CH Energy Group, Inc. (NYSE:CHG) Q3 2008 Earnings Call October 27, 2008 2:00 PM ET
Steven Lant – President & CEO
Chris Capone – EVP & CFO
Kim Wright - VP of Accounting and Controller
Stacey Renner - Treasurer
Paul Patterson – Glen Rock Associates
Maurice May - Power Insights
James Heckler – Levin Capital Strategies
Welcome to the CH Energy Group third quarter conference call. (Operator instructions) I would now like to turn the conference over to Mr. Steven Lant; please go ahead.
Good afternoon and welcome to our quarterly conference call. With me today are Chris Capone, Executive Vice President and CFO, Kim Wright, Vice President of Accounting and Controller and Stacy Renner, Treasurer.
Following my introductory remarks, Kim Wright, will cover our quarterly results in detail by business unit. Then Chris Capone will discuss the current business climate and our view of the issues affecting us going forward. Following Chris Capone’s remarks we’ll take your questions.
Before we begin our discussion of the quarter I’d now like to ask Stacey Renner to review with you our cautionary statement regarding reliance on forward-looking statements.
Thanks, Steve. I’d first like to remind listeners that the presentation slides for this conference call and our supplemental third quarter 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’re 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 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, 2007 under the section labeled Risk Factors and as updated in subsequent 10-Q filings. Those filings are available in the Investor Relations section of our website at the link for SEC filings.
And, now I’ll return the call to Steve Lant.
Thanks Stacey, I’d now like to summarize our results for the quarter, our earnings per share for the third quarter of 2008 was $0.18 versus $0.27 for the third quarter of 2007, a decrease of $0.09 per share.
The primary driver of these results was a larger third quarter loss at Griffith that occurred in 2007, a difference of $0.07 per share. Before discussing the details, I’d like to note that we expect to lose money at Griffith in the third quarter which is the lowest volume quarter for sales of heating oil and propane which is Griffith’s core business.
And Griffith has grown substantially through acquisitions which we expect to add to our profitability overall but which we would also expect to result in a larger third quarter loss. In the third quarter of 2008 our residential customer base was 11% larger then in 2007.
However in this quarter the reduced earnings per share was not due to the increased scale of Griffith per se but due to higher reserves for uncollectable accounts; $0.06 of the $0.07 decline which in turn reflect both the commodity price spike in heating oil prices that peaked in the third quarter combined with the weakening economy that made it more difficult for some customers to pay their bills.
I would note that the wholesale price of oil has fallen precipitously in recent weeks which should provide relief both to our customers and the company going forward.
Higher reserves for uncollectable accounts also impacted Central Hudson Gas & Electric by $0.04 in the quarter. We are managing the issue of increasing arrears as sensitively as possible but we have added resources to our collection efforts as our arrears have increased.
The other noteworthy variation in third quarter 2008 earnings per share was at the holding company which had reduced interest income amounting to $0.02 per share as the last of our re-deployable cash has been invested over the past year.
While our quarter results weren’t great, there are some positives that deserve mention. First our liquidity position is excellent reflecting our approach of planning for the worst on this fundamental issue. Second while volatility has been rather high, our share price has held up very well which I take as a recognition of our fundamental strength and prospects for improved earnings in 2009 and beyond.
Third despite the weakness in the housing market and high oil prices, CHGE increased its customer base in the third quarter of 2008.
I’d now like to turn the call over to Kim Wright to cover our third quarter results in more detail.
Thanks Steven, good afternoon everyone. As Steven mentioned, I’ll be reviewing our results for the third quarter and will be covering pages six through eight of the presentation for those of you who are following along online.
Beginning on page six, Central Hudson earnings of $0.37 for the quarter were unchanged from last year. Looking at some of the highlights of the details provided on the bottom half of the page you see that our regulatory mechanisms and unusual events did not impact our year-over-year earnings.
Continuing down the page as Steven mentioned you see the biggest change in our earnings was driven by higher uncollectable accounts. We discussed this during last quarter’s call and we continue to see our customers struggle with higher energy prices and the weak economy.
We continue to see an increase in the number of customers billed during the third quarter this year as we did last quarter. The $0.03 favorable impact to earnings helped to reduce the impact of the higher uncollectable accounts on Central Hudson’s earnings.
Moving on to page seven you see that Griffith’s earnings were $0.07 lower then last year. As Steven mentioned the biggest driver was the impact of the weak economy and high-energy prices. During the third quarter this resulted in an increase in uncollectable accounts as here too our customers have struggled to pay their energy bills.
We have taken steps to reduce the impact of conservation and higher uncollectable accounts by reducing costs which favorably impacted this year’s earnings by $0.02 relative to last year. Wrapping up on page eight with our other businesses and investments, our earnings were $0.02 lower then last year due to lower interest and investment income at the holding company.
As Steven mentioned earlier this is due to the fact that our re-deployable cash has been invested. Now I’ll turn the call over to Chris Capone for discussion of our 2008 outlook and earnings guidance.
