | 2010 | | | (Decrease) | | | 2011 | | | 2010 | | | (Decrease) | |
Revenues with Matching Expense Offsets:(1) | | | | | | | | | | | | | | | | | | |
| Energy cost adjustment | | $ | 12,572 | | | $ | 10,006 | | | $ | 2,566 | | | $ | 44,122 | | | $ | 38,115 | | | $ | 6,007 | |
| Sales to others for resale | | | 2,119 | | | | 4,211 | | | | (2,092 | ) | | | 11,816 | | | | 13,290 | | | | (1,474 | ) |
| Other revenues with matching offsets | | | 5,008 | | | | 4,196 | | | | 812 | | | | 14,810 | | | | 12,456 | | | | 2,354 | |
| Subtotal | | | 19,699 | | | | 18,413 | | | | 1,286 | | | | 70,748 | | | | 63,861 | | | | 6,887 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenues Impacting Earnings: | | | | | | | | | | | | | | | | | | | | | | | | |
| Customer sales | | | 12,572 | | | | 10,104 | | | | 2,468 | | | | 37,673 | | | | 30,544 | | | | 7,129 | |
| RDM and other regulatory mechanisms | | | 190 | | | | 2,594 | | | | (2,404 | ) | | | (2,107 | ) | | | 4,022 | | | | (6,129 | ) |
| Interruptible profits | | | 630 | | | | 508 | | | | 122 | | | | 1,294 | | | | 1,075 | | | | 219 | |
| Finance charges | | | 362 | | | | 308 | | | | 54 | | | | 695 | | | | 630 | | | | 65 | |
| Other revenues | | | 544 | | | | 534 | | | | 10 | | | | 1,176 | | | | 1,416 | | | | (240 | ) |
| Subtotal | | | 14,298 | | | | 14,048 | | | | 250 | | | | 38,731 | | | | 37,687 | | | | 1,044 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Natural Gas Revenues | | $ | 33,997 | | | $ | 32,461 | | | $ | 1,536 | | | $ | 109,479 | | | $ | 101,548 | | | $ | 7,931 | |
| (1) | 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 natural gas costs. Other related costs include authorized business expenses recovered through rates and the cost of special programs authorized by the PSC and funded with certain available credits. For natural gas sales to other entities for resale, 85% of such profits are returned to customers. |
Electric revenues decreased in the three and six months ended June 30, 2011 as compared to the same periods in 2010, primarily due to lower energy cost adjustment revenues and lower revenue stabilization mechanisms, primarily related to the RDMs. The lower energy cost adjustment revenues are due to lower purchased volumes and lower wholesale prices partially reduced by higher revenues collected for previously deferred purchased electricity costs. Lower RDMs are a result of an increase in actual delivery revenue. In the prior year, actual delivery revenues were below the levels approved by the PSC and as such, additional revenues were recorded through RDMs for future recovery from customers for this difference. During the six months ended June 30, 2011, actual delivery volumes were higher than approved levels and this revenue was set aside through RDMs for future customer benefit. During the three months ended June 30, 2011, delivery revenues were more in-line with approved levels as compared to the same period in the prior year.
Partially offsetting the decrease in electric revenues for the three and six month periods were increased revenues from customer sales due to higher delivery rates and other revenues with matching offsets.
Natural gas revenues increased in the three and six months ended June 30, 2011 as compared to the same periods in 2010, primarily due to higher customer sales, energy cost adjustment revenues and revenues with matching offset. These increases were partially reduced by lower revenue stabilization revenue, primarily related to RDMs and lower sales to others for resale. Increased gas revenues from customer sales are due to higher delivery rates as compared to the prior periods. The higher gas energy cost adjustment revenues for the six months resulted primarily from higher revenues required to be recovered from previously deferred gas costs. Gas energy cost adjustment revenues were also impacted by higher wholesale prices and lower volumes for the three months ended June 30, 2011 as compared to the prior year. Lower RDMs are a result of greater excess of actual delivery revenue in the current year over the levels provided in PSC approved rates as compared to the excess in the prior year. Central Hudson set aside this excess revenue for future customer benefit.
Revenues with matching offsets increased for both electric and gas during the three and six months ended June 30, 2011 as compared to the same periods in 2010 due to an increase in rates related to new NYS energy efficiency programs.
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, the Temporary State Assessment, and NYS energy efficiency programs.
