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Executives

Steve Lant - Chairman, President, Chief Executive Officer

Chris Capone - Executive Vice President, Chief Financial Officer

Donna Doyle - Vice President, Accounting and Controller

Stacey Renner - Treasurer

Analysts

(John Hanson - Criterion Asset Management)

Maurice May - Power Insights

Paul Patterson - Glenrock Associates

Peter Harp - Talent Capitals

CH Energy Group, Inc. (CHG) Q4 2007 Earnings Call February 14, 2007 2:00 PM ET

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 would now like to turn the conference over to your host Chairman, President, and CEO Steve Lant. Please go ahead sir.

Steve Lant - Chairman, President, Chief Executive Officer

Thank you. Good afternoon and welcome to our call. With me today are Chris Capone, Executive Vice President and CFO; Donna Doyle, Vice President, Accounting and Controller; and Stacey Renner, our Treasurer.

Following my introductory comments, Donna Doyle will review our results for 2007 by business unit, then Chris Capone will discuss the outlook for 2008 for each of our business units including expected earnings contributions from each and their prospects for growth beyond 2008.

Before we begin, Stacey Renner will review our reminder about forward-looking statements.

Stacey Renner – Treasurer

Thanks Steve. I would first like to remind listeners that the presentation slides for this conference call on some supplemental fourth quarter and full year's financial information are available in the Investor Relations section of our website at www.chenergygroup.com.

I'll refer you now to the paragraph on forward-looking statements at the bottom of this morning's press release. If you're following along in the presentation slides, please reference page 3.

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 statements.

These risks are discussed in more detail in our Form 10-K for the year ended December 31, 2007 under the section labeled risk factors, that 10-K was filed yesterday and is available in the Investor Relations of our website at the link for SEC filings.

I'll now return the call to Steve Lant.

Steve Lant - Chairman, President, Chief Executive Officer

Thank you, Stacey. Earlier today, we announced our earnings per share of $0.73 for the fourth quarter of 2007 versus $0.62 for the fourth quarter of 2006. These results brought our calendar year earnings per share for 2007 to $2.70 versus $2.73 in 2006.

Before I discuss our 2007 results further, I'd like to note that our earnings per share are at the very top of our guidance range as revised in early December. In retrospect, it appears we were too conservative in reducing our guidance in early December. Despite the 1% decline in earnings per share, we accomplished a great deal in 2007. We were able to mostly offset a large number of favorable one-time and unusual earnings contributions in 2006 to sustainable cash earnings in 2007.

Our Griffith subsidiary had a terrific year executing well on all three fronts of its strategy. Growth to internal improved operational efficiency and especially acquisitions. Griffith made 13 acquisitions totalling over $23 million during 2007. While these acquisitions did not contribute very much to 2007 earnings per share because of their timing, the four annualized earnings per share growth associated with them is expected to be about $0.8 per share in 2008 on a weather normalized basis, and could approach $0.12 in future years.

During the fourth quarter, we announced another renewal energy investment, the Auburn project. This project we used gas from municipal waste and landfill gas to produce electricity. We're excited about it and look to do more projects of this nature. We're a bit frustrated but not discouraged by the fact that our progress in increasing earnings per share is offset by two unfavorable factors in 2007.

First, essential Hudson sales are running well below the level assumed in our rate agreement. We believe this earnings drag is temporary. Chris Capone will discuss our plans to remedy this situation later in our call.

Second, ethanol crush margins were compressed in 2007 to principally to very high prices, but also due to lower ethanol prices. Chris will also discuss this situation in his remarks. Despite the sales under-run relative to the rate case level at Central Hudson, we did see sales growth in 2007 on a weather normalized basis.

We remain optimistic about the growth of our service territory. We continue to see growth in the number of residential customers albeit at a slower rate than in prior years. An important development occurred on November 1st when the Port Authority of New York and New Jersey took control of Stewart airport which is located in our service territory. We expect Stewart to begin to realize its potential as an important regional airport under the Port Authority's ownership.