Thanks Kim, Kim covered the earnings impact of what is turning out to be an extraordinary time. I’m going to provide some specific financial comments in a few moments but first I’d like to make some broader comments.
These are clearly difficult economic times for everyone including our customers and CH Energy Group. Liquidity has emerged as an important issue and I feel we’re well prepared for the current environment. We developed plans to address liquidity needs in a variety of different environments and we like many others, sought to create adequate liquidity even under extreme circumstances and I think current market conditions qualify for such a time.
Even though the access to the term debt markets is spotty I think we have adequate liquidity to meet our typical long-term debt needs for the foreseeable future should we choose not to issue medium term notes.
We have a total of $275 million of committed credit, $125 million at Central Hudson and $150 million at the holding company. At this time we have $15 million outstanding on our Central Hudson line and $15 million outstanding on the Energy Group facility.
For Central Hudson we also have uncommitted lines available which are in addition to our committed facilities. These uncommitted lines have been competitive in the past and recently they’ve become a little bit more competitive but as LIBOR spiked, these became somewhat less competitive.
Though over the recent week or so as LIBOR has been better behaved, again these have become back in line with the kind of expectations that we’ve had as well as making them more cost competitive then our committed credit.
The recent commodity price declines that we’re all aware of have reduced working capital requirements and that also gives us a greater financial flexibility. While access to term debt is currently more difficult then it has been historically it is during times such as these that Central Hudson’s single A rating proves most valuable and reinforces for us why a strong credit rating is fundamental for capital-intensive businesses.
Specifically at Central Hudson as we’ve stated in the past, the economic health of the Hudson Valley depends in part on New York City. Given the job losses that have already occurred and those that will most likely follow, we do expect to see further effects in our service territory, especially the southern portion.
As Kim mentioned we’ve seen an increase in the uncollectable but the significant drop in energy prices should help this trend going forward but there are the additional issues of job uncertainty and the wealth effect that will also factor into our customers’ ability to pay their energy bills.
Usage per customer continues to be well below that used to set our current rates. As I mentioned in previous calls we believe the significant driver was price-induced conservation and current macroeconomic factors will most likely temper any expected increase in usage as commodity prices have declined from their second quarter peak.
I stated on our July 28th call that we expect EPS to be lower then they would be otherwise by approximately $0.50 and in our recent press release we’ve updated that number to approximately $0.56 per share due to the lower usage levels compared to rate case assumptions.
Many of the issues that we are currently facing such as the sale shortfall, the increase in uncollectables and the need to invest capital to maintain and improve our delivery system were the primary drivers of our July 31 filing for new rates to go into effect next July 1st.
The staff at the PSC has been very active since we made our filing, providing us with over 600 information requests.
The current timeline calls for staff to file their testimony on November 25 and we’ll have 30 days to respond. We look forward to receiving their filing to better understand their positions.
Regarding Griffith, as Steven mentioned prices spiked in the second quarter and have come down significantly since then. That quantified our estimate of 2008 price induced conservation in prior calls at approximately $0.15 for the full year.
The prices peaked in late July at around $147 a barrel and have since declined to less then half that amount right now in the low $60 per barrel range. Usage per customer should improve but the current economic and financial turmoil that I discussed in relation to Central Hudson certainly applies to Griffith customers and that may limit a rebound in usage.
There are other benefits of declining oil prices such as the opportunity to expand margins and more closely align revenues with the cost of providing service to our customers as well as earning an acceptable return.
Declining oil prices also reduce the amount of working capital necessary to run Griffith freeing up capital for other more productive uses. As Steven mentioned in our July call, we have undertaken a review of Griffith operations and this analysis continues.
The volatility in oil markets has made this effort somewhat more complex. Please keep in mind that we are entering the heating season, the period during which earnings in this business peaks. We want to focus on operations and financial performance and not disrupt this business with our review.
We as a management team and our Board are committed to creating shareholder value and as such we plan to be thorough in our review. We feel Griffith is a valuable franchise and is among the preeminent suppliers in all the markets we serve.
However we want to concentrate our assets in those markets where we believe we can most efficiently meet customer needs and provide our shareholders with an acceptable return.
Regarding our other business and investment segment, this is the segment that houses our Cornhusker ethanol investment, our Lyonsdale biomass investment and CH community wind energy, our wind investment and includes our company interest income.
At Cornhusker like in all other commodity markets, prices have been very volatile for corn and ethanol. Corn reached almost $8 a bushel before falling rather rapidly and is now less then half that amount. Ethanol prices have also declined with petroleum markets.
Crush margins have improved modestly because ethanol prices have not fallen as far as fast, again this is as those related to the corn markets. Our Lyondale investment, the 19-mw biomass plant in Upstate New York continues to perform well as do the wind projects in which we hold the minority interest.
We have approximately $45 million of [latent] debt capacity to grow our businesses and as well look at opportunities we will be guided by what we believe are those opportunities that will best add to shareholder value including share buybacks if the risk adjusted rate of return on that use of our financial resources becomes more attractive then the other investments we could make.
