FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended................................September 30, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from.......................to.........................
Commission Registrant, State of Incorporation IRS Employer
File Number Address and Telephone Number Identification No.
- ----------- ---------------------------- ------------------
0-30512 CH Energy Group, Inc. 14-1804460
(Incorporated in New York)
284 South Avenue
Poughkeepsie, New York 12601-4879
(845) 452-2000
1-3268 Central Hudson Gas & Electric Corporation 14-0555980
(Incorporated in New York)
284 South Avenue
Poughkeepsie, New York 12601-4879
(845) 452-2000
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether CH Energy Group, Inc. is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act):
Yes |X| No |_|
Indicate by check mark whether Central Hudson Gas & Electric Corporation
is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act):
Yes |_| No |X|
As of the close of business on November 3, 2004, (i) CH Energy Group, Inc.
had outstanding 15,762,000 shares of Common Stock ($0.10 per share par value)
and (ii) all of the outstanding 16,862,087 shares of Common Stock ($5 per share
par value) of Central Hudson Gas & Electric Corporation were held by CH Energy
Group, Inc.
CENTRAL HUDSON GAS & ELECTRIC CORPORATION MEETS THE CONDITIONS SET FORTH
IN GENERAL INSTRUCTIONS (H)(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING
THIS FORM WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION
(H)(2).
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2004
INDEX
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------ ----
Item 1 - Consolidated (Unaudited) Financial Statements
CH ENERGY GROUP, INC.
Consolidated Statement of Income -
Three Months Ended September 30, 2004, and 2003 1
Consolidated Statement of Income -
Nine Months Ended September 30, 2004, and 2003 2
Consolidated Statement of Comprehensive Income
Three Months Ended September 30, 2004, and 2003 3
Consolidated Statement of Comprehensive Income
Nine Months Ended September 30, 2004, and 2003 4
Consolidated Balance Sheet - September 30, 2004,
December 31, 2003, and September 30, 2003 5
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 2004, and 2003 7
CENTRAL HUDSON GAS & ELECTRIC CORPORATION
Consolidated Statement of Income -
Three Months Ended September 30, 2004, and 2003 8
Consolidated Statement of Income -
Nine Months Ended September 30, 2004, and 2003 9
Consolidated Balance Sheet - September 30, 2004,
December 31, 2003, and September 30, 2003 10
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 2004, and 2003 12
INDEX
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------ ----
Item 1 - Consolidated (Unaudited) Financial Statements (Cont'd)
Notes to Consolidated Financial Statements 13
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 30
Item 3 - Quantitative and Qualitative Disclosures
about Market Risk 46
Item 4 - Controls and Procedures 47
PART II - OTHER INFORMATION
- ---------------------------
Item 1 - Legal Proceedings 48
Item 5 - Other Information 48
Item 6 - Exhibits 49
Signatures 50
Exhibit Index 51
Certifications 52
----------
Filing Format
This Quarterly Report on Form 10-Q is a combined quarterly report being
filed by two different registrants: CH Energy Group, Inc. ("Energy Group") and
Central Hudson Gas & Electric Corporation ("Central Hudson"), a wholly-owned
subsidiary of Energy Group. Except where the content clearly indicates
otherwise, any reference in this report to Energy Group includes all
subsidiaries of Energy Group, including Central Hudson. Central Hudson makes no
representation as to the information contained in this report in relation to
Energy Group and its subsidiaries other than Central Hudson.
PART I - FINANCIAL INFORMATION
Item I - Consolidated Financial Statements
CH ENERGY GROUP, INC
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
For the Three Months Ended September 30,
2004 2003
--------- ---------
(Thousands of Dollars)
Operating Revenues
Electric ..................................................................... $ 113,122 $ 124,181
Natural gas .................................................................. 11,426 11,104
Competitive business subsidiaries ............................................ 37,324 34,542
--------- ---------
Total Operating Revenues ................................................. 161,872 169,827
--------- ---------
Operating Expenses
Operation:
Purchased electricity and fuel used in electric generation ................. 66,947 73,792
Purchased natural gas ...................................................... 4,571 6,892
Purchased petroleum ........................................................ 28,056 21,315
Other expenses of operation - regulated activities ......................... 24,658 29,263
Other expenses of operation - competitive business subsidiaries ............ 12,027 13,106
Depreciation and amortization ................................................ 8,627 8,346
Taxes, other than income tax ................................................. 7,644 8,330
--------- ---------
Total Operating Expenses ................................................. 152,530 161,044
--------- ---------
Operating Income ............................................................... 9,342 8,783
--------- ---------
Other Income
Allowance for equity funds used during construction .......................... 92 115
Interest on regulatory assets and investment income .......................... 1,987 3,193
Other - net .................................................................. 1,339 1,902
--------- ---------
Total Other Income ....................................................... 3,418 5,210
--------- ---------
Interest and Other Charges
Interest on mortgage bonds ................................................... -- 68
Interest on other long-term debt ............................................. 2,696 2,599
Interest on regulatory liabilities and other interest ........................ 1,041 3,223
Allowance for borrowed funds used during construction ........................ (61) (99)
Cumulative Preferred Stock Dividends of Central Hudson ....................... 242 242
--------- ---------
Total Interest and Other Charges ......................................... 3,918 6,033
--------- ---------
Income Before Income Taxes ..................................................... 8,842 7,960
Income Taxes ................................................................... 4,391 3,255
--------- ---------
Net Income ..................................................................... 4,451 4,705
Dividends Declared on Common Stock ............................................. 8,511 8,511
--------- ---------
Balance Retained (Deficit Accumulated) in the Business ......................... ($ 4,060) ($ 3,806)
========= =========
Common Stock:
Average Shares Outstanding (000) - Basic ................................... 15,762 15,767
- Diluted ................................. 15,770 15,771
Earnings Per Share - Basic ................................................. $ 0.28 $ 0.30
- Diluted ............................................... $ 0.28 $ 0.29
Dividends Declared Per Share ............................................... $ 0.54 $ 0.54
See Notes to Consolidated Financial Statements
-1-
CH ENERGY GROUP, INC
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
For the Nine Months Ended September 30,
2004 2003
--------- ---------
(Thousands of Dollars)
Operating Revenues
Electric ................................................................... $ 329,833 $ 353,396
Natural gas ................................................................ 96,220 96,301
Competitive business subsidiaries .......................................... 164,166 168,460
--------- ---------
Total Operating Revenues ............................................... 590,219 618,157
--------- ---------
Operating Expenses
Operation:
Purchased electricity and fuel used in electric generation ............... 194,416 211,680
Purchased natural gas .................................................... 60,121 72,887
Purchased petroleum ...................................................... 115,852 106,458
Other expenses of operation - regulated activities ....................... 72,418 80,510
Other expenses of operation - competitive business subsidiaries .......... 39,598 41,720
Depreciation and amortization .............................................. 25,842 24,943
Taxes, other than income tax ............................................... 22,536 23,127
--------- ---------
Total Operating Expenses ............................................... 530,783 561,325
--------- ---------
Operating Income ............................................................. 59,436 56,832
--------- ---------
Other Income
Allowance for equity funds used during construction ........................ 254 357
Interest on regulatory assets and investment income ........................ 7,824 10,654
Other - net ................................................................ 4,955 5,048
--------- ---------
Total Other Income ..................................................... 13,033 16,059
--------- ---------
Interest and Other Charges
Interest on mortgage bonds ................................................. -- 570
Interest on other long-term debt ........................................... 8,436 7,850
Interest on regulatory liabilities and other interest ...................... 5,413 8,673
Allowance for borrowed funds used during construction ...................... (169) (309)
Cumulative Preferred Stock Dividends of Central Hudson ..................... 727 1,145
--------- ---------
Total Interest and Other Charges ....................................... 14,407 17,929
--------- ---------
Income Before Income Taxes ................................................... 58,062 54,962
Income Taxes ................................................................. 25,126 22,439
--------- ---------
Net Income ................................................................... 32,936 32,523
Dividends Declared on Common Stock ........................................... 25,534 25,582
--------- ---------
Balance Retained in the Business ............................................. $ 7,402 $ 6,941
========= =========
Common Stock:
Average Shares Outstanding (000) - Basic ................................. 15,762 15,854
- Diluted ............................... 15,771 15,857
Earnings Per Share - Basic ............................................... $ 2.09 $ 2.05
- Diluted ............................................. $ 2.08 $ 2.05
Dividends Declared Per Share ............................................. $ 1.62 $ 1.62
See Notes to Consolidated Financial Statements
-2-
CH ENERGY GROUP, INC
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
For the Three Months Ended September 30,
2004 2003
------ -------
(Thousands of Dollars)
Net Income .................................................................... $4,451 $ 4,705
Other comprehensive income:
Net unrealized gains (losses) net of tax and net income realization:
FAS 133 Designated Cash Flow Hedges, net of tax of $(38) and $(2) ........ 57 2
Investments, net of tax of $(79) and $484 ................................ 119 (810)
------ -------
Other comprehensive income (loss) ............................................. 176 (808)
------ -------
Comprehensive Income .......................................................... $4,627 $ 3,897
====== =======
See Notes to Consolidated Financial Statements
-3-
CH ENERGY GROUP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
For the Nine Months Ended September 30,
2004 2003
-------- --------
(Thousands of Dollars)
Net Income ..................................................................... $ 32,936 $ 32,523
Other comprehensive income:
Net unrealized gains (losses) net of tax and net income realization:
FAS 133 Designated Cash Flow Hedges, net of tax of $20 and $10 ........... (31) (14)
Investments, net of tax of $33 and $(884) ................................ (50) 1,471
-------- --------
Other comprehensive income (loss) .............................................. (81) 1,457
-------- --------
Comprehensive Income ........................................................... $ 32,855 $ 33,980
======== ========
See Notes to Consolidated Financial Statements
-4-
CH ENERGY GROUP, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
September 30, December 31, September 30,
ASSETS 2004 2003 2003
------------- ------------ -------------
(Thousands of Dollars)
Utility Plant
Electric .................................................. $ 672,014 $ 656,192 $ 624,391
Natural gas ............................................... 208,866 199,221 193,778
Common .................................................... 106,258 104,532 105,450
---------- ---------- ----------
987,138 959,945 923,619
Less: Accumulated depreciation ........................... 315,366 309,208 309,439
---------- ---------- ----------
671,772 650,737 614,180
Construction work in progress ............................. 70,415 56,764 84,430
---------- ---------- ----------
Net Utility Plant ................................. 742,187 707,501 698,610
---------- ---------- ----------
Other Property and Plant, net .................................... 22,830 21,589 18,350
---------- ---------- ----------
Current Assets
Cash and cash equivalents ................................. 130,895 125,834 129,240
Accounts receivable -
net of allowance for doubtful accounts of
$5.1 million, $4.6 million, and $3.8 million,
respectively ........................................ 50,976 61,223 65,200
Accrued unbilled utility revenues ......................... 5,496 7,618 4,952
Other receivables ......................................... 3,344 12,216 2,375
Fuel and materials and supplies - at average cost ......... 25,116 19,847 23,094
Fair value of derivative instruments ...................... 3,081 869 14
Special deposits and prepayments .......................... 18,753 23,315 34,570
---------- ---------- ----------
Total Current Assets ............................. 237,661 250,922 259,445
---------- ---------- ----------
Deferred Charges and Other Assets
Regulatory assets - pension plan .......................... 86,559 124,210 118,732
Intangible asset - pension plan ........................... 22,291 24,447 24,447
Goodwill .................................................. 50,462 50,462 50,462
Other intangible assets - net ............................. 29,464 31,518 32,319
Regulatory assets ......................................... 43,207 67,474 63,921
Unamortized debt expense .................................. 3,770 3,901 3,583
Other ..................................................... 19,220 18,468 19,555
---------- ---------- ----------
Total Deferred Charges and Other Assets .......... 254,973 320,480 313,019
---------- ---------- ----------
Total Assets ........................... $1,257,651 $1,300,492 $1,289,424
========== ========== ==========
See Notes to Consolidated Financial Statements
-5-
CH ENERGY GROUP, INC
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
September 30, December 31, September 30,
CAPITALIZATION AND LIABILITIES 2004 2003 2003
------------- ------------ -------------
(Thousands of Dollars)
Capitalization
Common Stock Equity:
Common stock, 30,000,000 shares authorized;
16,862,087 shares issued ($0.10 par value) .............. $ 1,686 $ 1,686 $ 1,686
Paid-in capital ................................................ 351,230 351,230 351,230
Retained earnings .............................................. 186,796 179,395 176,445
Treasury stock:
(1,100,087 shares at September 30, 2004,
December 31, 2003, and September 30, 2003) ................. (46,252) (46,252) (46,252)
Accumulated comprehensive income (loss) ........................ (388) (307) (275)
Capital stock expense .......................................... (328) (328) (641)
----------- ----------- -----------
Total Common Stock Equity .............................. 492,744 485,424 482,193
----------- ----------- -----------
Cumulative Preferred Stock of a Consolidated Subsidiary
Not subject to mandatory redemption ....................... 21,030 21,030 21,030
----------- ----------- -----------
Total Cumulative Preferred Stock ....................... 21,030 21,030 21,030
----------- ----------- -----------
Long-term Debt ................................................. 285,880 278,880 293,877
----------- ----------- -----------
Total Capitalization ................................... 799,654 785,334 797,100
----------- ----------- -----------
Current Liabilities
Current maturities of long-term debt ........................... -- 15,000 12,500
Notes payable .................................................. 37,000 16,000 20,000
Accounts payable ............................................... 35,732 40,602 31,919
Accrued interest ............................................... 2,410 4,274 2,971
Dividends payable .............................................. 8,754 8,512 8,754
Accrued vacation and payroll ................................... 5,540 5,289 3,904
Customer deposits .............................................. 6,267 5,813 5,539
Accrued taxes payable .......................................... -- -- 3,849
Deferred revenues .............................................. 9,650 8,197 9,262
Fair value of derivative instruments ........................... -- -- 2,659
Other .......................................................... 10,877 16,333 17,221
----------- ----------- -----------
Total Current Liabilities .............................. 116,230 120,020 118,578
----------- ----------- -----------
Deferred Credits and Other Liabilities
Regulatory liabilities ......................................... 161,081 228,058 240,480
Operating reserves ............................................. 5,930 5,043 5,367
Deferred gain - sale of major generating assets ................ 2,472 9,887 12,359
Accrued environmental remediation costs ........................ 19,500 19,500 19,305
Accrued other post-employment benefit costs .................... 13,930 10,561 7,747
Accrued pension costs .......................................... 13,313 9,775 6,621
Other .......................................................... 20,622 16,266 11,996
----------- ----------- -----------
Total Deferred Credits and Other Liabilities ........... 236,848 299,090 303,875
----------- ----------- -----------
Accumulated Deferred Income Tax (Net) .................................. 104,919 96,048 69,871
----------- ----------- -----------
Total Capitalization and Liabilities .......... $ 1,257,651 $ 1,300,492 $ 1,289,424
=========== =========== ===========
See Notes to Consolidated Financial Statements
-6-
CH ENERGY GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended
September 30
2004 2003
--------- ---------
Operating Activities: (Thousands of Dollars)
Net Income ....................................................................... $ 32,936 $ 32,523
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization ........................................... 25,842 24,943
Deferred income taxes - net ............................................. 16,569 14,098
Provision for uncollectibles ............................................ 3,594 2,892
Accrued/deferred pension costs .......................................... (13,792) (14,084)
Amortization of fossil plant incentive .................................. (7,415) (7,415)
Other - net ............................................................. 2,766 3,472
Changes in operating assets and liabilities, net:
Accounts receivable, unbilled revenues and other receivables ............ 17,647 (4,489)
Fuel, materials and supplies ............................................ (5,269) (7,061)
Special deposits and prepayments ........................................ 1,575 (3,193)
Contribution - prefunded pensions costs ................................. -- (10,000)
Accounts payable ........................................................ (4,870) (13,898)
Accrued taxes and interest .............................................. 1,320 14,615
Deferred natural gas and electric costs ................................. 2,608 14,372
Customer benefit and carrying charge - net .............................. (14,604) (29,272)
Proceeds from sale of emissions allowances .............................. 13,576 --
Other - net ............................................................. (4,902) (1,504)
--------- ---------
Net Cash Provided by Operating Activities ..................................... 67,581 15,999
--------- ---------
Investing Activities:
Purchase of investments ....................................................... -- (22,221)
Proceeds from sale of temporary investments ................................... -- 111,539
Additions to utility plant and other property and plant ....................... (48,396) (41,297)
Acquisitions made by competitive business subsidiary .......................... -- (7,697)
Other - net ................................................................... (1,446) (734)
--------- ---------
Net Cash (Used in) Provided by Investing Activities ........................... (49,842) 39,590
--------- ---------
Financing Activities:
Proceeds from issuance of long-term debt ...................................... 7,000 24,000
Retirement of long-term debt .................................................. (15,000) (15,000)
Net borrowings of short-term debt ............................................. 21,000 20,000
Repurchase of treasury stock .................................................. -- (13,135)
Dividends paid on common stock ................................................ (25,534) (25,582)
Issuance and redemption costs ................................................. (144) (155)
--------- ---------
Net Cash Used in Financing Activities ......................................... (12,678) (9,872)
--------- ---------
Net Change in Cash and Cash Equivalents .............................................. 5,061 45,717
Cash and Cash Equivalents - Beginning of Year ........................................ 125,834 83,523
--------- ---------
Cash and Cash Equivalents - End of Period ............................................ $ 130,895 $ 129,240
========= =========
Supplemental Disclosure of Cash Flow Information
Interest paid ................................................................. $ 12,126 $ 12,249
Federal and State income tax paid ............................................. $ 11,133 $ 383
As authorized in the Joint Proposal Order $83 million of deferred electric
pension and OPEB costs, including carrying charges, were offset against the
Customer Benefit Fund with no impact to cash flow for the nine months ended
September 30, 2004.
