CH Energy CEO Discusses Q1 2011 Results - Earnings Call Transcript

Apr.28.11 | About: CH Energy (CHG)

CH Energy Group, Inc (NYSE:CHG)

Q1 2011 Earnings Call

April 28, 2011 2:15 pm ET

Executives

Steven Lant – Chairman, President and CEO

Chris Capone – CFO and President

Kim Wright – VP, Accounting and Controller

Stacey Renner – Treasurer

Analysts

John Hanson – Praesidis

Gordon Howald – East Shore Partners

Operator

Ladies and gentlemen, thank you for standing by and welcome to the CH Energy Group conference call. At this time, all phone participants are in a listen-only mode. Later there will be an opportunity for your questions. Instructions will be given at that time. (Operator instructions) And as a reminder, this conference is being recorded.

I’d now like to turn the conference over to Chairman, President and CEO, Steven Lant. Please go ahead, sir.

Steven Lant

Thank you, Gayle. Good afternoon and welcome to our call. With me on today’s call are Chris Capone, Chief Financial Officer and President of CHG; Kim Wright, Vice President of Accounting and Controller, and Stacey Renner, our Treasurer.

Following my introductory remarks, Kim Wright will cover our earnings by business unit in detail and Chris Capone will provide an update on our future prospects and the progress we are making on divesting our renewable energy portfolio.

Before we begin, I'd like Stacey Renner to read our cautionary statements 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 first quarter 2011 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, belief, 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 10-K for the year ended December 31, 2010 under the section labeled risk factors. The 10-K 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.

Steven Lant

Thank you, Stacey. CH Energy Group’s earnings per share for the first quarter of 2011 were $1.08 versus $1.30 in the first quarter of 2010, a decrease of $0.22. Central Hudson, our primary subsidiary was down $0.25. Two factors were primarily responsible for this decrease.

First, Central Hudson’s tree trimming expenses were much higher in 2011. This was due to the low normal trimming in 2010’s first quarter partly due to the Twin Peaks storm. And this is combined with an above normal level of tree trimming in the first quarter of 2011.We took advantage of unusually favorable contract pricing and crude availability and accelerated our 2011 tree trimming plan. This timing difference will disappear by year end.

The second primary factor was weather and storm-related expenses. In 2010, the large expense of the Twin Peaks storm was deferred, whereas in 2011 we experienced a tough winter with numerous smaller storms and associated operating problems, none of which rose to the level that qualified for deferred accounting treatment. Also the PSC ruled on our deferred accounting petition for a recovery of the Twin Peaks storm cost and didn’t approve the petition in its entirety. Of the approximately 20 million we requested, all but 850,000 was approved, but that 850,000 represents $0.03 per share that we need to recognize in the first quarter of 2011.

I would note that we are considering filing a petition for rehearing regarding the portions of our petition that were not approved. Kim Wright will cover all the Central Hudson’s earnings impacts more fully in just a moment.

I’m pleased to note that Griffith came in $0.02 per share higher in the first quarter of 2011 despite the run-up in wholesale oil prices. We also experienced a $0.04 per share drag related to our divestiture activity, which we hope will not continue too much longer. The process is proceeding well and Chris Capone will discuss it more fully later in the call.

Kim Wright will now review the quarter in detail by business unit Kim?

Kim Wright

Thanks, Steve. Good afternoon, everyone. As Steve mentioned, I'll be reviewing our results for the first 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, you can see on page 5 that we earned $1.08 in the first quarter of 2011, that’s a $0.22 decrease from last year’s first quarter earnings of $1.30 and this was due to lower earnings from Central Hudson, which I will discuss next.

And moving on to page six, Central Hudson’s earnings of $0.79 were $0.25 lower than the first quarter of 2010. As Steve noted Central Hudson's earnings decreased primarily due to the timing of our tree trimming expenditures as well as higher costs to restore service to customers following storms. And regarding our tree trimming costs, in 2010, the impact of the significant storm events in late February put us behind schedule, reducing our expenditures in this area.

During 2011, we had several factors contributing to us being ahead of schedule. First, the weather conditions were favorable for most of the quarter and found it to be contagious to trend the (inaudible) in the spring. Second, the availability of crude allowed us to have additional people in the field. And finally, we were able to negotiate favorable pricing terms that reduced our average cost per mile to perform this work.

And therefore, while we saw a reduction in earnings this quarter as we spent money in advancing of receiving it in our rates, the level of expenditures are expected to decrease over the remainder of the year and bringing us back in line with our rate allowance by year end.

In terms of our higher storm cost, there were few drivers. First in 2011, we experienced a severe ice storm in part of our northern territory to result in an incremental expenditures of over $2 million. We also incurred incremental cost for the restoration of natural gas service as a result of severe weather conditions in January. Unlike the incremental costs we incurred from the severe 2010 February storm events, the 2011 costs didn’t meet the criteria for deferral for recovery customers. The combination of deferring our incremental restorations costs in 2010 and not doing so in 2011 reduced earnings by $0.09 in 2011.

