CH Energy Group, Inc. Q4 2008 Earnings Call Transcript

CH Energy Group, Inc. (CHG)

Q4 2008 Earnings Call

February 12, 2009 2:00 pm ET

Executives

Steve V. Lant – Chairman of the Board, President & Chief Executive Officer

Christopher M. Capone – Chief Financial Officer & Executive Vice President

Kimberly J. Wright – Vice President Accounting, Principal Accounting Officer & Controller

Stacey A. Renner – Treasurer

Analysts

Analyst for Jack Moore – Harpswell Capital

Barry Abramson – GAMCO Investors

Maurice E. May – Power Insights

Paul Patterson – Glenrock Associates

[John Hansen – Three Cities Asset Management]

Peter Hark – Talon Capital

Presentation

Operator

Welcome to the CH Energy Group conference call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session. Instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to our host Mr. Steven Lant.

Steve V. Lant

With me today are Chris Capone, Executive Vice President and CFO; Kim Wright, Vice President of Accounting and Controller; and Stacy Renner, our Treasurer. Following my introductory remarks, Kim Wright will cover our fourth quarter 2008 and calendar year 2008 results in detail by business unit. Then, Chris Capone will discuss the current business climate and our views of the issues affecting us going forward. Following Chris Capone’s remarks, we will take your questions.

Before we begin I would ask Stacey Renner to review with you our cautionary statement regarding reliance on forward-looking statements.

Stacey A. Renner

I would like to first remind listeners that the presentation Slides for this conference call and our supplemental financial information are available in the investor relations section of our website at www.CHEnergyGroup.com. I refer you now to the paragraph now on forward-looking statements at the bottom of this morning’s press release. If you are following along with the presentation Slides, please reference page 3.

During this conference call presentation and in the question and answer session to follow, CH Energy Group participants may discuss managements’ intentions, beliefs, expectations, projections, or make other statements that are not historical in nature. Please note these forward-looking statements are subject to assumptions, risks and uncertainties that could cause actual results to differ materially from the forward-looking statements.

These risks are discussed in more detail in our filing on Form 10K for the year ended December 31, 2008 under the section labeled risk factors. That 10K was filed on February 10^th and is available in the investor relations section of our website at the link for SEC filings. I’ll now return the call to Steve Lant.

Steve V. Lant

I’d now like to summarize our results for the fourth quarter 2008 and for the calendar year 2008. Our earnings per share for the fourth quarter were $0.71 in 2008 versus $0.73 in 2007. While the quarter was almost flat in aggregate the performance of our two largest business units varied substantially from the fourth quarter 2007.

Central Hudson earned $0.32 per share in the fourth quarter 2008 versus $0.54 per share for the fourth quarter of 2008, a decline of $0.22 per share. Griffith earned $0.34 per share for the fourth quarter 2008 versus $0.09 for the fourth quarter 2007, an increase of $0.25 per share. For the calendar year, CH Energy Group earned $2.22 in 2008 versus $2.70 in 2007, a decline of $0.48.

The decline in earnings per share was most evident at Central Hudson which earned $1.57 in 2008 versus $2.06 in 2009. Central Hudson’s earning drop of $0.39 in 2008 was driven by sales that were well below the level projected in our rate settlement and also by write offs of uncollectable accounts and increased reserves for uncollectable accounts which totaled $0.17.

We believe the deteriorating economy was the driving factor affecting our earnings in the fourth quarter versus higher energy prices which affected us in prior periods but have now abated. Storm expenses were also significantly higher, about $0.13. While Central Hudson did benefit from the third phased in rate increase called for under our 2006 rate settlement and from our efforts to control expenses we were not able to overcome the combined effect of weak sales, higher earned collectibles and much higher storm restoration expenses.

Griffith was up $0.06 for the year from $0.20 in 2007 to $0.26 in 2008. This was due in large part to improving margins as the wholesale price of oil fell dramatically during the fourth quarter reversing the rapid increase that occurred earlier in the year. The speed with which oil prices fell surprised us which is why we exceeded our earnings per share guidance for Griffith.

For the year margin growth in combination with our efforts to control costs were more than sufficient to offset the effects of conservation and higher uncollectable accounts. The contribution for CH Energy Group including [checks] investments other than Griffith was down $0.15 for the year due principally to a lower average investment balance in 2008.

While our 2008 earnings are disappointing, there is hope for improvement during 2009. Our results at Central Hudson make it crystal clear that we need a rate increase to recalibrate our revenues to reflect our actual sales and costs of serving our customers. The rate case we filed on July 31^st has proceeded according to the 11 month procedural schedule. Hearings were conducted in January and all that remains before the case goes to the PSC for decision are briefs to be filed over the next few weeks and an ALG recommended decision in April.