See Notes to Consolidated Financial Statements
-7-
CENTRAL HUDSON GAS & ELECTRIC CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
For the Three Months Ended September 30,
2004 2003
--------- ---------
(Thousands of Dollars)
Operating Revenues
Electric ............................................................... $ 111,665 $ 122,451
Natural gas ............................................................ 10,836 11,075
--------- ---------
Total - own territory ................................................ 122,501 133,526
Electric sales to other utilities ...................................... 1,457 1,730
Natural gas sales to other utilities ................................... 590 29
--------- ---------
Total Operating Revenues ........................................... 124,548 135,285
--------- ---------
Operating Expenses
Operation:
Purchased electricity and fuel used in electric generation ........... 66,947 73,792
Purchased natural gas ................................................ 4,571 4,292
Other expenses of operation .......................................... 24,658 29,262
Depreciation and amortization .......................................... 7,064 6,711
Taxes, other than income tax ........................................... 7,567 8,256
--------- ---------
Total Operating Expenses ........................................... 110,807 122,313
--------- ---------
Operating Income ......................................................... 13,741 12,972
--------- ---------
Other Income
Allowance for equity funds used during construction .................... 92 115
Interest on regulatory assets and other interest income ................ 1,671 2,508
Other - net ............................................................ 1,921 1,793
--------- ---------
Total Other Income ................................................. 3,684 4,416
--------- ---------
Interest Charges
Interest on mortgage bonds ............................................. -- 68
Interest on other long-term debt ....................................... 2,696 2,599
Interest on regulatory liabilities and other interest .................. 1,065 3,223
Allowance for borrowed funds used during construction .................. (61) (99)
--------- ---------
Total Interest Charges ............................................. 3,700 5,791
--------- ---------
Income Before Income Taxes ............................................... 13,725 11,597
Income Taxes ............................................................. 6,158 4,671
--------- ---------
Net Income ............................................................... 7,567 6,926
Dividends Declared on Cumulative Preferred Stock ......................... 242 242
--------- ---------
Income Available for Common Stock ........................................ $ 7,325 $ 6,684
========= =========
See Notes to Consolidated Financial Statements
-8-
CENTRAL HUDSON GAS & ELECTRIC CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
For the Nine Months Ended September 30,
2004 2003
--------- ---------
(Thousands of Dollars)
Operating Revenues
Electric .............................................................. $ 325,557 $ 348,784
Natural gas ........................................................... 95,101 96,037
--------- ---------
Total - own territory ............................................... 420,658 444,821
Electric sales to other utilities ..................................... 4,275 4,612
Natural gas sales to other utilities .................................. 1,119 264
--------- ---------
Total Operating Revenues .......................................... 426,052 449,697
--------- ---------
Operating Expenses
Operation:
Purchased electricity and fuel used in electric generation .......... 194,417 211,680
Purchased natural gas ............................................... 60,121 61,505
Other expenses of operation ......................................... 72,418 80,511
Depreciation and amortization ......................................... 21,191 20,132
Taxes, other than income tax .......................................... 22,348 22,968
--------- ---------
Total Operating Expenses .......................................... 370,495 396,796
--------- ---------
Operating Income ........................................................ 55,557 52,901
--------- ---------
Other Income
Allowance for equity funds used during construction ................... 254 357
Interest on regulatory assets and other interest income ............... 7,025 7,383
Other - net ........................................................... 5,356 5,553
--------- ---------
Total Other Income ................................................ 12,635 13,293
--------- ---------
Interest Charges
Interest on mortgage bonds ............................................ -- 570
Interest on other long-term debt ...................................... 8,436 7,850
Interest on regulatory liabilities and other interest ................. 5,489 8,673
Allowance for borrowed funds used during construction ................. (169) (309)
--------- ---------
Total Interest Charges ............................................ 13,756 16,784
--------- ---------
Income Before Taxes ..................................................... 54,436 49,410
Income Taxes ............................................................ 23,419 20,133
--------- ---------
Net Income .............................................................. 31,017 29,277
Dividends Declared on Cumulative Preferred Stock ........................ 727 1,145
--------- ---------
Income Available for Common Stock ....................................... $ 30,290 $ 28,132
========= =========
See Notes to Consolidated Financial Statements
-9-
CENTRAL HUDSON GAS & ELECTRIC CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
September 30, December 31, September 30,
ASSETS 2004 2003 2003
------------- ------------ -------------
(Thousands of Dollars)
Utility Plant
Electric ........................................................ $672,014 $ 656,192 $ 624,391
Natural Gas ..................................................... 208,866 199,221 193,778
Common .......................................................... 106,258 104,532 105,450
-------- ---------- ----------
987,138 959,945 923,619
Less: Accumulated depreciation .................................. 315,366 309,208 309,439
-------- ---------- ----------
671,772 650,737 614,180
Construction work in progress ................................... 70,415 56,764 84,430
-------- ---------- ----------
Net Utility Plant ....................................... 742,187 707,501 698,610
-------- ---------- ----------
Other Property and Plant, net .......................................... 963 968 968
-------- ---------- ----------
Current Assets
Cash and cash equivalents ....................................... 6,147 12,720 17,008
Accounts receivable -
net of allowance for doubtful accounts of $3.8 million,
$3.0 million, and $2.2 million, respectively .............. 34,327 37,487 42,270
Accrued unbilled utility revenues ............................... 5,496 7,618 4,952
Other receivables ............................................... 1,268 9,566 2,737
Fuel and materials and supplies - at average cost ............... 20,412 16,158 19,187
Fair value of derivative instruments ............................ 2,986 722 --
Special deposits and prepayments ................................ 17,720 22,503 31,188
-------- ---------- ----------
Total Current Assets ................................... 88,356 106,774 117,342
-------- ---------- ----------
Deferred Charges and Other Assets
Regulatory assets - pension plan ................................ 86,559 124,210 118,732
Intangible asset - pension plan ................................. 22,291 24,447 24,447
Regulatory assets ............................................... 43,207 67,474 63,921
Unamortized debt expense ........................................ 3,770 3,901 3,583
Other ........................................................... 10,587 8,100 9,489
-------- ---------- ----------
Total Deferred Charges and Other Assets ................ 166,414 228,132 220,172
-------- ---------- ----------
Total Assets ................................. $997,920 $1,043,375 $1,037,092
======== ========== ==========
See Notes to Consolidated Financial Statements
-10-
CENTRAL HUDSON GAS & ELECTRIC CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
September 30, December 31, September 30,
CAPITALIZATION AND LIABILITIES 2004 2003 2003
------------- ------------ -------------
(Thousands of Dollars)
Capitalization
Common Stock Equity:
Common stock, 30,000,000 shares authorized;
16,862,087 shares issued ($5 par value) ................ $ 84,311 $ 84,311 $ 84,311
Paid-in capital ............................................... 174,980 174,980 174,980
Retained earnings ............................................. 18,256 13,466 12,610
Capital stock expense ......................................... (4,961) (4,961) (5,273)
--------- ----------- -----------
Total Common Stock Equity ............................. 272,586 267,796 266,628
--------- ----------- -----------
Cumulative Preferred Stock
Not subject to mandatory redemption ...................... 21,030 21,030 21,030
--------- ----------- -----------
Total Cumulative Preferred Stock ...................... 21,030 21,030 21,030
--------- ----------- -----------
Long-term Debt ................................................ 285,880 278,880 293,877
--------- ----------- -----------
Total Capitalization .................................. 579,496 567,706 581,535
--------- ----------- -----------
Current Liabilities
Current maturities of long-term debt .......................... -- 15,000 12,500
Notes payable ................................................. 37,000 16,000 20,000
Accounts payable .............................................. 28,982 33,084 26,722
Accrued interest .............................................. 2,410 4,274 2,971
Dividends payable ............................................. 242 242 242
Accrued vacation and payroll .................................. 5,265 5,289 5,180
Customer deposits ............................................. 6,143 5,690 5,539
Accrued taxes payable ......................................... 269 -- 4,834
Fair value of derivative instruments .......................... -- -- 2,659
Other ......................................................... 5,677 6,622 7,065
--------- ----------- -----------
Total Current Liabilities ............................. 85,988 86,201 87,712
--------- ----------- -----------
Deferred Credits and Other Liabilities
Regulatory liabilities ........................................ 161,081 228,058 240,480
Operating reserves ............................................ 5,930 5,043 5,367
Deferred gain - sale of major generating assets ............... 2,472 9,887 12,359
Accrued environmental remediation costs ....................... 19,500 19,500 19,305
Accrued other post-employment benefit costs ................... 13,930 10,561 7,747
Accrued pension costs ......................................... 13,313 9,775 6,621
Other ......................................................... 15,109 12,524 8,019
--------- ----------- -----------
Total Deferred Credits and Other Liabilities .......... 231,335 295,348 299,898
--------- ----------- -----------
Accumulated Deferred Income Tax (Net) ................................. 101,101 94,120 67,947
--------- ----------- -----------
Total Capitalization and Liabilities .................. $ 997,920 $ 1,043,375 $ 1,037,092
========= =========== ===========
See Notes to Consolidated Financial Statements
-11-
CENTRAL HUDSON GAS & ELECTRIC CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended
September 30,
2004 2003
-------- --------
Operating Activities: (Thousands of Dollars)
Net Income ......................................................................... $ 31,017 $ 29,277
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization ............................................ 21,191 20,132
Deferred income taxes - net .............................................. 14,607 12,989
Provision for uncollectibles ............................................. 3,050 2,792
Accrued/deferred pension costs ........................................... (13,792) (14,084)
Amortization of fossil plant incentive ................................... (7,415) (7,415)
Other - net .............................................................. (2,478) 1,035
Changes in operating assets and liabilities - net:
Accounts receivable, unbilled revenues and other receivables ............. 10,529 (7,234)
Fuel, materials and supplies ............................................. (4,254) (6,728)
Special deposits and prepayments ......................................... 1,517 (2,445)
Contribution - prefunded pension costs ................................... -- (10,000)
Accounts payable ......................................................... (4,102) (10,344)
Accrued taxes and interest ............................................... 1,673 8,511
Deferred natural gas and electric costs .................................. 2,608 14,372
Proceeds from sales of emissions allowances .............................. 13,576 --
Customer benefit and carrying charge - net ............................... (14,604) (29,272)
Other - net .............................................................. (515) (1,064)
-------- --------
Net Cash Provided by Operating Activities ...................................... 52,608 522
-------- --------
Investing Activities:
Additions to plant ............................................................. (44,488) (39,538)
Other - net .................................................................... (1,322) (1,003)
-------- --------
Net Cash Used in Investing Activities .......................................... (45,810) (40,541)
-------- --------
Financing Activities:
Proceeds from issuance of long-term debt ....................................... 7,000 24,000
Retirement and redemption of long-tem debt ..................................... (15,000) (15,000)
Net borrowings of short-term debt .............................................. 21,000 20,000
Dividends paid on cumulative preferred and common stock ........................ (26,227) (26,807)
Issuance and redemption costs .................................................. (144) (155)
-------- --------
Net Cash (Used in) Provided by Financing Activities ............................ (13,371) 2,038
-------- --------
Net Change in Cash and Cash Equivalents ................................................ (6,573) (37,981)
Cash and Cash Equivalents - Beginning of Year .......................................... 12,720 54,989
-------- --------
Cash and Cash Equivalents - End of Period .............................................. $ 6,147 $ 17,008
======== ========
Supplemental Disclosure of Cash Flow Information
Interest paid .................................................................. $ 10,423 $ 10,433
Federal and State income tax paid .............................................. $ 10,618 $ 2,917
As authorized in the Joint Proposal Order $83 million of deferred electric
pension and OPEB costs, including carrying charges, were offset against the
Customer Benefit Fund with no impact to cash flow for the nine months ended
September 30, 2004.