The last topic I would like to comment on is our share price. As you know, there have been some dramatic swings in the market in recent weeks and our company has seen even greater price swings than the overall industries. As a small cap company with a relatively low daily trading volume we occasionally see price changes that seem to move us beyond a reasonable equilibrium based on long-term fundamentals. I'm pleased to see that actually our price has rebounded substantially from its January lows.

I'll now turn the call over to Donna Doyle and Chris Capone, and I look forward to answering your questions later in the call. Donna?

Donna Doyle - Vice President, Accounting and Controller

Thank you, Steve, and good afternoon, everyone. For those of you who are following our website presentation, my remarks will relate to pages 5 through 8 and I'll like to clarify before I start my references to this year and last year are referred to 2007 and 2006.

So, starting on page 5, we presented a bar chart, which shows the earnings per share by segment for the fourth quarter of 2006 and 2007 and year-to-date. And as Steve Lant indicated, Energy Group earned $0.73 in the fourth quarter of 2007 compared to $0.62 in the fourth quarter of 2006, and $2.70 for 2007 compared to $2.73 last year. The $0.11 quarter over quarter increase resulted mostly in Central Hudson and the factors underlying this with continuation with the phase-in of the electric and gas rate increases plus weather normalized sales growth and some increased sales from the weather.

We also incurred less storm restoration expense in the fourth quarter of 2007 and our tree trimming expenses were less. The overall variations in the fourth quarter for Griffith and the other businesses and investments were not significant. For the year to date several favorable regulatory mechanisms and one-time unusual items recorded last year caused the lower comparable earnings this year and these were mostly Central Hudson items.

And now, what I would like to do is take you through pages 6 through 8 which will provide more detail on the earnings changes for Central Hudson, for Griffith, and our other businesses. And, I'm going to focus mostly on the year over year comparison.

And, starting on page 6, we showed the major components of the earnings variation for Central Hudson, which earned $0.54 per share in the fourth quarter of this year compared to $0.42 last year and year-to-date earnings of $2.06 this year and $2.15 last year.

The $0.9 reduction in 2007 was driven by $53 per share of favorable regulatory and unusual items related to 2006, which weren't present in 2007, and primary among these were the release of reserves, regulatory record of revenues recorded under our prior rate agreement, plus gains on non-utility property sales. But, we were able to replace a significant portio of this $53 reduction with the continuation of the phase-in of new rates plus weather normalized sales growth. And, we also experienced some increased sales from weather of about $0.7 and lower storm restoration cost of about $15.

We did incur certain increased expenses in 2007 and most notably additional tree trimming cost and we believe they contributed to the lower storm restoration costs. And, other increased expenses include interest and carrying charges. And, the increased interest expense was due to the issuance of additional medium term notes to fund our construction program, and the hearing charges for pensions and other post retirement benefits also increased because of increased collections and rates for these items. So, that summarizes the primary reason for the year over year earnings variation for Central Hudson.

And, now if we can go onto to page 7 of the website presentation and those were the results for our fuel distribution company Griffith. Griffith had lower results of $0.01 per share for the fourth quarter of 2007, however the year-over-year results as David mentioned were 10 times higher. The quarterly results were negatively impacted by weather and increased operating expenses, but these negative items were nearly offset by increasing margins on petroleum sales and services.

First the earning from acquisitions. The $0.10 higher year to date results progressive were driven by higher margins on petroleum sales and services and that was more than sufficient to cover increased operating expenses for the year.

Thirteen acquisition in 2007 and earnings from the acquisitions contributed $0.04 per share more than in 2006 and this was sufficient to offset the reduction from the release of the environmental reserve in 2006.

Weather had small favorable impact in 2007 contributing $0.02 more to earnings than in 2006 and now on page eight and this will be the conclusion of my remarks, we have the results of Central Hudson energy group other businesses and just as reminder these businesses include the legacy partnerships and some of our cogeneration projects plus the newer investments of Central Hudson enterprises primarily wind, ethanol, biomass, plus the interest income of our temporary cash investments and the other results as the holding company.