Total utility operating expenses decreased 5% in the three months ended June 30, 2011 compared to the same period in 2010 and increased 5% on a year-to-date year-over-year comparison. The following summarizes the change in operating expenses:
Change in Central Hudson Operating Expenses
| | | Three Months Ended | | | | | | Six Months Ended | | | | |
| | | June 30, | | | Increase / | | | June 30, | | | Increase / | |
| | | 2011 | | | 2010 | | | (Decrease) | | | 2011 | | | 2010 | | | (Decrease) | |
Expenses Currently Matched to Revenues:(1) | | | | | | | | | | | | | | | | | | |
| Purchased electricity | | $ | 37,795 | | | $ | 52,649 | | | $ | (14,854 | ) | | $ | 108,063 | | | $ | 119,523 | | | $ | (11,460 | ) |
| Purchased natural gas | | | 14,691 | | | | 14,217 | | | | 474 | | | | 55,938 | | | | 51,405 | | | | 4,533 | |
| Temporary State Assessment | | | 4,725 | | | | 3,972 | | | | 753 | | | | 11,270 | | | | 9,538 | | | | 1,732 | |
| Pension | | | 6,377 | | | | 6,914 | | | | (537 | ) | | | 14,496 | | | | 15,693 | | | | (1,197 | ) |
| OPEB | | | 1,528 | | | | 1,610 | | | | (82 | ) | | | 3,478 | | | | 3,637 | | | | (159 | ) |
| NYS energy programs | | | 6,363 | | | | 5,472 | | | | 891 | | | | 14,960 | | | | 10,728 | | | | 4,232 | |
| MGP site remediations | | | 1,057 | | | | 657 | | | | 400 | | | | 2,273 | | | | 1,452 | | | | 821 | |
| Other matched expenses | | | 4,894 | | | | 3,593 | | | | 1,301 | | | | 10,817 | | | | 8,914 | | | | 1,903 | |
| Subtotal | | | 77,430 | | | | 89,084 | | | | (11,654 | ) | | | 221,295 | | | | 220,890 | | | | 405 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Other Expense Variations: | | | | | | | | | | | | | | | | | | | | | | | | |
| Tree trimming | | | 4,679 | | | | 3,280 | | | | 1,399 | | | | 10,500 | | | | 5,856 | | | | 4,644 | |
| Property taxes | | | 8,086 | | | | 7,548 | | | | 538 | | | | 17,457 | | | | 15,073 | | | | 2,384 | |
Weather related service restoration (2) | | | 1,163 | | | | 1,295 | | | | (132 | ) | | | 6,134 | | | | 4,191 | | | | 1,943 | |
| Depreciation | | | 8,960 | | | | 8,422 | | | | 538 | | | | 17,881 | | | | 16,836 | | | | 1,045 | |
| Uncollectible expense | | | 1,270 | | | | 1,383 | | | | (113 | ) | | | 3,346 | | | | 3,772 | | | | (426 | ) |
| Uncollectible deferrals | | | - | | | | (3,702 | ) | | | 3,702 | | | | - | | | | (3,702 | ) | | | 3,702 | |
| Purchased natural gas incentive arrangements | | | 599 | | | | 537 | | | | 62 | | | | 1,150 | | | | 997 | | | | 153 | |
| Other expenses | | | 28,008 | | | | 28,631 | | | | (623 | ) | | | 55,908 | | | | 53,855 | | | | 2,053 | |
| Subtotal | | | 52,765 | | | | 47,394 | | | | 5,371 | | | | 112,376 | | | | 96,878 | | | | 15,498 | |
| Total Operating Expenses | | $ | 130,195 | | | $ | 136,478 | | | $ | (6,283 | ) | | $ | 333,671 | | | $ | 317,768 | | | $ | 15,903 | |
| (1) | Includes expenses that, in accordance with the 2009 and 2010 Rate Orders, are adjusted in the current period to equal the revenues earned for the applicable expenses. |
| (2) | Three and six months ended June 30, 2010 does not include $19.3 million in incremental costs related to the February 2010 significant storm event 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 for the three and six months ended June 30, 2011 compared to the same period in the prior year was driven primarily by lower purchased volumes and lower wholesale prices partially reduced by higher revenues collected for previously deferred purchased electricity cost. The increase in purchased natural gas for the three months ended June 30, 2011 compared to 2010 is the result of higher revenues collected for previously deferred purchased gas costs and higher wholesale prices partially reduced by lower purchased volumes. The increase in purchased gas for the six months ended June 30, 2011 was primarily driven by higher revenues collected for the recovery of previously deferred purchased gas costs and higher purchased volumes, partially reduced by lower wholesale prices.
Variations in other expenses currently matched to revenues, including increases in NYS energy programs, Temporary State Assessment, MGP site remediations and other matched expenses and decreases in pensions and OPEBs are due to a change in the level of expenses recorded, with a corresponding change in revenues resulting from a change in the amounts included in delivery rates as authorized in the 2010 Rate Order.
Weather related service restoration costs can fluctuate from year to year based on changes in the number and severity of storms each year. The increase in expenses associated with tree-trimming in the second quarter of 2011 and year-to-date is a result of accelerated trimming in 2011 to take advantage of contractor crew availability, favorable trimming and pricing conditions. In addition the reassignment of tree trimming crews to assist with the restoration efforts for the significant storm event during the last week of February 2010 led to an increase in year-over-year tree trimming expenses. These 2010 costs do not include incremental costs from this major storm event, such as the costs of mutual aid crews and contractors from other areas and overtime costs for Central Hudson crews, which were deferred for future recovery from customers. Central Hudson filed a petition with the PSC for approval and recovery on September 23, 2010. On April 14, 2011 the Commission issued an Order authorizing deferral of $18.8 million of the incremental electric storm restoration expense. Central Hudson recorded $0.8 million of storm costs from the February 2010 storm disallowed by the Commission in its April 14th Order in the first quarter of 2011.
The increase in expenses related to the uncollectible deferral is due to Central Hudson deferring for future recovery $2.6 million in uncollectible expense over rate allowances for the rate year ended June 30, 2010. In addition, Central Hudson deferred an additional $1.1 million of gas uncollectible expense during the second quarter of 2010 based on the PSC Order issued in May 2010, which covered the calendar year 2009 rather than the rate year ended June 30, 2009 as requested by the company. Central Hudson did not record uncollectible deferrals in the three or six month periods ending June 30, 2011.
