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CH Energy Group (NYSE:CHG)

Q4 2010 Earnings Call

February 11, 2011 10:00 am ET

Executives

Steven Lant - Chairman, President & CEO

Stacey Renner - Treasurer

Kim Wright - VP, Accounting & Controller

Chris Capone - EVP & CFO

Analysts

John Hanson - Praesidis Asset Management

Gordon Howald - East Shore Partners, Inc

Daniel Fidell - Brean Murray, Carret & Co

[Peter Hart] - Unidentified Company

Maurice May - Power Insights

[Neil Stein] - Unidentified Company

Operator

(Operator Instructions). As a reminder, today's conference is being recorded. I would now like to turn the call over to our host, Mr. Steven Lant. Please go ahead, Mr. Lant.

Steven Lant

Good morning and welcome to our call. With me today are Chris Capone, Executive Vice President and CFO; Kim Wright, Vice President of Accounting and Controller; and Stacey Renner, our Treasurer.

Following my introductory remarks, Kim Wright will cover the quarter and full calendar year by business unit in detail. Then Chris Capone will discuss the status of our renewable energy portfolio divestiture process and our business prospects for 2011. Following Chris's remarks, we'll answer your questions.

Before we begin, I'd like Stacey Renner to read our cautionary statement regarding undue reliance on forward-looking statements.

Stacey Renner

Thanks, Steve. I'd like to first remind listeners that the presentation slides for this conference call and our supplemental year ended 2010 financial information are available in 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 are following along with the presentation slides, please reference page three.

During this conference call presentation and in 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 statement.

These risks are discussed in more detail in our filing on form 10-K for the year ended December 31, 2010, under the section labeled Risk Factors. The 10-K was filed yesterday and is available in the Investor Relations section of our website at the link for SEC Filings.

I'll now return the call to Steven Lant.

Steven Lant

Thank you, Stacey. CH Energy Group's earnings for the fourth quarter of 2010 were $0.60 versus $1.04 for the fourth quarter of 2009. For the full calendar year, earnings per share was $2.44 versus $2.76 in 2009, a decline of $0.32.

However, each year had at least one significant unusual item which bears mention. Kim Wright will discuss these items in detail, but three relate to the transition of our business, which I will now mention.

In 2009, we had a one-time gain of $0.34 related to the partial divestiture of Griffith Energy Services. In 2010, we had an impairment charge of $0.44 related to our ethanol project investment and $0.08 related to our biomass investment.

Normalizing for these three unusual items produces earnings per share of $2.96 in 2010 versus $2.42 in 2009. While this is a bit of an oversimplification because other factors also affected each year, these adjustments provide a better indicator of our performance.

2010 was overall a successful year at CH Energy Group, with the notable exception of the impairments I just mentioned. Some of our accomplishments at Central Hudson included an excellent response to our worst-in-history storm event in February, approval by the PSC of a three-year rate settlement in June and the launching of a business transformation effort we are calling the bridge to excellence.

CHEC also had some notable accomplishments, including successful construction of the Shirley Wind project. At Griffith Energy Services, our achievements included a corporate right-sizing effort, expansion of our HVAC services and launching a parallel business transformation effort.

Both Central Hudson and Griffith did a very good job operationally managing expenses well and providing excellent service to our customers. In 2010, Central Hudson met all of its PSC quality targets, and our customer satisfaction and call center metrics improved. Likewise, Griffith did an excellent job serving its customers and achieving high customer satisfaction.

Last quarter, we discussed our new strategy, which focuses on Central Hudson and Griffith and entailed divestiture of our renewable energy projects, with proceeds going toward a share repurchase program.

The divestiture process is underway, as Chris Capone will discuss. Due to our strong cash position, we've already initiated share repurchases. So the accretive effect will begin immediately.

By all accounts, our new strategy has been well received by our investors, and we're working hard to execute our strategies successfully in 2011 and beyond.

Now I would like to turn the presentation over to Kim Wright who will cover fourth quarter results by business unit in more detail. Kim?

Kim Wright

Thanks, Steve. Good morning, everyone. As Steve mentioned, I'll be reviewing our results for the year. We'll 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 five that we earned $2.44 in 2010, a $0.32 decrease from 2009's earnings of $2.76. As Steve noted, this decrease was primarily due to $0.52 of impairments recorded related to our ethanol and biomass investments in 2010 and the $0.34 gain in 2009 from Griffith partial divestiture. Absent these events, our results would have increased $0.54 due to improved earnings at Central Hudson.