In this final segment of our business, have the same earning for the two quarters, fourth quarters of 2006 and 2007 of $0.10 each quarter and for the year, the earnings were $0.04 lower. This $0.04 reduction comes in two parts, $0.02 from unusual items and the other $0.02 from operations.

The unusual items include a gain on the sales property and the release of reserves which produced favorable results in 2006, but again we are not experienced in 2007. Much of this was offset however by favorable tax items recorded in 2007 including tax audit adjustment.

The $0.02 lower results from checks operating investments was due to lower earning of $0.04. from our Corn Husker ethanol investments. As Steve mentioned, because of the difficult commodities markets in 2007 and also Steve mentioned the crush margin was compressed by the lowering of the ethanol price compared to increasing corn prices.

However, the increased earnings from our wind and biomass investments offset those lower Corn Husker results and that demonstrates the benefit of the diversification of our investment portfolio, so that ends my remarks for our fourth quarter and year-to-date financial results.

And now I'd like to turn the presentation to Chris Capone. Chris is going to discuss the business outlook and earning guidance for 2008

Chris Capone - Executive Vice President, Chief Financial Officer

Thank you. Good Afternoon everyone. As we stated in our press release, at first I like to walk through what our Central Hudson guidance will be for 2008 discussed the impacts that robust to that guidance range and then some of the other factors surrounding the business conditions and what we expect to see in 08 and beyond.

Again our guidance for 2008 for Central Hudson in $95 to $205 a share and this projection has been reduced by $0.05 per share due to the warmer than normal weather, we have experienced so far in 2008. As Steve mentioned, we do expect to continue to see some level of residential growth in our footprints and really staying close to our historical range of about 1%, but the Hudson Valley shouldn't be totally immune to what's going on in the housing markets, but again we believe that given the price differential here versus community surrounding the New York City area that we will still continuing enjoy some modest level of growth again in the Hudson Valley.

In 2007 as in previous years, we have invested significant resources into our utility infrastructure to improve the reliability of our service for customers and to meet that growth that we have been experiencing in the Hudson Valley. We invested approximately $83 million in 2007 alone on top of the $73 million we invested in 2006. And in 2008, we estimate we will spend an additional 85 million as we continue to serve the needs of our customers.

The majority of our CapEx investments become part of what is known as rate base and our rate structure designed to produce and allowed rate of return which is currently 9.6% on the equity portion of our rate base. Now in the last two years, the equity portion of our rate base has increased by approximately $50 million typically translating to an increasing earnings per share and as we continue investing in our T&D system, our rate base will continue to grow.

Now, as Steve mentioned previously, we did see a slight increase in usage per customer in '07 compared to '06, but residential usage levels are still well below the levels used to set rates in our current agreement and unfortunately we expect this situation to continue for the remainder of the current rate agreement which runs through June 30, 2009. Now the problem has been particularly acute in our gas business, but is also evident in our electric business as well.

We estimate that the earnings impact in 2007 alone was approximately $0.15 per share and we are projecting that it will be approximately $0.20 to $0.25 impact per share in 2008 again at our utility subsidiary. We brought this to the attention of the PSC and we are working on an interim solution. We are also conducting the analysis necessary to determine whether or not we should file on August 1st of this year for new rates to take place effect July 1, 2009.

All indications as of now lead us to believe that we will file and that the issue of sales per customer and the shortfalls will be a significant issue in the case. There are certainly numerous other issues that will be addressed in the next filing as well including allowed ROA. However we can't project at this stage, what the likely outcome of the filing will be. I would now like to turn my comments to Griffith.

Also in our press releases, we indicated our guidance for 2008 for Griffith is $0.20 to $0.30 per share. This projection was also lowered by $0.05 per share to reflect 2008 warmer than normal weather to date. Also when you look at heating prices, over the last year they have climbed significantly on the order of about 45% to 50% and we do believe there has been some conservation on the part of our customers.