Second, the Public Service Commission issued its order on our deferral petition for the significant storm events we had in the winter of 2010, disallowing approximately $850,000. Since we had deferred all of our incremental costs associated with these storms, the PSC’s disallowance resulted in higher expenses for the first quarter of 2011 reducing our earnings by $0.03.

Moving on to page seven, you see that Griffith contribution to CH Energy Group’s first quarter earnings on $0.28 were $0.02 higher than the same period last year. As Steve just mentioned, the primary driver of the improved earnings were lower operating expenses which were the results of reducing our infrastructure costs following the partial divestiture in December 2009. Higher margins and other favorable expense savings were able to partially offset the impact of lower sales volumes which we believe were due to pricing induced conservation.

Wrapping up on page eight with our other businesses and investments, our first quarter earnings were $0.01 higher than the same period 2010. As you can see on the top portion of the details shown in the slide, the combined impact of our current divestiture activities reduced earnings by $0.04. Given the nature of these costs, we expect such impacts to get smaller as we progress further in the divestiture process. And as Steve mentioned, Chris Capone will be updating you on our progress in this area following my remarks. Higher interest income at the holding company from inter-company loans and the lack of losses in 2011 from our ethanol investments helped to reduce the unfavorable impact of the divestitures on our consolidated earnings.

And now I'll turn the call over to Chris Capone for discussion of the outlook for our businesses and investment.

Chris Capone

Thanks, Kim. Good afternoon, everyone. As Steve and Kim mentioned in their prepared remarks, Central Hudson experienced a difficult first quarter compared to the first quarter of 2010 with a number of these year over year earnings not indicative of the underlying earnings power of our business. As was mentioned earlier, the impact of the storms in the first quarter and the disallowance of a small portion of the Twin Peaks did have a negative impact and they will reduce our 2011 earnings per share and earned returns, but neither of these items have a permanent effect on the earnings power of Central Hudson.

Our goal continues to be to meet or even exceed the authorized return on equity of 10%. The need to invest in our infrastructure continues and our current three year rate agreements are very supportive of these investments. The equity capital to fund these investments will drive our earnings growth and achieve in return similar to 2010 supports our five-year goal of an approximately 5% annual EPS growth trend using the $2.76 we earned in 2009 on a consolidated basis as the base year. We have also begun to see tangible benefits from implementing Lean, Six Sigma process and we look forward to improving our business processes as we strive to drive out unnecessary costs, improve quality and increase customer satisfaction.

At Griffith due to the ongoing unrest in the Middle East as well as across all the markets, certainly oil prices were even more volatile than typical during the first quarter and generally moved higher, often rapidly. Griffith’s full service model and margins that provide the resources necessary to meet our customers standards of service and earning acceptable return on investment. As prices rose quickly, margin management became critical to striking the balance between passing along commodity price increases and minimizing automatic delivery customer turnover. We feel we are able to strike this balance appropriately.

As seen in our results, we are able to increase our margins year over year and yet we experienced attrition in this year’s first quarter of just over one half of 1% of our ADS or automatic delivery service customer count compared to just over 1% on average over the prior similar periods, most of which actually have lower commodity prices. On a very positive note, we saw a significant increase in our roll-call customer account this year. Understand that this type of customer actively manages their fuel deliveries more so than in automatic delivery customer where we certainly determine the timing and the amount of the deliveries with these local customer accounts are still very profitable for us.

We do earn attractive margins and over half of these customers have service contracts with us in addition to over 85% of our full service automatic delivery customers. Further validating that Griffith’s service quality is truly among the best in their industry.

Through focused cost management coupled with margin expansion, we were able to offset all the negative impact from slightly warmer weather compared to last year. We feel Griffith performed well by working closely with all of our customers during this period of volatile and rising prices which again allowed us to mostly maintain our automatic delivery service customer account and significantly grow our roll-call customer base.

Regarding acquisitions at Griffith, we’ve acquired three fuel distribution companies for a total consideration of approximately 2.7 million since last December including 1.9 million so far this year and we continue to look for accretive tuck-in acquisitions. The earnings and cash flow provided from Griffith are supportive of and will contribute to CH Energy Group’s earnings, growth and dividend objectives.

Regarding our other check which houses other investments, at this point I would like to provide you with an update regarding our process of unwinding our renewable asset portfolio. As we announced at the end of March we are working towards closing the sale of Lyonsdale [ph] to Energy Corp. We currently expect the sale to close in the second quarter and we don’t expect deferring the transaction to have any significant impact 2011 earnings. The sale process for Shirley Wind, our 20 megawatt wind project in Wisconsin is also underway though not as far along as Lyonsdale process. At the appropriate time, we will certainly provide additional information on this as well. As we have indicated on previous calls, we believe greater share holder can be created by monetizing these assets at reasonable evaluations, repaying the portion of the holding company debt, originally put in place to support these assets and repurchasing shares with the remaining proceeds.