Other Income
Other income and deductions for Central Hudson for the three months ended June 30, 2011, remained consistent with the same period in the prior year and increased $0.8 million for the six months ended June 30, 2011 compared to the prior year. For both the three and six month period, increases in regulatory adjustments related to changes in interest costs on Central Hudson’s variable rate debt resulted from the redemption of Series C and D notes in December 2010 with proceeds from the Series G medium term notes. Additional increases included increase in regulatory carrying charges from customers related to pension costs and MGP and interest on undercollected gas cost adjustments. These increases were offset by decreases in carrying charges from customers relating to deferral costs of the February 2010 storm event and the deferred uncollectible expense noted above. For the six months ended June 30, 2011, the increases were only partially offset by the decreases noted.
Interest Charges
Central Hudson’s interest charges increased $1.1 million and $2.0 million for the three and six months ended June 30, 2011 compared to the same period in 2010. The increase is primarily the result of the higher interest rates associated with the $82.2 million medium-term notes issued in December 2010 compared to the $82.2 million variable rate series C and D notes retired in December 2010. An overall higher outstanding debt balance during the three and six months ended June 30, 2011 as compared to the same periods in 2010 also resulted in increased interest charges.
Income Taxes
Income taxes for Central Hudson decreased $1.6 million and $4.8 million for the three and six months ended June 30, 2011 when compared to the same period in 2010 primarily due to a decrease in pre-tax book income.
CH Energy Group
In addition to the impacts on 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 inter-company interest income and expense which are eliminated in consolidation.
Income Statement Variances
| | | Three Months Ended June 30, | | | Increase/(Decrease) in | |
| | | 2011 | | | 2010 | | | Amount | | | Percent | |
| Operating Revenues | | $ | 207,652 | | | $ | 200,238 | | | $ | 7,414 | | | | 3.7 | % |
| Operating Expenses: | | | | | | | | | | | | | | | | |
| Purchased electricity, fuel, natural gas and petroleum | | | 101,313 | | | | 99,716 | | | | 1,597 | | | | 1.6 | % |
| Depreciation and amortization | | | 10,295 | | | | 9,719 | | | | 576 | | | | 5.9 | % |
| Other operating expenses | | | 79,849 | | | | 71,819 | | | | 8,030 | | | | 11.2 | % |
| Total Operating Expenses | | | 191,457 | | | | 181,254 | | | | 10,203 | | | | 5.6 | % |
| Operating Income | | | 16,195 | | | | 18,984 | | | | (2,789 | ) | | | (14.7 | ) % |
| Other Income (Deductions), net | | | 1,329 | | | | 524 | | | | 805 | | | | 153.6 | % |
| Interest Charges | | | 8,264 | | | | 7,137 | | | | 1,127 | | | | 15.8 | % |
| Income before income taxes, non-controlling interest and preferred dividends of subsidiary | | | 9,260 | | | | 12,371 | | | | (3,111 | ) | | | (25.1 | ) % |
| Income Taxes | | | 2,990 | | | | 4,599 | | | | (1,609 | ) | | | (35.0 | ) % |
| Net income from continuing operations | | | 6,270 | | | | 7,772 | | | | (1,502 | ) | | | (19.3 | ) % |
| Net loss from discontinued operations, net of tax | | | (73 | ) | | | (1,184 | ) | | | 1,111 | | | | 93.8 | % |
| Non-controlling interest in subsidiary | | | - | | | | (419 | ) | | | 419 | | | | 100.0 | % |
| Dividends declared on Preferred Stock of subsidiary | | | 242 | | | | 242 | | | | - | | | | - | % |
| Net income attributable to CH Energy Group | | $ | 5,955 | | | $ | 6,765 | | | $ | (810 | ) | | | (12.0 | ) % |
| | | Six Months Ended June 30, | | | Increase/(Decrease) in | |
| | | 2011 | | | 2010 | | | Amount | | | Percent | |
| Operating Revenues | | $ | 535,206 | | | $ | 500,210 | | | $ | 34,996 | | | | 7.0 | % |
| Operating Expenses: | | | | | | | | | | | | | | | | |
| Purchased electricity, fuel, natural gas and petroleum | | | 289,145 | | | | 267,010 | | | | 22,135 | | | | 8.3 | % |
| Depreciation and amortization | | | 20,574 | | | | 19,409 | | | | 1,165 | | | | 6.0 | % |
| Other operating expenses | | | 175,078 | | | | 153,628 | | | | 21,450 | | | | 14.0 | % |
| Total Operating Expenses | | | 484,797 | | | | 440,047 | | | | 44,750 | | | | 10.2 | % |
| Operating Income | | | 50,409 | | | | 60,163 | | | | (9,754 | ) | | | (16.2 | ) % |
| Other Income (Deductions), net | | | 3,232 | | | | 1,254 | | | | 1,978 | | | | 157.7 | % |
| Interest Charges | | | 16,485 | | | | 14,408 | | | | 2,077 | | | | 14.4 | % |
| Income before income taxes, non-controlling interest and preferred dividends of subsidiary | | | 37,156 | | | | 47,009 | | | | (9,853 | ) | | | (21.0 | ) % |
| Income Taxes | | | 13,665 | | | | 18,631 | | | | (4,966 | ) | | | (26.7 | ) % |
| Net income from continuing operations | | | 23,491 | | | | 28,378 | | | | (4,887 | ) | | | (17.2 | ) % |
| Net loss from discontinued operations, net of tax | | | (104 | ) | | | (1,075 | ) | | | 971 | | | | 90.3 | % |
| Non-controlling interest in subsidiary | | | - | | | | (385 | ) | | | 385 | | | | 100.0 | % |
| Dividends declared on Preferred Stock of subsidiary | | | 485 | | | | 485 | | | | - | | | | - | % |
| Net income attributable to CH Energy Group | | $ | 22,902 | | | $ | 27,203 | | | $ | (4,301 | ) | | | (15.8 | ) % |
Griffith
Sales Volumes
Delivery and sales volumes for Griffith vary in response to weather conditions, changes in our customer base and customer behavior. Deliveries of petroleum products used for heating purposes peak in the winter. Sales also vary as customers respond to the price of the particular energy product and changes in local economic conditions.