We have lowered our 08 guidance by an additional $0.10 per share due to the impact of conservation we believe, we have experienced already and may face given what appear to be higher prices for the remainder of heating season. We have also seen some price induced conservation in prior periods and those prices has moderated or stabilized, we did see reversal of a portion if not all of that conservation.

We look overall at our business and again on the oil side where we have seen this expansion, what's interesting to note is when we look at the behavior of natural gas prices, they have not moved anywhere near as significantly. They have moved on the order of about 10% in the prior year again which is in stark contrast to what we have seen on the oil side. Just regarding margins which Donna alluded to and Steve did as well earlier on, margin expansion going forward could offset some of the volume impact, but we haven't factored in any margin expansion into our guidance.

Now overall 2007 was a year of significant progress for Griffith. As Steve did mention, we closed on 13 attractive acquisitions for a total purchase price just over 23 million. We expect these acquisitions on fully integrated into the Griffith platform will add earnings to Griffith and CH energy group overall.

We have already closed in 2008 on two additional acquisitions for a total of approximately $8.5 million and we do continue to seek attractive opportunities. We will evaluate potential acquisitions with the same vigor we have applied in the past and we will only close on those that we believe will provide the appropriate level of returns.

At this point, I would like to just made some comments on what we call our check business and as Donna mentioned that's where we house our Cornhusker ethanol investment, biomass and CH community wind investment.

The guidance for this segment of our business for 2008 is $0.25 to $0.35 per share. For Cornhusker and the entire ethanol industry 2007 was certainly a difficult and challenging year. Corn prices rose significantly in a state high while ethanol prices dipped in the 08 fall and if recovered somewhat by year's end to be back near levels that were in place in early 2007. When we made our investment in Cornhusker, we were fully aware of the potential volatility and in two short years, we have certainly experienced our fair share. Cornhusker did contribute earnings in 2006 and 2007 and we are projecting slightly smaller contribution in 2008.

Recently signed energy bill includes a significant increase in the renewable fuel standard and that should support ethanol prices to some extent. Regarding our Lyonsdale investment, that's the 19 megawatt biomass plant which we own 75%, it did make progress in 2007 compared to 06, as Donna mentioned the earnings contribution did increase year-over-year, but approximately 70% of which is below our target and we expect and that can move higher in 2008 and we have taken significant steps to set the stage for those higher capacity levels. And I do believe we can consistently achieve levels of both the year 7 figures going forward.

In November of 2007 we announced the Auburn project the project is slated to be constructed by the end of 2008 and as days go is currently planned will contribute to earnings beginning in 2009.

Overall 2008 will be a challenging year. But I do believe we are setting the stage for future earnings growth. We have invested significant capital in Central Hudson and our other businesses. And we believe this dollars will contribute to future earnings growth and we do continue to look at close and integrated attractive oil acquisitions.

And very importantly at the end of 2007 we hire Ron Flax-Davidson to head our Business Development Group. Ron comes to us with over 25 years of experience in the energy sector and we look forward to his contributions towards our success and accelerate and finding and closing on quality investments.

At this point I would like to turn it back to Gail, so she open up the call for questions,

Question-and-Answer Session

Operator

(Operator Instructions). We will go to (John Hanson with Criterion Asset Management). Please go ahead.

John Hanson

Yes good afternoon.

Steve Lant

Good afternoon

John Hanson

You mentioned that you were still doing acquisitions in the grift of business, I think you said here in '08, but anything what's your thoughts are on the ethanol business this year in terms of I know you mentioned before the way that the business was kind of shaking out a bit that you might see some opportunities in that?

Steve Lant

On the ethanal side, again what we are focusing on primarily in 2008 John really is looking at our existing investments in Corn Husker looking at expansion opportunities there to modestly increase the efficiency and the scale of the plant to bring down overall cost. Beyond that we are looking at other potential investments in the ethanol space. As you would imagine, hedging is becoming a more and more important component of that and any additional investments that we would make in ethanol space would have to have a very tight hedging policy in place.

John Hanson

Okay. Alright, thank you.

Steve Lant

You are welcome.

Operator

We will go to Maurice May with Power Insights. Please go ahead.

