CH Energy's CEO Discusses Q4 2011 Results - Earnings Call Transcript

Executives

Steven Lant – Chairman, President and Chief Executive Officer

Chris Capone – Executive Vice President and Chief Financial Officer

Kim Wright – Vice President of Accounting and Controller

Stacey Renner – Treasurer

Analysts

Nicholas Yuelys – Gabelli Company

Michael Gaugler – Brean Murray, Carret

CH Energy Group, Inc. (CHG) Q4 2011 Earnings Conference Call February 16, 2012 2:00 PM ET

Operator

Ladies and gentlemen, standing for standing by, and 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 our host, Mr. Steven Lant. Please go ahead.

Steven Lant

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 of CH Energy Group and President of CHEC; Kim Wright, Vice President of Accounting and Controller; and, Stacey Renner, our Treasuer.

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

Thanks, Steve. I would like to first remind listeners that the presentation slides for this conference call and our supplemental yearend 2011 financial information are available in the Investor Relations section of our website at ww.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 risks 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, 2011 under the section labeled risk factors. We expect to post the 10-K this afternoon in the Invest Relations section of our website at the link for SEC filings.

I will now return the call to Steve Lant.

Steve Lant

Thank you, Stacey. On today’s call, we will address both the fourth quarter of 2011 and our results for the full calendar year. Following my introductory remarks, Kim Wright will discuss our results by business unit in detail. Following Kim, Chris Capone will discuss our business environment and our prospects for 2012. Then we look forward to taking your questions.

CH Energy Group’s consolidated earnings for the fourth quarter of 2011 were $0.95 per share versus $0.60 per share for the fourth quarter of 2010. For the calendar year, earnings-per-share was $2.97 for 2011 versus $2.44 in 2010. Both years were impacted by significant events that masked the trend in core earnings, which forms the basis for our expectations for the future.

We’ll attempt to identify those items and illuminate the underlying trend on today’s call. Our slides were also prepared with this goal in mind.

2011 was a very challenging and rewarding year for CH Energy Group both strategically and operationally. Relative to strategy during 2011, we executed the divestitures of our four largest components of our renewable energy portfolio and recognize an impairment for a fifth investment. This effectively completed our strategic transition. We expect no material financial impacts going forward.

We have promptly used the proceeds of divestitures to pay down holding company debt related to the projects and to repurchase about 6% of our outstanding shares, which has produced immediate earnings per share accretions. But the effect will not be fully evident until mid 2012.

The transition has produced the company that has more focused, has higher earnings per share, a higher dividend, and a lower risk profile. I’m pleased to say that the shift in strategic direction that we announced in October of 2010 has proven out.

On the operational side, it was a very successful year as well. Central Hudson faced the worst-weather year in our long history, notably Tropical Storm Irene, and the unusual late October snowstorm. We did an excellent job restoring service as efficiently and promptly as was reasonably possible in each case. I’m very proud of how our employees responded and I feel we really came through for our customers.

However, our storm response had a significant price. Despite our ability to defer much of the cost of storm restoration under the PSC’s deferred accounting policy, we absorbed $0.31 per share of incremental expenses during 2011 as the result of all of the storms we experienced in aggregate. So, while our earnings growth was strong, it could have been much better than it was had the weather been normal.

Despite being thrown off stride repeatedly by the storms, Central Hudson did an excellent job executing its capital investment plan and managing expenses. Central Hudson also did an excellent job on its customer service and quality metrics, meaning all of the PSC’s targets for customer service, electric reliability, and gas safety, and showing especially good improvement in its electric reliability metrics.

We attribute this to the benefits of our capital investments in our system into our enhanced tree trimming program. We also did a superb job on energy efficiency, earning revenue incentives for delivering effective programs to our customers.

Central Hudson was able to earn its allowed ROE in 2011 on a weather-normalized basis and we continue to believe that our three-year rate plan that began on July 1, 2010 is benefitting both our customers and our shareholders.

Griffith had a challenging year due to a substantial increase in wholesale oil prices and its earnings fell slightly as a result. But Griffith did a good job serving its customers reliably, managing expenses and making several tuck-in acquisitions that will help boost and increase in earnings per share in 2012.

Overall, I’m very pleased with how CH Energy Group performed in 2011 and how well our company is positioned to make significant progress in 2012.