I believe we’ve demonstrated the rate increase is reasonable and necessary but we won’t know the outcome of the proceeding until June. I’m also encouraged by Griffith’s fourth quarter recovery which was due to a combination of lower oil prices and near normal weather.

The last topic I’d like to address is probably the most important one during a fiscal crisis and that is liquidity. As many of you know, for many years we’ve emphasized the importance of credit worthiness and liquidity for a company in a very capital intensive industry and with an obligation to serve its customers at all times. This focus has led us to adopt conservative financial policies that have supported a solid A utility bond rating and to our securing committed credit that is sufficient to cover commodity price spikes and other potential variations in our cash requirements.

I’m very pleased that we have weathered the storm fairly well due to our strong liquidity position and that we are well positioned today to continue to fulfill our obligations. During the fourth quarter we were able to successfully place long term debt and although the credit spreads were much higher than historical averages the all in cost was acceptable.

I’d now like to turn the call over to Kim Wright.

Kimberly J. Wright

As Steve mentioned, I’ll be reviewing our results for the year and will be covering pages five through eight of the PowerPoint presentation for those of you who are following along online. Beginning with our consolidated results you see on page 5, you see that we earned $2.25 in 2008, $0.48 less from the $2.70 we earned in 2007.

Moving on to page 6 Central Hudson’s earnings of $1.67 were $0.39 lower than 2007. Looking at some of the highlights of the details provided on the bottom half of page 6 you see that our regulatory mechanisms and unusual events did not significantly impact our year-over-year earnings.

There were really three primary drivers of our lower earnings for both the fourth quarter and the year. First, significantly lower sales volumes than the levels assumed in our rates. Although you can see that our earnings were $0.16 higher than 2007 as a result of rate increases, if you look at the lines following that, two lines below beginning with tree trimming, depreciation, interest and other taxes, you can see that the normal cost of our business increased over 2007 levels in excess of what we generated from the higher rates.

This was due to the short fall between our actual sales volume and the levels assumed in the rates that were approved in 2006. As Steve noted earlier and we’ve been discussing with you for quite some time the sales volumes in our rate settlement [inaudible] creating a gap between our revenue and the cost of running our business. This gap began to emerge in 2006 and 2007 due to price induced conservation but in 2008 it further widened with the financial crisis and the weak economy which caused our customers to spend less.

The weak economy and the high energy prices also contributed to the second driver of our lower earnings, higher costs for uncollectable accounts. As you can see, these costs rose $0.17 over 2007. During 2008 we saw our bad debt write offs increase by $0.37 in terms of dollars. The number of accounts in arrears grew 14% and the balance of these account increased 43%. With weak economic forecast continuing in to 2009 we do expect to see this number continue to be at a level than it has been historically.

Due to the significant impacts write off had on our earnings, we have petitioned the Public Service Commission for a recovery of $1.8 million, the excess of our actual write off about the amount reflected in our rates.

There are some bright spots as we move in to 2009. Our energy commodity prices are lowered now which are being passed through to our customers and will slow the pace in increases in our accounts that are in arrears. In terms of foreclosures and unemployment our territory has been faring better than the nation overall with foreclosures up 29% in New York versus the national average of 81% and unemployment at 6.3% in our territory versus New York’s 6.8% and the national average of 7.1%.

Finally, you see that storm restoration costs reduced our earnings by $0.13. This was a combination of 2007 being a quieter than average year while 2008 was unusually severe in terms of both dollars and the number of stores. In 2008 we had eight storms that met the Public Service Commission’s criteria of a major storm versus five in 2007. In 2008 we spent $6 million to restore service following storms, more than double the $2.8 million we spent in 2007.

I do want to point out that in spite this significant increase, it does not reflect over $3 million of cost we incur to restore electric service to approximately 72,000 customers following the severe ice storm we had in December. We have petitioned the Public Service Commission for recovery of these costs and have therefore deferred them.

Moving on to page seven, you see that Griffith’s earnings are $0.06 lower than 2007. By far the biggest driver was our margins which increased earnings by $0.28. If you look to the right side of the Slide you can also see that virtually all of this incurred in the fourth quarter when oil prices dropped rapidly and significantly following the historic highs we experienced last July. Looking at the next two lines, you see that these margins were needed to offset the impact of our customer’s conserving, lowering earnings by $0.16 and higher uncollectable accounts.

As we saw with Central Hudson, the weak economy has made it difficult for Griffith’s customers to pay their bills reducing our earnings by a total of $0.12, $0.03 of which is reflected in the acquisition line. Of this $0.12, $0.02 was from higher write offs while the remainder is for higher reserves which we believe are necessary for future write offs related to our 2008 sale. You can see that our acquisitions contributed $0.07 to the increase in 2008 earnings, $0.10 when you exclude the impact of higher uncollectables. Despite the success, as we’ve discussed on prior calls, due to the uncertainty that the current environment has created in valuing acquisitions, we have suspended this program.