Looking forward, there were several other events that occurred in 2009 and 2010 that are not representative of the underlying business drivers of our earnings going forward. These other items, which I will describe in more detail during my review of the business unit results, added $0.49 to our 2009 earnings and $0.25 to our 2010 earnings.

Combining these events with the 2009 Griffith gain and the 2010 impairments, our 2010 and 2009 earnings would have been $2.71 and $1.93 respectively, a $0.78 increase year-over-year.

Moving on to page six, Central Hudson's earnings of $2.86 were $0.84 higher than 2009's $2.02. Central Hudson's earnings were impacted by some of the transactions I just referred to, which we do not believe are representative of our future earnings power. You can see these transactions in the center of the slide.

The first item, which favorably impacted both years' results, were the impact of petitions we filed with the Public Service Commission to recover bad debt write-offs we incurred in excess of what we recovered in rates. We believe those variations were significant and not indicative of the future. With our 2010 rate order, the rate allowance for these expenses has increased to levels that match our recent experience.

The other item we reflected in this category is the impact weather had on our sales in 2009. With the implementation of revenue decoupling mechanisms in July 2009, our earnings are no longer helped or hurt by changes in our sales volumes that result from colder or warmer-than-normal weather.

Excluding the impact of these items, Central Hudson's 2010 results would have been $2.72 per share, $0.94 higher than 2009's $1.76. This increase was primarily due to the rate increases that went into effect July 1, 2009 and 2010.

As we've discussed on prior calls, the rate order that went into effect July 1, 2009, resolved the misalignment we had between our delivery revenue and our operating costs under the prior rate agreement.

Furthermore, they included [in a] revenue decoupling mechanisms, or RDMs, which adjusts our revenue for variations in delivery volumes and removed the disincentive to promote energy efficiency, is expected to remove the risks of that misalignment recurring.

The last two rate agreements were a significant driver of our year-over-year results in 2010, largely because we had a full year of the impact of the agreements in 2010 versus only six months in 2009.

The corresponding revenue increases were sufficient to cover the increases in the normal cost of running our business, such as depreciation, taxes, tree trimming and other expenses, and provide a reasonable return to our shareholders.

Moving on to page seven, we see the Griffith contribution to CH Energy Group's earnings of $0.11 was $0.65 lower than 2009 due to the partial divestiture at the end of 2009.

Excluding both the $.40 gain and the $0.23 for the divested portion of the business contributed prior to the sale, earnings would have been $0.13 in 2009. Comparing the adjusted results of $0.13 to the $0.11 per share we earned in 2010 shows a $0.02 decrease in year-over-year earnings.

As you can see in the bottom portion of the slide, the weather resulted in a $0.04 deterioration of earnings without which our 2010 earnings would have been $0.02 than 2009.

Looking at some of the reasons for the change, you can see that during 2010 our weather-normalized sales were $0.05 lower than 2009 primarily due to the pricing deconservation by our residential customers and commercial customers that opted to burn natural gas instead of oil.

We were able to more than offset the impact of lower sales volumes through reductions in operating expenses to ensure the company's cost structure is in line with the lower sales volumes resulting from the partial divestiture. Managements' ability to control bad debt during these challenging economic times also favorably impacted year-over-year results.

It is important to point out that although we saw favorable results in 2010 from our realignment of our cost structure, we expect this to be larger in 2011, as we are able to benefit from a full year of the changes we implemented.

Wrapping up on page eight with our other businesses and investments, our earnings were $0.51 lower than 2009 due to the impairments we recognized associated with our ethanol and biomass investments, which reduced earnings by $0.52.

You can see the impact of these impairments on the first two lines of the details on the slide. We discussed the reasons for the impairment of our ethanol investment on our third quarter call.

The biomass impairment that we recorded in the fourth quarter reflects management's estimate of the fair market value of this investment at this point in the divestiture process.

You can also see that our earnings benefitted by $0.11 in 2010 due to lower effective tax rates. The largest component of this was due to taxable income that was lower than we anticipated when we closed our books for 2009. We do not expect these lower rates to continue going forward.

The last line of this section of the slide shows the incremental $0.06 of income taxes the holding company had to pay as a result of the gain on growth of partial divestiture.