I’ll now turn the call over to Kim Wright. Kim?

Kim Wright

Thanks, Steve, and good afternoon, everyone. As Steve mentioned, I’ll be reviewing our results for 2011 and 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’d see on page five that we are $2.97 in 2011, a $0.53 cent from 2010’s earnings of $2.44. As Steve noted, this increase reflects the fact that we have essentially completed the shift in strategy we announced in the fall of 2010 and strong core earnings from Central Hudson.

Both years’ results reflect impacts from our strategy shift as well as events that management does not believe are representative of the underlying business drivers of our earnings going forward, particularly from our renewable energy investments. These items, which I will describe in detail as I review each business unit’s results, reduced our 2011 consolidated earnings by $0.18 and by $0.34 by 2010. Absent these items, our earnings would’ve increased $0.37 from $2.78 to $3.15, with most of the increase coming from Central Hudson.

So let’s look at the detail behind this increase beginning with Central Hudson. If you turn to page six, you can see in the middle of the slide Central Hudson’s earnings were significantly impacted by some of the events I just referred to, which we do not believe are representative of our future earnings power.

Central Hudson’s earnings prior to adjusting for these significant events were $2.88, $0.02 higher than 2010’s $2.86. Removing these items from both years, you can see that our core earnings increased significantly by $0.26 or 9.5% from $2.74 in 2010 to $3 in 2011.

Before we discuss Central Hudson’s core earnings, let’s review the events that we do not believe are representative of our future earnings. The first item, which favorably impacted 2010’s results, was the impact of a petition we filed with the public service commission in 2010 to recover bad debt write-offs we incurred in excess of what we recovered in rates, the portion of which related to 2009 write-off.

The second item, and by far the largest, reflects the incremental cost of restoring electric and natural gas service to our customers as a result of abnormal weather. 2011 was the worst weather year we have experienced in our over 100-year of history, with the associated restoration cost clearly not representative of the experience reflected in our current rate.

As the result of numerous weather events, including a severe ice storm, Tropical Storm Irene and an October snowstorm consisting of heavy wet snow that have curbed one of our trees had not lost most of their [leads], we incurred substantial restoration cost. While some of our incremental restoration costs were deferred, a substantial portion were not, reducing our earnings by $0.31. This $0.31 also includes $0.02 for the PSC’s reduction of our request for recovery for the incremental restoration cost from the significant snowstorms we experienced in February of 2010.

On the next line, you can see the results of a successful year of working with our customers, to take advantage of their variety of efficiency program. The energy savings we were able to generate resulted in earning revenue incentives of $2.7 million, adding $0.10 to our earnings. While we will continue to have the opportunity to earn incentives over the next three years in the new energy efficiency program period, we currently do not expect the level of such incentive to be as large as it was in 2011.

The last item reflects the impact of our share repurchase, which resulted from our shift in strategy. The reduction in outstanding shares between 2010 and 2011 increased our earnings per share for 2011 by $0.09. Due to the timing of the repurchases, our 2011 earnings benefits by approximately half of the expected annualized favorability. Therefore, we should see a comparable increase in our 2012 earnings per share with no incremental impacts thereafter.

Excluding the impact of these items, Central Hudson’s 2011 results would’ve been $3 per share, $0.26 higher than 2010’s $2.74. Looking at the bottom portion of the slide, you can see that we saw an increase in earnings of $0.42 from higher delivery revenue. This increase reflects the rate order that went into effect in July of 2010 and was needed to address the cost of capital as we continued to make significant investments in our system while we incur higher operating costs.

Continuing down the list, you can see some of those costs, such as higher property taxes and depreciation. In total, our operating costs were $0.16 higher in 2011 than they were in 2010, resulting in a $0.26 increase in our core earnings for the year. This increase in our core earning continues the strong earnings growth that began in 2010 with the implementation of our current three-year rate agreement.

Moving on to page seven. You see that Griffith’s contribution to CH Energy Group’s earnings of $0.10 was $0.01 lower than 2010. Here too you can see that in addition to weather, we have one time that we do not believe is representative of our future earnings. In this case, earnings were $0.02 higher as the result of a reduction in the amount we expect to spend for environmental remediation associated with our 2009 divestiture.