Wrapping up on page 8 with our other businesses and investments, our earnings were $0.15 lower than 2007 primarily due to lower interest and investment income at the holding company. This is due to the fact that our redeployable cash has been invested. The other large driver was lower [crush] margins at Cornhusker] due largely to historically high corn prices without corresponding increases in ethanol prices. This largely impacted the first half of the year and we have seen a reduction in corn prices recently.

Now, I’ll turn the call over to Chris Capone for a discussion of our 2009 outlook.

Christopher M. Capone

These continue to be extraordinary times for everyone. CH Energy Group and its primary subsidiaries Central Hudson and Griffith were impacted as was virtually every other business. As Steve mentioned in his comments, it’s during times such as these that a strong financial position, a single A bond rating at Central Hudson and access to committed credit are more important than ever.

Stacey Renner our Treasurer and I spend significant time monitoring capital markets and taking all reasonable steps to really maintain this access. We have a total of $275 million of committed credit, $125 million at Central Hudson and $150 million at CH Energy Group. At this time we have nothing outstanding on the Energy Group facility and we have approximately $50 million in short term debt at Central Hudson for typical seasonal working needs plus funding cap ex.

$20 million of that $50 million is from our $125 million committed facility and the balance is from uncommitted lines which tend to be cheaper from time-to-time. However, at this point those lines tend to be a little bit more expensive and we may be shifting towards the committed facilities going forward.

In addition, Central Hudson will most likely access the term debt market this year to fund a portion of our cap ex program as we normally do. In recent years our term borrowing have been approximately $30 million but given the level of our projected cap ex for 2009, our term borrowing may be slightly higher.

More specifically, I want to make some comments about our business segments. At Central Hudson the primary drivers of weakness for 2008 results were really as Steve mentioned earlier in this call which were the continued short fall in residential sales relative to the sales forecast used to set delivery rates in our existing agreement in addition to the gap to the amounts we were amount to collect [inaudible] our un collectibles compared to our actual experience and those are the figures that Kim just alluded to a few moments ago.

Just the sales gap alone amounted to approximately $0.55 per share in 2008. Again these are the shortfalls relative to those level set in rates as part of our three year agreement. Interestingly there was virtually no change year-over-year in residential electrical use per customer although there was a slight decline in the natural gas usage per customer of about 3%. Again, this highlights the fact that the sales issue has been primarily relative to those amounts forecasted in rates.

When you look also at the shortfall in recovery for bad debts again, compared to the amounts allowed in our current rate agreement, that was roughly $0.07 per share in 2008 as well. Now, the filing that Steve alluded to addresses both of these significant issues. We have proposed a revenue decoupling mechanism or an RDM and in their rebuttal testimony PSC staff also included an RDM so the actual form of the RDM won’t be determined until the rate case has been finalized.

Regarding uncollectables, we would like to set the rate in this rate case based on our most recent actual experience with a deferral mechanism to address any differences between those amounts. In addition, the Public Service Commission began a statewide proceeding to address the uncollectable issue for this existing winter season but at this point it’s too early to know the outcome and any financial impact that may have.

Our current rate agreement runs until June 30^th of this year so there will be continuing impacts from this rate case up until that point. The sales shortfall in just the first half of 2009 again, under the current rate agreement is projected to be $0.45 per share and the additional amounts for the uncollectables is another $0.04 to $0.05 per share again, these are in the first half of this year alone.

When new rates do go in to effect, the revenues we collect from customers should be much more closely aligned with the actual cost of providing service. The change in delivery rates coupled with continued investment in infrastructure sets the foundation for a significant improvement in our financial results in the future.

As described in our release, Central Hudson earned $1.67 in 2008 but as I mentioned a few moments ago earnings were reduced by a total of about $0.60 per share due to the short fall in usage per customer and the under collection for bad debts. While we are not providing guidance for 2009 given the pending rate case, I think it’s important to focus on the period after new rates go in to effect.

Now, it’s impossible to know the outcome of the current proceedings but if you look at our filing I think you can at least get a sense of the earnings power of the utility going forward. Included as part of our filing is a rate base figure for the year ended June 30, 2010. This figure is approximately $837 million. We also filed for a 48% equity ratio and a 10.25% return on equity. If you just multiple the rate base figure times the equity percentage of 48% times the 10.25 ROE again, that we filed for, that can provide you with an income figure and that equates to approximately $41 million or $2.60 per share for Central Hudson.