Maurice May

Yes, good afternoon folks. Congratulations on a good quarter. Surprisingly a good quarter actually.

Steve Lant

Thank you.

Maurice May

And that is you know, one of my questions, when you lower guidance in early December and then you report beating the upper end of that guidance by $0.03 just after a few more weeks after the guidance lowering. What was it in the later part of the December that changed the earnings picture sporadically?

Chris Capone

Primarily it was whether there was experienced towards the end of the year while January again is you heard us over count on the '08 guidance, we did actually experience some reasonably good whether towards the end of the year and that’s was the primary driver.

Maurice May

Okay. And second of all, I noticed you all are down to 11 million in cash as of December 31, so your cash hold is pretty much done, but you still have liquidity don’t you?

Steve Lant

We do Maurice, we have again when you look at our non-regulated businesses at this point, virtually completely funded with equity. So we have what we have always turned as late debt capacity.

Maurice May

Yeah.

Steve Lant

So we do have that. yes.

Maurice May

And what is your late debt capacity?

Chris Capone

Right now its I think a good number to use us on the order of 80 to $90 million.

Maurice May

Okay.

Chris Capone

When we look at capitalized and non-regulatory businesses its going to be driven by the characteristics of the assets. So what the ultimate capital structure will look like is a little bit difficult at this time, but our target overall is to have reasonably sound investments grade metrics. We don’t believe that we want to or that we should move beyond that type of credit profile.

Maurice May

Okay. I have always thought of you all in terms of 50-50, but you are sayings that’s going really be in the business specific?

Steve Lant

It will be I think 50-50 maybe even at the upper end, 50% of the debt maybe on the upper end, its going to depend on the type of assets, you know, if we have fully contracted assets you know, on the Auburn, something like an Auburn. We will look at that specifically. But on balance I still think something like a 50/50 is pretty reasonable. Again that may even be a little bit on the higher side on the debt side.

Maurice May

Okay. And Griffith, I think you have like 125 million of equity there now?

Steve Lant

It’s a little bit larger than that given the acquisitions that we made at the end of the year and the early part of this year that number is at this point closer to a 140.

Maurice May

140, okay. And can you leverage that one 50%?

Steve Lant

That, I'm not sure that we want to given the nature of that business, could we again add one more target and things like investment grade metrics I think that would be a bit of a stretch to be able to go that far.

Maurice May

Okay. And then the $0.10 in the fourth quarter from other business. Can you break that down between legacy interest and renewable?

Steve Lant

Donna do you have what that one would be?

Chris Capone

Can you spare with us a second worth

Maurice May

Sure.

Donna Doyle

That’s the absolute amount I have the variations here more. I don't have the absolute with me at the moment.

Maurice May

Okay, can you kind of wing it?

Chris Capone

No I mean in the past we've never really commented on what the specific assets have provided. I mean we have provided the year over year.

Maurice May

True. In the past you have given some idea of the profitability of the renewables.

Chris Capone

Right, now we've given ranges of returns.

Maurice May

Yeah.

Chris Capone

And, I'm not trying to be intentionally difficult. But again we've just shied away from giving absolutely UPS numbers. And when you look at things like Lyonsdale our target for that kind of project given that is contracted, it has always been in the low double digits. When you look at ethanol certainly the expected returns over time are projected to be higher but 2007 was a pretty difficult year.

When you look at an ROE for a year like 2007 it was closer to right around 10%. And on CH community wind again that’s a pretty modest project. And given the structure there that throws awful lot of cash but little earnings in the early years, and then it flips around. So there the ROE again even on the modest size investment like that was just that. It was pretty modest but it did throw a significant amount of cash.

Maurice May

Okay great. Okay, thank you folks.

Chris Capone

Sure thank you.

Steve Lant

Thank you Maurice.

Operator

(Operator Instructions). We will go to Paul Patterson with Glenrock Associates. Please go ahead.

Paul Patterson

Good afternoon.

Steve Lant

Good afternoon Paul,

Donna Doyle

Good afternoon.