Excluding this from our results, earnings would’ve been $0.10 in 2011, $0.03 lower than the weather-normalized, $0.13 Griffith has contributed to CH Energy Group’s earnings of 2010. Continuing down the slide, you can see that the primary driver of this $0.03 decrease was the lower weather-normalized sales volumes.

The unusual combination of higher commodity prices and the continued weak economy resulted in conversation and attrition within our residential customer base, in addition to reduced volumes for our motor fuel business. In total, we saw a $0.13 reduction to earnings associated with these lower volumes.

Despite the increase in commodity prices, we were able to increase margin sufficiently over 2011 levels that increased year-over-year earnings by $0.09, significantly reducing the impact on the bottom line of our lower sales volume. Strong cost management and process improvements helped to further reduce the impact of lower sales volume, adding $0.03 to our year-over-year earnings.

Wrapping up on page eight with our other businesses and investments, our earnings were $0.52 higher than 2010, primarily due to events associated with our renewable energy investment. Absent these impacts, our 2011 earnings would’ve been $0.05, a $0.14 increase over the 2010 loss of $0.09.

Moving to the middle portion of the slide, you can see the events associated with our renewable investments in more detail. Summarizing these impacts, these data on a year-over-year basis contributions to CH Energy Group’s earnings increased by $0.38 due to reduced impairment charges, increased by $0.17 from the net gains from the investments we sold, decreased by $0.11 due to the pre-payment penalty we incurred when we used some of the proceeds from selling our Shirley Wind investment to retire a portion of the holding company’s long-term debt, decreased by $0.01 from the absence of the operations of the renewable investments, and increased by $0.02 from lower income taxes as a result of divestitures.

You can also say that our earnings 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 estimated when we closed our books for 2009. As we had discussed last year, we do not expect these lower rates to continue going forward. And as you can see, our 2011 earnings only reflected $0.02 of impact from similar deduction.

On the bottom portion of the slide, you see the year-over-year earnings impact of those activities we expect to continue in the future. Interest added $0.07 to earnings in 2011 relative to 2010, largely due to higher interest income from Griffith as the intercompany borrowings increased to cover the working capital needs from commodity cost I discussed earlier. We also benefited from lower estimated income taxes that will be payable in future years.

Now, after having reviewed a rather substantial number of details regarding our 2011 earnings, I think it’s important to summarize our results for 2011 before turning the call over to Chris Capone for the discussion of the outlook for our businesses and investments. As Steve mentioned, 2011 was a very successful year. We essentially completed the shift in our strategy that we announced late in 2010, raised the dividend and saw Central Hudson increased its core earnings by $0.26 or 9.5% to $3, laying a strong foundation for continued growth in future years.

Now I’ll turn the call over to Chris.

Chris Capone

Thank you, Kim. Kim has reviewed our full year 2011 financial result in detail including the year-over-year comparison. I’m going to focus my remarks on the business conditions for CH Energy Group and its subsidiaries, our strategy and our outlook for 2012 and beyond.

As Steve and Kim have mentioned, we have essentially completed the strategic transition we announced in October 2010 and during 2011 we divested our four largest renewable energy investments. Totaling 93% of CH Energy Group assets are now T&D utility assets at Central Hudson and virtually all of the remainder is our fuel distribution business, Griffith Energy Services.

At Central Hudson we continue to invest significantly in the utility infrastructure of our electric and gas systems to improve service quality and customer satisfaction. In 2011, Central Hudson’s CapEx was approximately $88 million, an increase of $11 million over 2010. We’re still on track with the investment levels projected in our three-year rate agreement, covering the period July 2010 through June 2013, and Central Hudson plans to invest approximately $108 million in calendar year 2012.

These investments are the drivers of Central Hudson’s earnings growth. When the current rate agreement was negotiated, CapEx was projected to drive rate-base growth of approximately 5% per year off the base historic year. However, there had been some unanticipated tax benefits that while beneficial to cash, it actually lowered our rate base. We expect the impact over the course of the three-year agreement will reduce the average annual growth rate to approximately 4.5% over the base year.

The long-term outlook for capital investments at Central Hudson indicate similar or higher levels of growth in rate base, but this will ultimately depend on a number of factors, such as economic conditions, tax policy, regulatory support, and the ability to recover the cost of these investments through rates.