When these events are excluded from our earnings, our 2010 loss was $0.12 compared to $0.04 of earnings in 2009, reflecting a decrease of $0.16 in the year-over-year earnings.

We have previously discussed the other items that reduced our year-over-year earnings. Reviewing those items, our earnings from our renewable energy investments were $0.13 lower in 2010.

Our biomass investments earnings were $0.08 lower, reflecting production tax credits the plant earned previously, which expired at the end of 2009, as well as the [Turgon] overhaul in 2010. It was beyond the scope of the plant's normal annual re-maintenance outage.

Our ethanol investments earnings were $0.05 lower in 2010, primarily due to lower crush margins and a decrease in the price for distiller [inaudible], the production process's co-product. As a result of the impairment of this investment, we do not expect to book earnings or losses on this investment in the future.

Finally, you can see that interest expense reduced earnings by $0.05 in 2010 relative to 2009. As we have discussed previously, the increase in the holding company's interest expense was expected, given the issuance of debt in the second quarter of 2009, and is being serviced by interest income from interest [company] loans to the non-utility operating company, primarily Griffith.

Now I'll turn the call over to Chris Capone for discussion of the outlook for our businesses and investments.

Chris Capone

Thanks, Kim. As our 2010 consolidated earnings figures clearly demonstrate, Central Hudson is currently the core of CH Energy Group and will certainly continue to be so into the future.

In 2010, Central Hudson's earned ROE was 9.8%, excluding the prior period deferral Kim described during her remarks. This is slightly below the 10% ROE authorized in the two rate agreements that spanned the calendar year of 2010.

These results somewhat mask the considerable efforts needed to achieve this return. While we feel our regulators are tough but fair, there are considerable drags on reaching the authorized ROE that must be overcome each and every year.

Our goal is to meet or even exceed the authorized ROE, and achieving a return similar to 2010 will support our five-year goal of approximately 5% annual EPS growth trend using $2.76 earned in 2009 as the base year.

As we have stated on previous calls, given the age of our utility infrastructure and to meet the service quality and reliability expectations of our customers, we will need to continue to invest in significant dollars in our utility system.

Our current three-year rate agreement is supportive of these investments, and the equity capital to fund these investments will drive our earnings growth in the future.

Beyond the term of our current agreement, which ends on June 30, 2013, the need to invest significant sums in our infrastructure should likely continue. We also remain very focused on managing our cost structure and meeting the needs of our customers. We have implemented a lean six sigma process to help achieve these goals and continue rollout training to all of our employees.

At Griffith Energy Services, the other key component of CH Energy Group, we took significant steps in 2010 to right-size our cost structure, given the reduced size of Griffith to close the divestiture of northeast assets. The benefits of these cost reduction efforts will be recognized fully beginning in 2011 and should significantly improve results going forward.

Weather-normalized results in 2010 were $0.13 per share versus a 2009 weather-normalized mid-Atlantic-only result of $0.11 per share. The ROEs associated with these normalized results were essentially equal in both periods at approximately 7.5%.

Since last December, we have acquired three field distribution companies for total consideration of approximately $2.7 million. We're continuing the expansion of our HVAC services, and we have begun a lean six sigma training process to focus on a cost management [end] process efficiencies. All of these efforts provide us with the confidence that results will improve in the future at Griffith.

The earnings and cash flow provided from Griffith are supportive of and will continue to support our ability to achieve consolidated earnings growth of 5% per year on average over time and eventually raise our dividend.

At this point, I'd like to provide you with an update regarding our process of unwinding our renewable asset portfolio, as Steve mentioned earlier in the call.

On our last call in October, I indicated that, internally, we had grouped these investments into two broad categories. The first category contains those assets that do not possess the earnings and cash flow characteristics that support our earnings and dividend objectives. [inaudible] they'll fit into this category.

After the $2.1 million impairment that Kim described at Lyonsdale that we recognize in the fourth quarter, we have Lyonsdale on our books for approximately $8.9 million.

We recorded the impairment because, based on information provided by the marketplace, management believes that $8.9 million figure is representative of the value of the assets.

Should the sale of Lyonsdale take place, we expect to use the proceeds for share repurchases. We will provide additional information as it becomes available.

The second category of assets are those that do possess acceptable earnings in cash flow volatility, but we nonetheless feel greater shareholder value would be created by monetizing these assets at reasonable valuations, repaying a portion of the holding company debt originally put in place to support these assets and repurchasing shares with the remaining proceeds.

