10-K 1 form10k.htm CH ENERGY GROUP 10-K 12-31-2012


UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K


(Mark One)
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2012

OR
 

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______________ to _______________

 
Commission
File Number
 
Registrant, State of Incorporation
Address and Telephone Number
 
IRS Employer
Identification No.
 
             
     
     
 
0-30512
 
CH Energy Group, Inc.
(Incorporated in New York)
284 South Avenue
Poughkeepsie, New York 12601-4839
(845) 452-2000
 
14-1804460
 
             
     
     
 
1-3268
 
Central Hudson Gas & Electric Corporation
(Incorporated in New York)
284 South Avenue
Poughkeepsie, New York 12601-4839
(845) 452-2000
 
14-0555980
 
 

 
Securities registered pursuant to Section 12(b) of the Act:

Title of each class
 
Name of each exchange on which registered
CH Energy Group, Inc.
Common Stock, $0.10 par value
 
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

Title of each class
 
Central Hudson Gas & Electric Corporation Cumulative Preferred Stock
 
4.50% Series
4.75% Series
 
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

CH Energy Group, Inc.
Yes  þ
 
No  o
Central Hudson Gas & Electric Corporation
Yes o
 
No  þ
 
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

CH Energy Group, Inc.
Yes  o
 
No  þ
Central Hudson Gas & Electric Corporation
Yes o
 
No  þ
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

CH Energy Group, Inc.
Yes  þ
 
No  o
Central Hudson Gas & Electric Corporation
Yes þ
 
No  o
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

CH Energy Group, Inc.
Yes  þ
 
No  o
Central Hudson Gas & Electric Corporation
Yes  þ
 
No  o
 

 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.  (Check one):

CH Energy Group, Inc.
 
Central Hudson Gas & Electric Corporation
Large Accelerated Filer þ
 
Large Accelerated Filer o
Accelerated Filer o
 
Accelerated Filer o
Non-Accelerated Filer o
 
Non-Accelerated Filer þ
Smaller Reporting Company o
 
Smaller Reporting Company o
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

CH Energy Group, Inc.
Yes  o
 
No  þ
Central Hudson Gas & Electric Corporation
Yes  o
 
No  þ
 
The aggregate market value of the voting and non-voting common equity of CH Energy Group held by non-affiliates as of February 1, 2013, was $972,139,350 based upon the price at which CH Energy Group's Common Stock was last traded on that date, as reported on the New York Stock Exchange listing of composite transactions.
 
The aggregate market value of the voting and non-voting common equity of CH Energy Group held by non-affiliates as of June 30, 2012, the last business day of CH Energy Group's most recently completed second fiscal quarter, was $981,479,282 computed by reference to the price at which CH Energy Group's Common Stock was last traded on that date, as reported on the New York Stock Exchange listing of composite transactions.
 
The aggregate market value of the voting and non-voting common equity of Central Hudson held by non-affiliates as of June 30, 2012 was zero.
 
The number of shares outstanding of CH Energy Group's Common Stock, as of February 1, 2013, was 14,955,990.
 
The number of shares outstanding of Central Hudson's Common Stock, as of February 1, 2013, was 16,862,087.  All such shares are owned by CH Energy Group.
 

 

 
GLOSSARY OF TERMS
The following is a glossary of frequently used abbreviations or acronyms used herein.

CH Energy Group Companies and Investments
CHEC
Central Hudson Enterprises Corporation (the parent company of Griffith Energy Services, Inc. (not regulated by the PSC) and wholly owned subsidiary of CH Energy Group)
Griffith
Griffith Energy Services, Inc. (a wholly owned subsidiary of CHEC)
Lyonsdale
Lyonsdale Biomass, LLC (a former wholly owned subsidiary of CHEC)
CH-Auburn
CH-Auburn Energy, LLC (a former wholly owned subsidiary of CHEC)
CH-Greentree
CH-Greentree, LLC (a former wholly owned subsidiary of CHEC)
CH Shirley Wind
CH Shirley Wind, LLC (a former wholly owned subsidiary of CHEC which owned 90% controlling interest in Shirley Delaware, which owned 100% interest in Shirley Wind)
Shirley Delaware
Shirley Wind (Delaware), LLC (100% owner of Shirley Wind)
Shirley Wind
Shirley Wind, LLC (a 20 megawatt wind project)
Cornhusker Holdings
Cornhusker Energy Lexington Holdings, LLC (a former CHEC investment)
 
Regulators
 
NYS
New York State
PSC
NYS Public Service Commission
FERC
Federal Energy Regulatory Commission
DEC
NYS Department of Environmental Conservation
 
 
(i)

 
Terms Related to Business Operations Used By CH Energy Group
1993 PSC Policy
PSC's 1993 Statement of Policy regarding pension and other post-employment benefits
2009 Rate Order
Order Establishing Rate Plan issued by the PSC to Central Hudson on June 22, 2009
2010 Rate Order
Order Establishing Rate Plan issued by the PSC to Central Hudson on June 18, 2010
Dth
Decatherms
Distributed Generation
An electrical generating facility located at a customer's point of delivery which may be connected in parallel operation to the utility system
kWh
Kilowatt-hour(s)
Mcf
Thousand Cubic Feet
MGP
Manufactured Gas Plant
MW / MWh
Megawatt(s) / Megawatt-hour(s)
OPEB
Other Post-Employment Benefits
RDMs
Revenue Decoupling Mechanisms
Retirement Plan
Central Hudson's Non-Contributory Defined Benefit Retirement Income Plan
ROE
Return on Equity
ROW
Right-of-Way
Settlement Agreement
Amended and Restated Settlement Agreement dated January 2, 1998, and thereafter amended, among Central Hudson, PSC Staff, and Certain Other Parties
Temporary State Assessment
New York State Temporary State Energy and Utility Service Conservation Assessment required to be collected from April 4, 2009 to March 31, 2014
 
Other
 
COSO
Committee of Sponsoring Organizations of the Treadway Commission
EITF
FASB Emerging Issues Task Force
Exchange Act
Securities Exchange Act of 1934
GAAP
Accounting Principles Generally Accepted in the United States of America
NYISO
New York Independent System Operator
NYSERDA
New York State Energy Research and Development Authority
Registrants
CH Energy Group and Central Hudson
 
(ii)

 
TABLE OF CONTENTS


PART I
PAGE
2
11
15
15
17
17
PART II
 
18
22
24
86
88
188
188
188
PART III
 
189
201
252
256
259
PART IV
 
260
 
 
PART I

FILING FORMAT

This 10-K Annual Report for the fiscal year ended December 31, 2012, is a combined report being filed by two different Registrants: CH Energy Group and Central Hudson.  Any references in this 10-K Annual Report to CH Energy Group include all subsidiaries of CH Energy Group, including Central Hudson, except where the context clearly indicates otherwise.  Central Hudson makes no representation as to the information contained in this 10-K Annual Report in relation to CH Energy Group and its subsidiaries other than Central Hudson.  When this 10-K Annual Report is incorporated by reference into any filing with the SEC made by Central Hudson, the portions of this 10-K Annual Report that relate to CH Energy Group and its subsidiaries, other than Central Hudson, are not incorporated by reference therein.

CH Energy Group's wholly owned subsidiaries include Central Hudson and CHEC.  For additional information, see the sub-caption "CHEC and Its Subsidiaries and Investments" in Item 1 - "Business" under the caption "Subsidiaries of CH Energy Group."

FORWARD-LOOKING STATEMENTS

Statements included in this Annual Report on Form 10-K and any documents incorporated by reference which are not historical in nature are intended to be, and are hereby identified as, "forward-looking statements" for purposes of the safe harbor provided by Section 21E of the Exchange Act. Forward-looking statements may be identified by words including "anticipates," "intends," "estimates," "believes," "projects," "expects," "plans," "assumes," "seeks," and similar expressions.  Forward-looking statements including, without limitation, those relating to CH Energy Group's and Central Hudson's future business prospects, revenues, proceeds, working capital, investment valuations, liquidity, income, and margins, as well as the acquisition by a subsidiary of Fortis Inc. and the expected timing of the transaction, are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements, due to several important factors, including those identified from time to time in the forward-looking statements. Those factors include, but are not limited to: the possibility that various conditions precedent to the consummation of the proposed Fortis transaction will not be satisfied or waived, including regulatory approvals of the proposed Fortis transaction and the timing and terms thereof; the impact of delay or failure to complete the proposed Fortis transaction on CH Energy Group's stock price; the costs associated with the proposed Fortis transaction; deviations from normal seasonal weather and storm activity; fuel prices; energy supply and demand; potential future acquisitions; legislative, regulatory, and competitive developments; interest rates; access to capital; market risks; electric and natural gas industry restructuring and cost recovery; the ability to obtain adequate and timely rate relief; changes in fuel supply or costs including future market prices for energy, capacity, and ancillary services; the success of strategies to satisfy electricity, natural gas, fuel oil, and propane requirements; the outcome of pending litigation and certain environmental matters, particularly the status of inactive hazardous waste disposal sites and waste site remediation requirements; and certain presently unknown or unforeseen factors, including, but not limited to, acts of terrorism.  CH Energy Group and Central Hudson undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.  Given these uncertainties, undue reliance should not be placed on the forward-looking statements.
 

Additional Information about the Fortis Transaction and Where to Find It

In connection with the proposed acquisition of CH Energy Group by Fortis, CH Energy Group filed a definitive proxy statement with the SEC on May 9, 2012, and has filed other relevant materials with the SEC as well.  Investors and stockholders of CH Energy Group are urged to read the proxy statement and other relevant materials filed with the SEC because they contain important information about the proposed acquisition and related matters.  Investors and stockholders may obtain a free copy of the proxy statement and other documents filed by CH Energy Group, at the SEC's Web site, www.sec.gov.  These documents can also be obtained by investors and stockholders free of charge from CH Energy Group at CH Energy Group's website at www.chenergygroup.com, or by contacting CH Energy Group's Shareholder Relations Department at (845) 486-5204.

ITEM 1 - Business

CORPORATE STRUCTURE

CH Energy Group is the holding company parent corporation of two principal, wholly owned subsidiaries, Central Hudson and CHEC.  Central Hudson is a regulated electric and natural gas subsidiary.  CHEC, the parent company of CH Energy Group's unregulated businesses and investments, has one wholly owned subsidiary, Griffith Energy Services, Inc. ("Griffith").  CHEC also has ownership interests in certain subsidiaries that are less than 100% owned.  For more information, see sub-caption "Other Subsidiaries and Investments" under caption "CHEC and Its Subsidiaries and Investments." For information concerning revenues, certain expenses, earnings per share, and information regarding assets of Central Hudson's regulated electric and regulated natural gas segments and of Griffith, see Note 13 - "Segments and Related Information."

HOLDING COMPANY REGULATION

CH Energy Group is a "holding company" under Public Utility Holding Company Act of 2005 ("PUHCA 2005") because of its ownership interests in Central Hudson and CHEC.  CH Energy Group, however, is exempt from regulation as a holding company under PUHCA 2005, because it derives substantially all of its public utility company revenues from business conducted within a single state, the State of New York.  At the present time, CH Energy Group cannot predict whether and when its circumstances may change such that it no longer qualifies for exemption from PUHCA 2005.
 

SUBSIDIARIES OF CH ENERGY GROUP

Central Hudson

Central Hudson is a New York State natural gas and electric corporation formed in 1926.  Central Hudson purchases, sells at wholesale and retail, and distributes electricity and natural gas at retail in portions of New York State.  Central Hudson also generates a small portion of its electricity requirements.

Central Hudson serves a territory comprising approximately 2,600 square miles in the Hudson Valley, with a population estimated at 681,000.  Electric service is available throughout the territory, and natural gas service is provided in and about the cities of Poughkeepsie, Beacon, Newburgh, and Kingston, New York, and in certain outlying and intervening territories.  The number of Central Hudson employees at December 31, 2012, was 869.

Central Hudson's territory reflects a diversified economy, including manufacturing industries, governmental agencies, public and private institutions, wholesale and retail trade operations, research firms, farms and resorts.

Seasonality and Other Weather Impacts

Central Hudson's delivery revenues have historically varied seasonally in response to weather.  Sales of electricity are highest during the summer months, primarily due to the use of air-conditioning and other cooling equipment.  Sales of natural gas are highest during the winter months, primarily due to space heating usage.  Central Hudson's rates are developed based on forecasts of annual sales volumes.  Effective July 1, 2009 and continuing in the 2010 Rate Order through June 30, 2013, Central Hudson's delivery rate structure includes RDMs, which provide the ability to record revenues equal to those forecasted in the development of current rates for most of Central Hudson's customers.  As a result, fluctuations in actual sales volumes as a result of weather or other factors as compared to those forecasted in rate proceedings no longer have a significant impact on earnings.  However, variations between actual expenses incurred due to storm activity and the amount set in rates may impact Central Hudson's earnings.  Central Hudson has the ability to request regulatory recovery of significant incremental costs incurred if certain criteria are met as defined by the PSC and, as such, any adverse impact on earnings for higher storm expenses should be limited to non-material amounts, as long as the other criteria for deferral accounting are met.
 

Competition

Central Hudson is a regulated utility with a legal obligation to deliver electricity and natural gas within its PSC-approved franchise territory.  Central Hudson has no direct competitors in its electricity distribution business; indirect competitors include distributed generation systems, including net metered systems.  Central Hudson's natural gas business competes with other fuels, especially fuel oil and propane.  The competitive marketplace continues to develop for electric and natural gas supply markets, and Central Hudson's electric and natural gas customers may purchase energy and related services from other providers.  Central Hudson's rate making structure neutralizes any earnings impact of customers' decisions to purchase electricity and natural gas from other providers.

Regulation

Central Hudson is subject to regulation by the PSC regarding, among other things, services rendered (including the rates charged), major transmission facility siting, accounting treatment of certain items, and issuance of securities.  For certain restrictions imposed by the Settlement Agreement, see Note 2 - "Regulatory Matters."

Certain activities of Central Hudson, including accounting and the acquisition and disposition of property, are subject to regulation by FERC under the Federal Power Act.

Central Hudson is not subject to the provisions of the Natural Gas Act.  Central Hudson's hydroelectric facilities are not required to be licensed under the Federal Power Act but are regulated by the DEC.

Central Hudson is subject to regulation by the North American Electric Reliability Corporation regarding its ownership, operation and use of a bulk power system.

Rates

General: The electric and natural gas rates charged by Central Hudson applicable to service supplied to retail customers within New York State are regulated by the PSC.  Costs of service, both for electric and gas delivery service and for electric and gas supply costs, are recovered from customers through PSC approved tariffs, subject to a standard of prudency.  Both transmission rates and rates for electricity sold for resale which involve interstate commerce are regulated by FERC.

Since July 2009, Central Hudson's rates have included RDMs which are intended to minimize the earnings impact resulting from reduced energy consumption as energy efficiency programs are implemented by breaking the link between energy sales and utility revenues and profits.  Central Hudson's RDMs allow the Company to recognize electric delivery revenues and gas sales per customer at the levels approved in rates for most of Central Hudson's electric and gas customer classes.
 

Central Hudson's retail electricity rate structure consists of various service classifications covering delivery service and full service (which includes electricity supply) for residential, commercial, and industrial customers.  Retail rates for delivery and supply are shown separately on retail bills to allow customers to see the costs associated with their commodity supply, and thus facilitate retail competition.  During 2012, the average price of electricity for full service customers was 14.85 cents per kWh as compared to an average of 14.48 cents per kWh in 2011.  The PSC has authorized Central Hudson to recover the costs of the electric commodity from customers, without earning a profit on the commodity costs.  The average delivery price in 2012 was 6.24 cents per kWh and 5.60 cents per kWh in 2011.  The increase in delivery price was primarily due to the implementation of new rates as part of the 2010 Rate Order.  The average delivery prices in 2012 and 2011 also include a surcharge resulting from the Electric RDM.

Central Hudson's retail natural gas rate structure consists of various service classifications covering transport, retail access service, and full service (which includes natural gas supply) for residential, commercial, and industrial customers.  During 2012, the average price of natural gas for full-service customers was $13.81 per Mcf as compared to an average of $15.50 per Mcf in 2011.  The PSC has authorized Central Hudson to recover the costs of the gas commodity from customers, without earning a profit on the commodity costs.  The average delivery price for natural gas for retail and full service in 2012 was $7.52 per Mcf and $6.94 per Mcf in 2011.  The increase in delivery price was primarily due to the implementation of new rates as part of the 2010 Rate Order and the result of fixed revenue spread over lower sales due to milder weather conditions.  The average delivery price in 2012 includes a refund resulting from the Gas RDM, whereas the average delivery price in 2011 includes a surcharge resulting from the Gas RDM.

For further information regarding the terms of the 2009 Rate Order and 2010 Rate Order under which Central Hudson operated during the current reporting period, see Note 2 - "Regulatory Matters" under the caption "2009 and 2010 Rate Orders."

Cost Adjustment Clauses and RDMs:  For information regarding Central Hudson's electric and natural gas cost adjustment clauses and RDMs, see Note 1 - "Summary of Significant Accounting Policies" under the caption "Rates, Revenues and Cost Adjustment Clauses."

Capital Expenditures and Financing
For estimates of future capital expenditures for Central Hudson, see the sub-caption "Anticipated Sources and Uses of Cash" in Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this 10-K Annual Report under the caption "Capital Resources and Liquidity."
Central Hudson's Certificate of Incorporation and its various debt instruments do not contain any limitations upon the issuance of authorized, but unissued, Preferred Stock or unsecured short-term debt.
 
 
Central Hudson has in place certain credit facilities with financial covenants that limit the amount of indebtedness Central Hudson may incur.  Additionally, Central Hudson's ability to issue debt securities is limited by authority granted by the PSC.  Central Hudson believes these limitations will not impair its ability to issue any or all of the debt described under the sub-caption "Financing Program" in Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this 10-K Annual Report under the caption "Capital Resources and Liquidity."
 
Purchased Power and Generation Costs
 
For the year ended December 31, 2012, the sources and related costs of purchased electricity and electric generation for Central Hudson were as follows (In Thousands):
 
Sources of Energy
 
Aggregate Percentage of Energy Requirements
   
Costs in 2012
 
Purchased Electricity
   
98.0
%
 
$
172,499
 
Hydroelectric and Other
   
2.0
     
15
 
Deferred Electricity Cost
           
3,207
 
Total
   
100.0
%
 
$
175,721
 
 
Research and Development

Central Hudson is engaged in the conduct and support of research and development ("R&D") activities, which are focused on the improvement of existing energy technologies and the development of new technologies for the delivery and customer use of energy.  Central Hudson's R&D expenditures were $4.0 million in 2012, $2.1 million in 2011 and $3.1 million in 2010.  These expenditures were for internal research programs and for contributions to research administered by New York State Energy Research and Development Authority ("NYSERDA"), the Electric Power Research Institute, and other industry organizations.  The decrease in total R&D expenditures in 2011 as compared to the other periods presented is a result of a PSC Order to cease the collection from customers and payment to NYSERDA of certain energy efficiency research funds in 2011.  There was no impact on earnings related to this change and the collections and payments resumed in 2012.  R&D expenditures are provided for in Central Hudson's rates charged to customers for electric and natural gas delivery service, with any differences between R&D expense and the rate allowances deferred for future recovery from or return to customers.

Other Central Hudson Matters

Labor Relations:  Central Hudson has an agreement with Local 320 of the International Brotherhood of Electrical Workers for its 526 unionized employees, representing construction and maintenance employees, customer service representatives, service workers, and clerical employees (excluding persons in managerial, professional, or supervisory positions).  This agreement became effective on May 1, 2011, and remains effective through April 30, 2016.
 

CHEC and Its Subsidiaries and Investments

CHEC, a New York corporation, is a wholly owned subsidiary of CH Energy Group.  CHEC's wholly owned subsidiary is Griffith.  For further discussion of certain energy-related projects within other subsidiaries and investments, see Note 5 - "Acquisitions, Divestitures and Investments."

Griffith

Griffith is an energy services company engaged in fuel distribution, including heating oil, gasoline, diesel fuel, kerosene, and propane, and the installation and maintenance of heating, ventilating, and air conditioning equipment.  The number of Griffith employees at December 31, 2012 was 366.

Seasonality

A substantial portion of CHEC's revenues vary seasonally, as Griffith's fuel oil deliveries are directly related to use for space heating and are highest during the winter months.  Griffith entered into a weather swap for the period beginning November 1, 2012 through March 31, 2013. The hedge is designed to minimize the impact on earnings of variations from normal temperatures on the sale of products and services whose use is weather sensitive. These products and services include the sale of heating oil, propane, HVAC equipment, and billable service on HVAC equipment. In prior years, Griffith had entered into weather collars which reduced, but did not eliminate, the impact of weather on earnings.  Management believes that the weather swap will more effectively mitigate the impact of weather on earnings volatility.

Competition

Griffith participates in a competitive fuel distribution industry that is subject to different risks than those found in the businesses of the regulated utility, Central Hudson.  Griffith faces competition from other fuel distribution companies and from companies supplying other sources for heating, such as electricity, natural gas, propane and heat pumps.  For a discussion of Griffith's operating revenues and operating income, see the caption "Results of Operations" in Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this 10-K Annual Report.
 

ENVIRONMENTAL QUALITY REGULATION

Central Hudson and Griffith are subject to regulation by federal, state, and local authorities with respect to the environmental effects of their operations. Environmental matters may expose Central Hudson and Griffith to potential liability, which, in certain instances, may be imposed without regard to fault or may be premised on historical activities that were lawful at the time they occurred.

Central Hudson and Griffith each monitor their activities in order to determine their impact on the environment and to comply with applicable environmental laws and regulations.

The principal environmental areas relevant to these companies (air, water and industrial and hazardous wastes, other) are described below. Unless otherwise noted, all required permits and certifications have been obtained by the applicable company. Management believes that each company was in material compliance with these permits and certifications during 2012, except as noted in Note 12 – "Commitments and Contingencies" under the caption "Environmental Matters" of this 10-K Annual Report.

Air Quality

The Clean Air Act Amendments of 1990 address attainment and maintenance of national air quality standards and impact Central Hudson electric generating facilities in South Cairo and Coxsackie, NY.  See Note 12 − "Commitments and Contingencies" under the caption "Environmental Matters" regarding the investigation by the EPA into the compliance of a former major Central Hudson generating asset.

Water Quality

The Clean Water Act established the basic framework for federal and state regulation of water pollution control and requires facilities that discharge waste or storm water into the waters of the United States to obtain permits. Central Hudson and Griffith have permits regulating pollutant discharges for relevant locations.

Industrial & Hazardous Substances and Wastes

Central Hudson and Griffith are subject to federal, state and local laws and regulations relating to the use, handling, storage, treatment, transportation, and disposal of industrial, hazardous, and toxic wastes. Currently, there are no permit or certification requirements for Griffith. See Note 12 − "Commitments and Contingencies" under the caption "Environmental Matters" for additional discussion regarding, among other things, Central Hudson's former MGP facilities and Little Britain Road.
 

Environmental Expenditures

2012 actual and 2013 estimated expenditures attributable in whole or in substantial part to environmental considerations are detailed in the table below (In Millions):

 
 
2012
   
2013
 
Central Hudson
 
$
4.1
   
$
7.3
 
Griffith
 
$
0.4
   
$
0.5
 

The increase in 2013 estimated expenditures relates to MGP remediation activities at the Catskill site, which commenced in September 2012.  For further discussion of these activities, see Note 12 – "Commitments and Contingencies" under caption "Former Manufactured Gas Plant Facilities".

Central Hudson and Griffith are also subject to regulation with respect to other environmental matters, such as noise levels, protection of vegetation and wildlife, and limitations on land use, and are in compliance with regulations in these areas.

Regarding environmental matters, except as described in Note 12 - "Commitments and Contingencies" under the caption "Environmental Matters," neither CH Energy Group, Central Hudson nor Griffith are involved as defendants in any material litigation, administrative proceeding, or investigation and, to the best of their knowledge, no such matters are threatened against any of them.

AVAILABLE INFORMATION

CH Energy Group and Central Hudson file annual, quarterly, and current reports and other information with the SEC.  CH Energy Group also files proxy statements.  The public may read and copy any of the documents each company files at the SEC's Public Reference Room at 100 F Street N.E., Room 1580, Washington, D.C. 20549.  The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  SEC filings are also available to the public from the SEC's Internet website at www.sec.gov.

CH Energy Group and Central Hudson make available free of charge at www.CHEnergyGroup.com their annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the SEC.  CH Energy Group's proxy statements, governance guidelines, Code of Business Conduct and Ethics, and the charters of its Audit, Compensation, Governance and Nominating, and Strategy and Finance Committees are also available at www.CHEnergyGroup.com.  The governance guidelines, the Code of Business Conduct and Ethics, and the charters may also be obtained by writing to the Corporate Secretary, CH Energy Group, Inc., 284 South Avenue, Poughkeepsie, New York 12601-4839.
 
 
EXECUTIVE OFFICERS OF CH ENERGY GROUP
 
All executive officers of CH Energy Group are elected or appointed annually by its Board of Directors.  There is no family relationship among any of the executive officers of CH Energy Group.  The names of the current executive officers of CH Energy Group, their positions held and business experience during the past five years, and ages (at December 31, 2012) are as follows:
 
 
 
 
 
 
 
 
 
Date Commenced
Executive Officers
 
Age
 
Current
 and Prior Positions
 
CH Energy Group
 
Central Hudson
 
CHEC
Steven V. Lant
 
55 
 
Chairman of the Board
 
Apr 2004
 
May 2004
 
May 2004
 
 
 
 
 
Chief Executive Officer
 
Jul 2003
 
Jul 2003
 
Jul 2003
 
 
 
 
 
President
 
Jul 2003
 
 
 
Jul 2003
 
 
 
 
 
Director
 
Feb 2002
 
Dec 1999
 
Dec 1999
 
 
 
 
 
 
 
 
 
 
 
 
 
James P. Laurito(1)
 
56 
 
President
 
 
 
Jan 2010
 
 
 
 
 
 
 
Executive Vice President
 
Nov 2009
 
Nov 2009
 
 
 
 
 
 
 
Director
 
 
 
Nov 2009
 
Nov 2009
 
 
 
 
 
 
 
 
 
 
 
 
 
Christopher M. Capone
 
50 
 
President
 
 
 
 
 
Sep 2010
 
 
 
 
Executive Vice President
 
Jan 2007
 
Jan 2007
 
 
 
 
 
 
 
Director
 
 
 
Mar 2005
 
Mar 2007
 
 
 
 
 
Chief Financial Officer
 
Sep 2003
 
Sep 2003
 
Sep 2003
 
 
 
 
 
 
 
 
 
 
 
 
 
John E. Gould(2)
 
68 
 
Executive Vice President and General Counsel
 
Oct 2009
 
Jan 2010
 
Jan 2010
 
 
 
 
 
Secretary
 
Mar 2007
 
Jun 2007
 
Jun 2007
 
 
 
 
 
 
 
 
 
 
 
 
 
Denise D. VanBuren
 
51 
 
Secretary
 
Dec 2009
 
Jan 2010
 
Jan 2010
 
 
 
 
Vice President - Corporate Communications
 
Dec 2009
 
Jan 2010
 
 
 
 
 
 
 
Vice President - Public Affairs and Energy Efficiency
 
Aug 2007
 
Aug 2007
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Charles A. Freni, Jr.
 
53 
 
Director
 
 
 
Mar 2011
 
 
 
 
 
 
 
Senior Vice President - Customer Services
 
 
 
Jan 2005
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
W. Randolph Groft
 
51 
 
Executive Vice President
 
 
 
 
 
Jan 2003
 
 
 
 
 
Director
 
 
 
 
 
Jan 2003
 
 
 
 
 
 
 
 
 
 
 
 
 
Kimberly J. Wright
 
45 
 
Vice President - Accounting and Controller
 
May 2008
 
 
 
 
 
 
 
 
 
Controller
 
 
 
Oct 2006
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
From 2003 to August 2009, served as the President and Chief Executive Officer of New York State Electric and Gas Corporation and of Rochester Gas and Electric Corporation; both companies are gas and electric utilities.
(2)
Before October 2009, served as a partner of the law firm of Thompson Hine LLP.
 
 
 
ITEM 1A - Risk Factors

RISKS RELATED TO THE PROPOSED ACQUISITION BY FORTIS INC.

We May Be Unable to Satisfy the Conditions or Obtain the Approvals Required to Complete the Proposed Acquisition

While the proposed acquisition has been approved by CH Energy Group shareholders, the Federal Energy Regulatory Commission and the Committee on Foreign Investment in the United States, the approval of the PSC has not yet been obtained.  The PSC may not approve the acquisition or may seek to impose conditions on the completion of the transaction, which could cause the conditions to the acquisition to not be satisfied or which could delay or increase the cost of the transaction.  In addition, the occurrence of a material adverse effect could result in a termination of the agreement by Fortis.
 
The Proposed Acquisition May Not Be Completed, Which May Have a Material Adverse Effect on Our Share Price

Failure to complete the acquisition could negatively affect our share price, including by reducing it to a level at or below the trading range preceding the announcement of the Fortis transaction.
 
Termination of the Proposed Acquisition Could Result in CH Energy Group Being Required to Pay Termination Fees to Fortis

CH Energy Group will be obligated to reimburse up to $4 million of FortisUS' expenses if (i) FortisUS or CH Energy Group terminates the merger agreement because the acquisition has not been completed by the outside date of August 20, 2013 or FortisUS terminates the merger agreement based on a breach of the merger agreement by CH Energy Group, and (ii) a competing proposal has been made or publicly disclosed and not withdrawn prior to the termination of the merger agreement or applicable breach.  In addition, if within twelve months after such termination, a definitive agreement providing for an acquisition transaction is entered into, or an acquisition transaction is consummated by CH Energy Group with, the person who made the acquisition proposal prior to such termination or applicable breach or with any other third party making an acquisition proposal within three months following such termination, CH Energy Group will be obligated to pay FortisUS a termination fee of $19.7 million (less any expense reimbursement previously paid).  In no event will more than one termination fee be payable.
 

STORMS AND OTHER EVENTS BEYOND CH ENERGY GROUP'S CONTROL MAY INTERFERE WITH ITS OPERATIONS
 
Description and Sources of Risk

In order to conduct their businesses, (1) Central Hudson must have access to natural gas and electric supplies and be able to utilize its electric and natural gas infrastructure, and (2) Griffith needs access to petroleum supplies from storage facilities in its service and operating systems territories.  In addition, the operations of CH Energy Group and its subsidiaries are dependent on their ability to protect their computer equipment and the information stored in their databases.

Central Hudson has designed its electric and natural gas systems to serve customers under various contingencies in accordance with good utility practice.  
 
However, any one or more of the following could impact either or both of the companies' ability to access supplies and/or utilize critical facilities:

·
Storms, natural disasters, wars, terrorist acts, cyber incidents, failure of critical equipment and other catastrophic events occurring both within and outside Central Hudson's and Griffith's service territories.
·
Bulk power system and gas transmission pipeline system capacity constraints could impact Central Hudson.
·
Unfavorable developments in the world oil markets could impact Griffith.
·
Third-party facility owner or supplier financial distress.
·
Unfavorable governmental actions or judicial orders.

Potential Impacts

The companies could experience service disruptions leading to lower earnings and/or reduced cash flows if the situation is not resolved in a timely manner or the financial impacts of restoration are not alleviated through insurance policies, regulated rate recovery for Central Hudson or higher sales prices for Griffith.  In addition, Central Hudson has experienced one cyber incident and could experience others which could result in the misappropriation, destruction, corruption or unavailability of critical data or confidential customer information which could result in reputational damage and/or litigation.
 

CENTRAL HUDSON'S RATES LIMIT ITS ABILITY TO RECOVER ITS COSTS FROM ITS CUSTOMERS

Description and Sources of Risk

Central Hudson's retail rates are regulated by the PSC.  Rate plans generally may not be changed during their respective terms.  Therefore, rates cannot be modified for higher expenses than those assumed in the current rates, absent circumstances such as an increase in expenses that meet the PSC's threshold requirements for filing for approval of deferral accounting.  Central Hudson is operating under a three year rate plan approved by the PSC effective July 1, 2010.  The following could unfavorably impact Central Hudson's financial results:

·
Higher expenses than reflected in current rates.  Higher expenses could result from, among other things, increases in taxes and assessments, unrecoverable storm restoration expense, labor, health care benefits or other expense components.
·
Penalties imposed by the PSC for the failure to achieve performance metrics in the rate plan, or violation of PSC Orders.
·
Higher electric and natural gas capital project costs resulting from escalation of labor, material and equipment prices, as well as potential delays in the siting and legislative and/or regulatory approval requirements associated with these projects.
·
A determination by the PSC that the cost to place a project in service is above a level which is deemed prudent.

Potential Impacts

Central Hudson could have lower earnings and/or reduced cash flows if cost management and/or regulatory relief are not sufficient to alleviate the impact of higher costs.

Additional Information

See Note 2 - "Regulatory Matters" of this 10-K Annual Report.
 

UNUSUAL TEMPERATURES IN GRIFFITH'S SERVICE TERRITORIES MAY ADVERSELY IMPACT EARNINGS

Description and Sources of Risk

Griffith serves the Mid-Atlantic region of the United States.  This area experiences seasonal fluctuations in temperature.  A considerable portion of Griffith's earnings is derived directly or indirectly from the weather-sensitive end uses of space heating and air conditioning.  As a result, sales volumes fluctuate and vary from normal expected levels based on variations in weather from historically normal seasonal levels.  Such variations could significantly reduce sales volumes.  To mitigate this risk, Griffith entered into a weather swap for the period beginning November 1, 2012 through March 31, 2013. The hedge is designed to minimize the impact on earnings of variations from normal temperatures on the sale of weather related products and services. These products and services include the sale of heating oil, propane, HVAC equipment, and billable service on HVAC equipment. In prior years, Griffith had entered into weather collars which reduced, but did not eliminate, the impact of temperature variations.  Management believes that the current weather swap will more effectively mitigate the impact of temperature variations on earnings volatility, but cannot provide assurance that similar weather swaps will be available in the future.

Potential Impacts

If effective hedging arrangements such as the weather swap described above are not available in the future, Griffith could experience lower delivery volumes in periods of milder than normal weather, leading to lower earnings and reduced cash flows.

GRIFFITH'S INABILITY TO ATTRACT NEW CUSTOMERS, RETAIN EXISTING CUSTOMERS, MAINTAIN SALES VOLUMES, AND MAINTAIN MARGINS MAY ADVERSELY IMPACT EARNINGS

Description and Sources of Risk

Lower sales can occur for various reasons, including the following:

·
Changes in customers' usage patterns driven by customer responses to product prices,
·
Economic conditions,
·
Energy efficiency programs, and/or
·
The loss of major customers, the loss of a large number of residential customers, or the addition of fewer new customers than expected.

Significant increases in wholesale oil prices could negatively impact margins and/or cause current and/or prospective full service customers to reduce their usage and/or purchase fuel from discount distributors.
 
 
Potential Impacts

Any one or more of the following could result from these events:

·
An adverse impact on Griffith's ability to attract new full-service residential customers and retain existing full-service residential customers.
·
Sales volume reductions, and/or compressed margins.
·
Increased working capital requirements stemming from an increase in oil and/or propane prices.  

These events could materially reduce Griffith's contribution to CH Energy Group's earnings and cash flow.

CENTRAL HUDSON IS SUBJECT TO RISKS RELATING TO ASBESTOS LITIGATION AND MANUFACTURED GAS PLANT FACILITIES

Description and Sources of Risk

Litigation has been commenced by third parties against Central Hudson arising from the use of asbestos at certain of its previously owned electric generating stations, and Central Hudson is involved in a number of matters arising from contamination at former MGP sites.

Potential Impacts

To the extent not covered by insurance or recovered through rates, remediation costs, court decisions and settlements resulting from any litigation could reduce earnings and cash flows.

Additional Information

See Note 12 - "Commitments and Contingencies" and in particular the sub-captions in Note 12 regarding "Asbestos Litigation" and "Former Manufactured Gas Plant Facilities" under the caption "Environmental Matters."

ITEM 1B - Unresolved Staff Comments
None.

ITEM 2 - Properties

CH Energy Group has no significant properties other than those of Central Hudson and CHEC.
 

CENTRAL HUDSON

Electric

Central Hudson owns hydroelectric and gas turbine generating facilities as described below.
 
Type of Electric Generating Plant
 
Year Placed in Service/Refurbished
 
MW(1) Net Capability
Hydroelectric (3 stations)
 
1920-1986
 
22.4
Gas turbine (2 stations)
 
1969-1970
 
42.5
Total
 
 
 
64.9

(1)   Reflects maximum one-hour net capability (winter rating as of December 31, 2012) of Central Hudson's electric generating plants and therefore does not include firm purchases or sales.

Central Hudson owns substations having an aggregate transformer capacity of 5.4 million kilovolt amperes.  Central Hudson's electric transmission system consists of 629 pole miles of line.  The electric distribution system consists of approximately 7,300 pole miles of overhead lines and 1,400 trench miles of underground lines, as well as customer service lines and meters.

Electric Load and Capacity

Central Hudson's maximum one-hour demand for electricity within its own territory for the year ended December 31, 2012, occurred on July 17, 2012, and amounted to 1,168 MW.  Central Hudson's highest peak electric demand reached 1,295 MW on August 2, 2006.  Central Hudson's maximum one-hour demand for electricity within its own territory for that part of the 2012-2013 winter capability period through February 22, 2013, occurred on January 24, 2013, and amounted to 906 MW.

Central Hudson owns minimal generating capacity and relies on purchased capacity and energy from third-party providers to meet the demands of its full service customers.  For more information, see Note 12 - "Commitments and Contingencies."

Natural Gas

Central Hudson's natural gas system consists of 164 miles of transmission pipelines and 1,193 miles of distribution pipelines, as well as customer service lines and meters.  For the year ended December 31, 2012, the total amount of natural gas purchased by Central Hudson from all sources was 11,057,946 Mcf.  During 2012, Central Hudson retired and removed its propane-air mixing facilities, one located in Poughkeepsie, New York, and the other in Newburgh, New York. Additional investigation and testing of these sites will be required, which may require additional remediation. The cost to be incurred associated with the retirement of these facilities is not expected to be material and will have no impact on earnings.
 

The peak daily demand for natural gas of Central Hudson's customers for the year ended December 31, 2012, and for that part of the 2012-2013 heating season through February 22, 2013, occurred on January 23, 2013 and amounted to 115,070 Mcf.  Central Hudson's highest winter period daily peak demand reached 125,496 Mcf on January 27, 2005.  Central Hudson's firm peak day natural gas capability in the 2012-2013 heating season was 130,090 Mcf.

Other Central Hudson Matters

Central Hudson owns its corporate headquarters located in Poughkeepsie, New York, as well as several district offices located throughout the Hudson Valley.  Central Hudson's electric generating plants and important property units are generally held by it in fee simple, except for certain ROW and a portion of the property used in connection with hydroelectric plants consisting of flowage or other riparian rights.  Certain of the Central Hudson properties are subject to ROW and easements that do not interfere with Central Hudson's operations.  In the case of certain distribution lines, Central Hudson owns only a partial interest in the poles upon which its wires are installed and the remaining interest is owned by various telecommunications companies.  In addition, certain electric and natural gas transmission facilities owned by others are used by Central Hudson under long-term contracts.

During the three-year period ended December 31, 2012, Central Hudson made gross property additions of $270.1 million and property retirements and adjustments of $49.9 million, resulting in a net increase (including construction work in progress) in gross utility plant of $220.2 million, or 16%.

CHEC

CHEC owns a 100% interest in Griffith.  Griffith owns or leases several office, warehouse, and bulk petroleum storage facilities.  These facilities are located in Delaware, Maryland, Virginia, and West Virginia.  The bulk petroleum storage facilities have capacities from 60,000 gallons up to 760,000 gallons.  Griffith leases its corporate headquarters, which is located in Columbia, Maryland.

ITEM 3 - Legal Proceedings

For information about developments regarding certain legal proceedings, see Note 12 - "Commitments and Contingencies" of this 10-K Annual Report.

ITEM 4 – Mine Safety Disclosures

Not applicable.
 
PART II

ITEM 5 - Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   
 
For information regarding the market for CH Energy Group's Common Stock and related stockholder matters, see Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this 10-K Annual Report under the caption "Capital Resources and Liquidity - Financing Program" and Note 8 - "Capitalization - Common and Preferred Stock."

Under applicable statutes and their respective Certificates of Incorporation, CH Energy Group may pay dividends on its Common Stock and Central Hudson may pay dividends on its Common Stock and its Preferred Stock, in each case only out of surplus.
 

The line graph set forth below provides a comparison of CH Energy Group's cumulative total shareholder return on its Common Stock with the Standard and Poor's 500 Index ("S&P 500") and with the Edison Electric Institute Index (the "EEI Index"), which consists of the 51 U.S. shareholder-owned electric utilities.  Total shareholder return is the sum of the dividends paid and the change in the market price of the stock.  As of December 31, 2012, the cumulative total shareholder return of CH Energy Group of 84.5% was nearly ten times higher than that of the S&P 500 Index and the EEI Index.


 

 
 
 
Indexed Returns
 
 
Base Period
 
Years Ending
 
Company / Index
2007
 
2008
 
2009
 
2010
 
2011
 
2012
 
CH Energy Group, Inc.
 
$
100
 
$
122.13
 
$
105.86
 
$
128.11
 
$
159.47
 
$
184.52
 
S&P 500 Index
 
$
100
 
$
63.00
 
$
79.67
 
$
91.68
 
$
93.61
 
$
108.59
 
EEI Index
 
$
100
 
$
74.10
 
$
82.03
 
$
87.80
 
$
105.35
 
$
107.55
 
 
 
 
 
COMMON STOCK DIVIDENDS AND PRICE RANGES
 
CH Energy Group and its principal predecessors (including Central Hudson) have paid dividends on their respective Common Stock in each year commencing in 1903, and the Common Stock has been listed on the New York Stock Exchange since 1945.  The closing price as of December 31, 2012 and December 31, 2011 was $65.22 and $58.38, respectively.  The price ranges and the dividends paid for each quarterly period during the last two fiscal years are as follows:
 
 
 
2012
   
2011
 
 
 
High
   
Low
   
Dividend
   
High
   
Low
   
Dividend
 
1st Quarter
 
$
67.48
   
$
54.76
   
$
0.555
   
$
50.75
   
$
47.44
   
$
0.540
 
2nd Quarter
 
$
67.24
   
$
64.00
   
$
0.555
   
$
54.44
   
$
48.76
   
$
0.540
 
3rd Quarter
 
$
65.74
   
$
64.72
   
$
0.555
   
$
57.12
   
$
48.00
   
$
0.540
 
4th Quarter
 
$
65.69
   
$
64.48
   
$
0.555
   
$
59.67
   
$
50.55
   
$
0.555
 

In 2012, the Board of Directors of CH Energy Group declared quarterly dividends of 55.5 cents per share.  In declaring future dividends, CH Energy Group will evaluate all circumstances at the time of making such decisions, including business, financial, and regulatory considerations.

On February 21, 2012, CH Energy Group announced that it had entered into an agreement and plan of merger under which it agreed, subject to shareholder approval and the approval of applicable regulatory authorities, to be acquired by Fortis Inc. ("Fortis") for $65 per share of common stock in cash.  The agreement permits the declaration or payment of dividends and distributions in the normal course of business, up to 55.5 cents for quarterly dividends paid for periods commencing prior to March 19, 2013, and 57.0 cents for quarterly dividends paid for periods commencing after such date.

CH Energy Group's ability to pay dividends to common shareholders is affected by the ability of its subsidiaries to pay dividends to the parent company.  The Federal Power Act limits the payment of dividends by Central Hudson to its level of retained earnings.  More restrictive is the PSC's limit on the dividends Central Hudson may pay to CH Energy Group which is 100% of the average annual income available for common stock, calculated on a two-year rolling average basis.  Based on this calculation as of December 31, 2012, Central Hudson would be able to pay a maximum of $45.1 million in dividends to CH Energy Group without violating the restrictions imposed by the PSC.  Central Hudson's dividend would be reduced to 75% of its average annual income in the event of a downgrade of its senior debt rating below "BBB+" by more than one rating agency if the stated reason for the downgrade is related to CH Energy Group or any of Central Hudson's affiliates.  Further restrictions are imposed for any downgrades below this level.  During the year ended December 31, 2012, Central Hudson declared and paid dividends of $22.0 million to CH Energy Group.  CH Energy Group's other subsidiaries do not have express restrictions on their ability to pay dividends.
 

The number of registered holders of Common Stock of CH Energy Group as of December 31, 2012 was 12,815.

All of the outstanding Common Stock of Central Hudson and all of the outstanding Common Stock of CHEC are held by CH Energy Group.

Beginning in the fourth quarter of 2010 and continuing through 2011, CH Energy Group, using excess liquidity largely related to proceeds from divestitures, repurchased shares of its own common stock.  For more information regarding CH Energy Group's stock repurchase program, see the "Anticipated Sources and Uses of Cash" section of Item 7 – "Management Discussion and Analysis."
 
The following table provides a summary of shares repurchased by CH Energy Group for the quarter ended December 31, 2012:

 
 
 
 
Total Number of Shares Purchased(1)
 
Average Price Paid per Share(2)
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs(3)
October 1-31, 2012
 
1,038 
 
$
65.35 
 
 
November 1-30, 2012
1
390 
 
$
64.83 
 
 
December 1-31, 2012
 
1,611 
 
$
65.07 
 
 
Total
 
 
3,039 
 
$
65.13 
 
 
 
(1)
Consists of shares surrendered to CH Energy Group in satisfaction of tax withholdings on the vesting of restricted shares and performance shares.
(2)
Value at which reacquired shares of CH Energy Group's common stock credited on the date the stock was surrendered.
(3)
On July 31, 2007, the Board of Directors authorized the repurchase of up to 2,000,000 shares or approximately 13% of CH Energy Group's outstanding common stock on that date, from time to time, over the five year period ending July 31, 2012.  Upon expiration, the Board of Directors elected to not extend the repurchase program.    
 
 
 
ITEM 6 - Selected Financial Data of CH Energy Group and Its Subsidiaries
 
FIVE-YEAR SUMMARY OF CONSOLIDATED OPERATIONS AND SELECTED FINANCIAL DATA(1) (CH ENERGY GROUP)
(In Thousands, except per share data)
 
 
 
2012
   
2011
   
2010
   
2009
   
2008
 
Operating Revenues:
 
   
   
   
   
 
Electric - Delivery
 
$
336,360
   
$
332,388
   
$
317,023
   
$
275,167
   
$
242,334
 
Electric - Supply
   
175,721
     
206,160
     
246,116
     
261,003
     
365,827
 
Natural Gas - Delivery
   
83,158
     
85,196
     
81,606
     
66,916
     
59,897
 
Natural Gas - Supply
   
49,276
     
76,778
     
75,189
     
107,221
     
129,649
 
Competitive business subsidiaries
   
280,204
     
284,998
     
240,174
     
211,250
     
330,254
 
Total
   
924,719
     
985,520
     
960,108
     
921,557
     
1,127,961
 
 
                                       
Operating Income
   
91,318
     
99,589
     
99,303
     
81,585
     
70,701
 
 
                                       
Income from continuing operations
   
39,847
     
43,184
     
40,330
     
33,597
     
30,968
 
Income (loss) from discontinued operations, net of tax
   
-
     
3,126
     
(1,128
)
   
10,681
     
5,186
 
Preferred Stock redemption premium
   
342
     
-
     
-
     
-
     
-
 
Dividends declared on Preferred Stock of subsidiary
   
624
     
970
     
970
     
970
     
970
 
Net Income attributable to CH Energy Group
   
38,881
     
45,340
     
38,504
     
43,484
     
35,081
 
Dividends Declared on Common Stock
   
33,169
     
33,291
     
34,161
     
34,119
     
34,086
 
Change in Retained Earnings
   
5,712
     
12,049
     
4,343
     
9,365
     
995
 
Retained Earnings - beginning of year
   
242,391
     
230,342
     
225,999
     
216,634
     
215,639
 
Retained Earnings - end of year
 
$
248,103
   
$
242,391
   
$
230,342
   
$
225,999
   
$
216,634
 
 
                                       
Common Share Data:
                                       
Average shares outstanding - basic
   
14,909
     
15,278
     
15,785
     
15,775
     
15,768
 
Income from continuing operations - basic
 
$
2.61
   
$
2.77
   
$
2.51
   
$
2.08
   
$
1.89
 
Income (loss) from discontinued operations - basic
 
$
-
   
$
0.20
   
$
(0.07
)
 
$
0.68
   
$
0.33
 
Net Income attributable to CH Energy Group - basic
 
$
2.61
   
$
2.97
   
$
2.44
   
$
2.76
   
$
2.22
 
Average shares outstanding - diluted
   
15,099
     
15,481
     
15,952
     
15,881
     
15,805
 
Income from continuing operations - diluted
 
$
2.58
   
$
2.73
   
$
2.48
   
$
2.07
   
$
1.89
 
Income (loss) from discontinued operations - diluted
 
$
-
   
$
0.20
   
$
(0.07
)
 
$
0.68
   
$
0.33
 
Net Income attributable to CH Energy Group - diluted
 
$
2.58
   
$
2.93
   
$
2.41
   
$
2.74
   
$
2.22
 
Dividends declared per share
 
$
2.22
   
$
2.19
   
$
2.16
   
$
2.16
   
$
2.16
 
Book value per share (at year-end)
 
$
34.05
   
$
33.72
   
$
34.03
   
$
33.76
   
$
33.17
 
 
                                       
Total Assets (at year-end)
 
$
1,784,949
   
$
1,720,234
   
$
1,729,275
   
$
1,697,883
   
$
1,730,183
 
Long-term Debt (at year-end)(2)
 
$
486,926
   
$
446,003
   
$
502,959
   
$
463,897
   
$
413,894
 
Cumulative Preferred Stock (at year-end)
 
$
9,027
   
$
21,027
   
$
21,027
   
$
21,027
   
$
21,027
 
Total CH Energy Group Common Shareholders' Equity (at year-end)
 
$
509,290
   
$
502,248
   
$
537,804
   
$
553,502
   
$
523,534
 
 
(1)
This summary should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in Item 8 - "Financial Statements and Supplementary Data" of this 10-K Annual Report.
(2)
Net of current maturities of long-term debt.
 
For additional information related to the impact of acquisitions and dispositions on the above, this summary should be read in conjunction with Item 7 - "Management Discussion and Analysis of Financial Condition and Results of Operations" of this 10-K Annual Report and Note 5 - "Acquisitions, Divestitures and Investments" of Item 8 - "Financial Statements and Supplementary Data" of this 10-K Annual Report.
 
 
FIVE-YEAR SUMMARY OF CONSOLIDATED OPERATIONS AND SELECTED FINANCIAL DATA(1) (CENTRAL HUDSON)
(In Thousands)
 
 
 
2012
   
2011
   
2010
   
2009
   
2008
 
Operating Revenues
 
   
   
   
   
 
Electric - Delivery
 
$
336,360
   
$
332,388
   
$
317,023
   
$
275,167
   
$
242,334
 
Electric - Supply
   
175,721
     
206,160
     
246,116
     
261,003
     
365,827
 
Natural Gas - Delivery
   
83,158
     
85,196
     
81,606
     
66,916
     
59,897
 
Natural Gas - Supply
   
49,276
     
76,778
     
75,189
     
107,221
     
129,649
 
Total
   
644,515
     
700,522
     
719,934
     
710,307
     
797,707
 
 
Operating Income
   
98,513
     
95,526
     
94,848
     
76,338
     
67,344
 
 
                                       
Net Income
   
47,170
     
45,037
     
46,118
     
32,776
     
27,238
 
 
                                       
Preferred Stock Redemption Premium
   
342
     
-
     
-
     
-
     
-
 
 
                                       
Dividends Declared on Cumulative Preferred Stock
   
624
     
970
     
970
     
970
     
970
 
 
                                       
Income Available for Common Stock
   
46,204
     
44,067
     
45,148
     
31,806
     
26,268
 
Dividends Declared to Parent - CH Energy Group
   
22,000
     
43,000
     
31,000
     
-
     
-
 
Change in Retained Earnings
   
24,204
     
1,067
     
14,148
     
31,806
     
26,268
 
Retained Earnings - beginning of year
   
165,965
     
164,898
     
150,750
     
118,944
     
92,676
 
Retained Earnings - end of year
 
$
190,169
   
$
165,965
   
$
164,898
   
$
150,750
   
$
118,944
 
 
                                       
Total Assets (at year-end)
 
$
1,660,367
   
$
1,592,503
   
$
1,539,074
   
$
1,485,600
   
$
1,492,196
 
Long-term Debt (at year-end)(2)
 
$
459,950
   
$
417,950
   
$
453,900
   
$
413,897
   
$
413,894
 
Cumulative Preferred Stock (at year-end)
 
$
9,027
   
$
21,027
   
$
21,027
   
$
21,027
   
$
21,027
 
Total Equity (at year-end)
 
$
469,661
   
$
445,295
   
$
444,228
   
$
430,080
   
$
373,274
 
 
(1)
This summary should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in Item 8 - "Financial Statements and Supplementary Data" of this 10-K Annual Report.
(2)
Net of current maturities of long-term debt.
 
 
ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations
 
INTRODUCTION

The following Management's Discussion and Analysis of Financial Condition and Results of Operations are intended to help the reader understand CH Energy Group and Central Hudson.

Please note that the Executive Summary (below) is provided as a supplement to, and should be read together with, the remainder of this Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Consolidated Financial Statements, including the Notes thereto, and the other information included in this 10-K Annual Report.

EXECUTIVE SUMMARY

Business Overview

CH Energy Group's objective is to deliver value to its shareholders through current income, in the form of quarterly dividend payments, and through share appreciation that is expected to result from earnings and dividend growth over the long term.

CH Energy Group is a holding company with four business units:
 
Business Segments:
 
 
(1)
Central Hudson's regulated electric utility business;
 
 
 
(2)
Central Hudson's regulated natural gas utility business;
 
 
 
(3)
Griffith's fuel distribution business;
 
 
 
 
Other Businesses and Investments:
 
 
(4)
CHEC's renewable energy investments and the holding company's activities, which consist primarily of financing its subsidiaries.
 
 
 
CH Energy Group's asset allocation between Central Hudson, Griffith and Other Businesses and Investments were unchanged from December 31, 2011 to December 31, 2012.  The allocation for both periods is as follows:
 

 
 Central Hudson
 
 Griffith
 
 Other Businesses and Investments

 
Information Regarding the Fortis Transaction

On February 21, 2012, CH Energy Group announced that it had entered into an agreement and plan of merger under which it agreed, subject to shareholder approval and the approval of applicable regulatory authorities, to be acquired by Fortis Inc. ("Fortis") for $65 per share of common stock in cash.  On June 19, 2012, shareholders of CH Energy Group approved the proposed acquisition of the Company by Fortis.  As of December 31, 2012, the only outstanding approval needed for the transaction to close is from the New York State Public Service Commission ("PSC").  In January 2013, Fortis, Central Hudson PSC Staff and other parties reached an agreement of terms related to the proposed transaction.  This joint proposal was filed with the PSC for its review and approval.  While no assurance can be given, the transaction is expected to be approved by the PSC in the second quarter of 2013.  Under the terms of the merger agreement, Fortis must close the transaction if all conditions precedent are met, including PSC approval, and a material adverse effect has not occurred.  Closing of the transaction would follow shortly after Fortis' acceptance of the PSC's order approving the transaction.  Management can provide no assurances regarding the closing.
 
Fortis' strategy includes the expansion of its utility operations, which are currently concentrated in Canada, into the U.S.  CH Energy Group's mission and strategy remains unchanged as discussed in more detail below.
 
Mission and Strategy

CH Energy Group's mission is to provide electricity, natural gas, petroleum and related services to an expanding customer base in a safe, reliable, courteous and affordable manner; to produce growing financial returns for shareholders; to foster a culture that encourages employees to reach their full potential; and to be a good corporate citizen.

CH Energy Group endeavors to fulfill its mission, providing an attractive risk adjusted return to CH Energy Group shareholders, by executing our plan to:
 
·
Concentrate on energy distribution through Central Hudson in the Mid-Hudson Valley and through Griffith in the Mid-Atlantic region
·
Invest primarily in utility electric and natural gas transmission and distribution
·
Focus on risk management
-
Limit commodity exposure
-
Manage regulatory affairs effectively
-
Maintain a financial profile that supports a credit rating in the "A" category
-
Limit the impact of weather on Griffith's earnings
·
Target stable and predictable earnings, with growth trend expectations of 5% or more per year
·
Provide an annualized dividend that is approximately 65% to 70% of annual earnings
 
Strategy Execution

Based on the current investment and capital structure, CH Energy Group's management believes that it is well positioned to achieve its earnings growth and annualized dividend goals.

Management continues to focus on Central Hudson's electric and natural gas infrastructure as the core growth drivers of CH Energy Group.  Central Hudson's capital expenditure program is on course to achieve its targets under its three year rate plan.  Central Hudson invested approximately $100 million in 2012 and the five year forecast includes increasing annual capital investments.  The capital program provides for continued strengthening of electric and gas infrastructure, as well as prudent investment in technology that will improve reliability and customer satisfaction.  Central Hudson has effectively managed its operational challenges, including significant weather events in the past few years and the impact of a significant recession on its customers' ability to pay bills, and has achieved a return approximately equal to its allowed return in 2012.

Griffith's financial results in 2012 were impacted by extremely mild winter weather in the first quarter and escalating wholesale prices, which further dampened demand for its products.  Griffith continued its focus on cost management in an effort to reduce the impact of the lower volumes and higher commodity costs on its cost of doing business. Additionally, Griffith's high quality service and brand recognition enabled management to continue its history of increasing margins in an environment of contracting customer demand for petroleum products.  Griffith also successfully acquired and tucked-in five companies in 2012, all of which are expected to be accretive in 2013.
 

The following information outlines the strategies for each of CH Energy Group's business units, including a description of the business core competencies, investment opportunities, potential risks, and notable activity during 2012.  Business unit contributions to operating revenues and net income for years ended December 31, 2012 and 2011 are discussed in more detail in the Results of Operations section of this Management's Discussion and Analysis.

Central Hudson

Business Description and Strategy

Central Hudson's earnings are derived primarily from the revenue it generates from delivering energy to approximately 300,000 electric customers and 80,000 natural gas customers.  The delivery rates Central Hudson charges its customers are set by the PSC and are designed to recover the cost of providing safe and reliable service to Central Hudson's customers while providing the opportunity to earn a fair and reasonable return on the capital invested by shareholders.

Central Hudson's strategy is to provide exceptional value to its customers by:
·
practicing continuous improvement in everything we do;
·
investing in transmission and infrastructure to enhance reliability, improve customer satisfaction and reduce risk;
·
moderating cost pressures that increase customer bill levels and variability; and
·
advocating on behalf of customers and other stakeholders.

Central Hudson believes that it has strong competencies in safe and efficient utility operations, financial management, risk management and regulatory affairs which will facilitate the achievement of its strategy.  Central Hudson's strategic and business planning processes provides goal alignment throughout all levels of the organization in an effort to meet or exceed the expectations of its key stakeholders.

Opportunities and Risks

Earnings growth is primarily expected to come from increases in net utility plant.  Central Hudson invests significant capital on an annual basis to strengthen its distribution system by replacing aging infrastructure and to attach new customers to the system.  Central Hudson's investments enhance safety and reliability through cost-beneficial solutions, which improve customer satisfaction and reduce risk.  Opportunities to enhance transmission and distribution systems and information systems technologies are evaluated and prioritized based on their designed benefits, projected costs and estimated risks.  Management continually monitors and evaluates its capital expenditure forecasts and project priorities, which include certain long-term investment opportunities in the system's distribution infrastructure and potentially in gas and electric transmission.
 

Future legislative or political actions could result in additional opportunities for infrastructure enhancement.  Following Superstorm Sandy, Governor Cuomo formed the Moreland Commission to investigate utility storm preparedness and response.  The ultimate recommendations of this Commission, if adopted, could result in increased investment with the goal of reducing damage from storms in the future.

Central Hudson also believes there is an opportunity related to the expansion of its current natural gas customer base.  Development of the Marcellus Shale formation and other shale formations has dramatically increased the domestic supply of natural gas and its price has fallen significantly.  As a result, natural gas enjoys a significant price advantage over alternative fuels and management believes this will make it more attractive to customers.  Central Hudson is surveying its service territory to identify the most cost-effective areas in which to expand its gas distribution system and attach new customers.

Central Hudson continues to advance its cost management efforts and seek opportunities to improve existing business processes utilizing Lean Six Sigma techniques.  Lean Six Sigma is a data driven approach to develop processes that are faster, higher quality and less costly.  Our incremental process improvements focus on producing more revenue, providing cost savings and creating quality improvements, thereby providing benefits for both CH Energy Group shareholders and Central Hudson customers.  Central Hudson also recognizes the importance of innovation and encourages employees to create new value and opportunities to reduce costs and improve quality through the application of technology in new ways and creative problem solving.

The key risks management sees in achieving this strategy are the regulatory environment, cost pressures and the economy in Central Hudson's service territory.

Central Hudson's ability to meet its financial objectives is largely dependent on supportive ratemaking practices by the PSC.  Risks related to these practices include reduced allowed returns on equity and/or reduced probabilities of achieving allowed returns, an inability to recover the full costs of doing business, declining support for strong capital structures and credit ratings, changes in deferral accounting that increase volatility of earnings and/or defer cash recovery of our costs, elimination of RDMs and changes in the mechanisms currently in place for recovery of our commodity purchases.  Falling interest rates since our last rate case decision could lead to a decrease in the authorized ROE in a future rate proceeding.  Management believes Central Hudson's commitments to providing safe and reliable service, customer satisfaction, operational excellence and promoting positive customer and regulatory relations are important for supportive regulatory relationships and obtaining full cost recovery and competitive returns for shareholders.
 

In February 2013, Central Hudson experienced a cyber incident that may have exposed certain confidential customer information to an unauthorized third party.  Central Hudson commenced an investigation immediately upon becoming aware of the possible unauthorized access and began precautionary communications to Central Hudson customers as well as to the applicable regulatory agencies.  Central Hudson has also offered credit monitoring services to the potentially impacted customers free of charge.  At this time the investigation is in its early stages, and management has not yet determined whether any customer information was downloaded or misused; therefore no prediction can be made regarding the ultimate outcome of this matter.  The financial impact of the costs associated with the communication efforts and credit monitoring services is currently estimated to be approximately $1 million.
 
The current three-year rate plan, which commenced on July 1, 2010 and will continue until new rates are reset, reduces uncertainty and risk and supports investment in Central Hudson's infrastructure to improve the quality of service to customers.  The key provisions of the rate plan include an authorized regulatory return on equity of 10.0% and a 48% regulatory equity ratio; the continuation of a RDM; full recovery and deferral provisions for purchased electric and gas, MGP site remediation, pension and OPEB expenses.  The rate plan also contains a number of service quality thresholds; performance below these thresholds entails financial penalties.  Additionally, PSC staff approved and incorporated in the development of rates, the revenue requirements associated with Central Hudson's capital expenditure budget for the term of the three-year rate plan, subject to the achievement of certain defined Net Plant targets.  The PSC's regulations also provide an opportunity to recover certain extraordinary expenditures that are not reflected in rates.  However, the 3-pronged test criteria required for approval may limit Central Hudson from recovering some or all of such costs, reducing earnings for shareholders.  Management believes the current rate plan and other regulatory orders under which Central Hudson operates demonstrate a constructive relationship with New York State regulators and the willingness of regulators to enable Central Hudson to earn stable, predictable returns while providing reliable, high quality service and fulfilling New York State energy policy objectives.

The impacts of laws and regulations represent another risk to Central Hudson's strategy.  The Moreland Commission formed following Superstorm Sandy was tasked by Governor Cuomo to investigate utility storm preparedness and response.  The outcome of the Commission's investigation and recommendations may create potential opportunities, but may also create potential financial risks in terms of new or increased standards of performance, with associated penalties for failure to meet the standards.  Central Hudson responded timely to the two subpoenas it received during the Moreland Commission investigation requesting information regarding storm preparedness and restoration.  The Moreland Commission issued an Interim Report on January 7, 2013 making recommendations that, if adopted, may affect the regulation of future storm preparedness and response for all New York utilities, including Central Hudson.  Central Hudson believes its current storm preparedness and response is excellent, but opportunities for improvement are continuously pursued.  For example, Central Hudson's tree trimming program has proven to be a cost-effective measure to enhance reliability and reduce outages caused by falling branches, particularly in times of severe weather.  Central Hudson plans to invest in technology to automate the electric distribution system, which is expected to further reduce the frequency of outages.  Management believes these programs provide the type of cost-effective measures to improve resilience of the electric distribution system sought by state officials.  Furthermore, Central Hudson has been recognized nationally for its storm response by the Edison Electric Institute in each of the past three consecutive years, including its storm response and restoration efforts following Superstorm Sandy in 2012.  Central Hudson's dedicated and skilled workforce again demonstrated their ability to organize and execute high quality and efficient restoration for its customers, restoring power to 90% of its customers within four days following Superstorm Sandy.  Management does not believe it will be cited with any penalties related to prior storm restoration, however, continued regulatory support for recovery of the cost of these programs, along with recovery of incremental restoration costs will be necessary for Central Hudson to achieve stable and predictable earnings.
 

In addition to the recovery of costs of operation, Central Hudson's current rate structure includes a return on its projected rate base.  Rate base represents Central Hudson's investment in its utility infrastructure, less depreciation, adjusted for certain required regulatory items.  Changes in tax legislation or regulatory accounting can reduce the amount of Central Hudson rate base, reducing Central Hudson's future rates and potential earnings.  For example, Central Hudson's election to utilize bonus depreciation as it has been made available in recent years has had just such an impact.  In addition, Central Hudson's change in accounting tax method related to costs to repair and maintain utility assets has resulted in an increase in its deferred tax liability and a corresponding decrease in its rate base.  For additional discussion of these tax items, see Note 4 – "Income Tax."

Another risk is the ability to effectively manage costs, which is a key component of Central Hudson's strategy.  The continued implementation of Lean Six Sigma techniques to streamline existing business processes and innovation to create new value will play critical roles in managing the costs of doing business in a sustainable manner as well as result in continuous improvement in services provided to customers.

The third risk, the economy in Central Hudson's service territory, affects the growth of utility rate base and earnings through a direct relationship to customer additions and peak demand growth as well as affecting our ability to collect receivables.  Management believes the economy in Central Hudson's service territory has good long-term growth prospects, but unexpected prolonged downturns could inhibit our ability to meet long-term business objectives.  Central Hudson has an economic development program intended to increase job growth and income in its service territory.

Griffith

Business Description and Strategy

Griffith provides fuel distribution products and services to approximately 55,000 customers in Delaware, Washington, D.C., Maryland, Pennsylvania, Virginia and West Virginia.  Griffith's revenues, cash flows and earnings are derived from the sale and delivery of heating oil, gasoline, diesel fuel, kerosene and propane and from the installation and maintenance of heating, ventilating and air conditioning ("HVAC") equipment.  For a breakdown of Griffith's gross profit by product and service line for the years ended December 31, 2012, 2011 and 2010, see the chart in the Results of Operations under the caption – "Griffith."
 
 
Griffith's strategy is to provide premium service to customers and to increase its profitability and reduce earnings volatility by:
·
practicing continuous improvement in everything we do;
·
growing through selective "tuck-in" acquisitions;
·
managing the impacts of weather on earnings; and
·
expanding its service offerings.

Opportunities and Risks

Griffith has a strong regional brand that management believes stands for quality, reliability and value.  Griffith intends to continue its marketing efforts and focus on customer satisfaction, which management believes will help to minimize customer attrition.

Management also continues to focus on improving the profitability of operations and expanding products and services in the Mid-Atlantic region.  Griffith continues to seek selective oil and HVAC "tuck-in" acquisitions to be funded from internally generated cash.  This growth strategy focuses on acquiring and retaining customers in geographic areas that overlap Griffith's existing operations.  Griffith also expects to generate additional earnings and cash flow as a result of the organic expansion of its HVAC business.  These growth strategies are not expected to result in the growth of CH Energy Group's total invested capital in Griffith.

Management sees three key risks associated with this strategy.  The primary factor that could prevent Griffith from achieving earnings growth is a sustained, significant increase in wholesale oil prices, which could reduce residential sales volumes, put downward pressure on margins, increase operating costs and bad debt expense.  While management believes that margin expansion would still be possible in this environment as competitors would be forced to increase their prices to cover their increasing costs, management expects that this result would lag the increase in commodity prices.  Additionally, weakness in the economy of the Mid-Atlantic region could limit Griffith's ability to expand margins since customers' willingness and ability to pay are typically tied to income levels and unemployment rates.  The third risk relates to customer attrition which could be driven by increasing wholesale prices and margin expansion or as a result of the industry contracting due to conversions to alternative heating fuel sources or as a result of competitive pressures from within the industry.  Griffith seeks to eliminate the impact of weather on its business through the purchase of weather derivative instruments.

Notable 2012 Activity

In 2012, Griffith continued its successful acquisition strategy by acquiring five fuel distribution and service businesses.  Two of the acquisitions were HVAC companies, which totaled approximately half of the acquisition dollars invested in 2012.  These strategic acquisitions have already begun contributing to Griffith's earnings and cash flows.  However, during 2012 Griffith's earnings were adversely impacted by both unusually warm winter weather and higher fuel prices, which resulted in reduced usage in 2012.  Griffith's weather hedging in place in early 2012 mitigated a portion of the weather impact on earnings, but did not provide full protection.  Currently, Griffith is invested in weather swaps which management believes will more effectively minimize the impacts of weather on earnings.  Griffith also experienced a decline in the number of service installations and repairs under its expanded HVAC program in 2012, which management believes resulted from warmer than normal winter weather.  Despite the unfavorable environment, management was successful in continuing its trend of increasing margins and reducing costs through effective cost management measures.  Management believes that the reduced level of HVAC installations is temporary and that the long-term outlook of the economy in Griffith's service territory continues to be strong with a stable pool of current and prospective customers that value quality service at a fair price.
 

Other Businesses and Investments

As of December 31, 2012, CHEC's remaining investments are not considered a part of our core business.  These investments are immaterial at 0.1% of assets and no further capital investment in them is planned.  Management intends to retain these remaining investments, but will continue to monitor market conditions to evaluate the fair market value of these investments and consider whether the opportunity exists to create greater shareholder value through divestitures.  For further discussions relating to CHEC's renewable energy investments, see Note 5 – "Acquisitions, Divestitures and Investments."
 
 
EARNINGS PER SHARE AND OVERVIEW OF YEAR-TO-DATE RESULTS
The following discussion and analyses include explanations of significant changes in revenues and expenses between the year ended December 31, 2012 and 2011 and the year ended December 31, 2011 and 2010 for Central Hudson's regulated electric and natural gas businesses, Griffith, and the Other Businesses and Investments.

The discussions and tables below present the change in earnings of CH Energy Group's business units in terms of earnings for each outstanding share of CH Energy Group's Common Stock.  Management believes that expressing the results in terms of the impact on shares of CH Energy Group is useful to investors because it shows the relative contribution of the various business units to CH Energy Group's earnings.  This information is considered a non-GAAP financial measure and not an alternative to earnings per share determined on a consolidated basis, which is the most directly comparable GAAP measure.  Additionally, management believes that the disclosure of Significant Events within each business unit provides investors with the context around the Company's results that is important in enabling them to ascertain the likelihood that past performance is indicative of future performance.  A reconciliation of each business unit's earnings per share to CH Energy Group's earnings per share, determined on a consolidated basis, is included in the table below.

Earnings

Earnings per share (basic and diluted) of CH Energy Group's Common Stock are computed on the basis of the average number of common shares outstanding (basic and diluted) during the subject year.  The number of average shares outstanding of CH Energy Group Common Stock, the earnings per share, and the rate of return earned on average common equity, which is net income as a percentage of a monthly average of common equity, are as follows (Shares In Thousands):
 
 
 
2012
   
2011
   
2010
 
Average shares outstanding:
 
   
   
 
Basic
   
14,909
     
15,278
     
15,785
 
Diluted
   
15,099
     
15,481
     
15,952
 
 
                       
Earnings per share from continuing operations:
                       
Basic
 
$
2.61
   
$
2.77
   
$
2.51
 
Diluted
 
$
2.58
   
$
2.73
   
$
2.48
 
 
                       
Earnings per share from discontinued operations:
                       
Basic
 
$
-
   
$
0.20
   
$
(0.07
)
Diluted
 
$
-
   
$
0.20
   
$
(0.07
)
 
                       
Earnings per share:
                       
Basic
 
$
2.61
   
$
2.97
   
$
2.44
 
Diluted
 
$
2.58
   
$
2.93
   
$
2.41
 
 
                       
Return earned on average common equity
   
7.6
%
   
8.7
%
   
7.4
%
 
 
2012 AS COMPARED TO 2011
 
CH Energy Group Consolidated
 
Earnings per Share (Basic)
 
 
 
Year Ended December 31,
   
 
 
 
2012
   
2011
   
Change
 
Central Hudson - Electric
 
$
2.50
   
$
2.22
   
$
0.28
 
Central Hudson - Natural Gas
   
0.60
     
0.66
     
(0.06
)
Griffith
   
0.05
     
0.10
     
(0.05
)
Other Businesses and Investments
   
(0.54
)
   
(0.01
)
   
(0.53
)
Total CH Energy Group Consolidated Earnings, as reported
 
$
2.61
   
$
2.97
   
$
(0.36
)
 
                       
Significant Events:
                       
Central Hudson
 
$
(0.13
)
 
$
(0.20
)
 
$
0.07
 
Griffith
   
(0.12
)
   
-
     
(0.12
)
Other Businesses and Investments
   
(0.57
)
   
(0.06
)
   
(0.51
)
Total Significant Events
 
$
(0.82
)
 
$
(0.26
)
 
$
(0.56
)
 
                       
CH Energy Group Consolidated Adjusted Earnings Per Share (non-GAAP):
                       
Central Hudson
 
$
3.23
   
$
3.08
   
$
0.15
 
Griffith
   
0.17
     
0.10
     
0.07
 
Other Businesses and Investments
   
0.03
     
0.05
     
(0.02
)
Total CH Energy Group Consolidated Adjusted Earnings Per Share (non-GAAP)
 
$
3.43
   
$
3.23
   
$
0.20
 
 
Earnings for CH Energy Group for the year ended December 31, 2012 compared to 2011 were negatively impacted by costs incurred in the current year associated with the pending Fortis acquisition and the impact of weather on Griffith's earnings. These impacts were only partially offset by earnings on increased capital investments at Central Hudson.
 
The Significant Events noted for each business unit above and further detailed below represent items impacting earnings during the respective years which Management does not consider representative of core earnings of each business unit.  Management considers core earnings to include the results of operations excluding the effect of unusual events or transactions not reflective of ongoing performance, such as the impacts of extreme weather or an incentive earned outside the normal course of business. Overall the Company believes that providing investors with a view of core earnings as described above provides increased transparency and clarity into the operational results of the business; improves visibility to management decisions and their impacts on operational performance; and allows the company to provide a long-term strategic view of the business going forward.
 
 
Details by business unit were as follows:
 
Central Hudson
 
Earnings per Share (Basic)

 
 
 
Year Ended December 31,
 
 
 
 
2012
   
2011
 
Change
 
Central Hudson - Electric
 
$
2.50
   
$
2.22
 
$
0.28
 
Central Hudson - Natural Gas
   
0.60
     
0.66
   
(0.06
)
Total Central Hudson Earnings
 
$
3.10
   
$
2.88
 
$
0.22
 
 
                     
Significant Events:
                     
Weather related restoration costs
 
$
-
   
$
(0.14
)
$
0.14
 
Storm Deferral Adjustment
   
(0.13
)
   
(0.17
)
 
0.04
 
Energy efficiency incentives
   
-
     
0.11
   
(0.11
)
Central Hudson Adjusted Earnings Per Share
 
$
3.23
   
$
3.08
 
$
0.15
 
 
                     
 
               
Change
 
Delivery revenue
               
$
0.46
 
Share accretion due to fewer shares outstanding
                 
0.07
 
Lower trimming costs
                 
0.06
 
Higher depreciation
                 
(0.17
)
Higher property and other taxes
                 
(0.12
)
Higher operating expenses
                 
(0.12
)
Higher other distribution maintenance
                 
(0.06
)
Other
                 
0.03
 
 
               
$
0.15
 
 
(1)
Amount represents incremental costs incurred for weather related service restoration, including costs for outside contractor assistance in restoration efforts and higher than average internal expenses (such as overtime and materials), which did not meet the PSC criteria for deferral and therefore have not been deferred for future recovery from customers.
 
The increase in earnings from Central Hudson's electric and natural gas operations in the year ended December 31, 2012 compared to 2011 reflect the earnings on the additional capital investment in the business and the impact of accretion from repurchase of shares in 2011.  The increase in delivery rates effective July 2011 and July 2012 were necessary to cover the increasing costs of operating the business and to provide a reasonable return on our additional capital investments in electric and natural gas infrastructure.  Accretion of $0.07 per share in 2012 is attributable to CH Energy Group's repurchase of nearly $49 million of common stock primarily in the second half of 2011.  In addition to these items, other significant events affecting year-over-year results include:
 
 
• In 2011, Central Hudson was impacted by several weather related events, which did not meet the PSC criteria for deferral, and as such the incremental restoration costs associated with these events impacted earnings.
• In December 2011 and during the first half of 2012, Central Hudson recorded additional expenses and reduced its deferred incremental storm restoration costs associated with the significant snow storm event in late October 2011 ("SnowFall") to adjust earnings so that the return on common equity for the twelve months ending June 30, 2012 would not exceed the authorized rate of return of 10%.
• In 2011, Central Hudson earned incentives upon achieving certain energy efficiency targets established by the PSC regarding its internal programs.
 
 
Griffith
 
Earnings per Share (Basic)
 
 
 
Year Ended December 31,
 
 
 
 
2012
   
2011
 
Change
 
Griffith - Fuel Distribution Earnings
 
$
0.05
   
$
0.10
 
$
(0.05
)
 
                     
Significant Events:
                     
Weather impact on sales
 
$
(0.12
)
 
$
(0.02
)
$
(0.10
)
Discontinued operations
   
-
     
0.02
   
(0.02
)
Griffith Adjusted Earnings Per Share
 
$
0.17
   
$
0.10
 
$
0.07
 
 
                     
 
               
Change
 
Gross margin on petroleum sales
               
$
0.07
 
Operating expenses
                 
0.02
 
Gross margin on services
                 
0.02
 
Acquisitions
                 
0.02
 
Weather-normalized sales (including conservation)
                 
(0.06
)
 
               
$
0.07
 
 
Griffith's earnings decreased $0.05 per share in the year ended December 31, 2012 compared to 2011 primarily due to lower volumes sold resulting from the unusually warm winter season in early 2012 compared to the colder than normal winter season in early 2011.  In addition, Griffith's 2011 earnings benefited from reducing the environmental reserve associated with the 2009 divestiture.  Excluding the impact of these items, Griffith's weather-normalized core earnings for 2012 were $0.07 higher than 2011.  Griffith was able to effectively expand its margins and manage its operational costs which more than offset the impact of lower weather-normalized sales volumes driven primarily by customer conservation in response to high commodity prices.  Also impacting the year-over-year results is the additional income generated from the tuck-in acquisitions completed in 2011.
 
 
Other Businesses and Investments
 
Earnings per Share (Basic)
 
 
 
Year Ended December 31,
   
 
 
 
2012
   
2011
   
Change
 
Other Businesses & Investments Earnings
 
$
(0.54
)
 
$
(0.01
)
 
$
(0.53
)
 
                       
 
                       
Significant Events:
                       
   Renewable Investments:
                       
Wind investment impairment in 2011
 
$
-
   
$
(0.14
)
 
$
0.14
 
Payment for early retirement of debt
   
-
     
(0.11
)
   
0.11
 
Operations
   
-
     
(0.09
)
   
0.09
 
Tax impacts of divestitures
   
0.04
     
0.02
     
0.02
 
Federal tax grant benefit in 2011
   
-
     
0.17
     
(0.17
)
Gain on divestitures
   
0.01
     
0.07
     
(0.06
)
   Income taxes related to deductions for prior periods
   
0.02
     
0.02
     
-
 
   Merger related costs
   
(0.64
)
   
-
     
(0.64
)
Other Businesses and Investments Adjusted Earnings Per Share
 
$
0.03
   
$
0.05
   
$
(0.02
)
 
                       
 
                 
Change
 
Lower net interest income
                 
$
(0.03
)
Other
                   
0.01
 
 
                 
$
(0.02
)
 
The earnings of CH Energy Group (the holding company) and CHEC's partnerships and other investments decreased in the year ended December 31, 2012 compared to 2011 primarily due to the costs associated with the Fortis acquisition.  Excluding the significant events listed above, core earnings for this business unit decreased during the year ended December 31, 2012 compared to the prior period primarily due to a decrease in intercompany interest income as a result of a decrease in borrowings by Griffith.  The warmer winter weather in 2012 lowered Griffith's working capital needs, despite the increasing price of fuel oil.
 
 
2011 AS COMPARED TO 2010
 
CH Energy Group Consolidated
 
Earnings per Share (Basic)
 
  
 
Year Ended December 31,
   
 
 
 
2011
   
2010
   
Change
 
Central Hudson - Electric
 
$
2.22
   
$
2.10
   
$
0.12
 
Central Hudson - Natural Gas
   
0.66
     
0.76
     
(0.10
)
Griffith
   
0.10
     
0.11
     
(0.01
)
Other Businesses and Investments
   
(0.01
)
   
(0.53
)
   
0.52
 
  
 
$
2.97
   
$
2.44
   
$
0.53
 
 
                       
Significant Events:
                       
Central Hudson
 
$
(0.12
)
 
$
0.12
   
$
(0.24
)
Griffith
   
-
     
(0.02
)
   
0.02
 
Other Businesses and Investments
   
(0.06
)
   
(0.44
)
   
0.38
 
Total Significant Events:
 
$
(0.18
)
 
$
(0.34
)
 
$
0.16
 
 
                       
CH Energy Group Consolidated Adjusted Earnings Per Share (non-GAAP)
                       
Central Hudson
 
$
3.00
   
$
2.74
   
$
0.26
 
Griffith
   
0.10
     
0.13
     
(0.03
)
Other Businesses and Investments
   
0.05
     
(0.09
)
   
0.14
 
Total CH Energy Group Consolidated Adjusted Earnings Per Share (non-GAAP)
 
$
3.15
   
$
2.78
   
$
0.37
 
 
Earnings for CH Energy Group totaled $2.97 per share in 2011, an increase of $0.53 per share from the same period in 2010 when earnings had been negatively impacted by impairments on two of its non-utility assets.

Detail by business unit were as follows:
 
 
Central Hudson
 
Earnings per Share (Basic)
 
  
 
Year Ended December 31,
 
 
 
 
2011
   
2010
 
Change
 
Central Hudson - Electric
 
$
2.22
   
$
2.10
 
$
0.12
 
Central Hudson - Natural Gas
   
0.66
     
0.76
   
(0.10
)
Total Central Hudson Earnings
 
$
2.88
   
$
2.86
 
$
0.02
 
 
                     
Significant Events:
                     
Uncollectible deferral in 2010
 
$
-
   
$
0.12
 
$
(0.12
)
Higher weather related restoration costs(1)
   
(0.31
)
   
-
   
(0.31
)
Energy efficiency incentives
   
0.10
     
-
   
0.10
 
Share accretion
   
0.09
     
-
   
0.09
 
Central Hudson Adjusted Earnings Per Share
 
$
3.00
   
$
2.74
 
$
0.26
 
 
                     
 
               
Change
 
Delivery revenue
               
$
0.42
 
Higher property and other taxes
                 
(0.12
)
Higher depreciation
                 
(0.11
)
Higher trimming costs
                 
(0.02
)
Other
                 
0.09
 
 
               
$
0.26
 
 
(1)
Amount represents incremental costs incurred for weather related service restoration, including costs for outside contractor assistance in restoration efforts and higher than average internal expenses (such as overtime and materials), which did not meet the PSC criteria for deferral and therefore have not been deferred for future recovery from customers.
 
Earnings from Central Hudson's electric and natural gas operations increased in the year ended December 31, 2011 compared to 2010.  After adjusting Central Hudson's earnings per share for the significant items displayed above, including incremental storm-related restoration costs, earnings were $0.26 per share higher year over year.  The single largest driver was an increase in delivery revenue resulting from mid-year delivery rate increases in both 2011 and 2010.  This additional revenue was needed to cover projected increases in operating costs such as those noted above and to cover revenue requirements associated with increases in rate base.
 
 
Griffith
 
Earnings per Share (Basic)
 
  
 
Year Ended December 31,
 
 
 
 
2011
   
2010
 
Change
 
Griffith - Fuel Distribution Earnings
 
$
0.10
   
$
0.11
 
$
(0.01
)
 
                     
Significant Events:
                     
Discontinued operations
 
$
0.02
   
$
-
 
$
0.02
 
Weather impact on sales
   
(0.02
)
   
(0.02
)
 
-
 
Griffith Adjusted Earnings Per Share
 
$
0.10
   
$
0.13
 
$
(0.03
)
 
                     
 
               
Change
 
Weather normalized sales (including conservation)
               
$
(0.13
)
Gross margin on petroleum sales
                 
0.09
 
Operating expenses
                 
0.03
 
Other
                 
(0.02
)
 
               
$
(0.03
)
 
Griffith's earnings decreased for the year ended December 31, 2011 compared to the same period in 2010.  This decrease was primarily attributable to contractions in volume due to customer conservation that was brought on by a combination of the continued weak economy and higher wholesale fuel prices.  Improved margins and lower operating costs offset a majority of this impact.
 
 
Other Businesses and Investments
 
Earnings per Share (Basic)
 
 
 
Year Ended December 31,
 
 
 
 
2011
   
2010
 
Change
 
Other Businesses & Investment Earnings
 
$
(0.01
)
 
$
(0.53
)
$
0.52
 
 
                     
Significant Events:
                     
   Ethanol investment impairment in 2010
 
$
-
   
$
(0.44
)
$
0.44
 
   Biomass investment impairment in  2010
   
-
     
(0.08
)
 
0.08
 
   Wind investment impairment in 2011
   
(0.14
)
   
-
   
(0.14
)
   Gain from sales of renewable investments
   
0.17
     
-
   
0.17
 
   Pre-payment penalty on early retirement of debt following 2011 divestiture
   
(0.11
)
   
-
   
(0.11
)
   Operations
   
(0.02
)
   
(0.03
)
 
0.01
 
   Tax impacts
   
0.02
     
-
   
0.02
 
Income taxes related to deductions for prior periods
   
0.02
     
0.11
   
(0.09
)
Other Businesses and Investments Adjusted Earnings Per Share
 
$
0.05
   
$
(0.09
)
$
0.14
 
 
                     
 
               
Change
 
Higher interest income
               
$
0.05
 
Lower interest income
                 
0.02
 
Lower income taxes
                 
0.05
 
Other
                 
0.02
 
 
               
$
0.14
 
 
The earnings of CH Energy Group (the holding company) and CHEC's partnerships and other investments increased in the year ended December 31, 2011 compared to the same period in 2010.   Net of the impacts of renewable investment activity and prior period income tax adjustments noted above, Other Businesses and Investments adjusted earnings per share increased $0.14 per share.  This increase was primarily due to higher interest income related to intercompany debt and lower interest expense related to the pay down of debt with the proceeds from the sale of renewable investments.
 
 
RESULTS OF OPERATIONS

Central Hudson

The following discussion and analysis includes explanations of significant changes in operating revenues, operating expenses, volumes delivered, other income, interest charges, and income taxes between the years ended December 31, 2012 and 2011, and December 31, 2011 and 2010 for Central Hudson's regulated electric and natural gas businesses.
 
Income Statement Variances
(Dollars In Thousands)
 
 
 
Year Ended December 31,
   
Increase/(Decrease) in
 
 
 
2012
   
2011
   
Amount
   
Percent
 
Operating Revenues
 
$
644,515
   
$
700,522
   
$
(56,007
)
   
(8.0
)%
 
                               
Operating Expenses:
                               
   Purchased electricity, fuel and natural gas
   
224,997
     
282,938
     
(57,941
)
   
(20.5
)
   Depreciation and amortization
   
38,139
     
35,475
     
2,664
     
7.5
 
   Other operating expenses
   
282,866
     
286,583
     
(3,717
)
   
(1.3
)
      Total Operating Expenses
   
546,002
     
604,996
     
(58,994
)
   
(9.8
)
Operating Income
   
98,513
     
95,526
     
2,987
     
3.1
 
Other Income, net
   
7,104
     
6,879
     
225
     
3.3
 
Interest Charges
   
29,656
     
29,191
     
465
     
1.6
 
Income before income taxes
   
75,961
     
73,214
     
2,747
     
3.8
 
Income Taxes
   
28,791
     
28,177
     
614
     
2.2
 
Net income
 
$
47,170
   
$
45,037
   
$
2,133
     
4.7
%
 
 
 
Year Ended December 31,
   
Increase/(Decrease) in
 
 
 
2011
   
2010
   
Amount
   
Percent
 
Operating Revenues
 
$
700,522
   
$
719,934
   
$
(19,412
)
   
(2.7
)%
 
                               
Operating Expenses:
                               
   Purchased electricity, fuel and natural gas
   
282,938
     
321,305
     
(38,367
)
   
(11.9
)
   Depreciation and amortization
   
35,475
     
33,815
     
1,660
     
4.9
 
   Other operating expenses
   
286,583
     
269,966
     
16,617
     
6.2
 
      Total Operating Expenses
   
604,996
     
625,086
     
(20,090
)
   
(3.2
)
Operating Income
   
95,526
     
94,848
     
678
     
0.7
 
Other Income, net
   
6,879
     
3,282
     
3,597
     
109.6
 
Interest Charges
   
29,191
     
25,848
     
3,343
     
12.9
 
Income before income taxes
   
73,214
     
72,282
     
932
     
1.3
 
Income Taxes
   
28,177
     
26,164
     
2,013
     
7.7
 
Net income
 
$
45,037
   
$
46,118
   
$
(1,081
)
   
(2.3
)%
 
 
Delivery Volumes

Delivery volumes for Central Hudson vary in response to weather conditions and customer behavior.  Electric deliveries peak in the summer and deliveries of natural gas used for heating purposes peak in the winter.  Delivery volumes also vary as customers respond to the price of the particular energy product and changes in local economic conditions.

The following chart reflects the change in the level of electric and natural gas deliveries for Central Hudson in 2012 compared to 2011, and in 2011 compared to 2010.  Deliveries of electricity and natural gas to residential and commercial customers have historically contributed the most to Central Hudson's earnings.  Industrial sales and interruptible sales have a negligible impact on earnings.  Central Hudson's delivery rate structure includes revenue decoupling mechanisms ("RDMs"), which provide the ability to record revenues equal to those forecasted in the development of current rates for most of Central Hudson's customers.  As a result, fluctuations in actual delivery volumes do not have a significant impact on Central Hudson's earnings.
 
 
Electric Deliveries
(In Gigawatt-Hours)
 
 
 
Actual Deliveries
   
Weather Normalized Deliveries(1)
 
 
 
Year Ended
   
   
   
Year Ended
   
   
 
 
 
December 31,
   
Variation in
   
December 31,
   
Variation in
 
 
 
2012
   
2011
   
Amount
   
Percent
   
2012
   
2011
   
Amount
   
Percent
 
Residential
   
2,044
     
2,113
     
(69
)
   
(3
)%
   
2,052
     
2,064
     
(12
)
   
(1
)%
Commercial
   
1,931
     
1,962
     
(31
)
   
(2
)
   
1,923
     
1,939
     
(16
)
   
(1
)
Industrial and other
   
1,094
     
1,114
     
(20
)
   
(2
)
   
1,092
     
1,111
     
(19
)
   
(2
)
Total Deliveries
   
5,069
     
5,189
     
(120
)
   
(2
)%
   
5,067
     
5,114
     
(47
)
   
(1
)%
 
 
 
 
Actual Deliveries
   
Weather Normalized Deliveries(1)
 
 
 
Year Ended
   
   
   
Year Ended
   
   
 
 
 
December 31,
   
Variation in
   
December 31,
   
Variation in
 
 
 
2011
   
2010
   
Amount
   
Percent
   
2011
   
2010
   
Amount
   
Percent
 
Residential
   
2,113
     
2,092
     
21
     
1
%
   
2,064
     
2,053
     
11
     
1
%
Commercial
   
1,962
     
1,968
     
(6
)
   
-
     
1,939
     
1,946
     
(7
)
   
-
 
Industrial and other
   
1,114
     
1,150
     
(36
)
   
(3
)
   
1,111
     
1,149
     
(38
)
   
(3
)
Total Deliveries
   
5,189
     
5,210
     
(21
)
   
-
%
   
5,114
     
5,148
     
(34
)
   
(1
)%
 
(1)
Central Hudson uses an internal analysis based on historical weather data to remove the estimated impacts of weather on delivery volumes.
 
Natural Gas Deliveries
(In Million Cubic Feet)
 
 
 
Actual Deliveries
   
Weather Normalized Deliveries(1)
 
 
 
Year Ended
   
   
   
Year Ended
   
   
 
 
 
December 31,
   
Variation in
   
December 31,
   
Variation in
 
 
 
2012
   
2011
   
Amount
   
Percent
   
2012
   
2011
   
Amount
   
Percent
 
Residential
   
4,314
     
5,169
     
(855
)
   
(17
)%
   
5,172
     
5,272
     
(100
)
   
(2
)%
Commercial
   
5,027
     
5,743
     
(716
)
   
(12
)
   
5,740
     
5,873
     
(133
)
   
(2
)
Industrial and other
   
298
     
422
     
(124
)
   
(29
)
   
348
     
430
     
(82
)
   
(19
)
Total Deliveries
   
9,639
     
11,334
     
(1,695
)
   
(15
)%
   
11,260
     
11,575
     
(315
)
   
(3
)%
 
 
 
Actual Deliveries
   
Weather Normalized Deliveries(1)
 
 
 
Year Ended
   
   
   
Year Ended
   
   
 
 
 
December 31,
   
Variation in
   
December 31,
   
Variation in
 
 
 
2011
   
2010
   
Amount
   
Percent
   
2011
   
2010
   
Amount
   
Percent
 
Residential
   
5,169
     
4,802
     
367
     
8
%
   
5,272
     
5,081
     
191
     
4
%
Commercial
   
5,743
     
5,238
     
505
     
10
     
5,873
     
5,474
     
399
     
7
 
Industrial and other
   
422
     
403
     
19
     
5
     
430
     
421
     
9
     
2
 
Total Deliveries
   
11,334
     
10,443
     
891
     
9
%
   
11,575
     
10,976
     
599
     
5
%
 
(1)
Central Hudson uses an internal analysis based on historical weather data to remove the estimated impacts of weather on delivery volumes.
 
 
2012 vs. 2011

The year-over-year variance in electric and natural gas deliveries to residential and commercial customers was driven primarily by the unfavorable impacts of the warmer than normal winter season in the beginning of 2012 compared to the colder than normal winter season in 2011.  Lower sales per customer primarily due to conservation contributed to the slight decline in weather normalized deliveries year over year.  The lower industrial and other volumes were driven by the loss of a few large customers in 2012.
 
2011 vs. 2010

Total electric deliveries to residential, commercial, and industrial customers were essentially unchanged for the year ended December 31, 2011 as compared to the prior year.  The favorable impacts of colder weather in the first half of the year were offset by unfavorable impacts of cooler weather during the summer compared to the prior year as well as warmer weather at the end of 2011 compared to 2010.  The lower industrial and other volumes were driven by the loss of a large customer in 2011.
 
Total natural gas deliveries to residential and commercial customers increased during the year ended December 31, 2011 as compared to 2010 which is due to both an increase in sales per customer as well as the favorable impact of colder weather experienced during heating season peak months in the first half of 2011 compared to 2010.

Revenues

Central Hudson's revenues consist of two major categories: those that offset specific expenses in the current period (matching revenues), and those that impact earnings.  Matching revenues recover Central Hudson's actual costs for particular expenses.  Any difference between these revenues and the actual expenses incurred is deferred for future recovery from or refund to customers and therefore does not impact earnings.
 
 
Change in Central Hudson Revenues - Electric
(In Thousands)
 
 
 
Year Ended
   
   
Year Ended
   
 
    
 
December 31,
   
Increase /
   
December 31,
   
Increase /
 
 
 
2012
   
2011
   
(Decrease)
   
2011
   
2010
   
(Decrease)
 
Revenues with Matching Expense Offsets:(1)
 
   
   
   
   
   
 
Energy cost adjustment
 
$
171,735
   
$
201,731
   
$
(29,996
)
 
$
201,731
   
$
241,709
   
$
(39,978
)
Sales to others for resale
   
3,986
     
4,429
     
(443
)
   
4,429
     
4,407
     
22
 
Other revenues with matching offsets