See Notes to Consolidated Financial Statements
-12-
CH ENERGY GROUP, INC.
CENTRAL HUDSON GAS & ELECTRIC CORPORATION
Notes to Unaudited Consolidated Financial Statements
NOTE 1 - GENERAL
Basis of Presentation
This Quarterly Report on Form 10-Q is a combined report of CH Energy
Group, Inc. ("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 Energy Group and
Central Hudson. Energy Group's Consolidated Financial Statements include the
accounts of Energy Group and its wholly owned subsidiaries, which include
Central Hudson and Energy Group's non-utility subsidiary, Central Hudson
Enterprises Corporation ("CHEC" and, together with its subsidiaries, the
"competitive business subsidiaries").
Unaudited Consolidated Financial Statements
The accompanying Consolidated Financial Statements of Energy Group and
Central Hudson are unaudited but, in the opinion of the respective Managements,
reflect adjustments (which include normal recurring adjustments) necessary for a
fair statement of the results for the interim periods presented. These
unaudited, quarterly Consolidated Financial Statements do not contain the detail
or the footnote disclosures concerning accounting policies and other matters
which would be included in annual Consolidated Financial Statements and,
accordingly, should be read in conjunction with the audited Consolidated
Financial Statements (including the Notes thereto) included in the combined
Energy Group/Central Hudson Annual Report on Form 10-K for the year ended
December 31, 2003, as amended (the "Corporations' 10-K Annual Report").
Central Hudson's and CHEC'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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
For purposes of the Consolidated Statement of Cash Flows, Energy Group and
Central Hudson consider temporary cash investments with a maturity, when
purchased, of three months or less to be cash equivalents.
13
Accounting for Derivative Instruments and Hedging Activities
Reference is made to the caption "Accounting for Derivative Instruments
and Hedging Activities" of Note 1 - "Summary of Significant Accounting Policies"
to the Consolidated Financial Statements of the Corporations' 10-K Annual
Report. The total fair value of open Central Hudson derivatives, which hedge
electric and natural gas commodity purchases, at September 30, 2004, is $3
million (net unrealized gain), which compares to a fair value at December 31,
2003, of $0.7 million (net unrealized gain). Central Hudson realized an actual
net loss of $2.4 million on such derivatives for the three months ended
September 30, 2004, and a net loss of $2.2 million for the nine months ended
September 30, 2004. This compares to a net loss of $2.9 million and a net gain
of $1.3 million for the same periods, respectively, in 2003. These gains and
losses, which either decrease or increase actual energy costs, were deferred for
pass-back to or recovery from customers under Central Hudson's electric and
natural gas cost adjustment clauses as authorized by the New York State Public
Service Commission ("PSC") and in accordance with the provisions of Statement of
Financial Accounting Standard ("SFAS") 71, entitled Accounting for the Effects
of Certain Types of Regulation. Central Hudson also entered into weather
derivative contracts for the three months of the heating season ended March 31,
2004, and 2003 and for the three months of the cooling season ended August 30,
2004, and 2003. Payments of $0.2 million and $1.7 million, respectively, were
made to counter-parties due to the colder than normal weather experienced during
the three months ended March 31, 2004, and 2003 and a payment of $0.3 million
was received due to a cooler summer in 2004.
Additionally, in the first quarter of 2004, Central Hudson entered into
costless collars consisting of over-the-counter put and call options to hedge
the prices of a portion of SO2 emission allowances retained when Central Hudson
sold its major generating assets in January 2001. The counter-parties exercised
their call options in May and August of 2004 and purchased the emission
allowances for $5.6 million. Central Hudson sold all of its allowances by the
end of August 2004 realizing total proceeds of $13.6 million for all of the
allowances sold. All of the proceeds were deferred for the future benefit of
customers in accordance with a PSC order issued in 1993.
The fair value of CHEC's open derivative positions at September 30, 2004,
and at December 31, 2003, was not material. Derivatives entered into during the
nine months ended September 30, 2004, and 2003 included fuel oil put and call
options designated as fair value and cash flow hedges, respectively, for fuel
oil purchases for the heating season. Actual net gains recorded during the
comparative nine months ended September 30, 2004, and 2003 for options hedging
fuel oil purchase transactions, net of related option premium expense, were also
not material. CHEC also entered into weather derivative contracts for the three
months ended March 31, 2004, and March 31, 2003, which resulted in no payment to
counter-parties for 2004 and a payment to counter-parties of $2.1 million for
2003. A payment to counter-parties was not required in 2004 due to more
favorable settlement terms and also due to weather that was not as cold as last
year.
14
In addition to the above, Energy Group sold covered call options on stock
held in its Alternate Investment Program portfolio during the quarter ended
March 31, 2003. These covered call options expired in July 2003 and the final
gain realized for these derivatives was not material. The Alternate Investment
Program was liquidated during the second and third quarters of 2003 with
proceeds then placed in more secure money market instruments with a lower yield.
Goodwill and Other Intangible Assets
Reference is made to Note 6 - "Goodwill and Other Intangible Assets" to
the Consolidated Financial Statements of the Corporations' 10-K Annual Report.
Intangible assets include separate, identifiable, intangible assets such
as customer lists and covenants not to compete. Intangible assets with finite
lives are amortized over their useful lives. The estimated useful life for
customer lists is 15 years, which is believed to be appropriate in view of
currently experienced customer turnover. However, if customer turnover were to
substantially increase, a shorter amortization period would be used, resulting
in an increase in amortization expense. The useful life for a covenant not to
compete is based on the expiration date of the covenant. Intangible assets with
indefinite useful lives and goodwill are no longer amortized, but instead are
annually reviewed for impairment. Substantially all of CHEC's intangible assets
are the result of business combinations.
The components of amortizable intangible assets of Energy Group are
summarized as follows (thousands of dollars):
- --------------------------------------------------------------------------------------------------
September 30, 2004 December 31, 2003
- --------------------------------------------------------------------------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
- --------------------------------------------------------------------------------------------------
Customer Lists $ 38,371 $ 9,530 $ 38,371 $ 7,609
- -------------------------------------------------------------------------------------------------
Covenants Not to
Compete 1,439 816 1,439 683
- -------------------------------------------------------------------------------------------------
Total Amortizable
Intangibles $ 39,810 $ 10,346 $ 39,810 $ 8,292
- -------------------------------------------------------------------------------------------------
Amortization expense was $0.7 million for the three-month periods ended
September 30, 2004, and 2003, and $2.1 million for the nine month periods ended
September 30, 2004, and 2003. The estimated annual amortization expense for each
of the next five years, assuming no new acquisitions, is approximately $2.7
million per year.
The carrying amount for goodwill not subject to amortization was $50.5
million as of September 30, 2004, and as of December 31, 2003.
15
Depreciation and Amortization
Reference is made to "Depreciation and Amortization" of Note 1 - "Summary
of Significant Accounting Policies" to the Consolidated Financial Statements of
the Corporations' 10-K Annual Report. For financial statement purposes, Central
Hudson's depreciation provisions are computed on a straight-line basis using
rates based on studies of the estimated useful lives and estimated net salvage
value of depreciable property and equipment. The anticipated costs of removing
assets upon retirement are provided for over the life of those assets as a
component of depreciation expense. This depreciation method is consistent with
industry practice and the depreciation rates are approved by the PSC.
In 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
143, entitled Accounting for Asset Retirement Obligations ("SFAS 143"). One of
the provisions of SFAS 143 precludes the recognition of expected future
retirement obligations as a component of depreciation expense or accumulated
depreciation. Pursuant to SFAS 71, however, Central Hudson is required to use
depreciation methods and rates approved by the PSC. In accordance with SFAS 71,
Central Hudson continues to accrue for the future cost of removal for its
natural gas and electric assets. For financial reporting purposes, Central
Hudson reclassified $90.4 million, $79.3 million, and $77.8 million of net cost
of removal from accumulated depreciation to a regulatory liability as of
September 30, 2004, December 31, 2003, and September 30, 2003, respectively.
For financial statement purposes, the competitive business subsidiaries'
depreciation provisions are computed on a straight-line basis using depreciation
rates based on the estimated useful lives of depreciable property and equipment.
Expenditures for major renewals and betterments, which extend the useful lives
of property and equipment, are capitalized. Expenditures for maintenance and
repairs are charged to expense when incurred. Retirements, sales, and disposals
of assets are recorded by removing the cost and accumulated depreciation from
the asset and accumulated depreciation accounts with any resulting gain or loss
reflected in earnings.
Accumulated depreciation for the competitive business subsidiaries was
$11.1 million as of September 30, 2004, and $8.6 million as of December 31,
2003, and September 30, 2003.
Amortization of intangibles (other than goodwill) is computed on a
straight-line basis over an asset's expected useful life. See subcaption
"Goodwill and Other Intangible Assets" in this Note 2 for further discussion.
16
Parental Guarantees and Product Warranties
Reference is made to the captions "Parental Guarantees and Product
Warranties" of Note 1 - "Summary of Significant Accounting Polices" to the
Consolidated Financial Statements of the Corporations' 10-K Annual Report.
Energy Group and certain of its subsidiaries (other than Central Hudson)
have issued guarantees that provide financial or performance assurance to third
parties on behalf of Energy Group subsidiaries under certain commodity,
derivative, note purchase, and stock sale contracts. These agreements are
entered into primarily to support or enhance the creditworthiness otherwise
attributed to a subsidiary on a stand-alone basis, thereby facilitating the
extension of sufficient credit to accomplish the subsidiary's intended
commercial purposes. Guarantees have been provided to counter-parties to
guarantee the payment, when due, of obligations incurred by the Energy Group
subsidiaries in physical and financial transactions related to fuel oil,
propane, weather hedges, certain obligations related to the sale in 2002 of
former subsidiary CH Resources, Inc., and certain obligations related to CHEC's
commitment to purchase subordinated notes financing an ethanol production
facility.
At September 30, 2004, the aggregate amount of actual liabilities covered
by these guarantees was $3.6 million. The related liabilities are reflected in
the Consolidated Balance Sheet, and each such guarantee is not considered to be
material.
It is Management's belief that the possibility that Energy Group would be
required to perform or incur any material losses associated with any of the
above guarantees is remote.
Earnings Per Share
The average dilutive effect of stock options and performance shares was
7,916 shares and 3,792 shares for the quarters ended September 30, 2004, and
2003, respectively, and 9,042 shares and 3,475 shares for the nine months ended
September 30, 2004, and 2003, respectively. Certain stock options were excluded
from the computation of diluted earnings per share because the exercise prices
of those options were greater than the average market price per share of Common
Stock for each of the years presented. The number of shares of Common Stock
represented by the options excluded from the above calculation was 36,900 for
the three months and nine months ended September 30, 2004. The number of shares
excluded from the above calculation for the three and nine months ended
September 30, 2003, was 36,900 and 94,400, respectively. For additional
information regarding stock options and performance shares, see Note 5 -
"Stock-Based Compensation Incentive Plans."
17
Stock-Based Compensation
At September 30, 2004, Energy Group had a stock-based employee
compensation plan that is described more fully in Note 5 - "Stock-Based
Compensation Incentive Plans."
Effective January 1, 2003, Energy Group adopted the fair value recognition
provisions of FASB 123, entitled Accounting for Stock-Based Compensation,
utilizing the modified prospective methods under the provisions of SFAS 148,
entitled Accounting for Stock-Based Compensation - Transition and Disclosure.
Stock-based compensation costs recorded in the third quarters of 2004 and 2003
and the nine months ended September 30, 2004, and 2003 were inconsequential.
NOTE 3 - SEGMENTS AND RELATED INFORMATION
Reference is made to Note 14 - "Segments and Related Information" to the
Consolidated Financial Statements of the Corporations' 10-K Annual Report.
Energy Group's reportable operating segments are the regulated electric
and natural gas operations of Central Hudson and the unregulated fuel oil
distribution activities of CHEC. "Unregulated - Other" is currently comprised of
the investment and business development activities of Energy Group and the
energy efficiency and investment activities of CHEC. The fuel oil distribution
segments currently operate in the Northeast and Mid-Atlantic regions of the
United States.
Beginning with the Quarterly Report on Form 10-Q for the quarter ended
March 31, 2004, Energy Group refined its basis of segmentation to separate the
Unregulated Segment into "Fuel Oil Distribution" and "Other." Management
regularly reviews the operating results of the fuel oil distribution companies
as a standalone component of the total unregulated operations and assesses their
performance as a basis for allocating resources.
Certain additional information regarding these segments is set forth in
the following table. General corporate expenses, property common to both
electric and natural gas segments, and depreciation of common property have been
allocated to the segments in accordance with practices established for
regulatory purposes.
18
CH Energy Group, Inc. Segment Disclosure - 2004
- -----------------------------------------------------------------------------------------------------------------------------
Quarter Ended September 30, 2004
($000 Except Earnings Per ----------------------------------------------------------------------------------------------
Share) Regulated Unregulated Eliminations Total
- -----------------------------------------------------------------------------------------------------------------------------
Natural Fuel Oil
Electric Gas Distribution Other
- -----------------------------------------------------------------------------------------------------------------------------
Revenues from external
customers $ 113,122 $ 11,426 $ 37,085 $ 239 $ -- $ 161,872
- -----------------------------------------------------------------------------------------------------------------------------
Intersegment revenues 3 3 -- -- (6) --
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues $ 113,125 $ 11,429 $ 37,085 $ 239 $ (6) $ 161,872
- -----------------------------------------------------------------------------------------------------------------------------
Earnings before income
taxes $ 14,988 $ (1,505) $ (4,885) $ 244 $ -- $ 8,842
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 8,399 $ (1,074) $ (2,933) $ 59 $ -- $ 4,451
- -----------------------------------------------------------------------------------------------------------------------------
Earnings Per Share -
Basic $ 0.53 $ (0.07) $ (0.19) $ 0.01(1) $ -- $ 0.28
- -----------------------------------------------------------------------------------------------------------------------------
Segment Assets
at September 30, 2004 $ 771,585 $ 226,335 $ 132,490 $ 127,921 $ (680) $ 1,257,651
- -----------------------------------------------------------------------------------------------------------------------------
(1) This amount was primarily attributable to Energy Group's investment and
business development activities.