We have a total of approximately $60 million of assets in this bucket, the largest of which is Shirley Wind. Shirley Wind is substantially complete and is generating electricity. We're very pleased with the outcome of the construction process.

We have hired an experienced firm to conduct a potential sale process. At the appropriate time, we'll provide details regarding the outcome of any portions of that process.

We also had two operating landfill gas projects. We're reviewing these assets as well to determine whether divesting [then] in the near term or holding them for possible future divestiture will best maximize value.

Our overall goal is to maximize the value of these assets and minimize the future management and board attention required for oversight. We feel all our constituents are best served by focusing our future efforts on Central Hudson and Griffith.

I would like to now make some comments regarding our approach to capital allocation and dividend policy. As I mentioned earlier, Central Hudson earned 9.8% ROE in 2010, excluding the uncollectable deferral related to a prior period.

This is a significant improvement over 2009's earned ROE of approximately 7.3%, and we feel 2010 results are much more indicative of Central Hudson's future earnings power. Additional investments form the basis for sustainable earnings growth and, eventually, sustainable dividend growth.

Griffith's ROE in 2011 should improve considerably compared to 2010 weather-normalized results as well. We feel the right-sizing of their cost structure in 2010 more closely aligns our cost structure with the more geographically focused Griffith. We are very intent on improving results at Griffith and feel the incremental investments through acquisition could create shareholder value.

As we discussed in October as we detailed our revised business strategy, we feel greater long-term shareholder value will be created by monetizing our renewable asset portfolio. We're purchasing shares of Energy Group stock with available cash, and, again, concentrating our efforts on capital at Central Hudson and Griffith.

As Steve alluded to earlier, beginning in December of last year, we began a modest share repurchase program utilizing available holding company cash. We expect this initial program to be completed in the next few days, resulting in a buyback of approximately 200,000 shares, or just over 1% of our shares outstanding.

We will consider repurchasing additional shares throughout 2011 using an additional available holding company cash upstream from our operating companies and investments. At this juncture, it's too early to estimate the amount from that next round of a buyback.

Regarding our dividend payout ratio, our long-run approach is to target a range of approximately 65% to 70%. We recognize that based on consolidated earnings in 2009 and 2010 that we were well above this 65% to 70% range.

We feel that given growth in the earnings power at Central Hudson and Griffith, coupled with the impact of share repurchases with proceeds from our available cash and our renewable asset divestitures we will be in a position to consider raising our dividend later in 2011 or even early 2012.

While we would expect our payout ratio to be at the top end of this range at the time of our first dividend increase, we would expect that it would plain down over time. We want to assure ourselves and the investment community that any increase will be sustainable and recurring. We will provide updates as the year progresses as to the timing of any increases.

At this point, I'd like to turn it back over to [George] and open the call up for questions.

Operator

(Operator Instructions). Your first question comes from the line of John Hanson - Praesidis Asset Management.

John Hanson - Praesidis Asset Management

A couple of questions here on Griffith; you said you picked up a couple more or three more businesses. In terms of volumes, how are you seeing the volumes impacted here with the rise in fuel oil prices? How does that look like it's affecting the business?

Chris Capone

Actually, at this point, it doesn’t appear that it's really impacting customer behavior. When we look back at 2010, on a weather normalized basis, it looks like usage per customer was flat to up about 1% and certainly there were rising and very volatile prices throughout 2010.

So far, based on the weather that we've seen and normalizing out through the cold of the normal weather, again, we haven't seen any change in customer behavior as of yet.

John Hanson - Praesidis Asset Management

On the Wind sale or the -- can you give us any kind of assessment as to what you think that market looks like for that -- the prospects for that, that particular project? That's got a PPA with it, I assume, and all that.

Chris Capone

It does. It has a 20-year off-take with [Cuts and Powers] A rated. That was one of the very attractive elements to us and one of the main reasons why we even considered Shirley Wind in the first place. Just given our historical risk appetite and certainly our risk appetite as we go forward, it has always been our approach in the case of a win project and even in the Landfill gas projects and even our Biomass project at Linesdale where we required an off-take agreement.

In terms of the current market, we're still somewhat early in the process but we feel, based on the construction process, the quality equipment, the quality off-take agreement, we do believe that Shirley certainly has a significant value but it is, frankly, just a little bit too early to give you much more insight.