Changes in sales volumes of petroleum products, including the impact of acquisitions, are set forth below.
Actual & Weather Normalized Deliveries
(In Thousands of Gallons)
| | | Actual Deliveries | | | Weather Normalized Deliveries(1) | |
| | | Three Months Ended June 30, | | | Increase / (Decrease) in | | | Three Months Ended June 30, | | | Increase / (Decrease) in | |
| | | 2011 | | | 2010 | | | Amount | | | Percent | | | 2011 | | | 2010 | | | Amount | | | Percent | |
| Heating Oil | | | | | | | | | | | | | | | | | | | | | | | | |
Base company volume(2) | | | 3,208 | | | | 2,573 | | | | 635 | | | | 25 | % | | | 3,310 | | | | 3,482 | | | | (172 | ) | | | (5 | ) % |
| Acquisitions volume | | | 42 | | | | - | | | | 42 | | | | - | % | | | 43 | | | | - | | | | 43 | | | | - | % |
| Total Heating Oil | | | 3,250 | | | | 2,573 | | | | 677 | | | | 26 | % | | | 3,353 | | | | 3,482 | | | | (129 | ) | | | (4 | ) % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Motor Fuels | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Base company volume(2) | | | 11,094 | | | | 12,073 | | | | (979 | ) | | | (8 | ) % | | | 11,094 | | | | 12,073 | | | | (979 | ) | | | (8 | ) % |
| Acquisitions volume | | | 920 | | | | - | | | | 920 | | | | - | % | | | 920 | | | | - | | | | 920 | | | | - | % |
| Total Motor Fuels | | | 12,014 | | | | 12,073 | | | | (59 | ) | | | - | % | | | 12,014 | | | | 12,073 | | | | (59 | ) | | | - | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Propane and Other | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Base company volume(2) | | | 120 | | | | 98 | | | | 22 | | | | 22 | % | | | 123 | | | | 125 | | | | (2 | ) | | | (2 | ) % |
| Total Propane and Other | | | 120 | | | | 98 | | | | 22 | | | | 22 | % | | | 123 | | | | 125 | | | | (2 | ) | | | (2 | ) % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Base company volume(2) | | | 14,422 | | | | 14,744 | | | | (322 | ) | | | (2 | ) % | | | 14,527 | | | | 15,680 | | | | (1,153 | ) | | | (7 | ) % |
| Acquisitions volume | | | 962 | | | | - | | | | 962 | | | | - | % | | | 963 | | | | - | | | | 963 | | | | - | % |
| Total | | | 15,384 | | | | 14,744 | | | | 640 | | | | 4 | % | | | 15,490 | | | | 15,680 | | | | (190 | ) | | | (1 | ) % |
| (1) | Griffith uses an internal analysis based on historical weather data to remove the estimated impacts of weather on delivery volumes. |
| (2) | For the purpose of this chart, "Base company” excludes any impact from acquisitions made by Griffith in 2011. | |
Actual & Weather Normalized Deliveries
(In Thousands of Gallons)
| | | Actual Deliveries | | | Weather Normalized Deliveries(1) | |
| | | Six Months Ended June 30, | | | Increase / (Decrease) in | | | Six Months Ended June 30, | | | Increase / (Decrease) in | |
| | | 2011 | | | 2010 | | | Amount | | | Percent | | | 2011 | | | 2010 | | | Amount | | | Percent | |
| Heating Oil | | | | | | | | | | | | | | | | | | | | | | | | |
Base company volume(2) | | | 18,865 | | | | 20,816 | | | | (1,951 | ) | | | (9 | ) % | | | 18,871 | | | | 21,341 | | | | (2,470 | ) | | | (12 | ) % |
| Acquisitions volume | | | 394 | | | | - | | | | 394 | | | | - | % | | | 394 | | | | - | | | | 394 | | | | - | % |
| Total Heating Oil | | | 19,259 | | | | 20,816 | | | | (1,557 | ) | | | (7 | ) % | | | 19,265 | | | | 21,341 | | | | (2,076 | ) | | | (10 | ) % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Motor Fuels | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Base company volume(2) | | | 21,138 | | | | 22,647 | | | | (1,509 | ) | | | (7 | ) % | | | 21,138 | | | | 22,647 | | | | (1,509 | ) | | | (7 | ) % |
| Acquisitions volume | | | 1,398 | | | | - | | | | 1,398 | | | | - | % | | | 1,398 | | | | - | | | | 1,398 | | | | - | % |
| Total Motor Fuels | | | 22,536 | | | | 22,647 | | | | (111 | ) | | | - | % | | | 22,536 | | | | 22,647 | | | | (111 | ) | | | - | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Propane and Other | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Base company volume(2) | | | 634 | | | | 651 | | | | (17 | ) | | | (3 | ) % | | | 634 | | | | 666 | | | | (32 | ) | | | (5 | ) % |
| Total Propane and Other | | | 634 | | | | 651 | | | | (17 | ) | | | (3 | ) % | | | 634 | | | | 666 | | | | (32 | ) | | | (5 | ) % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Base company volume(2) | | | 40,637 | | | | 44,114 | | | | (3,477 | ) | | | (8 | ) % | | | 40,643 | | | | 44,654 | | | | (4,011 | ) | | | (9 | ) % |
| Acquisitions volume | | | 1,792 | | | | - | | | | 1,792 | | | | - | % | | | 1,792 | | | | - | | | | 1,792 | | | | - | % |
| Total | | | 42,429 | | | | 44,114 | | | | (1,685 | ) | | | (4 | ) % | | | 42,435 | | | | 44,654 | | | | (2,219 | ) | | | (5 | ) % |
| (1) | Griffith uses an internal analysis based on historical weather data to remove the estimated impacts of weather on delivery volumes. |
