Executives
Steve Lant – Chairman, President, and Chief Executive Officer
Chris Capone – Executive Vice President and Chief Financial Officer
Kim Wright – Vice President, Accounting and Controller
Stacey Renner - Treasurer
Analysts
Tim Winter
CH Energy Group, Inc. (CHG) Q3 2011 Earnings Conference Call October 27, 2011 2:00 PM ET
Operator
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 with instructions given at that time. (Operator instructions) I would now like to turn the conference over to host, Chairman, President and CEO Mr. Steve Lant. Please go ahead.
Steve Lant – Chairman, President, and Chief Executive Officer
Thank you. Good afternoon and welcome to our quarterly conference call. With me on today’s call are Chris Capone, Executive Vice President and CFO, CH Energy Group and CHEC, Kim Wright, Vice President of Accounting and Controller, Stacey Renner, our Treasurer.
All in my introductory remark, Kim Wright recover our earnings by business unit in detail and Chris Capone, who will provide an update on our future prospects. Following Chris is remarks with followed taking your question.
Before we begin, I would like to ask Stacey Renner to read our cautionary statement regarding undue reliance on forward-looking statements. Stacey?
Stacey Renner – Treasurer
Thanks Steve. I would like to first remind listeners that the presentation calls for this conference call and our supplemental third 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.
Steve Lant – Chairman, President, and Chief Executive Officer
Thank you, Stacey. CH Energy Group’s earnings per share for the third quarter 2011 were $0.55 versus the $0.11 for the third quarter 2010. Just a moment Kim Wright will explain result by business unit fully, before should us I would like to discuss our reason action to increase our quarterly dividend by almost 3% and $1.05 per share and $0.54 to $5.55 effective November 1, 2011.
Last October, we announced strategic shift that we believe with produce a strong trend of growing earning per share and increasing dividend. Along with reduced earnings volatility going forward. Our refocused strategy entailed divesting our renewable energy portfolio and concentrating our efforts on our energy delivery businesses, which have attractive investment opportunities and in which we’ve demonstrated a strong track record of operations and improving financial performance. Since our announcement last October 28, we focused on the execution of this revised strategy and I’m pleased to say that that process is nearly complete.
During this quarter we divested two projects both are gains. In addition we recorded impairment for one project. On the small amount of renewable energy related assets remain on our balance sheet representing about 1% of our consolidated equity. A few minutes Chris Capone will provide the details of our divestures as well as our thoughts about this small access we retained.
As planned we use our net proceeds to retire debt associated with the portfolio assets we divested and we’ve repurchased approximately 6% of our common stock reducing our share account to about 14.9 million shares. We entered into an accelerated stock repurchase arrangement in August, which is provided immediate accretion to our earnings per share. However the full annualized effect and I’ll be talked into the third quarter of 2012.
While our divesture plan execution as proceeded well so far this year importantly we’ve also been producing strong operating results in our core businesses Central Hudson and Griffith. Central Hudson is performing well for the calendar year 2011 we expect to earn close to the lot ROE in our three year rate plan of 10% on weather normalized basis. Incorporated in net projection is deferral of approximately 13 million of stone storm storm and restoration expense associated with tropical storm or rain.
Kim Wright will describe that topic in detail shortly. I believe our company once again rose to the occasion response to Tropical Storm Irene, which interrupted service to 60% of our customers. Central Hudson is also continuing into improve it’s reliability in customer satisfaction metrics and it’s meeting and surpassing all the performance measures incorporated in our way plan.
Griffith is also showing good progress have he made a number of attractive acquisition so far this year. Chris Capone will discuss Griffith in more detail shortly. All in all with an eventful and gratifying quarter for the company. And we’re especially pleased to deliver both the stock repurchase and a dividend increase to our shareholders consistent with the strategy we announced at this time last year.
I will now like to turn call over to Kim Wright. Kim?
