Steven Lant - Chairman, President, & CEO
Kim Wright - VP, Accounting & Controller
Christopher Capone - EVP & CFO
Stacey Renner - Treasurer
Maurice May - Ticonderoga Securities
Scott Carroll - Goldman Sachs
CH Energy Group, Inc (GTY) Q2 2011 Earnings Call July 29, 2011 11:00 AM ET
Ladies and gentlemen, thanks for standing by. 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 host, Steven Lant. Please go ahead, sir.
Good afternoon and welcome to our call. With me on today’s call are Kim Wright, Vice President of Accounting and Controller; Stacey Renner, our Treasurer; and Chris Capone, Executive Vice President and CFO, and President of CHEC.
Before we begin, I would like to ask Stacey Renner to read our cautionary statement regarding undue reliance on forward-looking statements.
Thanks Steve. I would like to first remind listeners that the presentation slides for this conference call and our supplemental second 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 as well as subsequent 10-Q filings. These filings are available in the Investor Relations section of our website at the link for SEC filings.
I will now return the call to Steve Lant.
Thank you, Stacey. CH Energy Group is in the midst of a strategic shift toward exclusive on energy distribution through Central Hudson and Griffith. That transition is proceeding well, both on the standpoint of our divestiture of renewable energy projects and from the standpoint of executing our plan at Central Hudson and Griffith to produce sustainable earnings growth.
Our second quarter results contain a number of items that results from our transition, as well as timing differences that affected the second quarters of both 2010 and '11. Kim Wright will explain each variation so that you can see that our underlying earnings trend continues on an upward path.
Following Kim's remarks Chris Capone will provide an update on the status of our divestitures and the earnings of Central Hudson and Griffith as well as our plan to repurchase common shares later this year. Following Chris Capone's remarks we will glad to answer any questions. Kim?
Thanks Steve. Good afternoon everyone. As Steve mentioned, I will be reviewing our results for the second quarter and will be covering pages 4 through 7 of the PowerPoint presentation for those of you who are following along online.
Beginning with our consolidated results, you see on page 4 that we earned $0.38 in the second quarter of 2011. while this represents a $0.05 decrease from last year's second quarter earnings of $0.43. as you will see as I go through the presentation the execution of our new strategy is moving along well and the performance of our core business particularly Central Hudson is strong.
Moving on to page 5, while you see that Central Hudson's earnings of $0.46 were $0.16 lower than the second quarter of 2010. there were items in both years that mapped the actual year-over-year growth we find in Central Hudson's financial performance. Starting with 2010, we must exclude from the second quarter results the impact of deferral petitions to be filed with the Public Service Commission to recover uncollectible account write offs that exceed our rate allowance. This added $0.14 to our 2010 earnings related to expenses we incurred in 2009 and 2010. these petitions were necessary to correct an imbalance featuring the high level of write off we began experiencing in 2008 as a result of a weak economy and the amount included in our rates for recovery of these expenses. This imbalance was corrected with the rates that went into effect in July 2010.
Since our uncollectible expenses for the rate year we just completed in June did not exceed our rate allowance we did not record the impact of a deferral petition as we did in the second quarter of 2010. therefore, we did not have the type of favorable impact to earnings in the second quarter of 2011 that we experienced last year.
Another important note on this aspect of our business is that we have seen the level of write off stabilize with essentially the same level of write off in the second quarter of 2011, as we incurred in the period last year, any modest improvement on the year to date basis.
Removing the impact of the deferral petitions from the comparison, our 2011 second quarter earnings would have been $0.02 lower relative to last year. However, there is one other important effect of our year over year financial results that needs to be put in to the proper context in order to understand how well Central Hudson actually performed during the last quarter relative to the same period last year. And we talked about this last quarter as well, the timing of our tree trimming expenditures.
Looking at the bottom half of the slide you can see that our cost were $0.05 higher in the second quarter of 2011 than the same period last year. However, as we discussed last quarter, this is due an acceleration of our work into the first half of the year which was driven by two factors. First, the availability of contracted crews allowed us to have additional people in the field and, second, we were able to negotiate favorable pricing terms for these additional crews that reduced our average cost per mile to perform the work. Therefore, while we saw reduction in earnings this quarter as we sent money in advance of receiving in our rate, the expenditures are expected to decrease over the reminder of the year bringing up the line with our rate allowance in last year spending level by year end.