| (2) | For the purpose of this chart, "Base company” excludes any impact from acquisitions made by Griffith in 2011. | |
| Actual and Weather Normalized Delivery Volumes as % of Total Volumes | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| | | Actual | | | Weather Normalized | | | Actual | | | Weather Normalized | | | Actual | | | Weather Normalized | | | Actual | | | Weather Normalized | |
| Heating Oil - Base Company | | | 21 | % | | | 22 | % | | | 17 | % | | | 22 | % | | | 45 | % | | | 45 | % | | | 47 | % | | | 48 | % |
| Motor Fuels - Base Company | | | 78 | % | | | 77 | % | | | 82 | % | | | 77 | % | | | 53 | % | | | 53 | % | | | 51 | % | | | 51 | % |
| Propane and Other - Base Company | | | 1 | % | | | 1 | % | | | 1 | % | | | 1 | % | | | 2 | % | | | 2 | % | | | 2 | % | | | 1 | % |
| Total | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
Sales of petroleum products increased 4% in the three months ended June 30, 2011 compared to the same period in 2010 due primarily to acquisitions completed in 2011 and the third quarter of 2010. Additionally, weather was 43% colder for the three months ended June 30, 2011 in comparison to the same period in 2010 as measured by adjusted degree days.
Sales of petroleum products decreased 4% in the six months ended June 30, 2011 compared to the same period in 2010 due primarily to customer conservation in response to higher oil prices, partially offset by an increase in sales related to acquisitions.
Gross Profit
A breakdown of Griffith's gross profit by product and service line for the three and six months ended June 30, 2011 and 2010 illustrated below (Dollars in Thousands):
| | | Three Months Ended June 30, | |
| Product and Service Line | | 2011 | | | 2010 | |
| Heating oil - Base Company | | $ | 2,282 | | | | 25 | % | | $ | 1,631 | | | | 20 | % |
| Heating oil - Acquisitions | | | 28 | | | | - | % | | | - | | | | - | % |
| Motor fuels - Base Company | | | 2,805 | | | | 31 | % | | | 2,911 | | | | 36 | % |
| Motor fuels - Acquisitions | | | 243 | | | | 3 | % | | | - | | | | - | % |
| Other fuels - Base Company | | | 159 | | | | 2 | % | | | 142 | | | | 2 | % |
| Service and installations - Base Company | | | 3,233 | | | | 36 | % | | | 3,265 | | | | 40 | % |
| Service and installations - Acquisitions | | | 18 | | | | - | % | | | - | | | | - | % |
| Other - Base Company | | | 289 | | | | 3 | % | | | 180 | | | | 2 | % |
| Other - Acquisitions | | | (5 | ) | | | - | % | | | - | | | | - | % |
| Total | | $ | 9,052 | | | | 100 | % | | $ | 8,129 | | | | 100 | % |
| | | Six Months Ended June 30, | |
| Product and Service Line | | 2011 | | | 2010 | |
| Heating oil - Base Company | | $ | 15,496 | | | | 54 | % | | $ | 15,525 | | | | 54 | % |
| Heating oil - Acquisitions | | | 237 | | | | 1 | % | | | - | | | | - | % |
| Motor fuels - Base Company | | | 5,098 | | | | 18 | % | | | 5,254 | | | | 19 | % |
| Motor fuels - Acquisitions | | | 381 | | | | 1 | % | | | - | | | | - | % |
| Other fuels - Base Company | | | 875 | | | | 3 | % | | | 922 | | | | 3 | % |
| Service and installations - Base Company | | | 6,163 | | | | 21 | % | | | 6,234 | | | | 22 | % |
| Service and installations - Acquisitions | | | 40 | | | | - | % | | | - | | | | - | % |
| Other - Base Company | | | 580 | | | | 2 | % | | | 553 | | | | 2 | % |
| Total | | $ | 28,870 | | | | 100 | % | | $ | 28,488 | | | | 100 | % |
Revenues
Change in Griffith Revenues
| | | Three Months Ended | | | | | | Six Months Ended | | | | |
| | | June 30, | | | Increase / | | | June 30, | | | Increase / | |
| | | 2011 | | | 2010 | | | (Decrease) | | | 2011 | | | 2010 | | | (Decrease) | |
| Revenues | | | | | | | | | | | | | | | | | | |
Heating Oil(1) | | $ | 12,236 | | | $ | 7,127 | | | $ | 5,109 | | | $ | 68,760 | | | $ | 60,236 | | | $ | 8,524 | |
| Heating Oil - Acquisitions | | | 161 | | | | - | | | | 161 | | | | 1,364 | | | | - | | | | 1,364 | |
Motor Fuels(1) | | | 37,817 | | | | 29,464 | | | | 8,353 | | | | 68,853 | | | | 54,639 | | | | 14,214 | |
| Motor Fuels - Acquisitions | | | 3,121 | | | | - | | | | 3,121 | | | | 4,666 | | | | - | | | | 4,666 | |
Other(1) | | | 694 | | | | 587 | | | | 107 | | | | 3,018 | | | | 2,462 | | | | 556 | |
Service Revenues(1) | | | 4,785 | | | | 4,933 | | | | (148 | ) | | | 9,035 | | | | 9,241 | | | | (206 | ) |
| Service Revenues - Acquisitions | | | 21 | | | | - | | | | 21 | | | | 59 | | | | - | | | | 59 | |
| Total | | $ | 58,835 | | | $ | 42,111 | | | $ | 16,724 | | | $ | 155,755 | | | $ | 126,578 | | | $ | 29,177 | |
| (1) | These line items exclude the impact of acquisitions made by Griffith in 2011 and 2010 for the analysis which compares the three and six months ended June 30, 2011 to 2010. |
Revenues, net of the effect of weather hedging contracts increased in the three and six months ended June 30, 2011 compared to the same period in 2010, due primarily to an increase in wholesale prices partially offset by a decline in sales volume.