I’d also like to provide you though with two important sensitivities. Each 100 basis point change in our proposed equity ration results in a net income impact of about $850,000 or a little more than $0.05 per share. Each 10 basis point change in the ROE, results in a net income impact of about $1 million or about $0.06 per share.

Importantly, there also are issues of expense recovery that could impact our earned return. Though it is far too early to know the final outcome of the current rate filing but, we do expect the annualized earning of the utility to improve significantly beginning in the second half of ’09 when new rates are in effect and going in to 2010.

I’d like to make a few comments as well about Griffith. As we’re all aware oil prices continue to be volatile. They peaked at close to $150 last July and have sense declined to now just below $40 per barrel or about a 70% drop. As Kim mentioned in terms of overall energy prices relieving the burden on our customers generally, it certainly will apply to our oil customers as well and that should help in terms of the uncollectables and then generally just in their ability to pay their bills.

But, uncertain economic times and the deteriorating job picture will continue to apply some amount of pressure. Declining oil prices have also allowed for a measured expansion in margins and that result certainly came through as Kim described in our fourth quarter and full year results. The margin expansion contribution was very significant.

Declining commodity prices also reduced the amount of working capital necessary to run Griffith. In 2008 alone Griffith repaid approximately $18 million in incremental working capital which it needed to address the higher commodity costs of late 2007 throughout the middle of 2008 and additionally was able to upstream to CH Energy Group an additional $11 million.

As we have said in prior calls we are undertaking a strategic review of Griffith and we are continuing that review across product lines as well as geographic markets. As we have said in the past as well, we as a management team and our board as well are committed to creating shareholder value and we do want to focus our assets in those markets where we believe we can most efficiently meet customer needs and importantly provide our shareholders with an appropriate return.

Just a few comments on the reminder of our businesses, our other business and investment segment, this is the segment that houses our Cornhusker ethanol investment, our Lyonsdale biomass investment and our wind investment and also includes intercompany interest income. At Cornhusker, we have a minority stake in an ethanol production facility. Corn prices have fallen from a high of approximately $8 per bushel but ethanol prices have fallen as well.

However, the relative price spread between ethanol and reformulated gasoline which is a general industry benchmark widened back out over the last few months and crush margins have improved modestly. Our Lyonsdale investment, the 19 megawatt biomass plant in upstate New York continues to perform well as do the wind projects in which we hold a minority interest.

We have not yet introduced long term debt as part of our capital structure for our non-utility businesses but we do expect to begin that this year. At the current size of these businesses that could provide approximately $50 million of capital for new investments. As we look at opportunities, we will be guided by what we believe are those opportunities that will best add to shareholder value including share buybacks at the risk adjusted rate of return on that use of our resources becomes more attractive than the other investments we could make.

Now, in 2008 we began focusing more on growing our regulated business Central Hudson. We will continue to invest significant capital in that entity which is by far our largest business unit including the possibility of rate base renewable resources. We believe these investments which are needed to provide the quality of service and reliability our customers expect can contribute to future earnings growth.

At this point I’d like to turn the call back over to the operator to open it up for question and answer.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Analyst for Jack Moore – Harpswell Capital.

Analyst for Jack Moore – Harpswell Capital

With respect to Griffith Oil, can you give us a little more color on the earnings, what we might expect to be recurring versus what might have just been related to the commodity volatility?

Christopher M. Capone

I think when you look at the earnings profile for 2008, again it was certainly a tail of almost two separate years. As we had mentioned early on in the year with the high commodity prices it required significantly more working capital, that put pressure on earnings as you would imagine. Again, the cost that goes along with that capital but, that was all primarily returned in the second half of the year.

Griffith was actually able to upstream cash in the fourth quarter and return that working capital which is very unusual as you would expect during the fourth quarter which begins their peak season. You would expect them actually to just normally absorb working capital. When you look at the results again for 2008 I think that does reasonably represent more of a trend type of earnings.

We would expect to see modestly increasing earnings from there given just what the oil outlook is right now. Again, that can change pretty dramatically but we have had good success in incrementally expanding margins on a year-to-year basis primarily to address increases in costs but we believe those increasing margins even this year can just modestly add to the earnings profile.

Analyst for Jack Moore – Harpswell Capital

Any more color on the strategic fit of Griffith? And, any color you can provide I guess in value, would be helpful.

Christopher M. Capone

I’m not sure I’ll be able to address the last part of your question but I can tell you some of the things we have completed and are currently undertaking. One of the things that we clearly saw was that given the level of conservation was prevalent among our customers and the reduced volumes that we would expect going forward that we needed to address our cost structure and we have done that and have taken approximately $4 million costs out of the business on an annualized basis.

Some of that was realized in the fourth quarter and was part of the reason why the fourth quarter’s earnings were strong. Some of it will annualize in to ’09. We’re not done, I don’t think we’re ever done managing our cost structure. We want to continue to look at every element and see where efficiencies can be found.

Another element that we’re working on is our marketing program. Clearly there has been a lot of turbulence in the oil market. Customers have seen prices fluctuate a lot. The relative preferences of our customers for different pricing packages whether they be variable, fixed or capped prices has been changing to we need to refresh our market research on that point and make sure we customize our offerings for each market based on these changing customer preferences. That’s about the extent of the analysis that we’ve completed and if we have other elements of this to talk about in the future, we will of course do so.

Operator

Your next question comes from Barry Abramson – GAMCO Investors.

Barry Abramson – GAMCO Investors

My question relates to something I saw in the new 10K mentioning that you’re going to be looking to allocate more capital going forward in to infrastructure and I guess that really means in to the utility and therefore that probably means less capital going forward in to the non-utility businesses. So, could you elaborate further on what kind of dollar amounts you might be looking or projecting to put in to the utility cap ex going forward versus the non-utility cap ex and how that might have changed from your thinking half a year ago or a year ago.

Steve V. Lant

I believe you did read our 10K correctly, that is our I guess general view of a shift in our opportunity set. I would have a difficult time at this point in giving you quantification. Let me just kind of point out really the three sources of the incremental opportunity that we’re looking to evaluate at the utility.

First, we do continue to have a pretty substantial cap ex program at the utility just based on serving our customer base which of course we see a slight downturn this year in the rate of growth, we have seen steady and consistent population and customer growth in the Hudson Valley. We expect again, over any reasonable planning horizon that will remain true. So, we expect strong capital expenditures necessary to serve that growing customer base.

But, on top of that, there are really three elements that are I guess under consideration both by us and by state policy makers as important increments to those investments. One is one that you read about a lot and that is the so called smart grid. It means different things to different people and there are different approaches to it but clearly we see it as an opportunity to bring the quality of our service to our customers through a higher level and increase the operating efficiency of our infrastructure.

It does involve a substantial capital investment though to realize those benefits. So, that would be a source of investment opportunity for Central Hudson. Another opportunity is renewable energy. The Governor recently increased the already aggressive targets that New York state has set for it for energy efficiency and renewable energy. We believe that given our access to capital and our expertise in connecting renewable energy to the grid that we are an excellent party to bring fourth on to the grid increased renewable energy whether it be biomass, solar or wind depending on the economics and the considerations.

The third element is looking at the bulk power transmission system which is a very large system connecting not just our service territory but the entire state to other regional grids and to Eastern Canada. That bulk power system can be thought of in a similar respect to the interstate highway system which is layered on top of the grid of local roads that people use in their daily travels.

Based on the age of that system and based on the need to increase the transfer capability across the country especially to bring renewable energy to the grid, in most cases renewable energy is located where nature puts it not where people live and so there has to be some increase in transition investment to bring the dispersed renewable energy to the grid. That is another potentially significant investment opportunity for Central Hudson.

All of these are kind of multiyear long term investment opportunities that we’re looking at and at this point too soon to give you clarity on the exact timing and amounts but certainly we’re working very hard to provide that clarity and as soon as we have something more to say on that we will convey it to our investors.

Operator

Your next question comes from Maurice E. May – Power Insights.

Maurice E. May – Power Insights

Could you review your efforts at getting a decoupling mechanism in the state of New York? And also, I know you requested it, you filed the RDM, how it’s been going in this current rate case? You referred to staff’s rebuttal accepting the RDM, I guess my question is did they reject it initially and what about other interveners? What are they suggesting?

Steve V. Lant

I’ll begin the answer and Chris will fill in the blanks. Really, this was a policy decision made by the New York Public Service Commission during the pendency of our current settlement requiring all future rate case filing by New York state utilities to include a revenue decoupling mechanism. This is consistent with their policy objective to have us play a role in providing energy efficiency services to our customers.

So, we were under a requirement to include a RDM. However, since we don’t have one now there was some uncertainty as to the exact mechanics that RDM would work. So, we filed and RDM whose mechanics we believed were most straight forward. The staff has filed an alternative version. Unless you’re a [inaudible] in the field I guess you wouldn’t get too immersed in the differences.

There’s two categories one is called per customer and one is called pre class. I think if you look at it from a high enough distance, there really aren’t a lot of differences. There are some differences in terms of the administration and the mechanics. So, really that’s the difference of opinion we have at this point in the case. We favor one, the staff favors the other but again, I think from a financial standpoint the differences are not really all that huge.

Maurice E. May – Power Insights

Do both of them cover both conservation and weather?

Steve V. Lant

Yes, I believe they do.

Operator

Your next question comes from Paul Patterson – Glenrock Associates.

Paul Patterson – Glenrock Associates

With respect to the level of debt, I think you said you were now planning on having long term debt at the parent and you said it was about $50 million that you were looking to raise there?

Christopher M. Capone

Just given the scale of the business we think that’s an approximately appropriate amount. Again, at this point we have zero and we’re just looking at market conditions for the timing and need and will determine in effect how much we would like to raise.

Paul Patterson – Glenrock Associates

Short term debt, how much do you have there?

Christopher M. Capone

Right now it’s zero.

Paul Patterson – Glenrock Associates

So it’s zero now and you’re looking to put about $50 million on?

Christopher M. Capone

Correct.

Paul Patterson – Glenrock Associates

Do you have a corporate credit rating?

Christopher M. Capone

Just the utility is rated by the rating agencies.

Paul Patterson – Glenrock Associates

And what would you expect to be the difference between corporate and the utility?

Christopher M. Capone

At this point we would expect, and this is all related certainly to market conditions, it would be on the order of maybe a one to two notch difference between op co and hold co.

Paul Patterson – Glenrock Associates

And what’s your utility at right now?

Christopher M. Capone

It’s A2A.

Paul Patterson – Glenrock Associates

You mentioned that would be for investments in the non-regulated area?

Christopher M. Capone

Not necessarily. Again, right now because we have zero debt we want to put true third party debt and make that capital available. We’ll then look across our entire organization to see where those dollars would be best invested. So, it isn’t necessarily going to be allocated to our non-regulated business.

Paul Patterson – Glenrock Associates

So it might be allocated to the utility or I think you also mentioned a buyback?

Christopher M. Capone

Well, we constantly monitor the viability and really the attractiveness of buybacks. So yes, it will span everything from again Central Hudson our non-reg existing businesses, new acquisition opportunities and buybacks.

Paul Patterson – Glenrock Associates

When would you guys expect to raise this money?

Christopher M. Capone

Again, it’s based on market conditions but we would expect certainly to begin raising say by the middle of the second quarter, possibly even a little bit sooner depending on market conditions.

Paul Patterson – Glenrock Associates

But if you raised it you’d probably take that cash – would you raise it and leave the cash there for potential acquisitions? Or, should we think of that as probably going pretty quickly in to an investment of the ones you just mentioned?

Christopher M. Capone

I think really it’s going to be a matter of we may be sitting on that cash for a little time until we find what we think is the best use of it.

Paul Patterson – Glenrock Associates

I guess it just seems a little bit odd that you’d be doing that or thinking about doing this without having something in hand. I mean, in other words is it because you think the markets might be getting more difficult? Can you just elaborate a little bit more on what sort of we should think about?

Christopher M. Capone

Please keep in mind a few things again, how much we’re going to go out, while we may ultimately raise approximately $50 million it’s not clear in our minds really based on a couple of things that you raise that we are going to automatically go out and raise the full $50, we may raise half of that.

When you look at the utility and our filing, we filed for a 48% equity ratio and we currently have 45%. That will require and equity injection in to Central Hudson so those dollars again, could find their way directly down in to the utility and we’ll have better visibility – we won’t have the right visibility prior to raising this but the timing won’t be too far off. When we look across our non-reg and our business development team, we do see some things out there that potentially offer but yes, we may have negative carry so to speak for some amount of time.

Paul Patterson – Glenrock Associates

I guess what I’m wondering here, why wouldn’t you take that money and put it in to the utility then? Why would you have the negative carry?

Christopher M. Capone

Well putting it in to the utility again, we’re only authorized to earn on a certain amount, a certain equity ratio and given what we’re laboring under right now, if we put incremental capital in there’s really no incremental revenues to service that. So, it wouldn’t be earning a return. We want to wait until we see the outcome of the case in which case there we then have a much clearer picture.

The timing will never be perfect. If the debt markets were normal we could probably fine tune this a little bit better and wait a little bit longer and try and match it more closely if not, I won’t say perfectly but very, very close to when the actual needs emerge which is why again we’re not going to look to run out and necessarily raise all that we believe we can raise over time.

Paul Patterson – Glenrock Associates

The reason why I guess you guys are doing this it seems is because you’re concerned about the volatility in the credit market and your access to capital. Am I understanding that sort of accurately? As a result, you guys want to have the money there in case you have an opportunity and it is difficult in the market?

Steve V. Lant

I guess concern is a strong word. Again, we approach most of our financial policy with a pretty conservative outlook and we don’t take for granted our access to capital. Even though our current credit ratings are strong clearly, the capital markets have been in a very unusual state and I don’t think we can just assume that access will be available at a time of our choosing and at terms of our choosing. So, I don’t think it’s the time to fine tune and optimize to the extent it would be under normal cases.

Operator

Your next question comes from [John Hansen – Three Cities Asset Management].

[John Hansen – Three Cities Asset Management]

Two questions here, one you mentioned in the utility you have a sales forecast and sales are coming up short and you’ve got a rate case that’s going on now. You’re going to get rates here half way through ’09, are those going to be based on a sales forecast that’s as of when? Is it the one you filed back in June of last year, or is there an update opportunity at all?

Steve V. Lant

John, we believe there will be an opportunity for an update. With an RDM again, we still want to be very careful and as accurate as possible but, there will be an update beyond that which we originally filed.

[John Hansen – Three Cities Asset Management]

In the ethanol area I just want to kind of revisit, I know you said in Griffith you’re kind of holding back in terms of some of the things you might have invested in a while back. What’s your current outlook here on the ethanol given the market conditions? I know there’s a lot of properties available shall we say?

Christopher M. Capone

I think what we realized along with what we’ve learned with the oil volatility last year is the returns on an ethanol project can also be very, very volatile. Based upon what we’re seeing now and really the lack of correlation between corn and ethanol prices and the volatility that can introduce we’re probably not going to make any ensuing ethanol investments. The only kind of structure where I think we’d even entertain it is if we could in fact find counterparties to insulate us from essentially again, the corn being able to move in one particular direction and ethanol prices in another.

So, if it more resembled something tentatively like a tolling agreement we might be interested. We believe that those opportunities may begin to exist just given now that the renewable fuel standard continues to grow and with the amount of capacity out there right now and then what the blenders have to contend with to avoid the penalties we may see a little bit of a growing interest on the blenders part to enter in to those types of contracts and in effect shift that risk over to the blenders.

But, short of that kind of a construct, I don’t really see us going too much further in to the ethanol space. In fact, we always have our eyes open and our ears open to try and actually obtain that kind of a construct if possible at Cornhusker, albeit we are a minority investor so even if they become available it’s not guarantee that we would actually be able to enter in to one.

Operator

Your next question comes from Peter Hark – Talon Capital.

Peter Hark – Talon Capital

To follow on to Barry’s earlier question I was also looking through the 10K and in that it states that the company continues to evaluate alternatives for issuing equity in 2009 and beyond as a source of capital for new investments. I was hoping you could expand upon that statement and clarify that the issue of common stock would be done exclusively in conjunction with the types of investment opportunities that you’re talking about or would you consider the issue of common stock at a premium to book value as a more prudent source of financing?

Steve V. Lant

Peter, the context in which that statement was written was I guess the optimism that we are beginning to feel relative to the investment opportunities I talked about in answer to Barry’s question. The capital outlays that may be associated with significant work on the bulk power system and smart grid and renewable energy individually are significant, in aggregate are very significant and at some point would require a component of new equity to finance. So, that was really the context in which that discussion was crafted.

Peter Hark – Talon Capital

But, to the extent we’re talking now about issuing $50 million of debt on a potentially unregulated arm, why not just issue a million shares of stock on a trailing 12 basis. The stock is trading at 22.5 times earnings. That inputs a 4% after tax cost of capital so wouldn’t you be better off issuing stock anyway than tapping the debt markets at 7%, 8% or 9%?

Steve V. Lant

I guess our approach is to look at the capital structure that we think is consistent with a strong credit rating going forward. If anything, we think we’ve been a little bit under levered corporately as we work to deploy the cash that came out of our power plant divestitures. So, we’re really just trying to reach a point where we think we’ve got the appropriate amount of debt in our structure and that’s really what’s governing this issuance of debt.

It was something that I guess we’ve looked forward to the day when it was appropriate to do, it certainly wasn’t appropriate to do while we still had cash that needed to be invested and had a very low rate of return in money market accounts while it was awaiting investments.

Peter Hark – Talon Capital

But there’s nothing wrong with a strong balance sheet during these trying times.

Steve V. Lant

That is for sure.

Peter Hark – Talon Capital

Chris, I believe you mentioned in your prepared remarks that you forecast Central Hudson’s earnings to be impacted by another I think you said $0.45 in the first half of ’09 due to deteriorating sales volumes. Is this $0.45 incremental to the $0.50 from ’08 or is this just carrying over the impact of ’08?

Christopher M. Capone

It’s carrying over the impact Peter. Again, if you look at the number, as I mentioned before, roughly $0.55 for 2008. If you very simplistically and the math isn’t perfect, if you double that number I provided, that roughly $0.45 the run rate changes from that $0.55 and degrades not in incremental but to a $0.90 annualized number. So, when you look at the incremental amount it’s on the order of really about an incremental $0.35 per share annually from ’08 to ’09.

Essentially what it relates back to is as I was mentioning, the uses for customers on electric year-over-year for residential which is the primary driver of our earnings was essentially flat. When you look at gas, it was down about 3%. The real problem here is that the forecast under which rates were set showed an increase in usage per customer year in year out. So, for the first half of ’09 there’s a continuation of that trend higher.

Peter Hark – Talon Capital

Because if I look at first half of ’09, Central Hudson earned about $1 between electric and gas over those first six months.

Christopher M. Capone

Over ’08? Yes, that’s correct.

Peter Hark – Talon Capital

So you’re suggesting that the earnings there will be $0.65 or thereabouts?

Christopher M. Capone

Well again, we’ve taken steps on the expense side but when you look at that individual factor I think that’s pretty accurate.

Peter Hark – Talon Capital

Then just to kind of do a different math, I think you ran through the components of the rate case filing gets to like $2.60 of earnings at the utility if you get all that you request. Is another way to do it to take the $1.67 that Central Hudson earned and back the $0.50 shortfall from the deterioration in sales and add back the $0.13 from storm restoration and the $0.17 from the higher write offs in uncollectables. That kind of gets you back there as well, it gets you to that $2.50 range. Is that effectively another way to look at it and say you’re trying to pick that up through the rate case?

Christopher M. Capone

Peter, there’s a little bit of apples and oranges in there in one respect. When you look at the storms and you look at, and these are the numbers that Kim quoted earlier, the bad debt. She was doing year-over-year. As she had mentioned, 2007 was a little bit better than normal in terms of storm experience, 2008 was a little bit worse. So, she was comparing year-over-year that’s where the $0.13 delta in storms and $0.17 as well, that was a year-over-year figure.

The figures I quoted were really were really relative to what we collect in rates and Kim did allude to some of that as well. I think in terms of a more straightforward way to look at it, again just from my vantage point is to look at the rate base. Again, granted that embeds an expectation that we would actually achieve the 48% and the 10.25%. We can probably provide you maybe with a little bit more clarity if that’s helpful.

Peter Hark – Talon Capital

Just to shift gears now to the other investment category, just trying to get an idea of 2009, is it fair to think that the interest income should continue to decline with the decline in cash balances? And, will this be offset by an increase in earnings at either ethanol, wind or biomass?

Christopher M. Capone

Well, when you look at the investment balance for 2008, the actual cash in the bank that was fairly minimal throughout most of the year especially once you got to the second half of the year. The primary component of interest income in this other category is related to Griffith and the intercompany note. So really there the bigger drive is going to be the size of their balance sheet, the size of their debt outstanding and then the other business is again we’ve never really drilled down in to the earnings capability of Lyonsdale and Griffith.

Peter Hark – Talon Capital

So it’s not a matter of looking at the $18 million of cash currently and saying what was your average cash balance in ’08 and then comparing that difference? It’s more what’s going on with the intercompany note with Griffith.

Christopher M. Capone

Correct.

Peter Hark – Talon Capital

Then lastly, just a broader question, a few months ago one of your largest shareholders has filed SEC documents that indicated they are interested in nominating representatives to the board. I was wondering if you could comment on what the current status of that request is and to your knowledge does this investor continue to express an interest in board positions?

Steve V. Lant

Well, there have been no further filings but I have no reason to believe that the expectation or intent that was signaled by that filing will not be followed through on. So, I guess we’re expecting that to occur. There’s nothing formal to point to supporting that, just I guess an expectation on our part.

Peter Hark – Talon Capital

Is there a deadline for them to come forth and nominate?

Steve V. Lant

There is.

Peter Hark – Talon Capital

What’s the timing of them having to come up with board nomination?

Steve V. Lant

It’s related to the timing of our annual meeting of shareholders and I believe if you look at the specifics it comes out to February 21^st.

Peter Hark – Talon Capital

Because if you go to the most recent public filings it will show that this investor continues to sell down its position in the company so there’s an inconsistency it seems with their request for board representation. So, I didn’t know if there was any other knowledge that you have suggesting that there is an attention still or not. But, recent public documents suggest that they’re getting out of your stock.

Steve V. Lant

I can’t add anything to what you’ve said.

Operator

We have no additional questions. Please continue.

Steve V. Lant

We thank you very much for your interest in today’s call and your questions. We really appreciate the interest. Chris Capone and Stacey Renner are available to answer any questions that occur to you later. In the interim we look forward to meeting with you and speaking with you and to next quarter’s conference call. Thank you very much.

Operator

Ladies and gentlemen this conference will be available for replay after 4:30 today through February 19^th at Midnight. You may access the AT&T teleconference replay system at any time by dialing 800-475-6701 and entering access code 983292. Again, that number is 800-475-6701 using access code 983292. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.

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