Kim Wright – Vice President, Accounting and Controller
Thanks, Steve, Good afternoon everyone. As Steve mentioned I’ll be reviewing our results for the third quarter and will be covering pages 5 to 8 of the power point presentation for those of you who are following along online. Beginning with our consolidated results you see on page five, that we are on $0.55 in the third quarter of 2011, a $0.44 increase from last year third quarter earnings of $0.11. As you all please I review detail results by business unit the performance of our core businesses particularly Central Hudson is strong. Moving on to page 6, Central Hudson earnings of $0.76 were $0.16 higher than our third quarter of 2010 primarily due to the second years rate increase in our three year rate settlement. In differences in the timing of treats on the expenses we discussed during the first half of the year.
Looking at the bottom half of the slide you can see that our costs were $0.05 lower in the third quarter of 2011 than the same period last year. And let’s take a look at some of the primary reason for the improvement. You recall that we previously talked about accelerating our tree trending into the first half of the year. What you’ve seen now this is the reverse side of this as we bring the overall level of spending for the year back in line with what we spent throughout 2010.
This increased earnings by $0.08 to relative to the third quarter of last year and then primarily a timing different. Reducing our earnings you see the result portions more on weather related restoration costs. These were incremental expenses we incurred following Tropical Storm Irene which is severely impacted our service territory in August. We incurred nearly 30 million of incremental cost associated with the restoration of electricity to approximately 180,000 of our customers as a result of this storm.
Due to the extraordinary nature amount of these costs, we believe they need the public service commission criteria for future recovery therefore you don’t see the impact of these costs here. While the incremental cost to restore electric service I’m showing here we did have two categories of costs negatively impact our earnings. First, our incremental cost to restore our nature gas system, but not being differed because we do not currently meet the CFCs criteria. We will continue to monitor this as the radial scraper and further process in the future if this changes these cost reduced earnings by $0.02. Second, our employees that were working on capital projects were redirected to support the restoration effect increasing our expenses.
However since these costs are reflected in our rate, which cannot be differed, this shifting of work reduced earning by an additional $0.02. Management considers these two weather impact following core sense to be unusually high cost and above the normal zone cost. One additional item of significant is be impact of our share repurchase program which increased our earning by $0.03 for the quarter relative the same period last year $0.05 on a year-to-date basis.
Moving on to page seven, you see aggressive contribution, CH Energy Groups third quarter earning were comparable to last year, and the quarter in which we expect to be a quite a lot. As you can see on the slide details improved margins were able to offset the impact of lower weather normalized sales for this quarter relative to the third quarter last year.
Ramping up on page eight with our other businesses investment you can see that in the third quarter this business unit lead to CH Energy Group consolidated earnings at $0.29 lower than the $0.35 lost for the same period in 2010. As you can see on the top portion of the detail shown on the slide the combined impact of our current divestiture activity improved our earnings by concern negatively impacting our earning you can also see that as we continue through our divestiture process we determine that we needed to recognize an impairment on our minority interest in two small wind farms reducing earnings by $0.14.
Looking further to detail we divested our two remaining large renewable investments so we went in the Auburn Landfield Gas plant during the third quarter, contributing $0.24 to CH Energy Group’s earnings. Following the Shirley wind divestiture we elected to repay external bag as a result of the early repayment we incurred a prepayment internal fee which reduced earning by $0.11. We also saw a decreased earning of $0.03 from the reduction in operations during 2011 from divested investment, line sales and offering.
The absence of the $0.44 impairment we reported in the third quarter 2010 related to our ethanol investment improved earnings while the impairment we recorded this year in the third quarter reduced earning at $0.14. There were two primary drivers of the impairment we recoded this quarter. First as we considered our option for selling those investments we considered the impact of the recent downturn in electric prices and determine that it unlikely that they will recover significantly.