- -----------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2004
($000 Except Earnings Per ----------------------------------------------------------------------------------------------
Share) Regulated Unregulated Eliminations Total
- -----------------------------------------------------------------------------------------------------------------------------
Natural Fuel Oil
Electric Gas Distribution Other
- -----------------------------------------------------------------------------------------------------------------------------
Revenues from external
customers $ 329,833 $ 96,220 $ 163,421 $ 745 $ -- $ 590,219
- -----------------------------------------------------------------------------------------------------------------------------
Intersegment revenues 9 195 -- -- (204) --
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues $ 329,842 $ 96,415 $ 163,421 $ 745 $ (204) $ 590,219
- -----------------------------------------------------------------------------------------------------------------------------
Earnings before income
taxes $ 41,067 $ 12,643 $ 2,475 $ 1,877 $ -- $ 58,062
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 23,483 $ 6,807 $ 1,484 $ 1,162 $ -- $ 32,936
- -----------------------------------------------------------------------------------------------------------------------------
Earnings Per Share -
Basic $ 1.49 $ 0.43 $ 0.10 $ 0.07(1) $ -- $ 2.09
- -----------------------------------------------------------------------------------------------------------------------------
Segment Assets
at September 30, 2004 $ 771,585 $ 226,335 $ 132,490 $ 127,921 $ (680) $ 1,257,651
- -----------------------------------------------------------------------------------------------------------------------------
(1) The amount attributable to CHEC's other business activities was $0.03; the
balance of $0.04 was primarily related to Energy Group's investment and
business development activities.
19
CH Energy Group, Inc. Segment Disclosure - 2003
- -----------------------------------------------------------------------------------------------------------------------------
Quarter Ended September 30, 2003
($000 Except Earnings Per ----------------------------------------------------------------------------------------------
Share) Regulated Unregulated Eliminations Total
- -----------------------------------------------------------------------------------------------------------------------------
Natural Fuel Oil
Electric Gas Distribution Other
- -----------------------------------------------------------------------------------------------------------------------------
Revenues from external
customers $ 124,181 $ 11,104 $ 34,285(1) $ 257 $ -- $ 169,827
- -----------------------------------------------------------------------------------------------------------------------------
Intersegment revenues 2 27 -- -- (29) --
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues $ 124,183 $ 11,131 $ 34,285 $ 257 $ (29) $ 169,827
- -----------------------------------------------------------------------------------------------------------------------------
Earnings before income
taxes $ 12,276 $ (919) $ (4,674) $ 1,277 $ -- $ 7,960
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 7,532 $ (848) $ (2,790) $ 811 $ -- $ 4,705
- -----------------------------------------------------------------------------------------------------------------------------
Earnings Per Share -
Basic $ 0.48 $ (0.06) $ (0.18) $ 0.06(2) $ -- $ 0.30
- -----------------------------------------------------------------------------------------------------------------------------
Segment Assets
at September 30, 2003 $ 811,969 $ 225,123 $ 130,722 $ 122,366 $ (756) $ 1,289,424
- -----------------------------------------------------------------------------------------------------------------------------
(1) Reflects reclassification of weather hedging contract settlement of $45
from operating expenses to revenues.
(2) This amount is largely attributable to Energy Group's investment
activities.
- -----------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 2003
($000 Except Earnings Per ----------------------------------------------------------------------------------------------
Share) Regulated Unregulated Eliminations Total
- -----------------------------------------------------------------------------------------------------------------------------
Natural Fuel Oil
Electric Gas Distribution Other
- -----------------------------------------------------------------------------------------------------------------------------
Revenues from external
customers $ 353,396 $ 96,301 $ 167,674(1) $ 786 $ -- $ 618,157
- -----------------------------------------------------------------------------------------------------------------------------
Intersegment revenues 8 260 -- -- (268) --
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues $ 353,404 $ 96,561 $ 167,674 $ 786 $ (268) $ 618,157
- -----------------------------------------------------------------------------------------------------------------------------
Earnings before income
taxes $ 35,753 $ 12,513 $ 2,390 $ 4,306 $ -- $ 54,962
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 21,088 $ 7,044 $ 1,480 $ 2,911 $ -- $ 32,523
- -----------------------------------------------------------------------------------------------------------------------------
Earnings Per Share -
Basic $ 1.33 $ 0.44 $ 0.09 $ 0.19(2) $ -- $ 2.05
- -----------------------------------------------------------------------------------------------------------------------------
Segment Assets
at September 30, 2003 $ 811,969 $ 225,123 $ 130,722 $ 122,366 $ (756) $ 1,289,424
- -----------------------------------------------------------------------------------------------------------------------------
(1) Reflects reclassification of weather hedging contract settlement of
$(2,058) from operating expenses to revenues.
(2) The amount attributable to CHEC's other business activities was $0.01; the
balance of $0.18 was related to Energy Group's investment activities.
20
Central Hudson Gas & Electric Corporation Segment Disclosure
- ----------------------------------------------------------------------------------------
($000) Quarter Ended September 30, 2004
- ----------------------------------------------------------------------------------------
Natural
Electric Gas Eliminations Total
- ----------------------------------------------------------------------------------------
Revenues from external customers $113,122 $ 11,426 $ -- $124,548
- ----------------------------------------------------------------------------------------
Intersegment revenues 3 3 (6) --
- ----------------------------------------------------------------------------------------
Total Revenues $113,125 $ 11,429 $ (6) $124,548
- ----------------------------------------------------------------------------------------
Earnings before income taxes $ 15,170 $ (1,445) $ -- $ 13,725
- ----------------------------------------------------------------------------------------
Net Income $ 8,581 $ (1,014) $ -- $ 7,567
- ----------------------------------------------------------------------------------------
Income Available for Common Stock $ 8,399 $ (1,074) $ -- $ 7,325
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
($000) Nine Months Ended September 30, 2004
- ----------------------------------------------------------------------------------------
Natural
Electric Gas Eliminations Total
- ----------------------------------------------------------------------------------------
Revenues from external customers $329,832 $ 96,220 $ -- $426,052
- ----------------------------------------------------------------------------------------
Intersegment revenues 9 195 (204) --
- ----------------------------------------------------------------------------------------
Total Revenues $329,841 $ 96,415 $(204) $426,052
- ----------------------------------------------------------------------------------------
Earnings before income taxes $ 41,613 $ 12,823 $ -- $ 54,436
- ----------------------------------------------------------------------------------------
Net Income $ 24,030 $ 6,987 $ -- $ 31,017
- ----------------------------------------------------------------------------------------
Income Available for Common Stock $ 23,483 $ 6,807 $ -- $ 30,290
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
($000) Quarter Ended September 30, 2003
- ----------------------------------------------------------------------------------------
Natural
Electric Gas Eliminations Total
- ----------------------------------------------------------------------------------------
Revenues from external customers $124,181 $ 11,104 $ -- $135,285
- ----------------------------------------------------------------------------------------
Intersegment revenues 2 27 $ (29) $ --
- ----------------------------------------------------------------------------------------
Total Revenues $124,183 $ 11,131 $ (29) $135,285
- ----------------------------------------------------------------------------------------
Earnings before income taxes $ 12,456 $ (859) $ -- $ 11,597
- ----------------------------------------------------------------------------------------
Net Income $ 7,714 $ (788) $ -- $ 6,926
- ----------------------------------------------------------------------------------------
Income Available for Common Stock $ 7,532 $ (848) $ -- $ 6,684
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
($000) Nine Months Ended September 30, 2003
- ----------------------------------------------------------------------------------------
Natural
Electric Gas Eliminations Total
- ----------------------------------------------------------------------------------------
Revenues from external customers $353,396 $ 96,301 $ -- $449,697
- ----------------------------------------------------------------------------------------
Intersegment revenues $ 8 $ 260 $(268) $ --
- ----------------------------------------------------------------------------------------
Total Revenues $353,404 $ 96,561 $(268) $449,697
- ----------------------------------------------------------------------------------------
Earnings before income taxes $ 36,612 $ 12,798 $ -- $ 49,410
- ----------------------------------------------------------------------------------------
Net Income $ 21,947 $ 7,330 $ -- $ 29,277
- ----------------------------------------------------------------------------------------
Income Available for Common Stock $ 21,088 $ 7,044 $ -- $ 28,132
- ----------------------------------------------------------------------------------------
21
NOTE 4 - NEW ACCOUNTING STANDARDS AND OTHER FASB PROJECTS
Reference is made to the caption "New Accounting Standards and Other FASB
Projects" of Note 1 - "Summary of Significant Accounting Policies" to the
Consolidated Financial Statements of the Corporations' 10-K Annual Report.
Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003
In December 2003, the President of the United States signed into law the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the
"Medicare Act"). On January 12, 2004, the FASB issued its FASB Staff Position
("FSP") 106-1, entitled Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003, which
permitted a sponsor of a post-retirement health care plan that provides a
prescription drug benefit to make a one-time election to defer accounting for
the effects of the Medicare Act under SFAS 106, entitled Employers Accounting
for Postretirement Benefits Other Than Pensions. On May 19, 2004, the FASB
issued FSP 106-2, which supersedes FSP 106-1 and provides guidance on the
accounting and disclosure requirements for the effects of the Medicare Act.
Under the provisions of FSP 106-1, Central Hudson elected to defer
recognition of the effects of the Medicare Act for the six months ended June 30,
2004, and as such, the net periodic post-employment cost, as previously
reported, did not reflect this federal subsidy.
Central Hudson's actuaries, based on the current guidance relating to the
Medicare Act, believe that Central Hudson's prescription drug plan offered to
Medicare-eligible retirees is actuarially equivalent and will qualify for this
federal subsidy. Accordingly, Central Hudson is adopting the provisions of FSP
106-2 effective July 1, 2004, on a retroactive basis. Based on a measurement
date of December 31, 2003, the actuaries have determined that the effect of the
Medicare Act on the valuation of post-employment health benefits is a reduction
in the net periodic post-employment benefit costs of $2.2 million (after-tax)
for 2004 and a reduction in the accumulated post-employment benefit obligations
of $12 million at December 31, 2003.
Under the policy of the PSC regarding post-employment benefits, Central
Hudson is able to defer differences between actual costs and rate allowances
covering these costs for future recovery from or return to customers. Therefore,
the adoption of FSP 106-2 is not expected to have a material impact on the
financial condition, results of operations, or cash flows of Central Hudson. The
provisions of FSP 106-2 do not affect CHEC.
Equity-Based Compensation
On March 31, 2004, the FASB issued an Exposure Draft of a proposed
Statement, entitled Share-Based Payment, that addresses the accounting for
share-based payment transactions in which an enterprise receives an employee's
services in
22
exchange for (a) equity instruments of the enterprise or (b) liabilities that
are based on the fair value of the enterprise's equity instruments or that may
be settled by the issuance of such equity instruments. The proposed Statement
would eliminate the ability to account for share-based compensation transactions
using Accounting Principals Board Opinion No. 25, entitled Accounting for Stock
Issued to Employees, and generally would require instead that such transactions
be accounted for using a fair value-based method. The comment period for the
Exposure Draft for this proposed Statement ended June 30, 2004, and the FASB
staff is currently re-deliberating several issues. A final Statement is expected
to be issued in the fourth quarter of 2004.
The proposed Statement covers a wide range of equity-based compensation
arrangements. Under the proposed Statement, all forms of share-based payments to
employees, including employee stock options and performance shares, would be
treated the same as other forms of compensation by recognizing the related cost
on the income statement. The expense of the award would generally be measured at
fair value at the grant date. Current accounting guidance allows that the
expense relating to so-called fixed plan employee stock options only be
disclosed in the footnotes to the financial statements. Energy Group adopted
fair value accounting for stock-based compensation in the first quarter of 2003.
Therefore, if adopted as proposed, it is not anticipated that this proposed
Statement would impact the financial condition, results of operations, or cash
flows of Energy Group or its subsidiaries at this time.
In July 2004, the United States House of Representatives voted to override
the FASB proposal, amending it to require expensing of options for those owned
by a corporation's top five executives. Energy Group cannot predict what further
action will be taken by Congress related to this FASB proposal. On October 13,
2004, the FASB delayed the effective date of this proposed Statement. Public
companies with a calendar year-end would be required to adopt the provisions of
the proposed Statement effective for periods beginning after June 15, 2005,
rather than January 1, 2005.
FIN 46 - Consolidation of Variable Interest Entities
In December 2003, the FASB issued a revised Interpretation No. 46,
entitled Consolidation of Variable Interest Entities ("FIN 46R"), which
clarifies the application of Accounting Research Bulletin No. 51, entitled
Consolidated Financial Statements, as it relates to the consolidation of a
variable interest entity ("VIE"). The original Interpretation was issued in
January 2003 and its application was required for periods ending after December
15, 2003, for companies that had interests in special-purpose entities. The
application of FIN 46R for all other types of VIEs is required for periods
ending after March 15, 2004. FIN 46R was adopted by Energy Group effective for
the quarter ended March 31, 2004.
A VIE is an entity that is not controllable through voting interests where
the equity investment at risk is not sufficient to permit the VIE to finance its
activities without additional subordinated financial support provided by any
party, including the equity holders. Variable interests are the investments or
other interests that will absorb
23
portions of a VIE's expected losses or receive portions of a VIE's expected
residual returns.
The objective of FIN 46R is to provide guidance on the identification of a
variable interest and a VIE to determine when the assets, liabilities, and
results of operations should be consolidated in a company's financial
statements. A company that holds a variable interest in an entity is required to
consolidate the entity if the company's interest in the VIE is such that the
company will absorb a majority of the VIE's expected losses and/or receive a
majority of the VIE's expected residual returns.
Energy Group and its subsidiaries do not have any interests in special
purpose entities and are not affiliated with any VIEs that require consolidation
under the provisions of FIN 46R. In arriving at this determination, long-term
power purchase contracts currently in effect for Central Hudson were reviewed,
including contracts with a number of independent power producers ("IPP").
Central Hudson does not have a controlling financial interest in or operational
control of these IPPs. Under federal and New York State laws and regulations,
Central Hudson is required to purchase the electrical output of IPPs which meet
certain criteria for Qualifying Facilities as such term is defined in the
applicable legislation. Payments are made under these contracts at rates often
higher than those prevailing in the wholesale market; however, these costs are
fully recoverable through Central Hudson's electric energy adjustment mechanism,
which provides for the recovery of purchased electricity costs. In 2003, Central
Hudson had contracts with IPPs which represented approximately 1.7% of Central
Hudson's electricity purchases.