John Hanson - Praesidis Asset Management

You gave us some numbers as to what the book value was of that pot of assets in there. I think you gave -- what -- a $60 million number.

Chris Capone

Correct.

John Hanson - Praesidis Asset Management

Can you give us any kind of clue as to what did you end up having to -- I know the building costs on some of those things sometimes move up a bit as they're getting done. But I don't know if we have an idea of what your dollar per KW or something along those lines that you took to build that project.

Chris Capone

If you refer to our K and page 128 just by way of reference, we had approximately $44 million invested at year-end. There were -- which is well in line with what we expected. There was approximately $3 million incremental remaining that we have invested in the project now that it is complete, again, well within what our expectations were and even a little bit below.

So we think, from an expectations standpoint, it's very much in line with what we're expecting, again, or even just a little bit better than we had expected. On a per-KW basis, at $47 million, I think it works out to about $2200 a KW, actually about $2250. I apologize, I don't have it. But it's very much in line, certainly when we look around at other projects.

Keep in mind, as well, though, it's a 20 megawatt project, certainly as you scale these up to much larger size as we all know you get the economies of scale. But it was very much in line with when we were doing our due diligence really back in '09 and during that time period that it was very much in line with our projects of similar size then underway.

John Hanson - Praesidis Asset Management

Where is the -- do you have debt for that in any particular place or is there debt that you'll have to deal with before you get some proceeds to do something else with?

Chris Capone

There is, actually. We have $50 million total at holding company debt and portions -- excuse me, the vast majority that was being utilized to support Griffith, especially at its prior larger size when we divested our Northeast assets back at the end of '09. It was coincident with undertaking the Shirley project and we reassigned some of that debt. But to your point, yes, upon a sale, we would look to retire some of that debt associated with it.

We're not obligated to because that debt, the $50 million is up at the holding company and we have assigned it internally to various projects, whether it's Griffith or Shirley and the like. But we'll look at that. It's fairly relative to what we could earn by just parking the cash temporarily. Certainly it's negative carry and we don't think it's wise to have it outstanding for long.

We would work with the owners of the debt to come to the most efficient means of retiring some of that debt.

Operator

Your next question comes from the line of Gordon Howald - East Shore Partners, Inc.

Gordon Howald - East Shore Partners, Inc

There's been some challenges to the legalities of federal transmission corridors. Does this play at all into the potential value of Shirley and what's your view on how those challenges could ultimately play out?

Steven Lant

We don't feel that this, I guess, debate that's been going on for some time about federal transmission corridors is really relevant to Shirley. It's got a connection to the local grid in Wisconsin, which is contracted and operating as expected. So we don't see any impact there.

Relative to the larger debate, I think your guess is as good as mine as to how it will all turn out. It is obviously a debate with many parties, many viewpoints and it's very, very hard to see how it will ultimately settle out.

Gordon Howald - East Shore Partners, Inc

Have any of those challenges or those issues been part of the reason for you getting out of that business or is it really just to streamline your operations?

Steven Lant

Really the -- again, that debate we didn't view as having a direct impact on us so I can't say it was a factor in our decision making. Our decisions are really based more on wanting to focus on our core businesses where we had the greatest skill and expertise and successful track record.

Gordon Howald - East Shore Partners, Inc

If I can just have one more follow-up question, how were the tax incentives on Shirley ultimately structured? Were they production tax credits or investment tax credits?

Chris Capone

Actually, at this point, we still retain the option tool like PPC or the 1603 tax grants and that will be driven as much by the buyer community and what they may prefer as much as anything else. In either event, they'll be economically equivalent and we want to just maintain that optionality.

We have probably through the end of the third quarter to make that determination, third quarter of this year. So really we have all the flexibility that we need.

Operator

(Operator Instructions). Your next question comes from the line of Daniel Fidell - Brean Murray, Carret & Co.

Daniel Fidell - Brean Murray, Carret & Co

Just you mentioned in the material and I think you have on past calls, too, as well, a recurring theme of [handle] of tuck-in acquisitions on the Griffith side annually. Should we be expecting what we saw in 2010 as a normalized rate that we should see going forward, a handful of names each year?

Steven Lant

Yes, Dan, I think you should. We've always targeted on the order of about $3 million to $4 million per year. We think that's a reasonable range. It's certainly financeable by Griffith itself and they are usually very attractive tuck-ins within our existing footprint. So I think that order of magnitude is very much in line with our thoughts.