Second a recent identification of the needs to replace the delays for two of the turbine at one of the wind farms will require additional cash flow for the repairs and will reduce operating cash flow as a result of the reduced generation during the repair. Such a repair being requirement in a relative early stage in the expected life cycle of the unit, we’re just concerned over similar repairs we needed for other units in the future. Based on these factors management we put it as unlikely that cash flows will be sufficient to recover the value of our investment and therefore we recognized the impairments for the full value of our investments.
The other large variance in these business units was the result of lower income taxes in 2010, which improved earnings in the third quarter of last year by $0.11. The largest component of this was due to taxable income that was lower than we estimated when we closed our books for 2009. As we noted at that time we did not expect changes of this size going forward and you see that in this years result.
Now, I will turn the call over to Christopher for discussion of the outlook for our business and investment.
Chris Capone – Executive Vice President and Chief Financial Officer
Thanks Kim. Kim has reviewed our third quarter results in detail including the year-to-date comparison. As Steve mentioned my remarks will cover some additional elements of the quarter but will primarily be focused on current and future periods. As Steve and Kim discussed Central Hudson results have improved considerably, as our infrastructure investment increased and earnings of have strengthened, Central Hudson role as the core of CH Energy Group continues to grow.
We are executing our plan of investing significant capital in our utility infrastructure to improve customer quality and satisfaction. These infrastructure investments are the basis for future earnings growth and we continue to be on track for the phase of investments, expected under our current three-year agreement. This agreement allows us to invest in customer service while keeping customer bills affordable. As we’ve continued to focus on improving our operating efficiency our goal continues to be early authorized return of 10%. As Steve mentioned, we believe that we will approach earning the authorized ROE in 2011 on a normalized basis and maintain or exceed that level in 2012.
We believe that our strategic shift to focus on our energy delivery businesses and primarily on Central Hudson can create significant shareholder value. Group returns most of returns from November to March with the third quarter being tough quarter. As Tim mentioned Griffith result in this year’s third quarter were similar to last year’s results. Year-to-date results were slightly better despite oil prices that have been 33% higher on average, so far this year, compared to the same period of 2010.
The expected customer response has been a reduction in average usage for customer. The overall usage was down we were able to offset a portion of the impact by expanding our average margin for gallon compared to the same period last year. While this was helpful we then increased margins by an amount that would have completely offset the negative impact of reduced usage, because we need to maintain competitive pricing in the markets we serve to retain and attract customers.
As mentioned during our last call, a number of our full service customers are actively managing their finances by selecting the timing of their fuel deliveries. This wasn’t unexpected given the significant escalation in energy prices and the continued difficult economic environment. We expect to begin delivering these gallons later this month and throughout the rest of this calendar year. We recognized that in the current economic environment our customers need to focus on managing their expenses and we were working with them to manage their fuel dose.
We continue to aggressively manage our uncollectibles and our bad debt Steve even year-to-year at approximately 0.5%. We continue to execute on our plan to selectively acquire smaller companies that we can tuck into our current footprint. We have closed on just over $3 million so far this year of acquisitions. We have demonstrated that we can effectively integrate these businesses and early returns well about the cost of capital and well above the returns available in the Central Hudson.
The higher piece of due diligence has been continuing and we hope to report for the progress on this front during our next earnings call. Now I would like to spend just a few moments on the other CHEC business. During the third quarter we did make significant progress towards substantial divestiture successfully closing the sale of Shirley Wind over landfill gas assets. As Tim mentioned these sales generated a combined gain of $0.24 per share something we’re very proud of.
In August we closed on the sale of Shirley Wind to Duke Energy renewables. A significant portion of the proceeds was utilized to repurchase approximately 550,000 shares of stock with reminder utilized with our holding company debt. In September, we closed on the sale of the O’Brien landfill gas project and the proceeds from this transaction were factored into the repurchase of the stock coincidence with the sale of Shirley Wind. Since the fourth quarter of last year we repurchased approximately 950,000 share stock of stock at an average price of approximately $52 per share.