Paul Patterson

The utility ROE on a regularly basis. What was that for the end of the year? For 2007 excuse me.

Chris Capone

Well do you want a kind of a full year average?

Paul Patterson

Yeah. The regulated. Or what you guys plan on seeing it I guess for the test year that they're going to filing up the Commission for? Or that you're thinking of filing at the Commission?

Chris Capone

No that’s fine. When you look at '07 we're at approximately 9% across both our businesses on a weighted average basis. The electric side was just under 10%. The gas side again were we mentioned that we've had the most difficulties was just under 6%. In terms of the test year we still in the process of calculating that. And when you look at something like 2008 we're projecting an ROE on the electric side of about 9% and on the gas just under 5%.

Paul Patterson

Okay. And that includes the $0.20 and $0.25 hurt due to customer usage. Is that right?

Chris Capone

Yes it does. I mean that’s exactly what it reflects. When you look at a blend for 2008 again we're estimating a net of it will be just under 8.5% across the entire business.

Paul Patterson

And most of that I guess is the gas?

Chris Capone

Yes it is. Again on the electric side as I mentioned we're expecting for 2008 a number of, on the electric side a little over 9%. And the real pain that we're feeling is really primarily on the gas side.

Paul Patterson

Would you be filing on the electric side or just on the gas side when you go in for a break in.

Chirs Capone

It will be a combined filing electric and gas.

Paul Patterson

Okay. And I guess I'm sorry, if I miss this. What is the equity ratio at the utility?

Chris Capone

45% is what we are allowed to earn on but we can also go up to 47% if we so choose. We have been targeting 45% equity at the utility.

Paul Patterson

Okay. And then, are there any usual items that we should be thinking about in terms of 2008 guidance. I mean obviously there were quite a few in '06 and '07. Is anything like that you have in your guidance at all?

Chris Capone

We have a few pennies at the utility from some assets that we expect dispose of. But it is just that, its just a few cents per share noting else in the remainder of our business units.

Paul Patterson

Okay great. Thanks a lot guys.

Chris Capone

You are welcome.

Operator

And we'll go the line of Peter Harp with Talent Capitals. Please go ahead.

Peter Harp

Thank you good afternoon everybody.

Chris Capone

Good afternoon Peter.

Peter Harp

First a few questions on the utility and maybe first for Chris, you had mentioned that you were working on an interim solution with the commission right now to capture back the loss of sales. What is that exactly? Is that the decoupling piece or something else?

Chris Capone

All right, yes Peter I guess the primary idea that we have is the revenue decoupling mechanism combined with an energy efficiency program which we are I guess ready, willing, and able to implement and we’ve certainly been actively promoting our launching that program.

Peter Harp

Where does it stand right now, I guess? And also a continual thought is if you were successful somehow with those filings would that preempt the need for the August rate filing or would you go after these things on a concurrent basis?

Chris Capone

Where the case stands at this point is a law judge's recommendation is expected as the next step. We obviously can't guess what the judge may say. That should occur over the next two- to three-week time period. But we don't have a firm date on that. As to the influence of this on the decision to file our rate case or not, I guess our belief is that we probably need to file the rate case regardless. But obviously if this issue were taken care of by a revenue decoupling mechanism, that would be one less significant issue that would need to be addressed by the rate filing.

Peter Harp

Got you. May if you had some comment of course on the makeup of the commission, I know there has been some changes there. And I guess the most recent governor appointee was accepted and maybe you can try and go over what the commission makeup looks like right now.

Chris Capone

I'll try to do so at a summary level. We've a fully staffed commission. All of the slots now have a more or less permanent incumbent including a new Chair, Gary Brown who is not an acting Chair but a permanent confirmed Chair. He has been on the job for about six weeks. So I think it is premature to evaluate his performance and I wouldn't begin to do so. Anyway that's really not my place. I have met him and I find him to be a very knowledgeable individual on the issues that are facing the commission.