Daniel Fidell - Brean Murray, Carret & Co

Maybe just a final question then as well on the share repurchase activities that you're just completing, a 200,000 share round. I was wondering if you could tell us -- hint at it -- maybe the possibility of additional repurchases and can you tell us what's left authorized under your current authorization and what you think the likelihood of additional repurchases going forward, just your appetite for it?

Steven Lant

Dan, in terms of the authorization we have outstanding, it's a total of 2 million shares. This math I can do live. That would leave us with about 1.8 million shares under that repurchase program. In terms of the dollars I was characterizing, those dollars are more similar, again, to what we were able to do with this first block of about 200,000, our first round of 200,000. So it would be on the order of about $9 million to $10 million but it's still very early.

These would be separate from most of the divestiture proceeds. Certainly when it comes time to look at what we would do and how we would go about doing a share buyback with the proceeds of the divestitures, especially for Shirley, even after we repay the debt, cover closing costs and the like, there would still be significant dollars.

It's just a little too early to tell and certainly the way we would go about conducting that kind of a buyback, again, given the order of magnitude, we're going to look at a variety of different approaches to certainly manage the cost as best we can.

Operator

Your next question comes from the line of [Peter Hart].

[Peter Hart] - Unidentified Company

Chris, where are we in the process with the banker that you've hired?

Chris Capone

Regarding Shirley?

[Peter Hart] - Unidentified Company

Well, Cornhusker and Linesdale as well.

Chris Capone

Cornhusker, at this point, as we mentioned, we took the full impairment. That one, frankly, given the troubles that the industry is having and giving the ability to have a better outcome with these other assets in terms of prioritizing our time and efforts, we have not been spending a great deal of time, as of now, on Cornhusker. That's somewhat fallen to the back of the queue and [inaudible] trying to monetize that.

In terms of Linesdale, again, we're going through the process right now. It's certainly a later stage than Shirley. The way we sequence these was to start with Linesdale and, again, based on the market information that we've received, which has been part of this process, that's why we felt the $8.9 million was more of an appropriate value.

It's still too early to tell, but certainly the outcome of Linesdale process should be ahead of any outcome from Shirley. Shirley, it's still somewhat in the early stages. There have been some due diligence being done by potential counter parties, data rooms as well as onsite visits, but that's earlier stage than Linesdale.

[Peter Hart] - Unidentified Company

Have you set a date for final bids or is that too early to say that, too?

Chris Capone

It's too early to say it at this stage, Peter.

[Peter Hart] - Unidentified Company

Then just understanding the $50 million of hold codes at and it sounded like you could assign some of that to the Griffiths business; but I'm just trying to understand maybe your ability to lever at the hold code level and keep your 48% equity ratio down at the utility and what kind of flexibility you have around that. So just hypothetically, if you could sell Wind for $60 million value and let's assign half of that $50 million debt to Griffiths.

So hypothetically -- so the thought is that there would be excess cash of $35 million and that would be a pre-tax number, number one. Number two, would then all of the aftertax proceeds be available for buyback under that type of scenario?

Chris Capone

You should keep very separate and distinct the cap structure at the utility. That 48% is not going to be influenced in any way, shape or form. It's always been our belief that we should have a higher equity ratio at our non-regulated based on the risk profile.

Again, so those are separate and distinct. That will in no way influence what we do at the utility. Going back -- and we feel we can and, frankly, we should maintain the 40% equity ratio. We think it's critical to maintaining our A rating and we find that a very, very important tool to be able to access the markets at any given time. As we've all seen in the last couple of years, that's been very, very valuable to our shareholders and to our customers.

In terms of what you walked through regarding proceeds out of a sell of Shirley, without getting into the numbers -- because, again, we have no clear sense right now what the asset is worth in the marketplace -- but some of the steps that you took, I think, are somewhat spot on.

This total debt, as I mentioned, we've assigned it down partially to Griffith, partially to Shirley and that has taken up all the $50 million. Certainly the debt associated with Shirley we would look to retire.

We also believe at Griffith, where the cap structure should be more heavily equitized than the utility, we've always targeted on the order of 55% equity, so that would entail, given the size of Griffith at year-end, assuming that there would be a number of the high 20s and in terms of the long-term debt and, again, with the remainder primarily with Shirley being responsible for.