As Tim also described on page 8 of the slide Deck, we recognized an impairment of the small wind investment in the third quarter. One important note this impairment will no way undermine our ability to achieve our future financial goals. And at this point we have one remaining assets at least molecular gate to landfill gas project in Pennsylvania that we call Greentree which has a book value of about $4.5 million. The contract calls for us to receive quarterly lease payments run through the middle of 2016.
At this point of project is turning on all of its lease payments, but due to less municipal solid waste being deliver to the landfill the project is experiencing financial difficulties. The project owners are in the process of trying to renegotiate the debt term to improve the project financial situation. If they are unable to do so and can no longer need their lease obligations to us. We have certain remedies available including removing the molecular gain. However, Greentree represents only approximately a quarter of 1% of our assets and again will no way interfere with our achievement in the financial goals we have articulated. Then namely 4% to 5% average annually PS growth coupled with an attractive and potentially growing dividend.
Before I open it up for questions, I just want to make a few comments regarding our dividend policy and approach. As Steve mentioned we announced a dividend increase September of this year, our first since the 1998 time period. We feel the improvements in our core business Central Hudson and Griffith, coupled with our reduced risk profile as a result of the divestitures, this industry raise the dividend. Going forward our dividend decisions will be based solely on the performance and prospects of Central Hudson and Griffith.
Our long run approach to the dividend payout ratios to target a range of approximately 65% to 70%. We believe this range is appropriate given the relative stability of earnings and earnings growth, we are projecting going forward as an energy delivery company that is more than 90% regulated. If we continue to execute this planned we feel we will be in a position to consider raising our dividend again in late 2012 depending on the end curve circumstances.
At this point, I’d like to turn the call over to Kathy and then open up for questions.
Question-and-Answer Session
Operator
(Operator Instructions) There are currently no questions in the queue. (Operator Instructions) We do have a question from Tim Winter. Go ahead please.
Tim Winter
Good afternoon guys and congratulations on a good quarter.
Steve Lant
Thank you, Tim.
Tim Winter
I wanted to get an update on the share repurchase program you bought 950,000 shares from 2 million share authorization, correct?
Steve Lant
Correct.
Tim Winter
What can we expect going forward? We continued actively repurchase or taking a slowdown.
Steve Lant
I would say at this point, we think we concluded the repurchases that we expect over the next year or two. As Chris indicated to the line share of the divestures are concluded unless last there is a surprise in that front. We don’t expect to be repurchasing more shares.
Tim Winter
Okay. And now that you’ve accomplished a lot of your strategic divestures, what kinds of opportunities do you see going forward I know you’re considering lot of the activity that’s going around the shale activity. Do you have any opportunity to invest in pipelines or transmission or anything of that nature?
Steve Lant
Potentially, yes. We’re actively looking at those opportunities both on the electric and gas side. We feel some pretty substantial long-term opportunities to invest to both increased the nature gas delivered capacity from the west to the east as well as the electric transmission delivery. And so, we’re looking at both of those sources of opportunity that would be on top of the I guess what we considered the normal course of business opportunities that we have in our core businesses tuck-in acquisitions for Griffith and approximately 5% annual rate base growth at Central Hudson.
Tim Winter
Okay, specific projects you’re now ready to talk about is that?
Steve Lant
There is nothing that as reach the level of concreteness that we have announced, but we are pursuing opportunities at this point.
Tim Winter
Okay, great. Thanks a lot guys.
Steve Lant
You’re welcome.
Chris Capone
Thank you.
Operator
(Operator Instructions) We currently have no questions.
Steve Lant – Chairman, President, and Chief Executive Officer
Well, there are no further questions. We would like to thank you very much for your time and attention today. And look forward to updating you next quarter.
Operator
Ladies and gentlemen, this conference will be available for replay after 4.30 PM today through 11.15, 9 PM November 3rd 2011. You may access the AT&T Teleconference replay system at anytime by dialling 180-475-6701 and entering the access code 220616. Again that number is 180-475-6701 using access code 220616.
That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.
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