Steven Lant - Chairman of the Board, President and CEO
Chris Capone - EVP and CFO
Kim Wright - VP of Accounting and Controller
Stacey Renner - Treasurer
Maurice May - Power Insights
John Hanson - Praesidis
CH Energy Group Inc. (CHG) Q2 2010 Earnings Conference Call July 30, 2010 2:00 PM ET
Ladies and gentlemen, thank you for standing by. Welcome to the CH Energy Group conference call. For today’s conference all participants are in a listen-only mode. There will be an opportunity for question and instructions will be given at that time. (Operator Instructions) Now that being said I’ll turn the conference now to the Chairman, President and CEO, Mr. Steven Lant. Please go ahead.
Thank you. Good afternoon and welcome to our quarterly conference call. With me today on today’s call are Chris Capone Executive Vice President and Chief Financial Officer; Kim Wright, Vice President of Accounting and Controller and Stacey Renner, our Treasurer.
Following my introductory remarks Kim Wright will cover our results in detail by business units then Chris Capone will discuss our business environment and future prospects. Following Chris’s remarks, we’ll answer any questions you might have.
Before we begin, I’d like to call on Stacey Renner to review our cautions regarding undue reliance on forward looking statements. Stacey?
Thanks Steve. I’d like to first remind listeners that the presentation slides for this conference call and our supplemental second quarter 2010 financial information are available on the Investor Relations section of our website at www.chenergygroup.com. I refer you now to the paragraph on forward-looking statements at the bottom of this morning's press release.
If you're following along with the presentation slides, please reference page three. During this conference call presentation and then the question-and-answer session to follow, CH Energy Group participants may discuss management's 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 filings on form 10-K for the year ended December 31, 2009 under the section labeled risk factors and as updated in subsequent 10-Q filings. The filings are available in the Investor Relations section of our website at the link for SEC filings.
I'll now return the call to Steve Lant.
Thank you, Stacey. CH Energy Group’s earnings per share, second quarter were $0.43 versus a loss of $0.09 in the second quarter of 2009, an increase of $0.52. For the first two quarters of 2010, our earnings per share were $1.72 versus a $1.36 for the same period of ’09, an increase of $0.35. The primary driver improved results for the quarter was much improved results for our primary subsidiary, Central Hudson Gas and Electric Corporation. Central Hudson earned $0.62 in the second quarter of 2010 versus $0.06 in 2009.
You may recall that the second quarter of 2009 was the final quarter of a three-year rate plan in which our revenues were insufficient to cover our cost of service. So our earnings fell to their lowest point in that quarter, since then we have seen a strong trend of recovery. The second quarter of 2010 is the fourth quarter since new rates went into effect and for each of those four quarters received strong improvement from the prior year.
Griffith showed improvement as well. While Griffith typically experienced as a loss in the second quarter as the [heating] season ends, the loss was $0.10 rather than the $0.14 per share we experienced in 2009. This is primarily due to the smaller scale of the business following our partial divestiture in December 2009. Our renewable energy projects and other businesses did not do as well in 2010, $0.09 versus $0.01 in 2009.
Our major turbine overhaul at our Lyonsdale biomass plant and the exploration of production tax credits at our Lyonsdale plant and lower cost margins at our Cornhusker ethanol plant with a primary causes of our lower earnings. There have been some significant developments since our last quarterly conference call. Most importantly, in June, The New York Public Service Commission approved a joint proposal which sets rates for the three-years July 1, 2010 through June 30, 2013.
The joint proposal provides modest phased in rate increases each year for both electric and gas service and we'll provide approximately $86 million in incremental revenue to cover increasing costs over the next three years. We are pleased that the PSE approved the joint proposal. We believe that represents a fair balance of interest and provide certainty for both the company and our customers. The joint proposal include significant productivity and cost management challenges to the company, they’re further only allowed rate of return on equity of 10% but we are hard at work and hope to accomplish that objective.
The joint proposal approved significant capital expenditures necessary to serve our customers and will result in rate case growth of approximately 5% per year. Partly due to the approval of the joint proposal, the rating agencies have recently approved our strong boundaries. Moody's has affirmed our rating at 83 and changed our outlook from negative to stable. Standard & Poors has affirmed our solid A ratings.
In our press release, we know that we are reviewing our strategy with respect to allocation of capital to renewable energy projects and has suspended making new investments. We expect to complete that review by early October and share the outcome with you after it's completed. Until then, we're unable to go into any further detail about what the outcome might be.
I'd now like to turn the call over to Kim Wright, who’ll cover our results by business unit in more detail. Kim?