Yes, we would look to repay that upon the sale. Then after transaction costs and any other costs associated with retirement of the debt from the proceeds of Shirley, yes, we would expect to use that for share repurchases.

[Peter Hart] - Unidentified Company

Then one value you didn't give us was the Landfill gas assets. What's the book value or -- ?

Chris Capone

As of year end, approximately $9.4 million. That is the CH-Greentree and the Auburn, so, yes, about $9.4 million.

[Peter Hart] - Unidentified Company

Then for accounting purposes, at what point do you consider them to be discontinued operations for either Cornhusker or Linesdale or Shirley? Then do I take a portion where you had in other businesses and investments an operating loss in 2010 of $0.12, do I add that back then to 2010 consolidate earnings to say that's what the normalized earnings of the business is if that $0.12 loss goes away and then, going forward, the use of the proceeds to enhance earnings per share on the buyback?

Kim Wright

Any of the investments that you mentioned would be classified in the held for sale category and reflected as discontinued operations following the point at which our board has authorized the divestiture. At that point the earnings from the prior years and the current year related to the particular investment would be segregated in discontinued operations.

The $0.12 that you're referring to in the PowerPoint slide really reflects more than just the investments themselves. For example, we do have, of course, the interest expense there. We have some other costs that run through the holding company. But certainly the amount of the loss would decrease on a going-forward basis.

[Peter Hart] - Unidentified Company

Could you say how much of the $0.12 is associated with the assets held for sale.

Kim Wright

I don’t have that information with me.

[Peter Hart] - Unidentified Company

Then maybe switching gears a little bit to the utility; Steve, you said the utility earned, or Chris said a 9.8% return in '10 and along with that you've got some mid-year rate relief but then also absorb some storm expenses.

I was wondering, on a normalized basis, absent those expenses, what the return could have been. You said for '11 that you're looking for utility earnings or ROE, I think you said, to improve considerably. I'm just trying to gauge what you mean by that and could you, again, review for us the sharing mechanism under the New York deal?

Steven Lant

The ROE that we quoted of 9.8% was intended to be pure run rate. It does not include any prior period deferral impacts. It also reflects the deferral of the storm costs that we incurred in February of 2010. So that was not a drag in that number.

Of course, that's assuming we get recovery of those costs but we believe we do qualify for recovery under the Commission's policy. So 9.8% is, we think, a pure run rate for 2010. The allowed ROE is 10% and we're working very hard to get to 10% and if we can exceed it we've certainly tried to do that.

The sharing mechanism in the current agreement kicks in at 10.5%, so if we were to improve our ROE to that level, we would begin to share. The comment about increasing our ROE substantially that Chris made was relative to Griffith, not relative to Central Hudson.

Clearly the leap forward we made in 2010 to 9.8% from the mid sevens was very substantial but now we're at the level where further improvements are going to become increasingly difficult.

[Peter Hart] - Unidentified Company

Then just lastly, to follow it up, there was some concern -- and maybe if you can make some comment broadly -- on the status of the Commission in New York now. A recent ruling passed down for Niagara Mohawk where they're talking about a 9.1% ROE. Some people wanted to suggest that Con Edison and/or yourselves would be faced with similar circumstances on the back end of your deals.

I'm not quite a believer in that. Niagara Mohawk's in a different situation but I was hoping that you can give us a broad indication of what you think the Commission intends and why the disparity in ROE is there in New York?

Steven Lant

We have analyzed the NiMo decision. It's sometimes a little bit difficult to do so from a distance because of the nuances involved. But our reading is that the Commission has applied its generic formula and the difference between the allowed ROE that we have and the allowed ROE that Niagara Mohawk has is a function of interest rates declining from one period to the next and also the fact that ours is a three-year deal that includes a two-year stay-out provision.

The 9.1% you quoted has no stay-out provision at all. So to compare, I guess, apples-to-apples, I'd view it as 50 to 60 basis points lower, not 90 basis points lower and that is a function of the decline in interest rates. So if interest rates were to remain at the same level that the record indicated for NiMo, I think we would be looking at a similar allowed ROE in our case.

Of course, that rate, that determination isn't going to be made until the Spring of 2013 at the earliest. So it's your guess is as good as mine as to what interest rates may do between now and then. But certainly I think most people believe that the odds are that they will rise rather than fall.

[Peter Hart] - Unidentified Company

Just maybe a commentary on the Commission under the new Cuomo administration.