With that behind us we can compare apples to apples, first adjusting for the 2011 acceleration of our tree trimming expenditures, our 2011 second quarter earnings would have been $0.61. Then adjusting our 2010 second quarter earnings to exclude the impact of the deferral petition, we would have earned $0.48. With these two items removed from the analysis, we can see that Central Hudson's underlying financial performance improved by $0.03 or 6% during the second quarter of 2011.
In terms of our year-to-date results, these same factors drove the unfavorable year-over-year variance with the accelerated tree trimming having an even larger impact for $0.18 year-to-date. In addition, higher storms restoration cost negatively impacted our first quarter relative to last year when we deferred our significant cost for future recovery. This negatively impacted our year-over-year results by $0.11.
Moving on to Page 6, you see that Griffith's contribution to CH Energy Group's second quarter earnings were comparable to last year in a quarter in which we expected to record a loss. The largest driver of the year-over-year variance was driven by lower weather normalized sales which management believes we will recovery later in the year. Offsetting half of this variance we improved our margins by $0.01 over the same period last year.
Wrapping up on Page 7 with or other businesses and investments, we can see that in the second quarter this business unit contributed $0.03 to CH Energy Group's consolidated earnings showing a $0.12 improvement over the $0.09 loss for the same period in 2010. As you will see, as I discussed the reasons for the year-over-year changes, this improvement reinforces the shift in our strategy that we announced last fall, which is resulting in a movement of our earnings in this business unit to near breakeven level, which is what we would expect from the holding company's activity.
As you can see on the top portion of the details show on the slide, the combined impact of our current divestiture activities improved our earnings by $0.05. This consist of $0.02 of discontinued operation and $0.03 of favorable taxes associated with our divestiture, which we do not expect to contribute to earnings going forward.
Looking at the details behind the $0.02 of discontinued operation, we have $0.05 for favorability from Lyonsdale Biomass plant that incurred losses in the second quarter of 2010, as the result of an unanticipated outage. Well in 2011, we had a small amount of earnings in April before closing on the sale of the plants effective on May 1. Offsetting this $0.05 of favorability are $0.03 of costs incurred during the second quarter of 2011, related to the divestiture of both our Lyonsdale and Shirley wind investment. We will not incur these types of costs once we complete our strategy shift. However, higher interest income at the holding company from inter-company loan and the absence of losses in 2011 from of ethanol investment; also have contributed favorably to our consolidated earnings.
The last item on the slide, our other category had a $0.03 favorable variance in the second quarter of 2011 relative to the same period last year, primarily due to the discontinuation of our business development activity late in the second quarter of 2010. During that quarter, these activities reduced consolidated earnings by approximately $0.02.
Now, I will turn the call over to Chris Capone for a discussion of the outlook for our business and investment.
Thanks Kim. Good afternoon everyone. Kim has reviewed in extensive detail our second quarter results including the year-over-year comparisons. My remarks will cover some additional moments of the second quarter, but will primarily be focused on current and future period.
I would like to start my comments with Central Hudson. As Kim indicated despite a number of items in both this year and last year second quarter that masked progress, the underlying story of Central Hudson continues to be one of improvement. We continue to invest significant capital in our business to maintain the integrity of our electric and gas infrastructure, and to improve customer satisfaction. These dollars are invested throughout the communities we serve and our positive impact on local economies. These investments are the basis for future earnings growth, and we continue to be on track with the pace of investments expected under our current 3-year rate agreement.
As we continue to focus on improving our operating efficiency, our goal continues to be earning the authorized return on equity of 10%. We believe that we will approach earning the authorized ROE of 10% in 2011 on a normalize basis and maintaining or exceeding that level in 2012.
Given the results we have seen from implementing Lean Six Sigma processes and our continuing focus on our cost structure, we feel we are on our way to reaching these goals. We look forward to improving our business prosthesis as we strive to drive out unnecessary parts, improve quality and increase customer satisfaction.
Finally, related to Central Hudson, as result of considerable effort in focus a significant accomplishment was achieved in the second quarter. We signed a 5-year labor agreement with our union work force. The certainty provide by an agreement of this length and in working in partnership we are focusing or collective efforts on improving customer satisfaction and making our business more profitable.