Thanks, Steve. Good afternoon, everyone. As Steve mentioned, I'll be reviewing our results for the second quarter 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, as Steve mentioned, you see on page five that we earned $0.43 in the second quarter of 2010, a $0.52 increase from last year's second quarter loss of $0.09. The primary driver of the increase was the rate order Central Hudson received in June 2009, which largely resolved the misalignment we had between our revenue and our cost under the prior rate agreement. As you may recall, the second quarter of 2009 was the last quarter of our prior rate agreement and also the period that had the widest misalignment of our revenue and cost.
Moving on to page six, Central Hudson's earnings of $0.62 were $0.56 higher than the second quarter of 2009, primarily due to the rate order, I just mentioned. During the second quarter of 2010, rate increases improved earnings by $0.41 per share, including the revenue stabilization effect of the RDM. These increases were sufficient to cover the $0.05 impact of warmer weather in the second quarter of 2009 that benefited earnings prior to the implementation of RDMs in July 2009. This left $0.36 to correct the misalignment between our revenue and cost. Looking at the increases in the normal cost of running our business, such as depreciation, storm restoration and taxes, in total we saw an increase of $0.08 in these costs over the same period a year ago. The remainder of the increased revenues allowed for a more appropriate return to our shareholders.
In terms of our uncollectible expenses, our reserves for future write-offs continues the favorable results we experienced in the first quarter, reducing our expenses relative to last year by $0.04 in the second quarter to $0.07 year-to-date. While we started to see signs of economic recover, it is important to note that our write-offs have not yet followed the results we experienced in our reserves during 2010.
During the second quarter, our write-offs continued to remain close to last year's levels. As I noted last quarter, while our rates went into effect in July 2009, did reflect an increased recovery for these costs, given the continued impacts of the weak economy which is causing us to continue to see an unusually high level of write-offs. Our expenses continue to exceed the amounts recovered through our rates through the end of the rate year that ended June 30, 2010. As a result of this, we recorded a deferral of the excess of the write-offs of our electric customers' accounts that were in excess of the amounts we recovered through our rates. This deferral accounts for $0.10 of the $0.14 shown on the first slide of the detail on page six. The remaining $0.04 was the result of the Public Service Commission's order on the deferral petition we filed in October 2009 to recover excess write-offs for the rate year ended June 30, 2009.
In that order, the PSE approved our recovery of incremental write-offs for our gas customers through December 31, 2009, rather than through June 30, 2009, as we requested. This increased the deferral by $1.1 million for the six additional months.
Moving on to page seven, you see that Griffith's contributions to CH Energy Group, the second quarter earnings was a loss of $0.10 which was a $0.04 improvement over the same period last year. Half of this improvement was the result of the 2009 partial divestiture.
During the second quarter, we experienced lower sales, which reduced earnings by $0.05 compared to the second quarter of last year. $0.03 of this was due to warmer weather in 2010. Improvements in our margins as well as lower operating and uncollectible expenses added $0.07 to our earnings relative to last year, more than offsetting the negative impact of the lower sales volumes.
Wrapping up on page eight with our other businesses and investments, our second quarter earnings were $0.08 lower than in the same period in 2009. As you can see on the top line of the detail shown on the slide, half of this was from our Lyonsdale investment. Two factors contributed to the facility's lower earnings in the second quarter of 2010. First, production tax credits that the plant earned previously expired at the end of 2009, accounting for approximately one-third of the decrease. The second item accounts for approximately two-thirds of the decrease and was the result of a turbine overhaul in 2010 in addition to the plant's normal annual spring outage. The plant's been running well since the completion of the overhaul and operating more efficiently. Cornhusker's year-over-year contribution to CH Energy Group's earnings was $0.02 lower in the second quarter of 2010. In addition to lower prices for one of the byproducts of the ethanol production process which management believes was the result of a new entrant into the market in Nebraska.
Now I'll turn the call over to Chris Capone for a discussion of the outlook for our businesses and investments.
Thank you, Kim. Good afternoon, everybody. As Steve and Kim mentioned in their remarks, second quarter results represented a continuation of the positive effects of the Central Hudson one year rate agreement that began on July 1 2009 and expired on June 30 of this year.
On prior calls, as Steve and I have both been characterizing our earnings going back really about a year, as representing a trough and not a trend and I think this recent 12 month performance as well as year-to-date performance does reflect that again. It was a trough and not a trend and now the trend is certainly towards higher earnings. The three-year joint proposal approved at the June session of the commission that went into effect on July 1 does represent a continuation of this positive upswing. The three-year term allows us to concentrate our efforts on effectively managing Central Hudson for the benefit of customers and shareholders and provides the resources needed to address the rising cost of providing services to our customers and to further invest in system infrastructure to maintain, improve system reliability and service quality.
Regarding the three-year joint proposal there are a number of key elements to this recently approved agreement. It contains a continuation of a 10% authorized ROE, a 48% equity ratio, which is a 100 basis point increase from the prior rate year, a continuation of the revenue decoupling mechanisms, forward cover and deferral provisions for purchased electricity and gas, updated amounts for uncollectibles which we feel are more closely aligned with our expected experience, and a 90%, 10% sharing mechanism for property taxes.
In addition, the agreement allows the company to retain earnings up to 10.5%, and then share with customers up to 11%. Collectively, these elements position us to focus our effort on improving the performance of our business. The joint proposal also contains a three-year, approximately $270 million CapEx program designed to address aging infrastructure, and to maintain and improve system reliability and service quality. We recognize that the service we provide is essential and that we need to work towards continuously improving the quality of the services we provide. These investments will also result in additions to rate base, but our opportunity to earn on them depends on our ability to earn the authorized ROE, which in turn depends on our ability to manage expenses over the term of the agreement.
In previous calls we had stated what our policy would be for earnings guidance overall as well as certainly for Central Hudson. And our policy on earnings guidance for 2010 was to not provide a specific range since it was largely dependent on an ongoing rate case. While the rate case is complete, we decided not to change the policy mid-year and will reconsider our policy for 2011. However, a way to estimate the earnings power of the utility like Central Hudson is to multiply the average rate base for a given year by the equity component and the expected return on equity. Under the joint proposal the average rate base in 2010 is projected to be approximately $866 million. The allowed equity ratio is actually a blend of the first half of the year which was at 47% rate, the second half of the calendar year, again, the period in which we are now at 48%, and the authorized ROE which was consistent across both agreements at 10%. Performing this rather simple calculation but again as a way to provide some degree of insight, we dealed in earnings per share of approximately $2.60 per share for Central Hudson.
Overall, we plan on focusing our efforts on earning the authorized ROE going forward in the context of the challenge of doing so related to significant productivity imputation and elements of costs for which we do not receive full recovery. We are implementing a new Lean Six Sigma program to optimize the way we manage our business through revenue enhancements and cost reduction. We feel this type of program will aid us in sustainably meeting the productivity imputations that should and will be part of each rate agreement.
Our management team looks forward to continuing our focus on improving operational and financial performance while also improving customer satisfaction and system reliability as well as meeting the numerous performance targets included in the agreement. We feel a three-year term will really allow us to focus our efforts on helping our customers manage their energy usage and their bills and improving operations and service quality for our customers.
Just one general comment on the local economy. Overall, the economic environment in our service territory continues to appear to be stabilizing along with the general economy. And the unemployment rate, the most recent statistic in the Hudson Valley is approximately 7.5%, better than the New York state average and certainly better than the national figures.
I'd like to now turn my comments towards Griffith. In the second calendar quarter, oil distribution businesses such as Griffith typically report a loss. Adjusting for the effects of the divestiture of our northeast assets which took place last December, Griffith did improve its results by $0.04 per year, year-over-year, as Kim alluded to earlier. This was accomplished by a continued focus on costs and improved experience with uncollectibles. Griffith will also be undertaking a Lean Six Sigma program in an effort to improve our operating efficiency and further drive out costs. These efforts are necessary to address the increasing costs of providing a level of service our customers expect. We continue to see modest signs of growth in our delivered motor fuels and we've actually seen a slight increase on a weather normalized basis on usage from our customers as well. Both of these are typically a good indication of the general economic health in the Mid-Atlantic market where they have a much lower unemployment rate than we do in Hudson Valley. Throughout their service territory, the unemployment rate is actually below 6%. Our experience with uncollectible accounts continued to improve from last year, as Kim alluded to in her materials. Because at Griffith we get to perform credit screens before we take on additional full service customers, an approach that has served us well throughout the past 18 months during very difficult economic conditions.
As I mentioned on prior calls we have restarted our acquisition program and while we have not closed any yet, we feel that the Mid-Atlantic region continues to be an attractive market for tuck-in acquisitions. Tuck-ins allow us to fully use our existing infrastructure and we will certainly be very discipline in the type of companies we consider and the prices we would pay. We feel that growing Griffith in a matured and discipline fashion should enhance its value and returns to shareholders as demonstrated by the $0.35 per share gain that we realized last year through the sale of our northeast division. Finally, I'd like to make some comments on what we call our other businesses and investments. In addition to managing our existing portfolio, which includes Cornhusker, Ethanol, Lyonsdale, biomass, Greenfield, landfill gas project and our small wind projects. Our focus during the second quarter was on keeping the surely wind project, the construction schedule on time and on budget. At this point we are in fact on schedule and within budget and our expectations are that Shirley will be online by year end.
As Kim mentioned, in June we undertook a turbine overhaul at Lyonsdale, our upstate New York biomass facility. The total cost of the overhaul was just in excess of $1 million and coupled with the facility being offline for that work for the entire month, produced disappointing financial results. We do expect, however, and July's performance validates that the efficiency gains from the overhaul should result in a payback period of approximately two-and-a-half years. At the Cornhusker ethanol facility, where we have a 12% equity interest, it was a difficult quarter as well as Kim alluded to. The ethanol markets overall experienced declining ethanol pricing in the face of slightly rising corn prices, compressing the crush margin as Steve mentioned, and also with the added pressure coming from the significantly lower prices for distiller grains which Kim alluded to in her comments. In early 2010, a roughly 300 million-gallon ethanol production facility began operations approximately 120 miles from the Cornhusker facility. To put that size facility in context, the Cornhusker facility production amount is roughly 50 million gallons per year, and it ranges anywhere from 40 to 50 million gallons per year.
Typically, wet distiller grains, the byproduct Kim mentioned, are sold in a fairly close radius to the plant to manage shipping cost because these products have to be trucked offsite to the cattle farmers who look to use that product. But it appears, given the significant volumes that that new 300 million-gallon plant produces, they began to sell those distiller grains partially in the same market that we typically do. This drove down the overall market price for distiller grains, negatively impacting Cornhusker results but it's too early at this point to determine whether this pricing environment will continue over the long run.
At this point, I'd like to turn it back over to John for questions.
(Operator Instructions). And we’ve lined up Maurice May with Power Insights. Please go ahead.
Maurice May - Power Insights
Two questions really. The first question has to do with the quarter, it was a very good quarter, and I was just wondering at the utility if you can give us some kind of indication of what ROE you earned in the quarter.
Maurice, frankly it's very difficult to evaluate the ROE in a quarter.
Maurice May - Power Insights
We can do it on a rolling 12 basis and I think that's a more valid measure when you have a seasonal business such as we have. Frankly, we don't really even attach any internal significance to the quarterly ROE but more like the run rate. I can tell you that the earned ROE from operations under the rate year that was just concluded was about 9.4%.
Maurice May - Power Insights
And so that would include the good second quarter?
Maurice May - Power Insights
And my second question is more of a strategic one, because you're reviewing additional renewable investments at a time that you are going back to tuck-ins at Griffith and at a time when you have a new three-year rate deal which allows you to grow rate base 5% a year. So are you essentially moving away from renewables, back to the utility?
Well, we've said that we have suspended new acquisitions of renewables, pending completion of a review that's being conducted internally here and is really subject to review and approval by the Board and until we have a final result of that, I don't think it's really fair for us to characterize our future strategy. So I hope you'll bear with us for a quarter and we'll be able to provide greater clarity then.
Maurice May - Power Insights
So you're going to unveil a new growth strategy at the third quarter conference call?
That wasn't a question so I won't answer.
And we'll go to the line of John Hanson with Praesidis. Please go ahead.
John Hanson - Praesidis
Just on your slide six, where you go through the various changes there in Central Hudson for the quarter, you got the line there, sales per customer up $0.08. Anything you can talk about there as to what that's kind of showing?
That was really an indication of the impact we have last year on the sales per customer and since the sales per customer were lower during the second quarter of 2009, prior to the implementation of the RDMs, we didn't have that negative impact in the second quarter of 2010, hence the favorability you see on the slide.
John Hanson - Praesidis
And refresh me again, what was the negative item the prior year?
Lower sales per customer on a usage basis.
John, this is Chris Capone. During that period, we didn't have a revenue decoupling mechanism so we were directly impacted by the usage per customer and that was also as Kim mentioned in her comments, that was the last quarter during a three-year rate agreement where the forecast that was utilized in setting rates during that prior three-year period ended June 30th of 2009 was predicated on an increase in usage per customer over that three-year period and in fact we did not have that to anywhere near the same extent so we had an earnings drag. This year we don't and that, because of the revenue decoupling mechanism and that difference was the $0.08 per share. Does that help?
(Operator Instructions) And to the presenters, no further questions.
Well if there are no further questions, we thank you very much for your attention and look forward to speaking to you next quarter. Have a good afternoon.
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.
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