Peter Harp

Thank you. Maybe more on the detailing side Steve, again you had provided guidance year by business segments for '08 and I was hoping that if you could perhaps, you or maybe Chris reconcile to the numbers first at Central Hudson where in '07 you had $2.6 number and now giving guidance $1.95 to $2.05. Picking up rate increases from the 2006 rate order, at both the gas and the electric utilities go at the positive side. Looking at electric retail sales for '07, which I look it is up 2.4%, so I'm not sure what's wrong with that. I know you say maybe this is more historic now down at the 1% level. But I'm just trying to reconcile back to the $1.95, $2.05 when we still have growth. We have lead increases kicking in from the '06 rate order. So if you can reconcile that on an EPS basis that would be helpful.

Chris Capone

My first attempted answer to your question isn't necessarily going to speak to specific numbers and the kind of bridge you are looking for. But again the important thing to keep in mind is when our rate case and when the rate case and when these sales forecast was created for existing rate case, what that reflected was an increase in overall sales. And again, what we're witnessing is really the two lines so of speak the actual compared to the projected usage of those lines when projecting again will continue to widen. So we do have the impact of the last stage of the rate increase and we still have expense increases which were expected to be covered and those we are incurring regardless of sales and disproportionate to the level of sales that we have. So, again on the overall sales side we're watching those lines diverge and that continue to put pressure. I think if you add back in the number I had given you, get a approximately $20 to $25 per share. On top of what is really a range of $2 to $2.10 weather normalized, now you're at something like $2.20 to $2.30 or $2.25 to $2.35. I think if you start looking back at your numbers that looks like more than normal trajectory that you might expect given the other characteristics of our business.

Peter Harp

I see. What was the level of growth that was embedded in the 2006 order?

Chris Capone

About a percent and a half, Peter. That's not a big number, but as I was mentioning before in terms of the ROEs, when you look at the percentage sale shortfall, on the gas side we're looking at numbers like 8% to 9%, and we don't expect to see a real uptick in the usage for customers, but the rate structure implied or was designed to reflect an increase in usage. So, that's why I was saying that gap is widening on the electric side and these are purely residential numbers. The shortfall in '07 was approximately 4% and that number is going to escalate over the remainder of the rate period.

Peter Harp

Okay. I guess where I'm disconnecting though Chris is when I look at the actual sales results and needs to be adjusted for weather impacts where retail sales on the electric side were above what was embedded in the order. It was at 2%?

Chris Capone

Peter, I think that the real issue is the starting point. We had a significant contraction sales in 2006, where the rate plan projected that there will be an increase. So, that's where the gap opened up.

Peter Harp

Oh! I see.

Steve Lant

And, since then the gap has widened steadily but also rather slowly. The real issue occurred in '06 when that gap opened up. So, we've rebounded a little bit from that depressed level, but by no means have we gone back to the trajectory that was embedded in the rate plan.

Peter Harp

Thank you for clarifying that. Thank you Steve. How about on the expense side? Have expenses exceeded what you thought they would be when you did the rate order in '06.

Steve Lant

Actually, in terms of how the rate plan is working out, our CapEx and expenses are close to the trajectories that were projected. Obviously, we're trying to manage expenses as best we can and we might be just a bit below the rate plan, but not much. And, as it turns out a number of the expense categories contained through us whereby if we were to spend less, it would not have any positive effect on earnings per share because those would become regulatory liabilities. So, we're a little bit constrained, more than a little bit constrained in terms of being able to respond to the sales problem under the terms of the rate agreement.

Peter Harp

Okay. Thank you Steve. And, then may be moving over to the investment side again you might not be able to provide exact EPS differentials, but in '07 you did $0.44 and your guiding here to $0.25 to $0.35. Can you give us the components that get us there?

Chris Capone

Peter, this is Chris. Again, when you look at the '07 and then compared to the '08, primarily interest income is gone and that's a significant portion of what was reflected again and what we characterize as the other business.

Peter Harp

Mostly the utilization of the cash and the utility and come out of that investment line.