Regarding Griffith, as Kim mentioned briefly in her comments, lower volumes negatively impacted year-over-year results. These volumes were lower than expected given the actual weather we experienced this year. A large number of fall service customers continue to more actively manage the financials by managing the timing of their fuel deliveries. Given the escalation in prices and the continued difficult economic environment this was not at all expected. This change in behavior resulted in reduction of approximately 600,000 residential gallon so far this year, which we expect we will deliver in this calendar year. Griffith's fall service models entails margins that provides the resources necessary to meet our customers' standards of service and also earn an acceptable return on investment.
Despite the volatile behavior of oil prices throughout the quarter, we were, however, able to expand our margin slightly year-over-year . And importantly we have not experienced any significant customer attrition over the last 12 months. We recognize that in the current economic environment our customers need to focus on managing their expenses and we are working with them closely to mange their fuel bills.
Now, another key way in which we are creating shareholder value is through selective tuck-in acquisitions. Though we did not close any additional acquisitions in the second quarter, we have 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. The phase of due diligence have been accelerating recently and we hope to report further progress on this front during our next earnings call.
At other CHEC, regarding that business unit which houses most of our renewable assets. During the second quarter, we made significant progress towards substantial diverse nature of this portfolio. In early May, we closed on the sale of Lyonsdale, the upstate 19 MW biomass facility for total consideration of approximately $8.4 million. In late May, we signed an agreement to sell our 20 MW Shirley Wind Project to Duke Energy Renewables. These two asserts together represent over 80% of our entire renewable portfolio assets.
We utilized the proceeds from the sale of Lyonsdale along with some additional available liquidity to repurchase approximately 200,000 shares of common stock. Since the fourth quarter of last year we purchased approximately 395,000 shares at an average price of approximately $51 per share. We continue to work towards closing Duke Energy Renewables and we are currently projecting a closing in the next month or so. Proceeds from the sale of Shirley Wind will be utilized to repay associated debt and repurchase of additional common shares. We are estimating that we will have approximately $25 million to $30 million available for share repurchases, which would allow us to repurchase roughly 500,000 shares at current prices, or about another 3% of our shares currently outstanding.
We continue to believe that greater shareholder value can be created by monetizing these assets at reasonable valuation, repaying a portion at holding company debt originally put at place to support these assets and repurchasing shares with the remaining proceeds.
We continue to work towards further divestitures but the remaining assets should not have any material impact on future results.
At this point, I would like to make some additional comments regarding our dividend policy and overall approach to dividends.
Our long arm approach to our dividend payout ratio is a targeted range of 65% to 70%. We believe this range is appropriate given the relative stability of earnings and earnings growth we expect going forward at an energy delivered company that is 90% regulated. We continue to make progress in growing the areas covered Central Hudson and Griffith and coupled with the impact of share repurchases with proceeds from their renewable asset divestitures, we continue to believe we are well-positioned to consider raising our dividend later on 2011 or early 2012. We will continue to provide updates as the year progresses as to the timing of any increases.
At this point, I would like to turn it over to Greg and open the call up for questions.
(Operator instructions). Your first questions comes from the line of Maurice May from Ticonderoga Securities.
Maurice May- Ticonderoga Securities
Just a couple of quick ones here. First of all, on the Shirley Wind, you hope to settle on that in the next month. Are you going to get post fees approximately your investment there?
That’s our current expectation, yes, Maurice.
Maurice May - Ticonderoga Securities
Okay. Let’s see, the second question I had had to do with the current level debt. You have, if I recall, $50 million in current level debt in two tranches like $27 million and $26.5 and $23.5 are you going to retire one of both of those?
Maurice, we are going to look both of this issues and determine what could be the most favorable economic impact in the long run. I am sure evaluating that we have to look at all the terms and conditions of both tranches of debt to see what makes the best sense.
Maurice May - Ticonderoga Securities
Because one piece I think matures in 2014 and the other is like 2025.
Right, the longer piece is an amortizing fees that was directly associated with the project.
Maurice May - Ticonderoga Securities
Directly associated it with Shirley?
Maurice May - Ticonderoga Securities
Okay, so if that’s directly related to Shirley, then that would be more likely the piece that you retire, is that correct?