As both Steve and Kim indicated in their remarks, Mother Nature presented Central Hudson with some considerable operating challenges in 2011. I’m pleased to say we overcame these challenges and Central Hudson employees again demonstrated what an outstanding team they are. Proud of their company, dedicated to their customers, and diligent in looking out for one another under extreme conditions.

During the storm restoration that followed Tropical Storm Irene and the October snowfall, not a single Central Hudson employee suffered an injury that resulted in loss time away from work or required medical treatment. While no customer likes to lose their service, we feel our efforts were commendable and we feel our restoration times were more than commendable.

We believe those were indeed performance to be proud of. Yet despite the financial impact of weather events that Kim described, which totaled $0.31 of earnings for the year, Central Hudson’s earnings improved significantly year-to-year.

We’re positioned to deliver a solid financial performance in 2012 and we continue to work towards earning the lot ROE of 10% on approximately $925 million of rate base. We have deferred approximately $15 million in store and restoration costs in 2011 for which we will seek approval of future rate recovery.

As always, our management team and all the employees at Central Hudson continue to see productivity improvements that make these sustainable improvements in our cost structure and innovations that improve our ability to provide quality service to our customers.

We’re currently in rate year two of our three-year agreement and rate year three will commence on July 1 of this year and conclude June 30, 2013. For the next several months, we will be assessing the need for a rate filing. Typically, we would file our rate case 11 months prior to the end of the rate agreement in order to have new rates in place for the subsequent rate year.

We will update you on future quarterly earnings calls with our outlook for the remainder of this rate agreement and the status of our regulator planning efforts.

At Griffith, as we have discussed on prior calls, the current business climate has been particularly challenging. Fuel oil prices rose throughout much of 2011 and also prices for heating oil were approximately 30% higher on average. The response by our customers was very predictable. And our most important product category, heating oil, delivered-based volumes declined approximately 11% after normalizing for weather and warm weather was also a factor of contributing to a further 4% decline.

With a significantly higher commodity prices, we typically see higher margins to cover the incremental working capital cost. We were able to increase margins to offset a portion of the reduced usage, as Kim described earlier. We continue to focus on our cost structure, adjusting our delivered capabilities to our delivered product volumes, and improving productivity, overall.

We also continue to pursue selective tuck-in acquisitions that improve the utilization of existing facilities and personnel. Our track record of integrating these acquisitions into our operations and earning returns well above our cost of capital supports continuing the current pace of investments. And in 2011 we invested approximately $4.5 million.

I’ll now turn my attention to the remaining assets in CHEC or Central Hudson Enterprises Corp. During 2011, we divested the Lyonsdale Biomass Plant, Shirley Wind, our landfill gas asset, CH-Auburn and CH-Greentree, and as Kim mentioned, we recorded the impairment of the small wind investment.

At December 31st, 2011, we had just $2.8 million, excuse me, of investment remaining on our books. While we retain ownership interest in CH-CWE Wind in Cornhusker ethanol, there’s no longer capital at risk and we have little expectation of value from those interests in the foreseeable future.

Utilizing the proceeds of divestitures and available cash at the holding company, we repaid all of the long-term debt that we have outstanding, except the portion that supports Griffith financing, and we re-repurchased approximately 6% of our shares in 2011. We entered 2012 with a share kind of approximately $14.9 million shares. We’re now planning in (inaudible) of the issuance in 2012 to fund our CapEx program, though we plan to use shares for various compensation blends.

We currently have ample liquidity of $300 million of total committed credit. Central Hudson signed a new $150 million five-year credit agreement in October of 2011. At the holding company, we have another $150 million credit agreement that runs through February of 2013. We expect to be in the market for long-term debt in 2012 to meet Central Hudson’s financing needs, placing $36 million that matures late next month and raising new debt to fund the debt portion of our CapEx.

Overall, we feel 2011 was a very successful year for our company. We raised our dividend, we successfully responded to the second and third worst storms in our history, our core earnings growth was strong, and we believe we can continue growing earnings at an attractive rate by investing additional capital in Central Hudson to improve reliability and service quality.

We made attractive acquisitions at Griffith and believe there are additional opportunities to do more in the future; all of this while de-risking our business as we exited the renewables business.

At this point, I would like to direct the call back to Stacey and we will do our best to answer your questions. Stacey?

Question-and-Answer Session

Operator

(Operator Instructions). And our first question today is from Nicholas Yuelys with the Gabelli Company. Please go ahead.