Chris Capone

Right. When you look at year-end cash balances and these are just approximate numbers, we ended 2006 with approximately about $60 million of available cash and then the balances will be a little bit different than what shows up in the K, just because of operational cash levels and things like that. And then when you look at the end of 2007 again net of these kind of, local level balances that number was down to about $6 million. And, the important thing to note is the amount of capital that we retained back in the utility and these are dollars. Again, as Steve described we have a lot of true-ups in the CapEx side, plus our system requires it. I mean we are here to provide safe and adequate service for our customer and try and increase our reliability and reach to their needs, but these are dollars that effectively aren't really earning much of a return if at all. These are incremental dollars because of the sales problem that we have. So, these are dollars again that came out of the cash bucket and went into the utility a good portion of the reduction in the cash balance.

Peter Harp

Okay that makes sense, Chris. Thank you. And then lastly I guess in terms of leveraging up at the non-utility side, you are fully equitized. Can you just provide some commentary, I guess the credit markets are pretty rough right now and does that impact at all your sense of timing on doing that?

Chris Capone

Peter, I think what it will impact in terms of availability it is really the term market versus short-term credit availability. We are in the fortunate position that we right now have a five-year committed facility. So that's available. It is LIBOR-based. LIBOR rates have come down. So we have availability.

When you choose to term out, I think it is really more to mean to the question that you asked. We've got out and we keep apprised to the market, kind of at any and all times. What we are hearing is that there will be availability. It is not going to be the kind of surprises that maybe would have seen a year ago when credit conditions were significantly different. But the all in borrowing costs still appear to be very reasonable. And certainly we would not be prohibited in anyway or dissuaded from going out and accessing the markets.

Again when we are at that time where we want to add actual leverage up at the holding company we'll just evaluate it on the spot. We've a few alternatives to look at. We can look at the bank market. We can go look at the private placement market. And as of now what we see, we believe we'll have reasonable success again on reasonable terms and conditions that are at an expectable price.

Peter Harp

That's great Chris. Thank you very much and thanks for your time this afternoon. Thank you.

Chris Capone

Thank you very much Peter.

Operator

We have a follow-up from Maurice May with Power Insights. Please go ahead.

Maurice May

Yes the follow-up on maybe the coupling that Peter just talked about. I've not been following this and would like to get a couple of details. If the coupling is approved, is this on the gas side, first of all and not the electric?

Steven Lant

Its both gas and electric.

Maurice May

Okay. And if you are approved, when would be the starting point?

Chris Capone

Well that's kind of an unknown.

Maurice May

Okay.

Chris Capone

This is a filing that is not covered by any particular required procedural schedule. We believe sooner is better than later, we have some very cost effective energy efficiency programs which we would like to launch and we think our customer base would benefit if we're able to launch them as soon as possible. But again it is an administrative process. I think it is possible that these programs could be in effect by early summer, if everything were to be decided promptly. But I can't say anything more than that. That's a possibility rather than that's an expectation.

Maurice May

Okay my main question here though is would the coupling, if authorized, and if it is started this summer, would it make you whole on ROV.

Chris Capone

It depends on the form of the coupling; it could, if it were the coupling on all sources of revenue variation. Or it could be a partial reconciliation to our rate case in ROE depending on what form the RDM took. And maybe that's one of the questions that is under discussion.

Maurice May

Okay. But this could help you on the gas side, if it were to be instituted this summer. And second of all would it be all, total de-coupler?

Chris Capone

It would obviously have more on the gas side at least initially.

Maurice May

It has to be designed for 9, 6 right?

Chris Capone

I guess I wouldn't assume that. I think it is really up to the commission to decide how to design it.

Maurice May

Okay, great. Thanks folks.

Steve Lant

You are welcome Maurice.

Operator

And we have no further questions in the queue at this time.

Steven Lant

We're having no further question, I would certainly thank you all very much for you interest in our call today. And as always Chris Capone and Stacey Renner remain available to answer your questions as they arise. So with that we look forward to speaking to you again in the near future. Have a good afternoon.

Operator

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Source: CH Energy Group, Inc. Q4 2007 Earnings Call Transcript
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