Again, we are looking at both, (inaudible) were both at the company as you mentioned but are going to look because again that depending upon the terms and condition. And they actually make more sense to retire their shorter term piece just looking at the prepayment aspects of it. And we will look at what the remaining debt will do there to serve and support the remaining part of our non-regulated businesses and again see what makes the most sense.
We will, certainly, if we get to the close we'll certainly provide all that detail so that you can have that information available.
Maurice May - Ticonderoga Securities
Okay, and then on, just to be clear, you are allocating $25 million to $30 million in an additional share purchases this year and that would indicate about 500,000 shares (inaudible) you have already bought an almost four so you could be buying in this year, I put the 900,000 shares, is that correct?
Yes, it is
(Operator instructions). And at this time you have a question from Scott Carroll from Goldman Sachs. Please go ahead.
Scott Carroll - Goldman Sachs
Please go ahead.
Scott Carroll - Goldman Sacks
Just one quick question on sort of revised growth expectations going forward. Could you remind us how you talked about and then just how you are going to fund that CapEx that’s associated with that in the over the next three, four, five, ten years? Thanks very much.
Sure. Well, going out ten years is a long time, but we can certainly talk about the current rate agreement and our expectations for maybe the future immediately beyond that. The current rate agreement calls for us to invest a total of about $270 million or $90 million per year. And that will be funded both with well, both primarily with external debt and retained earnings over this period such that we expect our rate base growth to be about 5% per year.
Now, going forward our expectation is that the capital expenditures of our company will at least remain at the current level, if not increase somewhat. We have the same needs going forward. We have had in recent periods related to investing in our infrastructure. And there are some opportunities to invest to improve customer service that we’re looking at such as distribution automation and some IT investments which could cause a CapEx to be a little higher in the future than in the current period.
However, potentially offsetting some of that is the benefit of tax refunds that we’ve been receiving through the tax repair project and bonus depreciation. I guess the long and short of it is over this 10-year horizon that you are referencing, we expect our rate base to grow at about 5%. That’s probably our best expectation on an annual basis, not that will be exactly that level each and every year but on a trend basis that appears to be about what we expect.
At some point in the out years, and this is certainly beyond the current rate agreement, there would be a need to begin to finance some of that growth with a little bit of incremental external equity. So, a little bit of that rate based growth could be offset by additional share outstanding but again that’s a few years off if not several years off.
(Operator Instructions). And you have a question from the line of Tim Winter from Gabelli and Company
Tim Winter – Gabelli and Company
I was wondering if you could talk a little bit about how your allocating 270 million? What types of rate base are you investing in? And then maybe do you see any other opportunities perhaps with transmission going forward?
Sure. Well, the $270 million is really not concentrated at all in any one particular project. It’s the sum total of a lot of infrastructure work and growth oriented investments related to attaching new customers, building new circuits where we are having low growth, changing out substations that have reached the end of their useful life and the like. So, it’s across our gas and electric system with no huge concentration. I don’t think we have got an investment that represents more than 5 or 10% of that total in any concentrated way. So, it is again the accretion of system like infrastructure work and new business.
Now, you asked about transmission. In the current CapEx program, there really isn’t a lot of transmission investment. But going beyond the current rate agreement there could be more than we’ve seen. There is a real need that the New York Transmission Owners are actively investigating to effectively rebuild a bulk of the bolt power system in the state which is on the order of 40 plus years old and getting older every year. And the transfer capability across the state isn’t what it really needs to be from the standpoint of serving future customer need. So, in addition to just replacing aging infrastructure, there’s really a need to reinforce the system so that there can be a more economic dispatch of generation and better trading across regions.
In addition to that, we see the potential for gas pipeline investments. I think we’re all aware in our industry of the importance of the Marcellus Shale and how much gas is being produced there, and the opportunity to present especially from the standpoint of additional electric generation being gas fired rather than in particular coal fired. So, we see long term opportunity is there to transmit gas for to and through our territory. And we’re exploring those opportunities. Again, these are beyond the term of the current rate agreement but in the period beyond that, we could start seeing in these opportunities bear fruit.
And at this time, there are no further questions.
Well, if there are no further questions, we thank you very much for your interest. As usual, I invite you to call Stacey Renner with any particular questions that comes you later. And we look forward to continue in next quarter.
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.
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