Steven Lant

Well, it's, I guess, too soon to tell. The governor has been going around the state giving his state of the state address and talking about his budget. Frankly, the Commission has not been something that he has spoken about publicly. So we're not aware of any particular policy changes that are coming from the governor's office.

Operator

Your next question comes from the line of Maurice May - Power Insights.

Maurice May - Power Insights

In your 10-K you did have 2011 and 2012 capital expenditures. I guess they are following the three-year rate deal. But I'm just wondering, you had 2011 utility CapEx at $93 million and then 2012 utility CapEx in a range where the midpoint is about $111 million. Both these numbers are well above utility depreciation, which is in the low $30 million range. I was just wondering, this entails a lot of growth CapEx and I was wondering where the money is going to be spent.

Steven Lant

Well, it's going to be spent in a whole lot of different places. There's no one place that we can point to, Mauri. But if you look at our industry, I don't think we're really unique at all. We've done some comparisons of other utilities, pipes and wires companies like us, and it really is quite common to see CapEx in the range of two to three times depreciation.

It really is driven by the need to replace aging infrastructure more than anything else. The industry had a very big building boom in the post-war period up until the mid-70s. It's transmission plant in particular but also a lot of it is distribution plant.

Despite our best efforts to maintain that plant and extend its life we find that its condition is reaching a point where it needs to be replaced on an orderly basis. Again, I say we're not at all unique in that respect.

So most of this capital investment is replacing existing infrastructure. When you do that, of course, you try to do it in a way that incorporates new technology and it will produce more reliable and better service going forward but it really is related not so much to load growth but to replacing aging infrastructure.

Maurice May - Power Insights

This is basically poles and wires and pipes.

Steven Lant

Substations, right.

Maurice May - Power Insights

Second question has to do with Shirley and a comment, I think, Chris made about marketing. You mentioned talking with Shirley counter parties. In my recollection there's only one Shirley counter party. Is that correct?

Chris Capone

Yes, Mauri. What I meant by counter parties weren't -- wasn't WPS in terms of the off-take agreement. Potential buyers are probably better words than counter parties.

Maurice May - Power Insights

So WPS, you're not really talking to WPS about it.

Chris Capone

No, we're not. Again, I apologize for the confusion. I meant the buyer community, not the off-take.

Operator

Your next question comes from the line of [Neil Stein].

[Neil Stein] - Unidentified Company

I had a question about your capital return strategy policies. What I was wondering in particular was [with a] little of a buyback, have you considered a special dividend instead? My thought was that your liquidity in your stock is already tight, so it's a difficult buyback to execute and then you have this issue of the more of the buyback you execute the tighter liquidity in the stock gets. Then there's also the issue of your earnings multiple relative to others in the sector, but just wanted to see what your thought was.

Steven Lant

[Neil], we did consider a special dividend and we just felt a share repurchase is a superior way to return the capital to our investors. So that's the route we're going to take. Obviously we are aware of the trading volume that we are experiencing lately. Clearly we want to do any repurchases efficiently.

We feel we've done the first repurchase of 200,000 shares efficiently, without disturbing the market trading or causing any particular, noticeable affect in our PE ratio or any other valuation metric. It is a little bit of a challenge but, frankly, one that we don't think should inhibit us.

[Neil Stein] - Unidentified Company

When you say it's superior, maybe could you say what some of the criteria are that you look at to come to that conclusion?

Steven Lant

Well, I think we look at the company as a going concern and if you have a special dividend it really doesn't do as much for the [growing] concern as it does for the shareholders at a particular holding date. So for that reason, we think elevating the ongoing earnings per share and providing a more approximate opportunity to increase our dividend is really better for the company going forward.

Operator

(Operator Instructions). There are no additional questions at this time, Mr. Lant.

Steven Lant

Well, thank you, [George], and thank you all for your attention and your interest in our company. As always, Stacey Renner is available to answer questions that come to you later and we look forward to our next quarterly conference call.

Operator

Ladies and gentlemen, this conference will be available for replay after today through Friday, March 11, 2011 at midnight. Now, you may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code for this conference 189910. If you're dialing from international, please dial 320-365-3844.

Those number again are domestic 1-800-475-6701 and international 320-365-3844. The access code for this conference is 189910.

That concludes our conference for today. Thanks for your participation and for using the AT&T Executive Teleconference service. You may now disconnect.

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