Operating Expenses
For the three months ended June 30, 2011, operating expenses increased $16.6 million, or 37%, from $44.3 million in 2010 to $60.9 million in 2011. The cost of petroleum products increased $15.9 million, or 49%, due to higher wholesale market prices.
Other operating expenses increased $0.7 million for the three months ended June 30, 2011 when compared to the same period in 2010 due primarily to increased insurance and bad debt expenses. The increase in other operating expenses was driven by favorable events in 2010 that did not recur in 2011 such as a payment on an insurance claim in 2010 relating to a 2009 incident and uncharacteristically low bad debt expense in 2010.
For the six months ended June 30, 2011, operating expenses increased $28.9 million, or 24%, from $121.4 million in 2010 to $150.3 million in 2011. The cost of petroleum products increased $28.9 million, or 30%, due to higher wholesale market prices.
There was minimal change in other operating expenses for the six months ended June 30, 2011 when compared to the same period in 2010.
Other Businesses and Investments
Revenues and Operating Expenses
Revenue and operating expenses of other businesses and investments include the results of operations of CH-Greentree and CH-Auburn and are included in the Consolidated Financial Statements of CH Energy Group. Results remained constant for these CHEC subsidiaries during the three and six months ended June 30, 2011 as compared to the same periods in the prior year.
Revenues and operating expenses associated with Lyonsdale and CH Shirley Wind are included in the discontinued operations section in the Consolidated Financial Statements of CH Energy Group. Revenues were essentially unchanged for the three months ended June 30, 2011 and increased $0.2 million in six months ended June 30, 2011 compared to the same periods in 2010. Operating expenses decreased $2.2 million and $1.9 million for the three and six months ended June 30, 2011, respectively. The primary drivers of these results included Lyonsdale’s lower plant capacity factor, unplanned outages in the months prior to the sale of the plant and the sale which was effective on May 1, 2011. Additionally, CH Shirley Wind became operational in early 2011.
Other Income and Interest Charges
Other income and deductions and interest charges for the balance of CH Energy Group, primarily the holding company and CHEC’s investments in partnerships and other investments (other than Griffith) for the three and six months ended June 30, 2011 increased by $0.7 and $0.8 million compared to the same periods in 2010. The increase in other income and deductions is primarily the result of a decrease in business development costs for the three and six months ended June 30, 2011 in addition to the combined benefit of the activity related to the divestiture of the renewable energy assets and higher interest income. Additional increases in both periods in 2011 compared to prior periods is due to the losses incurred in 2010 related to Cornhusker operations.
CH Energy Group – Income Taxes
Income taxes on income from continuing operations for CH Energy Group decreased $1.6 million and $5.0 million for the three and six months ended June 30, 2011, compared to the same periods in 2010, primarily due to a decrease in pre-tax book income and the impact on the effective rate due to a 2011 adjustment to NYS excess deferred taxes.
CAPITAL RESOURCES AND LIQUIDITY
CH Energy Group's book value per share of its Common Stock decreased from $34.03 at December 31, 2010, to $34.02 at June 30, 2011. Common equity comprised 49.4% of total capital (including short-term debt) at June 30, 2011, a decrease from 50.6% at December 31, 2010. The changes in book value per share of common stock and common equity ratio reflect the net impact of retained earnings and share repurchases during the six months ended June 30, 2011. Book value per share at June 30, 2010 was $34.40 and the common equity ratio was 51.5%.