CHEC has a number of limited partnership interests that are presently
accounted for under the equity method. These were also reviewed relative to FIN
46R and it was determined that consolidation is not required. CHEC has limited
partnership interests in two cogeneration facilities, a preferred unit
investment in a limited liability company which will build and operate an
ethanol production facility, and a limited partnership interest in a venture
capital fund. Neither of the two cogeneration partnerships nor the preferred
unit investment meet any of the criteria for classification as a VIE. CHEC has
only a 4% limited partnership interest in the venture capital fund and therefore
is not a primary beneficiary. CHEC's total equity investment in these limited
partnerships and this limited liability company are not material, comprising
less than 2% of Energy Group's total equity.
Pension Discount Rate
In April 2004, federal legislation was enacted that temporarily changes
the way pension plan obligations are calculated; this, in turn, impacts the
amount of a company's required pension plan contributions. The legislation
suspends a requirement that pension obligations be tied to interest rates on
30-year Treasury bonds; instead it substitutes for 2004 and 2005 a rate based on
a composite of long-term corporate bonds. As discussed in Note 10 -
"Post-Employment Benefits" to the Consolidated Financial Statements of the
Corporations' 10-K Annual Report, Central Hudson does not expect to make a
contribution to its pension plan in 2004 and therefore this change
24
is not expected to impact the financial condition, results of operations, or
cash flows of Energy Group or its subsidiaries at this time.
EITF 03-1: The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments
In March 2004, the FASB ratified the consensus reached by the Emerging
Issues Task Force ("EITF") on Issue No. 03-1, entitled The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments,
regarding disclosures about unrealized losses on available-for-sale debt and
equity securities accounted for under FASB Statement 115, entitled Accounting
for Certain Investments in Debt and Equity Securities. The scope of the
consensus is to give guidance on when an investment is impaired, whether the
impairment is other than temporary, and the measurement of an impairment loss.
The guidance for evaluating whether an investment is other than temporarily
impaired is applicable to evaluations made in reporting periods beginning after
June 15, 2004. The adoption of EITF Issue No. 03-1 does not presently have a
material impact on the financial condition, results of operations, or cash flows
of Energy Group or its subsidiaries.
EITF 04-8: The Effect of Contingently Convertible Debt on Diluted Earnings Per
Share
In September 2004, the EITF reached a consensus regarding the draft
abstract entitled The Effect of Contingently Convertible Debt on Diluted
Earnings per Share. The draft abstract reflects the EITF's conclusion that
contingently convertible debt instruments ("Co-Cos") should be included in
diluted earnings per share computations regardless of whether the market price
trigger has been met. Co-Cos are financial instruments that add a contingent
feature to a convertible debt instrument and are generally convertible into
common shares of the issuer after the common stock price has exceeded a
predetermined threshold for a specified time period (known as a market price
trigger). Currently, most issuers of Co-Cos exclude the potential dilutive
effect of the conversion feature from diluted earnings per share until the
market price contingency is met. The consensus reached by the EITF on this issue
will be effective for reporting periods ending after December 15, 2004.
Currently, neither Energy Group nor Central Hudson have contingently convertible
debt and therefore neither entity expects this issue to have any impact on its
financial condition, results of operations, or cash flows.
NOTE 5 - STOCK-BASED COMPENSATION INCENTIVE PLANS
Reference is made to Note 11 - "Stock-Based Compensation Incentive Plans"
to the Consolidated Financial Statements of the Corporations' 10-K Annual Report
and to the description of Energy Group's Long-Term Performance-Based Incentive
Plan ("Plan") referred to therein.
On January 1, 2003, the number of performance shares granted was 14,800,
in aggregate, to executives covered under the Plan. On January 1, 2004, the
number of
25
performance shares granted was 29,300, in aggregate, to executives covered under
the Plan. As of September 30, 2004, the number of these performance shares that
remain outstanding was 9,700 from the January 1, 2003, shares and 19,800 from
the January 1, 2004, shares. The ultimate number of shares awarded is based on
the performance of Energy Group's Common Stock over the three years following
the date of the relevant grant, but shall not exceed 150% of the number of
shares granted. Compensation expense is recorded as performance shares are
earned over the three-year life of the relevant performance share grant prior to
its award. The amounts recorded for the quarters and nine-month periods ended
September 30, 2004, and 2003 were not material.
A summary of the status of stock options awarded to executives and
non-employee Directors of Energy Group and its subsidiaries under the Plan as of
September 30, 2004, is as follows:
Weighted Weighted
Average Average
Exercise Remaining
Shares Price Contractual Life in Years
-----------------------------------------------
Outstanding at 1/1/04 107,360 $ 44.16 7.57
Granted -- -- --
Exercised 15,240 38.81 --
Forfeited -- -- --
------- ------- -------
Outstanding at 9/30/04 92,120 $ 45.05 6.98
Total Shares Outstanding 15,762,000
Potential Dilution 0.6%
No non-qualified stock options were exercised during the quarter ended
September 30, 2004, and 15,240 were exercised in the nine months ended September
30, 2004. These options had exercise prices of $31.94 and $44.06 and the
resulting compensation expense was not material.
In addition, effective January 1, 2003, Energy Group adopted the fair
value method of recording stock-based compensation utilizing the "modified
prospective" approach, whereby existing options are expensed prospectively over
their respective vesting periods. Under the fair value method, employee stock
option grants and other stock-based compensation will be expensed over their
respective vesting periods based on the fair value at the date the stock-based
compensation is granted. Compensation expense recorded for the quarters ended
and nine months ended September 30, 2004, and 2003 resulting from the
implementation of fair value accounting for stock options was not material.
26
The following table summarizes Energy Group's outstanding and exercisable
options at September 30, 2004:
Weighted Average
Number of Remaining Number of
Options Contractual Options
Exercise Price Outstanding Life in Years Exercisable
-------------- ----------- ------------- -----------
$31.94 6,360 5.25 5,088
$44.06 48,860 6.25 42,476
$48.62 36,900 8.25 16,200
------ ------
92,120 63,764
NOTE 6 - INVENTORY
Inventory is valued at average cost and is comprised of the following:
- ----------------------------------------------------------------------------
Energy Group
- ----------------------------------------------------------------------------
September 30, December 31, September 30,
2004 2003 2003
- ----------------------------------------------------------------------------
(In Thousands)
- ----------------------------------------------------------------------------
Natural Gas $13,908 $ 9,802 $12,762
- ----------------------------------------------------------------------------
Petroleum Products and
Propane 3,818 2,779 2,936
- ----------------------------------------------------------------------------
Materials and Supplies 7,390 7,266 7,396
- ----------------------------------------------------------------------------
Total $25,116 $19,847 $23,094
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Central Hudson
- ----------------------------------------------------------------------------
September 30, December 31, September 30,
2004 2003 2003
- ----------------------------------------------------------------------------
(In Thousands)
- ----------------------------------------------------------------------------
Natural Gas $13,908 $ 9,802 $12,762
- ----------------------------------------------------------------------------
Petroleum Products and
Propane 619 505 516
- ----------------------------------------------------------------------------
Materials and Supplies 5,885 5,851 5,909
- ----------------------------------------------------------------------------
Total $20,412 $16,158 $19,187
- ----------------------------------------------------------------------------
27
NOTE 7 - POST-EMPLOYMENT BENEFITS
The following are the components of Central Hudson's net periodic benefit
costs for its Pension and Other Post-Employment Benefits (the latter, "OPEB")
plans for the quarters ended and nine months ended September 30, 2004, and 2003.
The 2004 OPEB amounts reflect the effect of the Medicare Act under the
provisions of FSP 106-2.
Quarter Ended September 30,
---------------------------
Pension Benefits OPEB
2004 2003 2004 2003
---- ---- ---- ----
(In Thousands) (In Thousands)
Service cost $ 1,739 $ 1,486 $ 829 $ 715
Interest cost 5,378 5,240 2,252 2,161
Expected return on plan assets (5,510) (5,352) (1,296) (1,149)
Amortization of:
Prior service cost 538 427 (38) (2)
Transitional (asset) or obligation -- -- 642 642
Recognized actuarial (gain) or loss 2,209 2,195 734 673
------- ------- ------- -------
Net periodic benefit cost $ 4,354 $ 3,996 $ 3,123 $ 3,040
======= ======= ======= =======
28
Nine Months Ended September 30,
-------------------------------
Pension Benefits OPEB
2004 2003 2004 2003
---- ---- ---- ----
(In Thousands) (In Thousands)
Service cost $ 5,218 $ 4,457 $ 2,486 $ 2,145
Interest cost 16,133 15,721 6,757 6,482
Expected return on plan assets (16,530) (16,057) (3,887) (3,447)
Amortization of:
Prior service cost 1,615 1,280 (112) (7)
Transitional (asset) or obligation -- -- 1,925 1,925
Recognized actuarial (gain) or loss 6,627 6,585 2,201 2,020
-------- -------- ------- -------
Net periodic benefit cost $ 13,063 $ 11,986 $ 9,370 $ 9,118
======== ======== ======= =======
No contributions were made to Central Hudson's pension plan during the
nine months ended September 30, 2004, nor are contributions currently
anticipated for the balance of 2004. In September 2004, in accordance with SFAS
87, entitled Employers Accounting for Pensions, Central Hudson adjusted its
minimum pension liability balance to reflect the September 30, 2004, actuarial
estimates for the Accumulated Benefit Obligation balance for the pension plan
and the market value of the related pension assets. Based on the actuarial
information, the accrued pension liability balance was reduced by $9.2 million.
This liability was initially recorded in September 2003.
Employer contributions paid during the nine months ended September 30,
2004, for OPEB totaled $6 million of which $3.2 million was paid in the quarter
ended September 30, 2004. The total amount projected for payment in 2004 is
estimated at $7 million.
For additional information related to Pensions and OPEB, see Note 10 -
"Post-Employment Benefits" to the Consolidated Financial Statements of the
Corporations' 10-K Annual Report.
NOTE 8 - REGULATORY MATTERS
On June 14, 2004, the PSC issued an Order ("Joint Proposal Order")
adopting the terms of a Joint Proposal for Rate Plan Modification ("Joint
Proposal"). The Joint Proposal was developed in response to the PSC Orders
concerning future uses of a fund established to benefit customers ("Customer
Benefit Fund"), public policy programs, and other matters relating to the
encouragement and expansion of retail access and customer choice programs. The
significant terms of the Joint Proposal, which became effective July 1, 2004,
include:
29
(i) continuation of the rate levels, rate designs, and related accounting
provisions (including deferrals) previously established by the PSC
effective July 1, 2001;
(ii) expiration, as scheduled, of the current customer refund which was $85
million (pre-tax) through June 30, 2004, followed by an additional $5
million refund from the Customer Benefit Fund for certain classes of
electric customers in the period from July 1, 2004, through June 30, 2005;
(iii) continued funding from the Customer Benefit Fund for other purposes such
as economic development and retail access rate credits previously approved
by the PSC;
(iv) enhanced programs to promote retail competition and service quality;
(v) use of the Customer Benefit Fund to offset deferred pension and OPEB costs
of $75 million; and to offset future deferred pension and OPEB costs until
the fund balance reaches $8 million, anticipated to occur in early 2005;
and
(vi) modification of the earnings sharing formula from the current equal
sharing by shareholders and customers of earnings between an 11.3% and a
14% return on equity ("ROE") to 70% shareholders / 30% customers for
earnings between a 10.5% and an 11.3% ROE and 65% shareholders / 35%
customers for earnings between an 11.3% and a 14% ROE. All earnings above
a 14% ROE will continue to be reserved for customers.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Energy Group and Central Hudson face a number of contingencies which arise
during the normal course of business and which have been discussed in Note 13 -
"Commitments and Contingencies" to the Consolidated Financial Statements of the
Corporations' 10-K Annual Report. Except for that which is disclosed in Part II
of this Quarterly Report on Form 10-Q and all documents previously filed with
the SEC in 2004, there have been no material changes in the matters discussed in
said Note 13.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXECUTIVE SUMMARY
Energy Group's consolidated earnings per share (basic) during the third
quarter of 2004 totaled $0.28, down from the $0.30 per share earned in the third
quarter of 2003. The $0.02 decline was due largely to the absence of investment
gains and higher interest income from securities that were liquidated in 2003. A
cooler summer in 2004, which impacted Central Hudson's revenues, and increased
business development expenses at Energy Group also contributed to the decline.
Energy Group's consolidated earnings per share (basic) for the first three
quarters of 2004 were $2.09, a 2% increase over the $2.05 reported for the first
three quarters of 2003.
30
Energy Group's subsidiaries continued to perform well in the third
quarter. Despite cooler weather Central Hudson saw a modest increase in earnings
due to improved productivity and growth in its customer base. CHEC's fuel
distribution companies also made progress in improving productivity and
sharpening their marketing focus. However, CHEC's earnings were down slightly
due to reduced sales volumes related to a warmer spring in 2004.
Energy Group's business development team continues to seek opportunities
to make investments in regulated and competitive energy-related businesses. This
initiative is intended to expand Energy Group's portfolio of diversified
investments by adding investments that offer attractive returns and cash flows
relative to the risks they entail. Energy Group expects that certain investments
with lower risks may have expected returns below 10%. Energy Group is optimistic
that it will find appropriate opportunities to invest up to $100 million of its
re-deployable cash.
On November 3, 2004, Energy Group announced CHEC's acquisition of $2.7
million of preferred units issued by Cornhusker Energy Lexington Holdings, LLC
("Cornhusker Holdings") and also its commitment to acquire $8 million of
subordinated notes issued by Cornhusker Holdings. Cornhusker Holdings is the
owner of Cornhusker Energy Lexington, LLC, an ethanol production facility to be
located in Nebraska that is expected to be completed in the fourth quarter of
2005.
Central Hudson
Earnings of the regulated natural gas and electric utility were $0.46 per
share in the third quarter of 2004, versus $0.42 per share for the same quarter
of the previous year. The increase was largely attributable to lower storm
expense and continued growth in the utility's service area. That customer growth
helped to offset the impacts of the cool summer of 2004, when billing cooling
degree days were 5% lower than those of the third quarter of 2003. Results for
the third quarter of 2003 were also favorably impacted by $0.03 per share by a
regulatory revenue restoration mechanism that was not in place during the third
quarter of 2004.
CHEC
CHEC, the family of fuel oil companies with holdings from Connecticut to
the Washington, D.C. metro area, posted earnings that were both stable and
reflective of the unit's seasonal demand cycle. CHEC lost $0.19 per share in the
third quarter of 2004, compared to the $0.18 loss that occurred in the third
quarter of 2003. Importantly, CHEC's contribution to earnings for the nine
months ended September 30, 2004, remained positive at $0.12 per share, as
compared to the $0.10 per share posted during the same period in 2003.
Productivity improvements continue to favorably impact CHEC's profitability.
31
Energy Group
Energy Group income was $0.01 per share in the third quarter of 2004, down
from $0.06 per share during the third quarter of 2003. Energy Group's
contribution to earnings declined from $0.18 per share for the first nine months
of 2003 to $0.05 per share for the first nine months of 2004 due to two primary
factors: 1) the absence of substantial portfolio gains realized in 2003 through
an Alternative Investment portfolio (which was subsequently liquidated and
reinvested in lower yield money market instruments in order to provide access to
investment capital); and 2) the inclusion of $0.05 per share in 2004 for
business development costs when minimal costs of this nature were incurred in
2003.
Earnings Projection
Energy Group continues to project its 2004 earnings at between $2.60 and
$2.85 per share, noting that $2.30 to $2.45 is estimated to result from the
operations of Central Hudson, $0.20 to $0.25 from CHEC's fuel distribution
business units, and $0.10 to $0.15 from partnership income and interest income
on the funds held in money market funds that are ready for immediate deployment
if suitable investment opportunities are identified.
ACCOUNTING MATTERS
See Note 4 - "New Accounting Standards and Other FASB Projects" for
discussion on recent accounting matters.
REGULATORY MATTERS
On June 14, 2004, the PSC issued an Order adopting the terms of a Joint
Proposal for Rate Plan Modification. The Joint Proposal was developed in
response to the PSC Orders concerning future uses of the Customer Benefit Fund,
public policy programs, and other matters relating to the encouragement and
expansion of retail access and customer choice programs. For significant terms
of the Joint Proposal, which became effective July 1, 2004, see Note 8 -
"Regulatory Matters."
CAPITAL RESOURCES AND LIQUIDITY
The growth of Energy Group's retained earnings in the first nine months of
2004 contributed to the increase in the book value per share of its Common Stock
from $30.80 at December 31, 2003, to $31.26 at September 30, 2004. Energy
Group's common equity ratio decreased from 59.5% at December 31, 2003, to 58.9%
at September 30, 2004, due to a corresponding increase in total debt at
September 30, 2004.
Both Energy Group's and Central Hudson's liquidity reflect cash flows from
operating, investing, and financing activities, as shown on their respective
Consolidated Statements of Cash Flows and as discussed below.
32
The principal factors affecting Energy Group's liquidity are the dividends
it pays to its shareholders and, as it relates to both Central Hudson and CHEC,
cash flows generated from operations and construction expenditures. Central
Hudson's liquidity is also affected by its debt obligations and dividends paid
to Energy Group.
Central Hudson's cash flows from operating activities principally reflect
its energy sales and deliveries and cash costs of operations. The volume of
energy sales and deliveries is primarily dependent on factors external to
Central Hudson, such as weather and economic conditions. Prices at which Central
Hudson delivers energy to its customers are determined in accordance with rate
plans approved by the PSC. In general, changes in the cost of purchased
electricity, fuel, and natural gas may affect the timing of cash flows but not
net income because these costs are fully recovered through Central Hudson's
electric and natural gas cost adjustment mechanisms, which are adjusted monthly.
Energy Group and Central Hudson each believes that it will be able to meet
its reasonably likely short-term and long-term cash requirements.
Changes in Energy Group's and Central Hudson's cash and temporary cash
investments resulting from operating, investing, and financing activities for
the nine months ended September 30, 2004, and September 30, 2003, are summarized
as follows:
Energy Group - Cash Flow Summary
Nine Months Ended September 30,
- --------------------------------------------------------------------------------
Variance
(Millions of Dollars) 2004 2003 2004 vs. 2003
- --------------------------------------------------------------------------------
Operating Activities $ 67.6 $ 16.0 $ 51.6
- --------------------------------------------------------------------------------
Investing Activities (49.8) 39.6 (89.4)
- --------------------------------------------------------------------------------
Financing Activities (12.7) (9.9) (2.8)
- --------------------------------------------------------------------------------
Net change for the period 5.1 45.7 (40.6)
- --------------------------------------------------------------------------------
Balance at beginning of year 125.8 83.5 42.3
- --------------------------------------------------------------------------------
Balance at end of period $ 130.9 $ 129.2 $ 1.7
- --------------------------------------------------------------------------------
Energy Group's net cash flows provided by operating activities during the
nine months ended September 30, 2004, were $51.6 million higher as compared to
the nine months ended September 30, 2003. Cash flows increased due primarily to
a weather-related decrease in Accounts Receivable, a refund received in 2004 for
an amended Utility Service Tax Return for 2001 for Central Hudson, a reduction
in costs related to various programs funded by the Customer Benefit Fund
(notably the electric reliability program which was substantially completed by
the end of 2003), the proceeds from the sale of emissions allowances by Central
Hudson in the first nine months of 2004, the absence of a pension contribution
for Central Hudson, and higher net income.
Additionally, as authorized in the Joint Proposal Order, deferred electric
pension and OPEB costs as of September 30, 2004, including carrying charges,
were offset
33
against the Customer Benefit Fund with no impact to cash flow for the nine
months ended September 30, 2004. The total amount offset through September 30,
2004, was $83 million.
The net change in cash flows related to investing activities was $89.4
million when comparing the nine months ended September 30, 2004, with the nine
months ended September 30, 2003, due primarily to the proceeds from the sale of
investments that were reflected in 2003. The absence of CHEC acquisitions in the
first nine months of 2004 offset the increased additions to plant, property and
equipment during this period.
Net cash flows used in financing activities were $2.8 million higher
during the nine months ended September 30, 2004, as compared to the nine months
ended September 30, 2003, due primarily to the decrease in the amount of
long-term debt issued through September 30, 2004. Offsetting this decrease was
the absence of the Stock Repurchase Program that was suspended in the latter
part of 2003 in order to assess alternative investment opportunities. The Stock
Repurchase Program is discussed in greater detail below.
At September 30, 2004, Energy Group had short-term debt outstanding of $37
million. Cash and cash equivalents for Energy Group were $130.9 million at
September 30, 2004.
Central Hudson - Cash Flow Summary
Nine Months Ended September 30,
- -------------------------------------------------------------------------------
Variance
(Millions of Dollars) 2004 2003 2004 vs. 2003
- -------------------------------------------------------------------------------
Operating Activities $ 52.6 $ 0.5 $ 52.1
- -------------------------------------------------------------------------------
Investing Activities (45.8) (40.5) (5.3)
- -------------------------------------------------------------------------------
Financing Activities (13.4) 2.0 (15.4)
- -------------------------------------------------------------------------------
Net change for the period (6.6) (38.0) 31.4
- -------------------------------------------------------------------------------
Balance at beginning of period 12.7 55.0 (42.3)
- -------------------------------------------------------------------------------
Balance at end of period $ 6.1 $ 17.0 $ (10.9)
- -------------------------------------------------------------------------------
Central Hudson's net cash flows provided by operating activities in the
nine months ended September 30, 2004, were $52.1 million higher as compared to
the nine months ended September 30, 2003. Cash flow increased due primarily to a
weather-related decrease in Accounts Receivable and an increase in the amounts
collected through Central Hudson's cost adjustment mechanisms for the recovery
of electric and natural gas supply costs, a refund received in 2004 for an
amended Utility Service Tax Return for 2001, a reduction in costs related to
various programs funded by the Customer Benefit Fund (notably the electric
reliability program which was substantially completed by the end of 2003), the
absence of a pension contribution, and the proceeds from the sale of emissions
allowances in the first nine months of 2004.
34
Net cash flows used in investing activities were $5.3 million higher in
the first nine months of 2004 as compared to the same period in 2003 due to
increased expenditures related to property, plant, and equipment.
Net cash flows used in financing activities were $15.4 million higher in
the first nine months of 2004 as compared to the same period in 2003 due to the
issuance in February 2004 of $7 million of 4.73% medium-term notes, due February
2014, as compared to $24 million in issuances during the same period in 2003.
On July 2, 2004, Central Hudson redeemed at maturity $15 million of 7.85%
medium-term notes using its available cash and short-term borrowings.
A portion of the Customer Benefit Fund was earmarked for refunds to
Central Hudson's customers through June 30, 2004, under Central Hudson's
regulatory agreement approved by the PSC on October 25, 2001. As directed by the
Joint Proposal Order, $5 million will continue to be refunded from the Customer
Benefit Fund for certain classes of electric customers in the period July 1,
2004, through June 30, 2005. Additionally, as directed in the Joint Proposal
Order, deferred electric pension and OPEB costs as of June 30, 2004, including
carrying charges, were offset against the Customer Benefit Fund with no impact
to cash flow. The total amount offset through September 30, 2004, was $83
million. Funding of up to $6.6 million (net of tax) for economic development
initiatives from the Customer Benefit Fund will continue through May 31, 2007.
As of September 30, 2004, Central Hudson had short-term debt outstanding
of $37 million and cash and cash equivalents of $6.1 million. Effective July 1,
2004, Central Hudson entered into a five-year, $75 million revolving credit
agreement with a group of commercial banks, replacing a similar agreement that
expired on June 30, 2004. Central Hudson also has committed short-term credit
facilities totaling $1 million with a regional bank and certain uncommitted
lines of credit with various banks. These agreements give Central Hudson
competitive options to minimize the cost of its short-term borrowing. Existing
PSC authorization limits the amount of short-term borrowing Central Hudson may
have outstanding at any time to $77 million in the aggregate.
On June 8, 2004, Central Hudson filed a Registration Statement on Form S-3
with the United States Securities and Exchange Commission ("SEC") for the
purpose of issuing unsecured debt securities on a continuous basis up to a
maximum aggregate amount of $85 million. The Registration Statement was declared
effective on October 22, 2004. On October 28, 2004, Central Hudson completed a
Distribution Agreement with three investment banks to sell up to $85 million of
such securities.
On November 3, 2004, Central Hudson issued $27 million of 5.05% medium
term notes, due November 4, 2019. On November 5, 2004, Central Hudson issued $7
million of 4.8% medium term notes, due November 5, 2014. The proceeds will be
used to reduce outstanding short-term debt and for general corporate purposes.
35
Central Hudson's current senior unsecured debt rating/outlook is A/Stable
by both Standard and Poor's Corporation and Fitch Ratings and A2/Stable by
Moody's Investors Service.
CHEC finalized a $15 million line of credit effective September 30, 2004,
which replaced a $25 million line of credit with a commercial bank. As of
September 30, 2004, there was no outstanding balance.
Energy Group and certain of its subsidiaries (other than Central Hudson)
have issued guarantees that provide financial or performance assurance to third
parties on behalf of Energy Group subsidiaries under certain commodity,
derivative, note purchase, and stock sale contracts. These agreements are
entered into primarily to support or enhance the creditworthiness otherwise
attributed to a subsidiary on a stand-alone basis, thereby facilitating the
extension of sufficient credit to accomplish the subsidiary's intended
commercial purposes. Guarantees have been provided to counter-parties to
guarantee the payment, when due, of obligations incurred by the Energy Group
subsidiaries in physical and financial transactions related to fuel oil,
propane, weather hedges, certain obligations related to the sale in 2002 of
former subsidiary CH Resources, Inc., and certain obligations related to CHEC's
commitment to purchase subordinated notes financing an ethanol production
facility.
At September 30, 2004, the aggregate amount of actual liabilities covered
by these guarantees was $3.6 million. The related liabilities are reflected in
the Consolidated Balance Sheet, and each such guarantee is not considered to be
material.
It is Management's belief that the possibility that Energy Group would be
required to perform or incur any material losses associated with any of the
above guarantees is remote.
On July 25, 2002, the Board of Directors of Energy Group authorized a
Common Stock Repurchase Program ("Stock Repurchase Program") to repurchase up to
4 million shares, or approximately 25%, of its then-outstanding Common Stock
over the five years beginning August 1, 2002. The Board of Directors had
targeted 800,000 shares for repurchase in the first year of the Stock Repurchase
Program, but had authorized the repurchase of up to 1.2 million shares during
the first year. Between August 1, 2002, and December 31, 2003, 600,087 shares
were repurchased under the Stock Repurchase Program at a cost of $27.5 million.
No shares were repurchased during the nine months ended September 30, 2004.
Energy Group intends to set repurchase targets, if any, each year based on
circumstances then prevailing. Repurchases have been suspended while Energy
Group assesses opportunities to redeploy its cash reserves in regulated and
competitive energy-related businesses. Energy Group reserves the right to
modify, suspend, or terminate the Stock Repurchase Program at any time without
notice.
Energy Group's business development team continues to seek opportunities
to make investments in regulated and competitive energy-related businesses. This
36
initiative is intended to expand Energy Group's portfolio of diversified
investments by adding investments that offer attractive returns and cash flows
relative to the risks they entail. Energy Group expects that certain investments
with lower risks may have expected returns below 10%.
On November 3, 2004, Energy Group announced CHEC's acquisition of $2.7
million of preferred units issued by Cornhusker Energy Lexington Holdings, LLC
("Cornhusker Holdings") and also its commitment to acquire $8 million of
subordinated notes issued by Cornhusker Holdings. Cornhusker Holdings is the
owner of Cornhusker Energy Lexington, LLC, an ethanol production facility to be
located in Nebraska that is expected to be completed in the fourth quarter of
2005.
EARNINGS PER SHARE
Three Months Ended September 30, 2004
Energy Group's earnings per share (basic) for the third quarter of 2004
were $0.28 versus $0.30 for the third quarter of 2003, a decrease of $0.02 per
share.
Energy Group accounted for $0.05 of the total decrease due to a reduction
in investment income, an increase in business development costs, and additional
New York State income tax expense related to a final reconciliation of the 2003
tax year. The reduction in investment income reflects the full liquidation, by
July 2003, of Energy Group's Alternate Investment Program, a portfolio of
marketable securities, and the reinvestment of all of the proceeds in low risk
and lower yield money market instruments. The increase in business development
costs reflects Energy Group's intensified efforts to redeploy this available
capital in suitable investment opportunities.
Central Hudson's earnings increased by $0.04 per share due largely to a
decrease in operating expenses and a reduction in regulatory carrying charges
due to customers resulting primarily from a declining Customer Benefit Fund
balance. In addition to providing additional customer refunds, the Customer
Benefit Fund was used to offset deferred pension and OPEB costs, as authorized
in Central Hudson's Joint Proposal with the PSC effective July 1, 2004.
Operating expenses decreased primarily due to a reduction in storm restoration
costs, partially offset by an increase in costs for the maintenance of electric
overhead lines and natural gas mains and an increase in uncollectible accounts.
Earnings were also enhanced by an increase in natural gas net operating revenues
due to a favorable reconciling adjustment related to Central Hudson's natural
gas supply charge and a reduction in preferred stock dividends, reflecting the
repurchase of certain issues of preferred stock in October 2003. The increase in
earnings was partially offset by a decrease in electric net operating revenues,
an increase in depreciation on utility plant assets and an increase in taxes
other than income taxes related to increases in property and payroll taxes. The
decrease in electric net operating revenues (net of the cost of purchased
electricity, fuel and revenue taxes) is due largely to an increase in shared
earnings and the completion in June 2004 of the restoration of previously
deferred electric delivery revenues, of which $0.8 million was restored in the
quarter ended September 30, 2003. Despite
37
cooler weather during the quarter, electric sales increased slightly due to
residential and commercial customer growth and increased usage by industrial
customers.
CHEC's earnings decreased by $0.01 per share due to lower sales volumes
related to warmer spring weather and lower margins on its fuel oil products,
partially offset by a reduction in operating expenses resulting from fewer
deliveries and improved operating efficiencies at the fuel oil distribution
subsidiaries.
Nine Months Ended September 30, 2004
Energy Group's consolidated basic earnings per share for the nine months
ended September increased $0.04 per share from $2.05 per share in 2003 to $2.09
per share in 2004. The improvement in earnings reflects the following relating
to Central Hudson:
i) A decrease in operating expenses, primarily due to the reduced cost
of storm restoration.
ii) A reduction in regulatory carrying charges due to customers relating
primarily to a declining Customer Benefit Fund balance resulting
from additional customer refunds and the use of a portion of the
Customer Benefit Fund to offset deferred pension and other
post-employment benefit costs.
iii) A reduction in preferred stock dividends reflecting the repurchase
of certain issues in October 2003.
iv) An increase in natural gas net operating revenues due to the
favorable effect of weather hedging contracts, a favorable
reconciling adjustment related to Central Hudson's natural gas
supply charge, and the restoration of previously deferred natural
gas delivery revenues. The increase in net revenues was partially
offset by an increase in shared earnings.
v) The increase in earnings was also partially offset by increases in
depreciation on utility plant and taxes other than income taxes.
CHEC also contributed to the increase in earnings due to the effect of
weather hedging contracts with more favorable terms, a reduction in operating
expenses resulting from improved operating efficiencies at its fuel oil
distribution subsidiaries and from fewer deliveries due to warmer weather than
last year, and increased income from investments in partnerships.
The repurchase in 2003 by Energy Group of additional shares of Energy
Group Common Stock also favorably impacted earnings per share.
A reduction in earnings from Energy Group limited the overall increase in
earnings and was due largely to a reduction in investment income due to the
liquidation of its Alternate Investment Program portfolio and an increase in
business development costs.
38
RESULTS OF OPERATIONS
The following financial review identifies the causes of significant
changes in the amounts of revenues and expenses for Energy Group and its
subsidiaries, comparing the three-month and nine-month periods ended September
30, 2004, to the three-month and nine-month periods ended September 30, 2003,
respectively. The operating results of the regulated subsidiary reflect Central
Hudson's electric and natural gas sales volumes and revenues, and the operating
results of the unregulated subsidiary reflect CHEC's operations.
Operating Revenues
Energy Group's operating revenues decreased $8 million, or 4.7%, from
$169.8 million in the third quarter of 2003 to $161.8 million for the third
quarter of 2004. For the nine months ended September 30, 2004, Energy Group's
operating revenues decreased $27.9 million, or 4.5%, from $618.1 million for the
nine months ended September 30, 2003, to $590.2 million for the nine months
ended September 30, 2004. Details of these revenue changes by electric, natural
gas, and unregulated subsidiaries are as follows:
- ---------------------------------------------------------------------------------------------
2004/2003 Increase (Decrease)
($000) Three Months Ended September 30, 2004
- ---------------------------------------------------------------------------------------------
Natural
Electric Gas Unregulated Total
- ---------------------------------------------------------------------------------------------
Customer Revenues(a) $ 63 $ (54) (b) $2,782 $ 2,791
- ---------------------------------------------------------------------------------------------
Sales to Other Utilities (163) 495 -- 332
- ---------------------------------------------------------------------------------------------
Energy Cost Adjustment (7,324) 232 -- (7,092)
- ---------------------------------------------------------------------------------------------
Deferred Revenues(c) (3,632) (310) -- (3,942)
- ---------------------------------------------------------------------------------------------
Miscellaneous (3) (41) -- (44)
- ---------------------------------------------------------------------------------------------
Total $(11,059) $ 322 $2,782 $(7,955)
- ---------------------------------------------------------------------------------------------
39
- ---------------------------------------------------------------------------------------------------
2004/2003 Increase (Decrease)
($000) Nine Months Ended September 30, 2004
- ---------------------------------------------------------------------------------------------------
Natural
Electric Gas Unregulated Total
- ---------------------------------------------------------------------------------------------------
Customer Revenues(a) $ 1,685 $(773)(b) $(4,294) $ (3,382)
- ---------------------------------------------------------------------------------------------------
Sales to Other Utilities (227) 789 -- 562
- ---------------------------------------------------------------------------------------------------
Energy Cost Adjustment (18,667) (885) -- (19,552)
- ---------------------------------------------------------------------------------------------------
Deferred Revenues(c) (7,305) (37) -- (7,342)
- ---------------------------------------------------------------------------------------------------
Miscellaneous 951 825 -- 1,776
- ---------------------------------------------------------------------------------------------------
Total $(23,563) $ (81) $(4,294) $(27,938)
- ---------------------------------------------------------------------------------------------------
(a) Includes delivery of electricity and natural gas supplied by others and an
offsetting restoration of revenues from Central Hudson's Customer Benefit
Fund (described under the caption "Summary of Regulatory Assets and
Liabilities" and "Rate Proceeding - Electric and Natural Gas" in Note 2 to
the Consolidated Financial Statements of the Corporations' 10-K Annual
Report) for customer refunds to all customers and back-out credits for
retail access customers.
(b) Includes both firm and interruptible revenues.
(c) Includes the restoration of other revenues from Central Hudson's Customer
Benefit Fund for other authorized programs, the restoration of previously
deferred delivery revenues, and the deferral of electric and natural gas
shared earnings in accordance with the provisions of Central Hudson's
current rate agreement with the PSC (described in Note 2 of the
Corporations' 10-K Annual Report).
For the quarter ended September 30, 2004, Central Hudson's electric and
natural gas operating revenues decreased $10.7 million, or 7.9%, from $135.3
million in 2003 to $124.6 million in 2004. Electric revenues decreased $11.1
million, or 8.9%, due largely to a decrease in revenues collected through
Central Hudson's energy cost adjustment clause to recover its cost of purchased
electricity. It is also attributable to a decrease in Customer Benefit Fund
revenues offsetting the cost of various programs authorized by the PSC in
Central Hudson's settlement agreement, the completion in June 2004 of the
restoration of electric delivery revenues deferred in prior years, and an
increase in shared earnings revenues which are deferred for the future benefit
of customers. The increase in natural gas revenues largely reflects an increase
in sales to other utilities.
For the nine months ended September 30, 2004, Central Hudson's electric
and natural gas operating revenues decreased $23.6 million from $449.7 million
in 2003 to $426.1 million in 2004. Electric revenues decreased $23.5 million, or
6.7%, and natural gas revenues decreased $0.1 million, or 0.1%, due largely to
decreases in revenues collected through Central Hudson's energy cost adjustment
clauses to recover its cost of purchased electricity and natural gas. The
decrease in electric revenues also reflects a decrease in Customer Benefit Fund
revenues offsetting the cost of programs authorized by the PSC and an increase
in shared earnings. The decrease in electric revenues was partially offset by an
increase in revenues from electric sales due to customer growth and increased
usage per customer. The decrease in both electric and natural gas revenues were
also partially offset by the recording of previously deferred revenue.
40
CHEC's operating revenues for the third quarter increased $2.8 million, or
8.1%, from $34.5 million in 2003 to $37.3 million in 2004. The increase in
revenues largely results from an increase in the average sales price per gallon
of liquid petroleum products, which was partially offset by a reduction of $2.9
million due to the sale of SCASCO Inc.'s ("SCASCO") natural gas business unit in
October 2003. Revenues for the nine months ended September 30 decreased $4.3
million, or 2.6%, from $168.5 million in 2003 to $164.2 million in 2004. The
decrease in revenues reflects a $12.6 million reduction in revenues from natural
gas sales, which was partially offset by an increase in the average sales price
per gallon of liquid petroleum products.
Sales Volumes
Central Hudson's sales volumes vary in response to weather conditions.
Electric sales volumes peak in the summer, and natural gas sales volumes peak in
the winter.
Changes in Central Hudson's electric and natural gas volumes from last
year by major customer classifications are set forth below.
- -----------------------------------------------------------------------------------------
% Increase (Decrease) From 2003
- -----------------------------------------------------------------------------------------
Three Months Ended September 30 Nine Months Ended September 30
- -----------------------------------------------------------------------------------------
Electric Natural Gas Electric Natural Gas
- -----------------------------------------------------------------------------------------
Residential (2)% (8)% 1% (5)%
- -----------------------------------------------------------------------------------------
Commercial 2% 4% 3% --
- -----------------------------------------------------------------------------------------
Industrial 2% -- 3% (10)%
- -----------------------------------------------------------------------------------------
Interruptible (N/A) (4)% (N/A) --
- -----------------------------------------------------------------------------------------
Central Hudson's sales volumes of electricity to full service customers
within its service territory, plus delivery of electricity supplied by others,
increased by less than 1% in the third quarter of 2004 as compared to the third
quarter of 2003. Sales volumes to residential customers decreased 2% due
primarily to the cooler weather experienced this summer as compared to last
year, which was partially offset by customer growth. Billing cooling-degree days
decreased by 5% compared to last year. Sales volumes to commercial customers
increased 2% due to both customer growth and increased usage per customer.
Industrial sales volumes increased 2% due to increased usage by a large
industrial customer.
Sales volumes of electricity to full service customers, plus delivery of
electricity supplied by others, increased 2% in the first nine months of 2004 as
compared to the first nine months of 2003. Despite warmer winter weather
(billing heating degree-days decreased by 10%) and the cooler summer weather,
sales volumes to residential customers increased 1% due primarily to customer
growth. Sales volumes to commercial customers increased 3% due to customer
growth and increased usage per customer. Industrial sales volumes increased 3%
due primarily to increased usage by a large industrial customer.
Sales volumes of natural gas to firm Central Hudson customers, plus
transportation of natural gas supplied by others, remained relatively flat in
the third
41
quarter of 2004 as compared to the same period in the prior year. Sales volumes
to residential customers, primarily space heating sales, decreased 8% due to a
reduction in usage per customer partially offset by an increase in sales due to
customer growth. Sales to commercial customers increased 4% due largely to
customer growth. The level of industrial sales remained unchanged and
interruptible sales decreased 4%.
For the nine months ended September 30, 2004, sales volumes of natural gas
to firm Central Hudson customers, plus transportation of natural gas supplied by
others, decreased 2% as compared to the first nine months of 2003. Because of
the warmer winter weather, sales volumes to residential customers, primarily
space heating customers, decreased 5%, which was partially offset by customer
growth. Sales volumes to commercial customers remained relatively flat with a
reduction in usage per customer offset by customer growth. Industrial sales,
which represent approximately 5% of total firm sales volumes, decreased 10%, and
interruptible sales volumes also remained flat.
CHEC's sales volumes of petroleum products decreased by 1.3 million
gallons, or 5%, to 22.9 million gallons in the third quarter of 2004 from 24.2
million gallons in the third quarter of 2003. CHEC's sales volumes of petroleum
products decreased by 2.6 million gallons to 110 million gallons for the first
nine months of 2004 from 112.6 million gallons during the same period in 2003.
These decreases were primarily due to warmer weather, as evidenced by a 10%
average decrease in heating degree days for the first nine months of 2004, as
compared to the same periods in 2003. The decrease in sales for the quarter was
also due to fewer deliveries resulting from improved operating efficiencies at
the fuel oil distribution subsidiaries. CHEC's sales volumes of natural gas
decreased as a result of the sale of SCASCO's natural gas business in the fourth
quarter of 2003.
Operating Expenses
Energy Group's total operating expenses, including income taxes, decreased
$7.4 million, or 4.5%, in the third quarter of 2004 from the comparable period
in 2003.
For the nine months ended September 30, 2004, Energy Group's total
operating expenses, including income taxes, decreased $27.9 million, or 4.8%, as
compared to the first nine months of 2003.
Central Hudson's operating expenses for the third quarter of 2004,
including income taxes, decreased $10 million, or 7.9%, from $127 million in
2003 to $117 million in 2004. The reduction in operating expenses results
primarily from a decrease of $6.8 million in purchased electricity expense due
largely to a decrease in the wholesale cost of purchased electricity and a
decrease in other expenses of operation of $4.6 million. The latter resulted
primarily from a decrease in storm restoration costs and a reduction in costs
related to various programs funded by the Customer Benefit Fund, notably the
electric reliability program that was substantially completed by the end of
2003.
For the nine months ended September 30, Central Hudson's operating
expenses, including income taxes, decreased $23 million from $416.9 million in
2003 to
42
$393.9 million in 2004. The reduction is due largely to a decrease in purchased
electricity and natural gas expense, and a decrease in other expenses of
operation, primarily storm restoration costs and the cost of certain programs
funded by the Customer Benefit Fund. The decrease in purchased electricity
expense reflects a reduction in the wholesale cost, a reduction in the volume
purchased due to customer migration to other providers, and a change in the
amounts recorded related to the recovery of these costs via Central Hudson's
cost recovery mechanism. The decrease in purchased natural gas expense is also
due to a change in the amounts recorded related to the cost recovery mechanism
and a reduction in volumes purchased due to a decrease in sales and to customer
migration.
CHEC's operating expenses for the third quarter, including income taxes,
increased $2.9 million, or 7.9%, from $36.9 million in 2003 to $39.8 million in
2004. The cost of petroleum increased $6.7 million due primarily to an increase
in the wholesale cost of liquid petroleum products. Natural gas costs decreased
$2.6 million due to the sale of SCASCO's natural gas business in October 2003.