We will continue to invest significant capital in our largest business unit Central Hudson, which we believe will contribute to future earnings growth and as I mentioned earlier we are continuing our comprehensive review of Griffith.
At this point I’d like to open the call for questions.
(Operator Instructions) Your first question comes from the line of Analyst
I was looking at the income statement and I was looking at interest expense, it was up a bit, is some of that due to the financial market issues or is there, looks like about the same level of debt from the prior year.
Primarily that is a result of the increase in interest rates in terms of actual borrowings. Certainly treasury rates have been volatile and have been for the most part trending down but given the risk premium involved now in the debt markets, we have been paying a bit more to borrow money.
So as I look at that for the reporting period was through September and we’ve had some more stress in the October period, so some of that would probably continue into Q4.
That’s correct, when you look at our auction rate securities, we have three issues outstanding. Those have tempered somewhat recently but yes, some of the increased borrowing costs will continue into the fourth quarter, especially compared to the fourth quarter of last year when credit conditions were much more benign.
How much in principal do we have outstanding on it right now in the auction rate?
Its $116 million.
Your next question comes from the line of Paul Patterson – Glen Rock Associates
Paul Patterson – Glen Rock Associates
Briefly, do you feel that this current level of rate relief, do you feel that what you’re seeing on supply and demand and the economy and everything, do you feel you might need to go in for a rate case after the--?
We filed a one-year filing so the anticipation would be that we have the opportunity to have another rate case next year to go into effect the following year if needed. Its I guess hard to predict what kind of conditions we’ll be facing next year given how tumultuous and unpredictable this year has been but we certainly do have that opportunity if we feel that the costs and revenues are trending in ways that prevent us from managing them sufficiently and that rate relief is the required method of reaching a reasonable rate of return.
Paul Patterson – Glen Rock Associates
With Griffith you mentioned the bad debt expense and I just wasn’t clear why it was so large in the third quarter, it would just seem that it would be something that would be more oriented towards the fourth quarter. Was there something in particular, I just don’t think a lot people using the product so much during the third quarter, I’m just surprised. Could you elaborate a bit more.
If you recall the real increase in prices occurred toward the end of the last heating season in the March, April timeframe. So for most people, you’re right that most people do not use a lot of heating oil in the summer months but they do use heating oil at the end of winter and into the spring and so there were larger account balances then we would typically see at the end of the last heating season and its partly that.
And its also partly related to commercial accounts which have in a particular motor fuel accounts which peak in the summer time. But I think its fair to say that there’s a lag between when the oil is delivered and when we ultimately recognize that in an account receivable is not likely to be collected.
Paul Patterson – Glen Rock Associates
With the price of oil, could you just, how much lower is it are you projecting for this, will customers bills be assuming the same usage for this heating season versus last heating season?
At this point bills would be about the same as they were through most of the heating season last year.
When you look at the actual price, again this year that people paid, and this is for residential customers, the average selling price was about $3.55 per gallon and again that’s an underlying commodity cost plus a margin that we try to achieve.
When you look at the upcoming season given where oil is right now and how that translates into actually number two residential heating oil, I would expect that the price would be somewhere on the order of about 25% lower in terms of to the customer.
So it is fairly significant, again, its also only October and that’s based on a price that we’re seeing now and certainly what we saw last year around this time was really the beginning of the escalation in price that [led] virtually throughout the entire heating season and peaked in July. So its, based upon what we know now, it’s a significant decrease but its still very early and usage at this point has just really begun.
Your next question comes from the line of Maurice May - Power Insights
Maurice May - Power Insights
On Griffith, as I understand it this review of operations at Griffith that you announced in July and mentioned again today, you called it a comprehensive review, and would the comprehensiveness of it entail perhaps selling the operation?
Well that would be very comprehensive indeed. Without going into any detail at all, I think we have to keep all options open when we’re having this kind of change in the economy but I certainly wouldn’t want to signal in any way that that is our intent.
Maurice May - Power Insights
Okay because you fairly recently, not in the third quarter did buy from [tuck-ins] I think so your thrust there is really for efficiency.
We are trying to find all sources of efficiency and we have found quite a few that we’re building into our plans for this upcoming heating season and with the expectation that that’s going to help our profitability going forward.
Your next question comes from the line of James Heckler – Levin Capital Strategies
James Heckler – Levin Capital Strategies
I was wondering if you could comment on what your expectations might be for the impact on earnings next year funding requirements from your pension plans and the performance of them vis-a-vie the equity markets this year.
Well I can’t comment on that at this point. We’re just closing our plan year and evaluating that at this point and we don’t have any conclusions. I believe that we will be getting some additional actuarial information over the next few weeks and we’ll make that evaluation. Currently there is no direct effect on our earnings. The New York PSC has had a regulatory policy in place for 15 years whereby the effect of pensions and post retirement benefits is deferred for reconciliation and future rate cases.
So we don’t expect there to be a direct earnings effect. There could be a direct funding effect which again we are in the process of evaluating.
There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.
We thank everyone for their attention and look forward to speaking to you again next quarter.
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