Cash Flow Summary - CH Energy Group and Central Hudson
Changes in CH Energy Group’s and Central Hudson's cash and cash equivalents resulting from operating, investing, and financing activities are summarized in the following chart (In Millions):
| | CH Energy Group | | | Central Hudson | |
| | Six Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2011 | | 2010 | | | 2011 | | | 2010 | |
| Net Cash Provided By/(Used In): | | | | | | | | |
| Operating Activities | | $ | 75.5 | | | $ | 22.3 | | | $ | 82.1 | | | $ | 27.6 | |
| Investing Activities | | | (36.4 | ) | | | (37.3 | ) | | | (38.0 | ) | | | (34.2 | ) |
| Financing Activities | | | (24.7 | ) | | | (14.7 | ) | | | (22.7 | ) | | | 2.4 | |
| Cash Included in Current Assets Held for Sale | | | (1.6 | ) | | | - | | | | - | | | | - | |
| Net change for the period | | | 12.8 | | | | (29.7 | ) | | | 21.4 | | | | (4.2 | ) |
| Balance at beginning of period | | | 29.4 | | | | 73.4 | | | | 9.6 | | | | 4.8 | |
| Balance at end of period | | $ | 42.2 | | | $ | 43.7 | | | $ | 31.0 | | | $ | 0.6 | |
Central Hudson’s cash and cash equivalents increased by $31.0 million and $0.6 million for the six months ended June 30, 2011 and 2010, respectively. CH Energy Group’s cash and cash equivalents increased $42.2 million and $43.7 million for the six months ended June 30, 2011 and 2010, respectively.
Central Hudson’s net cash provided by operations was $82.1 million and $27.6 million for the six months ended June 30, 2011 and 2010, respectively. Cash provided by sales exceeded the period’s expenses and working capital needs in the first half of 2011. In 2010, excluding the contributions to Central Hudson’s pension and OPEB plans which totaled $35.4 million for the six months ended June 30, 2010; cash provided by sales also exceeded the period’s expenses and working capital needs. Central Hudson contributed $33.5 million to its pension and OPEB plans during 2011. Recovery of previously deferred electric and natural gas costs and lower wholesale prices during the six months ended June 30, 2011, contributed to the increase in cash provided by operating activities. In addition, net cash provided by operating activities at CH Energy Group was negatively impacted during the six months ended June 30, 2011 primarily due to an increase in Griffith's working capital.
Central Hudson’s net cash used in investing activities of $38.0 million and $34.2 million in the six months ended June 30, 2011 and 2010, respectively, was primarily for investments in Central Hudson’s electric and natural gas transmission and distribution systems. Proceeds from the sale of Lyonsdale reduced by additional investments in Shirley Wind and Griffith as well as acquisitions made by Griffith in the first quarter of 2011 impacted net cash used in investing activities of CH Energy Group for the six months ended June 30, 2011.
Central Hudson’s net cash (used in) provided by financing activities was ($22.7) million and $2.4 million, respectively, for the six months ended June 30, 2011 and 2010. During 2011, Central Hudson paid dividends of $22.0 million to parent CH Energy Group. No dividends were paid to parent during the six months ended June 30, 2010 and CH Energy Group’s borrowings for the six months ended June 30, 2011 were used primarily to supplement working capital. In addition to dividends paid on common stock in both periods, CH Energy Group repurchased and returned to treasury shares of $18.6 million in the six months ended June 30, 2011.
Capitalization – Issuance of Treasury Stock
Effective July 1, 2011, employer matching contributions to an eligible employee’s Central Hudson Savings Incentive Plan (“SIP”) will be paid in either cash or in CH Energy Stock. Central Hudson expects to make employer matching contributions to the SIP with the issuance of treasury shares.
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 $32.0 million and $31.4 million for the six months ended June 30, 2011 and 2010, respectively. No additional funding of the plan is expected for the remainder of 2011.
During the six months ended June 30, 2011 and 2010 employer contributions for OPEB plans were $1.2 million and $3.8 million, respectively. 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. No additional funding of the plan is expected for the remainder of 2011.
During the first quarter of 2010, Management began a transition 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.
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 use of treasury shares for several restricted share grants, for satisfaction of the Company stock match under Central Hudson’s Savings Incentive Plan and performance share awards earned, no equity issuance is currently planned for 2011.
At June 30, 2011, 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. If these lenders are unable to fulfill their commitment under these facilities, funding may not be available as needed.
Outstanding Balances
(In Thousands)
| | | June 30, | | | December 31, | | | June 30, | |
| | | 2011 | | | 2010 | | | 2010 | |
| CH Energy Group Holding Company: | | | | | | | | | |
| Current maturities of long-term debt at Holding Company | | $ | 973 | | | $ | 941 | | | $ | - | |
| $150 million revolving credit facility at Holding Company | | | 12,000 | | | | - | | | | - | |
| | | | | | | | | | | | | |
| Central Hudson: | | | | | | | | | | | | |
| Current maturities of long-term debt | | | 36,000 | | | | - | | | | 24,000 | |
| $125 million revolving credit facility | | | - | | | | - | | | | 3,000 | |
| | | | | | | | | | | | | |
| CH Energy Group Consolidated: | | | | | | | | | | | | |
| Current maturities of long-term debt at Holding Company and Central Hudson | | | 36,973 | | | | 941 | | | | 24,000 | |
| $150 million revolving credit facility at Holding Company, $125 million at Central Hudson | | | 12,000 | | | | - | | | | 3,000 | |
Central Hudson’s current senior unsecured debt rating/outlook is ‘A’/stable by both Standard & Poor’s Rating Services (“Standard & Poor’s”) and Fitch Ratings and ‘A3’/stable by Moody’s Investors Service (“Moody’s”)1.
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.
NYSERDA
Central Hudson’s Series B NYSERDA Bonds total $33.7 million at June 30, 2011. 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, 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 and will expire on April 1, 2012. 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.
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.
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.