For the nine months ended September 30, 2004, operating expenses decreased $4
million, or 2.4%, from $165.6 million in 2003 to $161.6 million in 2004 largely
due to a decrease in natural gas costs of $11.4 million resulting from the sale
of the natural gas business. Largely offsetting the decrease was an increase in
purchased petroleum costs of $9.4 million resulting primarily from higher
wholesale prices. Other operating expenses decreased by $1.2 million for the
quarter ended and $2 million for the nine months ended September 30, 2004, as
compared to the same periods last year due to improved operating efficiencies at
the fuel oil distribution subsidiaries and lower sales, general and
administrative costs.
Other Income
Other income for Energy Group (consolidated) decreased $1.8 million and $3
million for the quarter and nine months, respectively, ended September 30, 2004,
as compared to the same periods in 2003. The reduction for the quarter and the
nine months ended September 30, 2004, was due primarily to decreased investment
income from Energy Group due to the liquidation of its Alternate Investment
Program, an increase in business development costs by Energy Group for the
purpose of redeploying its available capital in suitable investment
opportunities, and a reduction in Central Hudson's regulatory carrying charges
due from customers related to deferred pension costs.
Interest and Other Charges
Interest and other charges for Energy Group (consolidated) decreased $2.1
million and $3.5 million for the quarter and nine months ended September 30,
2004, as compared to the same periods in 2003. The decrease for both periods was
due primarily to a reduction of regulatory carrying charges due to Central
Hudson customers resulting largely from a declining Customer Benefit Fund
balance. In addition to providing additional customer refunds, funds were used
to offset deferred pension and other post-employment benefit costs, as
authorized in Central Hudson's modified
43
settlement agreement with the PSC effective July 1, 2004. The reductions also
reflect a decrease in preferred stock dividends due to the redemption of certain
issues of preferred stock by Central Hudson in October 2003.
COMMON STOCK DIVIDENDS
Reference is made to the caption "Common Stock Dividends and Price Ranges"
of Part II, Item 7 of the Corporations' 10-K Annual Report for a discussion of
Energy Group's dividend payments. On March 26, 2004, the Board of Directors of
Energy Group declared a quarterly dividend of $0.54 per share, which was paid
May 3, 2004, to shareholders of record as of April 9, 2004. On May 21, 2004, the
Board of Directors of Energy Group declared a quarterly dividend of $0.54 per
share, payable August 2, 2004, to shareholders of record as of July 9, 2004. On
September 30, 2004, the Board of Directors of Energy Group declared a quarterly
dividend $0.54 per share, payable November 1, 2004, to shareholders of record as
of October 11, 2004.
FORWARD-LOOKING STATEMENTS
Statements included in this Quarterly Report on Form 10-Q and the
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 Securities Exchange
Act of 1934 ("Exchange Act"), as amended. Forward-looking statements may be
identified by words including "anticipates," "believes," "projects," "intends,"
"estimates," "expects," "plans," "assumes," "seeks," and similar expressions.
Forward-looking statements including, without limitation, those relating to
Energy Group's and Central Hudson's future business prospects, revenues,
proceeds, working capital, liquidity, income and margins, are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those indicated in the forward-looking statements, due to several important
factors including those identified from time to time in the forward-looking
statements. Those factors include, but are not limited to, weather; energy
supply and demand; fuel prices; interest rates; potential future acquisitions;
developments in the legislative, regulatory and competitive environment; 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; the success of strategies to satisfy electricity requirements following
the sale of Central Hudson's interests in its major generating assets; future
market prices for energy, capacity and ancillary services; 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. 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. In addition, such statements are
subject to the risks and uncertainties discussed in the "Risk Factors" section
and elsewhere in this document.
Given these risks and uncertainties, undue reliance should not be placed
on these forward-looking statements.
44
RISK FACTORS
Redeployment Of Capital
Energy Group is seeking to invest in energy-related assets approximately
$100 million currently held in money market instruments. Such investments are
being sought to produce earnings intended to replace, in whole or in part, the
income recorded in 2001, 2002, 2003, and 2004 from the sales of Central Hudson's
interests in its major generating assets. If such investments are not made
timely or are insufficient to replace the expiring income, Energy Group's
results of operations could be adversely affected. Reference is made to Note 2 -
"Regulatory Matters" in the Corporations' 10-K Annual Report and, in particular,
to the subcaption "Expiring Amortization." No projected income from such future
investments in new energy-related assets has been included in any earnings
guidance issued by Energy Group for 2004.
Storms and Other Events Beyond Central Hudson's Control May Interfere with
the Operation of its Transmission and Distribution Facilities in the
Mid-Hudson Valley Region
Central Hudson's revenues are generated by the delivery of electricity
over transmission and distribution lines and by the delivery of natural gas
through pipelines. These facilities, which are owned and operated by Central
Hudson or by third party entities, are at risk of damage from storms, natural
disasters, wars, terrorist acts, and other catastrophic events. If Central
Hudson is unable to repair its facilities in a timely manner, or if the third
parties that own and operate the interconnected facilities are unable to repair
their facilities in a timely manner, Central Hudson's customers may experience a
service disruption and Central Hudson may experience lower revenues or increased
expenses, or both, that Central Hudson may not be able to recover fully through
rates, insurance, sales margins, or other means in a timely manner, or at all.
Storms and Other Events Beyond the Control of CHEC's Subsidiaries May
Interfere with the Operation of their Fuel Oil Delivery Businesses in the
Mid-Atlantic and in the Northeast Region
CHEC's revenues from its fuel oil delivery businesses are generated by the
delivery of various petroleum products within their areas of operation. In order
to conduct these businesses, CHEC's subsidiaries need access to petroleum
supplies from storage facilities in their service territories. Some of these
storage facilities are owned or leased by CHEC's subsidiaries, and some are
owned and operated by third party entities. These facilities are at risk of
damage from storms, natural disasters, wars, terrorist acts, and other
catastrophic events and supply of petroleum products to these facilities could
be delayed, curtailed, or lost due to developments in the world oil markets. If
such damage or disruption were to occur, and if the affected CHEC subsidiary
were unable to procure petroleum from alternative sources of supply in a timely
manner, the customers of such subsidiary could experience a service disruption
and the subsidiary could experience lower revenues, or increased expenses, or
both, that the subsidiary might not be able to recover fully through insurance,
sales margins, or other means in a timely manner, or at all.
45
Unusual Temperatures in Central Hudson and CHEC's Service Territories
Could Adversely Impact Earnings
Central Hudson's service territory is the mid-Hudson Valley region. CHEC's
subsidiaries serve the mid-Atlantic region and northeast U.S. These areas
typically experience seasonal fluctuations in temperature. If, however, the
regions were to experience unusually mild winters and cooler summers, Central
Hudson's and CHEC's earnings could be adversely impacted. A considerable portion
of Central Hudson's total electric deliveries is directly or indirectly related
to weather-sensitive end uses such as air conditioning and space heating. Much
of the fuel oil delivered by CHEC's subsidiaries is also used for space heating,
as is the majority of the natural gas delivered by Central Hudson. As a result,
sales fluctuate and vary from normal expected levels based on variations in
weather from normal seasonal levels. Such variations in sales volumes could
affect results of operations significantly. Central Hudson and CHEC have
programs in place to constrain the potential variability in results of
operations through the use of derivative instruments. However, no assurance can
be given that suitable risk management instruments will remain available.
Central Hudson's Rate Plans Limit its Ability to Pass Through Increased
Costs to its Customers; If Central Hudson's Rate Plans Are Modified by
State Regulatory Authorities, Central Hudson Revenues May Be Lower Than
Expected
As a transmission and distribution company delivering electricity and
natural gas within New York State, Central Hudson is regulated by the PSC, which
regulates retail rates, terms and conditions of service, various business
practices and transactions, financings, and transactions between Central Hudson
and Energy Group or Energy Group's competitive business subsidiaries. The PSC's
Order Establishing Rates in Central Hudson's rate proceeding, which was issued
on October 25, 2001, and became effective November 1, 2001 (the "Rate Order"),
and the PSC's Joint Proposal Order issued on June 14, 2004, and effective in
June 2004 (together the "Rate Plans") cover the rates Central Hudson can charge
customers and contain a number of related provisions. Rates charged to customers
generally may not be changed during the respective limited terms of the Rate
Plans, other than for the recovery of energy costs and limited other exceptions.
As a result, the Rate Plans may not reflect all of the increased construction
and other costs that may be experienced after the date the Rate Plans became
effective. The approval of new rate plans or changes to existing Rate Plans
could have a significant effect on Central Hudson's financial condition, results
of operations, or cash flows. The current Rate Plans and material matters
relating to potential rate changes are described in Note 2 - "Regulatory
Matters" in the Corporations' 10-K Annual Report. The current Rate Plans permit
Central Hudson to file for changes in rates any time after June 30, 2004, but
rates are generally not changed by the PSC until eleven months after the filing
of proposed rate changes. Central Hudson expects to file for new retail rates
within the next two-year period. Central Hudson cannot predict the rates that
will be established by the PSC, or whether its business may be adversely
affected by the rates determined, in such proceeding.
46
Central Hudson Is Subject to Risks Relating to Asbestos Litigation and
Manufactured Gas Plant Facilities
Litigations have been commenced against Central Hudson arising from the
use of asbestos at its previously owned major generating assets, and Central
Hudson is involved in a number of matters arising from contamination at former
manufactured gas plant sites. Reference is made to Note 13 - "Commitments and
Contingencies" in the Corporations' 10-K Annual Report, and in particular to the
subcaptions in the Note regarding "Asbestos Litigation" and "Former Manufactured
Gas Plant Facilities," and Part II, Item 1 of this Quarterly Report on Form
10-Q.
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. There has been no material change in
either the market risks or the practices employed by Energy Group and Central
Hudson to mitigate these risks discussed in the Corporations' 10-K Annual
Report. For related discussion on this activity, see Note 2 - "Summary of
Significant Accounting Policies" under the caption "Accounting for Derivative
Instruments and Hedging Activities" and Item 2 - "Capital Resources and
Liquidity."
ITEM 4 - CONTROLS AND PROCEDURES
The Chief Executive Officer and Chief Financial Officer of 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 that evaluation, concluded that, as of the end of the
period covered by this Quarterly Report on Form 10-Q, Energy Group's and Central
Hudson's (together, the "Registrants") controls and procedures are effective for
recording, processing, summarizing, and reporting information required to be
disclosed in their reports under the Securities Exchange Act of 1934, as
amended, within the time periods specified in the SEC's rules and forms.
There have not been any changes to the Registrants' internal control over
financial reporting that occurred during the Registrants' last fiscal quarter
that have materially affected, or are reasonably likely to materially affect,
the Registrants' internal control over financial reporting.
47
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Asbestos Litigation
For a discussion of lawsuits against Central Hudson involving asbestos,
see Note 13 - "Commitments and Contingencies" under the caption "Asbestos
Litigation" in the Consolidated Financial Statements of the Corporations' 10-K
Annual Report.
As of October 4, 2004, a total of 3,215 cases involving asbestos have been
brought against Central Hudson of the type described under the caption, of which
1,525 remain pending. Of the 1,690 cases no longer pending against Central
Hudson, 1,549 have been dismissed or discontinued, and Central Hudson has
settled 141 cases. Energy Group and Central Hudson are presently unable to
assess the validity of the remaining asbestos lawsuits; accordingly, Energy
Group and Central Hudson cannot determine the ultimate liability relating to
these cases. Based on information known to Energy Group and Central Hudson at
this time, including Central Hudson's experience in settling and in obtaining
dismissals of asbestos cases, Energy Group and Central Hudson believe that the
cost to be incurred in connection with the remaining lawsuits will not have a
material adverse effect on Energy Group's and/or Central Hudson's financial
condition, results of operations, or cash flows.
Item 5 - Other Information
Environmental Matters. For discussion of Central Hudson's environmental
matters, see Note 13 - "Commitments and Contingencies" to the Consolidated
Financial Statements under the caption "Environmental Matters" of the
Corporations' 10-K Annual Report.
Central Hudson - Orange County Landfill. Reference is made to the
discussion under the subcaption "Orange County Landfill" in Note 13 to the
Consolidated Financial Statements of the Corporations' 10-K Annual Report. The
Tolling Agreement dated September 7, 2001, whereby Central Hudson agreed to toll
the applicable statute of limitations for certain alleged causes of action by
certain state agencies against Central Hudson, was extended to April 30, 2005.
Neither Energy Group nor Central Hudson can predict the outcome of this
investigation at this time.
Other Matter. The State of Maryland issued a Notice of Assessment for
Motor Fuel Tax on September 28, 2004, to Griffith Energy Services, Inc.
("Griffith"), one of the competitive business subsidiaries of CHEC. The
assessment is for $2.5 million for the period 2001 - 2003. Griffith intends to
appeal the assessment and Management believes that the ultimate resolution will
not have a material adverse effect on the financial condition, results of
operations, or cash flows of Griffith.
48
ITEM 6 - EXHIBITS
The following exhibits are furnished in accordance with the provisions of
Item 601 of Regulation S-K.
Exhibit No.
Regulation S-K
Item 601
Designation Exhibit Description
12(i) Statement Showing Computation of the Ratio of Earnings to
Fixed Charges for Energy Group.
12(ii) Statement Showing Computation of the Ratio of Earnings to
Fixed Charges and the Ratio of Earnings to Fixed Charges and
Preferred Dividends for Central Hudson.
31.1 Rule 13a-14(a)/15d-14(a) Certification by Steven V. Lant.
31.2 Rule 13a-14(a)/15d-14(a) Certification by Christopher M.
Capone.
32.1 Section 1350 Certification by Steven V. Lant.
32.2 Section 1350 Certification by Christopher M. Capone.
49
SIGNATURES
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 hereunder duly authorized.
CH ENERGY GROUP, INC.
(Registrant)
By: /s/ Donna S. Doyle
-------------------------------------------
Donna S. Doyle
Vice President - Accounting and Controller
CENTRAL HUDSON GAS & ELECTRIC
CORPORATION
(Co-Registrant)
By: /s/ Donna S. Doyle
-------------------------------------------
Donna S. Doyle
Vice President - Accounting and Controller
Date: November 8, 2004
50
EXHIBIT INDEX
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:
Exhibit No.
Regulation S-K
Item 601
Designation Exhibit Description
12(i) Statement Showing Computation of the Ratio of Earnings to
Fixed Charges for Energy Group.
12(ii) Statement Showing Computation of the Ratio of Earnings to
Fixed Charges and the Ratio of Earnings to Fixed Charges and
Preferred Dividends for Central Hudson.
31.1 Rule 13a-14(a)/15d-14(a) Certification by Steven V. Lant.
31.2 Rule 13a-14(a)/15d-14(a) Certification by Christopher M.
Capone.
32.1 Section 1350 Certification by Steven V. Lant.
32.2 Section 1350 Certification by Christopher M. Capone.
51