Just want to spend last few comments on our dividend policy and approach which we have provided on the previous calls. Our long-run approach to our dividend payout ratio is to target a range of 65 to 70%. We continue to make progress in growing earnings power of Central Hudson and Griffith and coupled with the impact of share repurchases from our divestitures. We believe we remain positioned to consider raising our dividend later in 2011 or early 2012.

Despite the temporary drags we experienced in the first quarter, we do believe we’re still on track. We’ll continue to provide update as the year progresses as to the timing of any dividend increases. At this point, I’d like to turn it over back over to Gayle and open the call up for questions.

Question-and-Answer Session

Operator

(Operator instructions) Gentlemen, we have no questions at – we do have one coming in which from John Hanson from Praesidis. Please go ahead.

John Hanson – Praesidis

Good afternoon, guys.

Steven Lant

Good afternoon, John.

John Hanson – Praesidis

I just wanted to check in terms of how you guys see the – I think you did really well in the fuel oil delivery business your given situation. How do you see that business come next fall if you got these kinds of prices? How does that affect the way that you look at that business?

Steven Lant

John, thanks for the question. Something when we look at this type of business, we look at the kind of capital that we’ll be required to finance the business and that’s one consideration. But in terms of how we deal with our customers, we continue to expect to work with our customers carefully. They certainly respond to energy prices at this level by trying to be a little bit more precise in terms of the size of the delivery. You can imagine that if you get a 175 gallon delivery at $3 or if you get one at $4.50, the financial impact can be considerably different. But we have been proactive throughout the last few years in working with our customers, and frankly again this quarter we think validates. We’ve been able to work well with them, meet their expectations and achieve the kind of returns we think are necessary.

John Hanson – Praesidis

Thanks on that. If I might just ask a little bit more about the [audible] – is that project in service yet?

Steven Lant

It is. It actually went into service in the month of February. And it’s been operating very well. The availability which is one of the key measurers certainly has been at or above our expectations frankly for being so early on in the project coming online, so we’re very pleased with the operations. We think the equipment manufacturer that we chose (inaudible) was certainly the right one. The process went well. It came in actually a little bit below the originally expectations, which is always good, and roughly on the timeline that we expected, and again it’s performed well.

John Hanson – Praesidis

Can you talk a little bit about the market for selling the assets but also just the market for wind in that area that you’re maybe that kind of goes together in terms of the – how you guys view that as an asset?

Steven Lant

Well, in terms of the overall market, certainly we think there is a fairly robust set of potential buyers out there. We’re running a fairly comprehensive process and we have received what we think a fair amount of interest certainly something that represents what the market would and should be willing to pay for this type of an asset. In terms of anything more specific, are you talking about the way the wind has manifested itself compared to expectations or the wind industry overall, the political climate or –

John Hanson – Praesidis

Just more of the market – that power, I guess, is more I was trying to say.

Steven Lant

Well, we have an uptick agreement with WTS for 20 years, so from that standpoint we don’t see that really as an issue, so there’s a contractual obligation with a single A counterparty. We would not have entered into this type of an investment without having a fixed PPA on the other side.

John Hanson – Praesidis

Very good, thanks.

Steven Lant

You’re very welcome.

Operator

Now we’ll go to Gordon Howald with East Shore Partners. Please go ahead.

Gordon Howald – East Shore Partners

Hi guys, good afternoon.

Steven Lant

Good afternoon.

Gordon Howald – East Shore Partners

Do you still believe that there are juggling through this divestiture process division, no impairments on the horizon as you exit some of these non-regulated projects?

Steven Lant

This is Lant. We do evaluate that each quarter and right now we had no expectation of any future impairments.

Gordon Howald – East Shore Partners

Okay, thank you. And, John has asked a little bit about this, but I’m (inaudible) what was the final oiling [ph] cost expenditures for that project.

Chris Capone

It was approximately $47 million Gordon.

Gordon Howald – East Shore Partners

Okay, so a little bit below, I guess, initial expectations.

Steven Lant

Right, a few million dollars below.

Gordon Howald – East Shore Partners

Yes. Okay, great. Thank you, very much.

Steven Lant

You’re already welcome.

Operator

(Operator Instructions) We have no further questions at this time.

Chris Capone

Well, there’s no further question, we thank you once again for your interest and intention and we look forward to speaking with you again next quarter. Have a good afternoon.

Operator

Ladies and gentlemen, this conference will be available for replay after 4:30 PM eastern time today through May 5 at midnight. We may ask this to AT&T replay system at anytime by dialing 1800-475-6701 and entering the access code 200772. That number again is 1800-475-6701 entering the access code 200772. That does conclude your conference for today. Thank you for your participation and for using AT&A executive teleconference. You may now disconnect.

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