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
Petition of Central Hudson Gas & Electric Corporation for Commission Approval of a Plan for Deferred Accounting for Future Recovery with Carrying Charges of Three Items and Funding These and Certain Other Deferrals through Balance Sheet Offsets
(Case 10-M-0473)
Background: On September 23, 2010, Central Hudson filed a petition with the PSC to defer for future recovery with carrying charges $19.4 million incremental electric storm restoration expense, $2.6 million incremental electric bad debt write-off expense, $1.9 million incremental electric property tax expense and $0.7 million incremental gas property tax expense above the respective rate allowances during the twelve months ended June 30, 2010. In December 2010, Central Hudson provided an update and amended the incremental storm expense deferral request to $19.7 million. The petition also requested approval for recovery via offsets of the foregoing against significant tax refunds resulting from a change in the way Central Hudson treats certain capital expenditures for tax purposes. Additional offsets against other deferred items, notably including MGP site investigation and remediation costs were also included in the petition given the size of the tax refunds. On April 14, 2011, the Commission issued an Order authorizing deferral of $18.8 million (denial of $0.8 million) of the incremental electric storm restoration expense and the $2.6 million of incremental bad debt expense and denying deferral of the Company’s $2.6 million of incremental electric and gas property tax expense. The PSC also approved the ratemaking treatment proposed by the Company in its filing and the offsets have been recorded as of March 31, 2011. On May 13, 2011, Central Hudson filed a Petition for Clarification and Rehearing on the PSC’s April 14, 2011 Order. The petition seeks clarification concerning recovery of the costs to achieve and rehearing for reconsideration and recovery of a portion of certain costs denied by the Commission for deferral accounting treatment proposed by the Company in its September 23, 2010 petition filing related to the incremental electric storm restoration expense. Central Hudson cannot predict the final outcome of this proceeding.
Management Audit
(Case 09-M-0764 – Comprehensive Management Audit of Central Hudson Gas & Electric Business)
Background: 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. The PSC is allowed to audit New York utilities every five years. Audit work officially commenced on March 24, 2010. In October 2010, the audit scope was expanded to examine affiliate transactions and accounting. 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. Central Hudson expects DPS Staff to initiate discovery on its implementation plan after their review. Progress update filings with the Commission are required every four months. 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. In addition to all the NYS gas and electric utilities and DPS Staff, Multiple Intervenors, the NYS Department of Environmental Conservation and the Environmental Energy Alliance are parties to the case. 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. In keeping with the Commission’s interest in having this proceeding move forward expeditiously and requiring that recommendations on these issues be presented for its determination before the end of the year, the ALJ has established a case procedure and schedule, adopting a comment oriented proceeding:
| · | Staff Discovery: | Ongoing |
| · | Staff Policy Whitepaper | June 29 |
| · | Technical Conference | July 12 |
| · | Initial Comments | August 4 |
| · | Reply Comments | August 24 |
In addition to providing the SIR case history, an overview of Federal and NYS regulatory context, MGP sites’ histories, current Commission SIR rate treatment and a discussion of utility comments, Staff’s Whitepaper reports that there does not appear to be any deficiency in utility cost control practices, with adequate controls in place. Staff also finds that rate recovery for prudent and verifiable legally imposed clean up costs is a reasonable approach and warns that sharing or less than full recovery will have cost capital impacts. No prediction can be made regarding the outcome of the matter at this time.
During the second quarter of 2011, there has been no significant activity related to the following proceedings:
| · | Renewable Portfolio Standard |
| · | The American Recovery and Reinvestment Act of 2009 |
| · | Energy Efficiency Programs and System Benefit Charge Collections |
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.
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, are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements, due to several important factors, including those identified from time-to-time in the forward-looking statements. Those factors include, but are not limited to: deviations from normal seasonal weather and storm activity; fuel prices; energy supply and demand; potential future acquisitions; the ability of the Company to divest non-core assets at acceptable prices within expected time frames, 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.
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk
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.
ITEM 4 – Controls and Procedures
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.
PART II – OTHER INFORMATION
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.
For a discussion identifying 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.
ITEM 2 - Unregistered Sales of Equity Securities and Use of Proceeds The following table provides a summary of shares repurchased by CH Energy Group for the quarter ended June 30, 2011:
| | Total Number of Shares Purchased(1) | | Average Price Paid per Share(2) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(3) | | Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs(3) |
| April 1-30, 2011 | 78,394 | | $ | 51.26 | | 78,394 | | 1,719,261 |
| May 1-31, 2011 | 113,920 | | $ | 53.27 | | 113,920 | | 1,605,341 |
| June 1-30, 2011 | - | | $ | - | | - | | 1,605,341 |
| Total | 192,314 | | $ | 52.45 | | 192,314 | | |
| (1) | Includes the repurchase of shares through the Company's authorized stock repurchase program as well as shares surrendered to CH Energy Group in satisfaction of tax withholdings on the vesting of restricted shares and stock options. |
| (2) | Closing price of a share of CH Energy Group's common stock on the date the stock was surrendered to CH Energy Group (in the case of shares surrendered in satisfaction of tax withholdings) and the actual price paid (in the case of market purchases). |
| (3) | On July 31, 2007, the Board of Directors authorized the repurchase of up to 2,000,000 shares or approximately 13% of CH Energy Group's outstanding common stock on that date, from time to time, over the five year period ending July 31, 2012. |
Incorporated herein by reference to the Exhibit Index for this Quarterly Report on Form 10-Q, which is located immediately after the signature pages to this report.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.
Following is the list of Exhibits, as required by Item 601 of Regulation S-K, filed as part of this Quarterly Report on Form 10-Q:
