10-Q 1 c21543_10-q.txt QUARTERLY REPORT FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended.....................June 30, 2001 OR [_] 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....................................1-3268 CENTRAL HUDSON GAS & ELECTRIC CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) NEW YORK 14-0555980 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 284 SOUTH AVENUE, POUGHKEEPSIE NEW YORK 12601-4879 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (845) 452-2000 -------------- 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. YES [ X ] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. Common stock, par value $5.00 per share; and the number of shares outstanding of Registrant's Common Stock, as of June 30, 2001, was 16,862,087. All shares are owned by CH Energy Group, Inc. CENTRAL HUDSON GAS & ELECTRIC CORPORATION FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2001 INDEX PART I - FINANCIAL INFORMATION PAGE ------------------------------ ---- Item 1 - Consolidated Financial Statements 1 Consolidated Statement of Income - Three Months Ended June 30, 2001 and 2000 1 Consolidated Statement of Income - Six Months Ended June 30, 2001 and 2000 2 Consolidated Balance Sheet - June 30, 2001 and December 31, 2000 3 Consolidated Statement of Cash Flows - Three Months Ended June 30, 2001 and 2000 5 Notes to Consolidated Financial Statements 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3 - Quantitative and Qualitative Disclosure about Market Risk 17 PART II - OTHER INFORMATION --------------------------- Item 1 - Legal Proceedings 17 Item 5 - Other Information 17 Item 6 - Exhibits and Reports on Form 8-K 18 Signatures 19 Exhibit Index PART I - FINANCIAL INFORMATION ITEM I - CONSOLIDATED FINANCIAL STATEMENTS CENTRAL HUDSON GAS & ELECTRIC CORPORATION CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) For the 3 Months Ended June 30, 2001 2000 --------- --------- (Thousands of Dollars) Operating Revenues Electric ......................................... $ 104,196 $ 107,324 Gas .............................................. 25,292 20,581 --------- --------- Total - own territory .......................... 129,488 127,905 Electric Sales to other utilities ................ 100 16,860 Gas Sales to other utilities ..................... 26 1,373 --------- --------- 129,614 146,138 --------- --------- Operating Expenses Operation: Fuel used in electric generation ............... 574 20,682 Purchased electricity .......................... 57,295 30,340 Purchased natural gas .......................... 13,361 11,141 Other expenses of operation .................... 29,878 37,614 Depreciation and amortization .................... 6,248 11,991 Taxes, other than income tax ..................... 12,328 15,066 Federal/State income tax ......................... 1,263 4,911 --------- --------- 120,947 131,745 --------- --------- Operating Income ................................... 8,667 14,393 --------- --------- Other Income and (Deductions) Allowance for equity funds used during construction ............................ 96 -- Federal/State income tax ......................... (553) (120) Other - net ...................................... 3,107 2,741 --------- --------- 2,650 2,621 --------- --------- Income before Interest Charges ..................... 11,317 17,014 --------- --------- Interest Charges Interest on mortgage bonds ....................... 1,302 2,997 Interest on other long-term debt ................. 3,138 2,974 Other interest ................................... 4,028 1,655 Allowance for borrowed funds used during construction ............................ (76) (172) --------- --------- 8,392 7,454 --------- --------- Net Income ......................................... 2,925 9,560 Dividends Declared on Cumulative Preferred Stock .................................. 807 807 --------- --------- Income Available for Common Stock .................. $ 2,118 $ 8,753 ========= ========= See Notes to Consolidated Financial Statements. - 1 - CENTRAL HUDSON GAS & ELECTRIC CORPORATION CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) For the 6 Months Ended June 30, 2001 2000 --------- --------- (Thousands of Dollars) Operating Revenues Electric ......................................... $ 211,896 $ 214,745 Gas .............................................. 78,879 60,712 --------- --------- Total - own territory .......................... 290,775 275,457 Electric Sales to other utilities ................ 7,655 27,579 Gas Sales to other utilities ..................... 52 2,081 --------- --------- 298,482 305,117 --------- --------- Operating Expenses Operation: Fuel used in electric generation ............... 13,658 40,008 Purchased electricity .......................... 97,893 53,455 Purchased natural gas .......................... 46,702 33,950 Other expenses of operation .................... 61,197 69,869 Depreciation and amortization .................... 14,445 23,998 Taxes, other than income tax ..................... 27,211 30,918 Federal/State income tax ......................... 9,258 13,995 --------- --------- 270,364 266,193 --------- --------- Operating Income ................................... 28,118 38,924 --------- --------- Other Income and (Deductions) Allowance for equity funds used during construction ............................ 177 -- Federal/State income tax ......................... (1,814) (147) Other - net ...................................... 6,897 5,016 --------- --------- 5,260 4,869 --------- --------- Income before Interest Charges ..................... 33,378 43,793 --------- --------- Interest Charges Interest on mortgage bonds ....................... 3,872 6,202 Interest on other long-term debt ................. 6,487 5,677 Other interest ................................... 7,619 3,781 Allowance for borrowed funds used during construction ............................ (140) (325) --------- --------- 17,838 15,335 --------- --------- Net Income ......................................... 15,540 28,458 Dividends Declared on Cumulative Preferred Stock ... 1,615 1,615 --------- --------- Income Available for Common Stock .................. $ 13,925 $ 26,843 ========= ========= See Notes to Consolidated Financial Statements. - 2 - CENTRAL HUDSON GAS & ELECTRIC CORPORATION CONSOLIDATED BALANCE SHEET June 30, December 31, 2001 2000 ASSETS (Unaudited) (Audited) ---------- ----------- (Thousands of Dollars) Utility Plant Electric .......................................... $ 569,364 $1,277,617 Gas ............................................... 177,165 172,242 Common ............................................ 102,101 99,353 Nuclear fuel ...................................... 46,697 46,688 ---------- ---------- 895,327 1,595,900 Less: Accumulated depreciation ................... 329,766 668,168 Nuclear fuel amortization .................. 42,088 40,762 ---------- ---------- 523,473 886,970 Construction work in progress ..................... 45,733 43,882 ---------- ---------- Net Utility Plant .......................... 569,206 930,852 ---------- ---------- Other Property and Plant ............................. 972 973 ---------- ---------- Prefunded Pension Costs and Other Investments Prefunded Pension Costs ........................... 71,646 63,390 Other Investments ................................. 17,113 18,199 ---------- ---------- Total Prefunded Pension Costs and Other Investments .. 88,759 81,589 ---------- ---------- Current Assets Cash and cash equivalents ......................... 118,623 17,279 Accounts receivable from customers-net of allowance for doubtful accounts ............. 49,490 70,072 Accrued unbilled utility revenues ................. 9,913 19,751 Other receivables ................................. 9,479 4,377 Fuel, materials and supplies, at average cost ..... 12,207 27,460 Special deposits and prepayments .................. 11,900 14,379 ---------- ---------- Total Current Assets ....................... 211,612 153,318 ---------- ---------- Deferred Charges and Other Assets Regulatory assets ................................. 69,506 155,230 Unamortized debt expense .......................... 4,582 4,869 Fair value of derivative instruments .............. 87,351 -- Other Assets ...................................... 7,897 5,467 ---------- ---------- Total Deferred Charges and Other Assets .... 169,336 165,566 ---------- ---------- Accumulated Deferred Income Tax (Net) ................ 46,444 -- ---------- ---------- TOTAL ASSETS ............... $1,086,329 $1,332,298 ========== ========== See Notes to Consolidated Financial Statements. - 3 - CENTRAL HUDSON GAS & ELECTRIC CORPORATION CONSOLIDATED BALANCE SHEET June 30, December 31, 2001 2000 CAPITALIZATION AND LIABILITIES (Unaudited) (Audited) ----------- ----------- (Thousands of Dollars) Capitalization Common Stock Equity: Common stock, 30,000,000 shares authorized; shares issued ($5 par value): 2001 - 16,862,087 2000 - 16,862,087 ...................... $ 84,311 $ 84,311 Paid-in capital ............................... 174,980 273,238 Retained earnings ............................. 754 114,546 Capital stock expense ......................... (5,828) (5,865) ----------- ----------- Total Common Stock Equity ............. 254,217 466,230 ----------- ----------- Cumulative Preferred Stock Not subject to mandatory redemption ...... 21,030 21,030 Subject to mandatory redemption .......... 35,000 35,000 ----------- ----------- Total Cumulative Preferred Stock ...... 56,030 56,030 ----------- ----------- Long-term Debt ................................ 235,360 320,370 ----------- ----------- Total Capitalization ....................... 545,607 842,630 ----------- ----------- Current Liabilities Current maturities of long-term debt .......... 22,500 62,610 Notes payable ................................. -- 25,000 Accounts payable .............................. 29,314 36,719 Accrued interest .............................. 7,561 11,307 Dividends payable ............................. 807 807 Accrued vacation .............................. 3,900 4,472 Customer deposits ............................. 4,830 4,637 Other ......................................... 5,240 7,703 ----------- ----------- Total Current Liabilities .................. 74,152 153,255 ----------- ----------- Deferred Credits and Other Liabilities Regulatory liabilities ........................ 409,998 118,574 Operating reserves ............................ 6,200 4,755 Other ......................................... 50,372 18,636 ----------- ----------- Total Deferred Credits and Other Liabilities ........................ 466,570 141,965 ----------- ----------- Accumulated Deferred Income Tax (Net) ............ -- 194,448 ----------- ----------- TOTAL CAPITALIZATION AND LIABILITIES ....... $ 1,086,329 $ 1,332,298 =========== =========== See Notes to Consolidated Financial Statements. - 4 - CENTRAL HUDSON GAS & ELECTRIC CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) For the 6 Months Ended June 30, 2001 2000 --------- -------- OPERATING ACTIVITIES: (Thousands of Dollars) Net Income .......................................... $ 15,540 $ 28,458 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization & nuclear fuel amortization ........................... 16,453 25,785 Deferred income taxes, net .................... (375) 2,767 Nine Mile 2 Plant deferred finance charges, net ................................ 1,311 (2,428) Provision for uncollectibles .................. 1,250 1,250 Net accrued/deferred pension costs ............ (7,492) (7,040) Net deferred gas costs/gas refunds ............ 1,778 2,227 Deferred revenues per 1998 Settlement Agreement ........................ 10,080 3,213 Other, net .................................... 802 (7,896) Changes in operating assets and liabilities, net: Accounts receivable and unbilled revenues ..... 24,068 (7,247) Fuel, materials and supplies .................. 932 4,985 Special deposits and prepayments .............. 2,479 3,282 Accounts payable .............................. (7,405) 2,505 Accrued taxes and interest .................... (31,212) 100 Deferred taxes related to sale of plants and NMP2 write-off .......................... (233,876) -- Other, net .................................... (2,842) (1,092) --------- -------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES ............................ (208,509) 48,869 --------- -------- INVESTING ACTIVITIES: Proceeds from sale of fossil generation plants .... 713,202 -- Additions to plant ................................ (29,357) (27,172) Net return of equity from affiliate ............... -- 23,500 Nine Mile 2 Plant decommissioning trust fund ...... (434) (434) Other, net ........................................ 4,101 (307) --------- -------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ............................ 687,512 (4,413) --------- -------- FINANCING ACTIVITIES: Proceeds from issuance of long-term debt .......... -- 47,500 Repayments of short-term debt ..................... (25,000) (45,500) Retirement and redemption of long-term debt ....... (125,130) (35,100) Dividends paid on cumulative preferred and common stock ................................ (15,515) (17,815) Special dividend to parent ........................ (212,000) -- Issuance and redemption costs ..................... (14) (307) --------- -------- NET CASH USED IN FINANCING ACTIVITIES ............. (377,659) (51,222) --------- -------- NET CHANGE IN CASH AND CASH EQUIVALENTS ............... 101,344 (6,766) CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR ......... 17,279 11,756 --------- -------- CASH AND CASH EQUIVALENTS - END OF PERIOD ............. $ 118,623 $ 4,990 ========= ======== Supplemental Disclosure of Cash Flow Information Interest paid .................................... $ 13,617 $ 12,093 Federal & State income tax paid .................. $ 260,208 $ 12,000 See Notes to Consolidated Financial Statements - 5 - CENTRAL HUDSON GAS & ELECTRIC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - GENERAL The accompanying consolidated financial statements of Central Hudson Gas & Electric Corporation (herein the Company) are unaudited but, in the opinion of Management, reflect adjustments (which include normal recurring adjustments) necessary for a fair statement of the results of operations for the interim periods presented. These condensed unaudited quarterly consolidated financial statements do not contain the detail or footnote disclosures concerning accounting policies and other matters which would be included in annual consolidated financial statements and, accordingly, should be read in conjunction with the audited Consolidated Financial Statements (including the Notes thereto) included in the Company's Annual Report, on Form 10-K, for the year ended December 31, 2000 (Company's 10-K Report). Due to the seasonal nature of the Company's operations, financial results for interim periods are not necessarily indicative of trends for a twelve-month period. NOTE 2 - REGULATORY MATTERS Reference is made to Note 2 - "Regulatory Matters" to the Consolidated Financial Statements of the Company's 10-K Report under the caption "Impact of Settlement Agreement on Accounting Policies," (hereinafter the "Settlement Agreement"). At December 31, 2000, the net regulatory assets of the Company associated with the fossil-fueled generating assets, including asbestos litigation costs and Clean Air Act credits, totaled $1.9 million. On January 30, 2001, the Company sold its interests in the Danskammer and Roseton Generating Plants. The proceeds in excess of the net book value were offset against the related fossil-fueled net regulatory assets. The balance in these accounts at June 30, 2001 is zero. (See Note 2 - "Regulatory Matters" to the Consolidated Financial Statements of the Company's 10-K Report under the caption "Sale of Generating Plants.") 6 COMPETITIVE OPPORTUNITIES PROCEEDING SETTLEMENT AGREEMENT As reported under the caption "Competitive Opportunities Proceeding Settlement Agreement" in Note 2 to the Consolidated Financial Statements included in the Company's 10-K Report, the Company had received approval from its shareholders and regulators to form a holding company. The holding company restructuring took place on December 15, 1999, at which time the Company became the wholly-owned subsidiary of CH Energy Group, Inc. (Energy Group). As of June 30, 2001, $28 million of the $100 million authorized by the Public Service Commission of the State of New York (PSC), has been transferred from the Company to the competitive business subsidiaries of Central Hudson Energy Services, Inc. (CH Services). These competitive business subsidiaries are described in Item 1 of the Company's 10-K Report under the caption "Other Affiliates of Central Hudson." RATE PROCEEDINGS - ELECTRIC AND GAS Reference is made to Note 2 - "Regulatory Matters" to the Consolidated Financial Statements of the Company's 10-K Report under the caption "Rate Proceedings - Electric and Gas." On August 1, 2000, the Company filed a major rate and restructuring proposal with the PSC. On April 24, 2001, the Administrative Law Judge (ALJ) assigned to this proceeding issued a recommended decision addressing the Company's and other parties' positions. The Company filed its response to the ALJ's decision on May 15, 2001. It was expected that new electric and gas delivery prices resulting from this filing would go into effect on July 1, 2001; however, by Order of the PSC issued and effective June 25, 2001, the suspension period for these new prices has been extended through August 31, 2001. The Company can make no prediction as to what determinations the PSC will ultimately make with respect to this proceeding. NOTE 3 - SEGMENTS AND RELATED INFORMATION Reference is made to Note 10 - "Segments and Related Information" to the Consolidated Financial Statements included in the Company's 10-K Report. The Company's reportable operating segments are its electric and gas operations. All of the segments currently operate in New York State. Certain additional information regarding these segments is set forth in the following table. General corporate expenses, property common to both segments and depreciation of the common property have been allocated to the segments in accordance with the practice established for regulatory purposes. 7 A material change occurred with the Company's total assets at March 31, 2001 as compared to total assets at December 31, 2000. The net reduction of $207.4 million related primarily to a decrease in net utility plant for the electric segment due to the sale of the Company's interests in the Danskammer and Roseton Generating Plants as follows: Electric Gas Subsidiary Total ----------- -------- ---------- ----------- 3/31/01 $ 914,799 $210,015 $89 $ 1,124,903 12/31/00 1,135,484 196,725 89 1,332,298 ----------- -------- --- ----------- $ (220,685) 13,290 $-- $ (207,395) =========== ======== === =========== The gas segment increased by $13.3 million since the gas regulator station at these Plants remained the Company's property and was reclassified from electric to gas. 8 Central Hudson Gas & Electric Segment Disclosure - FAS 131
------------------------------------------------------------------------------------------------------------------------------------ Quarter Ended June 30, 2001 Six Months Ended June 30, 2001 ------------------------------------------------------------------------------------------------------------------------------------ Electric Gas Total Electric Gas Total ------------------------------------------------------------------------------------------------------------------------------------ Revenues from external customers $ 104,284 $25,241 $129,525 $219,513 $78,686 $298,199 ------------------------------------------------------------------------------------------------------------------------------------ INTERSEGMENT REVENUES 12 77 89 38 245 283 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL REVENUES $ 104,296 $25,318 $129,614 $219,551 $78,931 $298,482 ------------------------------------------------------------------------------------------------------------------------------------ Income Available for Common Stock $ (425) $ 2,543 $ 2,118 $ 4,758 $ 9,167 $ 13,925 ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------ Quarter Ended June 30, 2000 Six Months Ended June 30, 2000 ------------------------------------------------------------------------------------------------------------------------------------ Electric Gas Total Electric Gas Total ------------------------------------------------------------------------------------------------------------------------------------ Revenues from external customers $ 124,157 $21,443 $145,600 $242,273 $61,865 $304,138 ------------------------------------------------------------------------------------------------------------------------------------ INTERSEGMENT REVENUES 27 511 538 51 928 979 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL REVENUES $ 124,184 $21,954 $146,138 $242,324 $62,793 $305,117 ------------------------------------------------------------------------------------------------------------------------------------ Income Available for Common Stock $ 7,049 $ 1,704 $ 8,753 $ 19,214 $ 7,629 $ 26,843 ------------------------------------------------------------------------------------------------------------------------------------
9 NOTE 4 - NEW ACCOUNTING STANDARDS DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - SFAS 133 Reference is made to Item 7A - "Quantitative and Qualitative Disclosure About Market Risk" of the Company's 10-K Report and also, Note 1 - "Summary of Significant Accounting Policies" to the Consolidated Financial Statements under the caption "New Accounting Standards, Other FASB Projects and NRC Policy Statement." These sections of the Company's 10-K provide background information regarding its risk management policy and practices for minimizing price risk associated with commodity purchases and the development of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 requires that all derivative instruments with certain limited exceptions including instruments that meet the "normal purchases and sales" exception, as defined, be recognized at fair value on the Company's balance sheet, effective January 1, 2001, with offsetting gains or losses recognized in earnings. The standard also permits the deferral of these gains or losses if stringent hedge accounting provisions are met. The Company uses derivative instruments to hedge the exposure to the variability in cash flows associated with forecasted sales of gas and forecasted sales and purchases of electricity. These derivatives are not formally designated as hedges under the provisions of SFAS 133 because the related gains and losses are included as part of the Company's commodity cost and/or price reconciled in its natural gas and electric service charge clauses. The earnings offset to these derivatives are therefore, deferred for pass-back to or recovery from customers under these adjustment mechanisms. The total fair value of the Company derivatives at June 30, 2001 is $87.4 million due largely to the conversion, effective July 1, 2001, of a multi-year transition purchase power agreement (TPA) (see Item 2 of the Company's 10-K Report under the caption "Load and Capacity") from a physical to a financial agreement. Under the terms of the modified agreement, the Company will purchase electric energy volumes covered by the TPA at market and financially net settle with the TPA counter-party for differences between market prices and the fixed prices stipulated in the TPA. The total net gain (realized and unrealized) year-to-date associated with settled and open derivatives is $87.6 million, comprised largely of unrealized gains associated with the TPA derivative, through October 2004. 10 PLANT DECOMMISSIONING Reference is made to the caption "New Accounting Standards, Other FASB Projects and NRC Policy Statement" of Note 1 - "Summary of Significant Accounting Policies," to the Consolidated Financial Statements of the Company's 10-K Report. On July 5, 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. Initially started in 1994 as a project to account for the costs of nuclear decommissioning, the FASB expanded the scope to include similar closure or removal-type costs in other industries that are incurred at any time during the life of an asset. That standard requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The standard is effective for fiscal years beginning after June 15, 2002, with earlier application encouraged. The Company is reviewing this new accounting standard and cannot make any prediction at this time as to its ultimate effect(s) on its financial condition, results of operations and cash flows. PROPERTY, PLANT AND EQUIPMENT In April, FASB agreed to issue an Exposure Draft that would amend certain APB Opinions and FASB Statements to incorporate changes that would result from issuance of a proposed AICPA Statement of Position (SOP), ACCOUNTING FOR CERTAIN COSTS AND ACTIVITIES RELATED TO PROPERTY, PLANT, AND EQUIPMENT. The FASB also agreed that the Exposure Draft would propose to amend APB Opinion No. 28, INTERIM FINANCIAL REPORTING, so the provisions of the proposed SOP that would require certain costs to be charged to expense as incurred would apply also to interim periods. In June, FASB approved for issuance FASB Exposure Draft, ACCOUNTING IN INTERIM AND ANNUAL FINANCIAL STATEMENTS FOR CERTAIN COSTS AND ACTIVITIES RELATED TO PROPERTY, PLANT, AND EQUIPMENT, which was issued contemporaneously in July 2001 with the issuance of the proposed SOP by the Accounting Standards Executive Committee (AcSEC). AcSEC drafted the proposed SOP to address diversity in accounting for expenditures related to property, plant and equipment (PP&E), including improvements, replacements, betterments, additions, repairs and maintenance. The proposed 11 SOP addresses accounting and disclosure issues related to determining which PP&E costs should be capitalized versus those that should be charged to expense as incurred. The proposed SOP also addresses capitalization of indirect and overhead costs and component accounting for PP&E. If adopted as a final Statement, the FASB proposal would be effective for annual and interim financial statements for fiscal years beginning after June 15, 2002, with earlier adoption encouraged. The comment period ends October 15, 2001. The Company can make no prediction at this time as to the ultimate form of the proposed accounting standard, assuming it is adopted, nor can it make any prediction as to its ultimate effect(s) on its financial condition, results of operations and cash flows. NOTE 5 - COMMITMENTS AND CONTINGENCIES The Company faces a number of contingencies which arise during the normal course of business and which have been discussed in Note 9 - "Commitments and Contingencies," to the Consolidated Financial Statements included in the Company's 10-K Report. Except for that which is disclosed in Part II of this Quarterly Report, on Form 10-Q, for the quarterly period ended June 30, 2001, and all documents previously filed with the Securities and Exchange Commission (SEC) in 2001, there have been no material changes in the subject matters discussed in Note 9. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAPITAL RESOURCES AND LIQUIDITY For the six months ended June 30, 2001, cash expenditures related to the construction program of the Company amounted to $29.4 million. Construction expenditures during the six months ended June 30, 2001 were primarily for normal extensions and improvements of the Company's electric and natural gas systems, as well as the transfer of substation and gas regulator station facilities from the Roseton Generating Plant cotenants to the Company as part of the sale of that Plant on January 30, 2001. The cash requirements for the expenditures were funded from internal sources. During the quarter, a portion of the proceeds from the January 30, 2001 divestiture of the Roseton and Danskammer Generating Plants was used to call the entire $70 million issue of 9.25% First Mortgage Bonds due May 1, 2021. During the quarter, the Company made open market purchases and retired 12 additional debt of $4.1 million of 6.25% First Mortgage Bonds due June 1, 2007, and 7.32% Medium Term Notes came due on their normal maturity date of June 13, 2001 in the amount of $40 million. In the future, the Company may repurchase debt in the open market. The Company has $50 million of committed short-term credit facilities available and has also entered into a revolving credit agreement with several commercial banks. Authorization from the PSC limits the short-term borrowing amount the Company may have outstanding, at any time, to $52 million in the aggregate. At June 30, 2001, the Company had no short-term debt outstanding. Investments in short-term securities, including cash and cash equivalents, were $118.6 million at June 30, 2001. RESULTS OF OPERATIONS The following financial review identifies the causes of significant changes in the amounts of revenues and expenses for the Company comparing the three-month and six-month periods between June 30, 2001 to the three-month and six-month periods ended June 30, 2000. OPERATING REVENUES Operating revenues decreased $16.5 million (11%) for the second quarter of 2001 as compared to the second quarter of 2000 and decreased $6.6 million (2%) for the six months ended June 30, 2001. Details of these revenue changes by electric and gas departments are as follows: INCREASE (DECREASE) FROM PRIOR PERIOD ------------------------ SECOND QUARTER ------------------------ ELECTRIC GAS -------- -------- (Thousands of Dollars) Customer Sales* ................................. $(55,663) $ (1,594)** Sales to Other Utilities ..................................... (16,760) (1,347) Fuel and Gas Cost Adjustment .................................... 54,563 6,233 Deferred Revenues ............................... (2,088)*** 156 Miscellaneous ................................... 60 (84) -------- -------- $(19,888) $ 3,364 ======== ======== 13 INCREASE (DECREASE) FROM PRIOR PERIOD ------------------------ SIX MONTHS ENDED JUNE 30, 2001 ------------------------ ELECTRIC GAS -------- -------- (Thousands of Dollars) Customer Sales* ................................. $(78,805) $ (2,222)** Sales to Other Utilities ..................................... (19,924) (2,029) Fuel and Gas Cost Adjustment .................................... 81,766 18,933 Deferred Revenues ............................... (5,740)*** 1,622 Miscellaneous ................................... (70) (166) -------- -------- $(22,773) $ 16,138 ======== ======== * Includes delivery of electricity and gas supplied by others. ** Both firm and interruptible revenues. *** Includes the deferral and restoration of revenues related to the Company's Retail Access Program and earnings in excess of the rate of return cap under the Settlement Agreement. The reduction in revenues from electric sales was due largely to the interim electric rates reflecting the reduction of rate base effective February 1, 2001 following the sale of the Company's interests in the Danskammer and Roseton Generating Plants on January 30, 2001 and the recovery of its share of NMP-2 investment. The increase in gas revenues is due primarily to an increase in amounts collected under the Company's gas cost adjustment, attributable to higher gas costs plus higher revenues from firm gas sales. The increases are partially offset by decreases in revenues from interruptible sales and from sales to other utilities and marketers. SALES The Company's sales vary seasonally in response to weather conditions. Generally, electric sales peak in the summer and gas sales peak in the winter. Total kilowatt-hour sales of electricity within the Company's service territory increased 3% and firm sales of natural gas increased 4% in the second quarter of 2001 as compared to the second quarter of 2000. For the first six months ended June 30, 2001, electric sales increased 4% and gas sales to firm customers increased 8% compared to the same period last year. Changes in sales from last year by major customer classifications, including energy supplied by others, are set forth below. 14 INCREASE (DECREASE) FROM PRIOR PERIOD ------------------------------------------- SECOND 6 MOS. ENDED QUARTER 6/30/01 ------------------ ----------------- ELECTRIC GAS ELECTRIC GAS -------- --- -------- --- Residential ...................... 3% 12% 6% 9% Commercial ....................... 5 8 5 12 Industrial ....................... 2 5 1 (1) Interruptible .................... N/A (36) N/A (41) Billing heating degree days were 7% higher for the quarter ended June 30, 2001 and 9% higher for the six months ended June 30, 2001 when compared to the same periods in 2000. Cooling degree days were 6% higher for both the quarter and six months ended June 30, 2001 when compared to the same periods in 2000. Interruptible gas sales decreased both in the second quarter and the first six months of 2001 due largely to the cost of gas compared to residual oil and a reduction in boiler gas sales for electric generation. OPERATING EXPENSES Total operating expenses decreased $10.8 million (8%), from $131.7 million in 2000 to $120.9 in the second quarter of 2001. Total operating expenses increased $4.2 million (2%) from $266.2 million in 2000 to $270.4 million in the first six months of 2001. In both periods, the reductions in other expenses, depreciation and amortization, and taxes result from the elimination of all operating costs associated with the fossil generating plants that were sold and a reduction in depreciation expense for the Company's share of the NMP-2 plant, the remaining cost of which was recovered using sale proceeds. Partially offsetting the reductions is a net increase of $9.1 million in the second quarter and $30.8 million in the six months ended June 30, 2001 as compared to the same periods in the year 2000 in purchased electricity and purchased natural gas costs mitigated by a decrease in the cost of fuel used in electric generation resulting from the sale of the fossil generating plants. The net increase in energy costs reflects increased fossil fuel prices, an increase in electric and gas own territory sales and also, the impact of changing market conditions brought about by the restructuring of the New York State wholesale electricity market. 15 DIVIDENDS TO CH ENERGY GROUP Reference is made to the caption "Dividends to Energy Group" of Part II, Item 7 of the Company's 10-K Report, for a discussion of the Company's dividend payments. On July 17, 2001, the Board of Directors of the Company declared a dividend of $9.0 million, payable August 1, 2001 to Energy Group. OTHER MATTERS FORWARD-LOOKING STATEMENTS Statements included in this Quarterly Report on Form 10Q and the 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 Securities Exchange Act of 1934, as amended. Forward-looking statements may be identified by words including "anticipated," "believe," "intends," "estimates," "expect," and similar expressions. The Company cautions readers that forward-looking statements, including without limitation, those relating to the Company's future business prospects, revenues, proceeds, working capital, liquidity, income and margins, 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 Company's reports filed with the SEC. All forward-looking statements are intended to be subject to the safe harbor protections provided by such Section 21E. A number of important factors affecting the Company's business and financial results could cause actual results to differ materially from those stated in the forward-looking statements. Those factors include weather, energy supply and demand, developments in the legislative, regulatory and competitive environment, electric and gas industry restructuring and cost recovery, future market prices for energy, capacity and ancillary services, nuclear industry regulation, the outcome of pending litigation, and certain environmental matters, particularly ongoing development of air quality regulations and industrial waste remediation requirements. The Company undertakes 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 these forward-looking statements. 16 ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Reference is made to Part II, Item 7A of the Company's 10-K Report for a discussion of market risk. During the second quarter of 2001, the Company's exposure to market risk was not material to its financial position or results of operations. PART II - OTHER INFORMATION Item 1. Legal Proceedings (a) ASBESTOS LITIGATION. For a discussion of lawsuits against the Company involving asbestos, see Note 10 - "Commitments and Contingencies," under the caption "Asbestos Litigation," in Part II, Item 8 of the Company's 10-K Report. As of July 25, 2001, 73 new cases involving asbestos have been brought against the Company of the type described under the caption. As of that date, of the 2,652 cases brought against the Company, 1,099 remain pending. Of the 1,553 cases no longer pending against the Company, 1,416 have been dismissed or discontinued, and the Company has settled 137 cases. The Company is presently unable to assess the validity of the remaining asbestos lawsuits; accordingly, it cannot determine the ultimate liability relating to these cases. Based on information known to the Company at this time, including the Company's experience in settling asbestos cases and in obtaining dismissals of asbestos cases, the Company believes that the cost to be incurred in connection with the remaining lawsuits will not have a material adverse effect on the Company's financial position or results of operations. Item 5. Other Information (a) NINE MILE 2 PLANT. Reference is made to Note 3 - Nine Mile 2 Plant under the caption "General" to the Consolidated Financial Statements included in the Company's 10-K Report, for a discussion of the sale of the interests of the cotenant owners in the Nine Mile 2 Plant. Closing of the sale is now expected to occur before the end of 2001. 17 Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are furnished in accordance with the provisions of Item 601 of Regulation S-K. EXHIBIT NO. REGULATION S-K ITEM 601 DESIGNATION EXHIBIT DESCRIPTION ----------------- ------------------- (12) -- Statement Showing Computation of the Ratio of Earnings to Fixed Charges and the Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends. (b) Reports on Form 8-K. During the period covered by this Report on Form 10-Q, the Company filed the following Current Report on Form 8-K: None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned hereunder duly authorized. CENTRAL HUDSON GAS & ELECTRIC CORPORATION (Registrant) By: /S/ DONNA S. DOYLE ---------------------------------- Donna S. Doyle Vice President - Accounting and Controller Dated: August 9, 2001 18 EXHIBIT INDEX Following is the list of Exhibits, as required by Item 601 of Regulation S-K, filed as part of this Report on Form 10-Q: EXHIBIT NO. REGULATION S-K ITEM 601 DESIGNATION EXHIBIT DESCRIPTION ----------------- ------------------- (12) -- Statement Showing Computation of the Ratio of Earnings to Fixed Charges and the Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends. 19 CENTRAL HUDSON GAS & ELECTRIC CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12 AND RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED DIVIDENDS
2001 YEAR ENDED DECEMBER 31, ------------------------------- --------------------------------------------- 3 Months 6 Months 12 Months Ended Ended Ended (*) June 30 June 30 June 30 2000 1999 1998 1997 -------- -------- --------- --------- --------- --------- --------- Earnings: A. Net Income $ 2,925 $ 15,540 $ 39,679 $ 52,595 $ 51,881 $ 52,544 $ 55,086 B. Federal & State Income Tax 710 7,444 29,194 35,598 28,144 28,627 26,237 -------- -------- --------- --------- --------- --------- --------- C. Earnings before Income Taxes $ 3,635 $ 22,984 $ 68,873 $ 88,193 $ 80,025 $ 81,171 $ 81,323 ======== ======== ========= ========= ========= ========= ========= D. Fixed Charges Interest on Mortgage Bonds 1,302 3,872 9,012 11,342 13,057 14,225 14,237 Interest on Other Long-Term Debt 3,138 6,487 13,674 12,864 11,094 8,890 8,860 Other Interest 4,028 7,619 11,259 5,363 4,860 3,639 2,647 Interest Portion of Rents 186 403 886 962 993 1,004 1,020 Amortization of Premium & Expense on Debt 273 620 1,224 1,170 993 924 906 -------- -------- --------- --------- --------- --------- --------- Total Fixed Charges $ 8,927 $ 19,001 $ 36,055 $ 31,701 $ 30,997 $ 28,682 $ 27,670 ======== ======== ========= ========= ========= ========= ========= E. Total Earnings $ 12,562 $ 41,985 $ 104,928 $ 119,894 $ 111,022 $ 109,853 $ 108,993 ======== ======== ========= ========= ========= ========= ========= Preferred Dividend Requirements: F. Allowance for Preferred Stock Dividends Under IRC Sec 247 $ 807 $ 1,615 $ 3,230 $ 3,230 $ 3,230 $ 3,230 $ 3,230 G. Less Allowable Dividend Deduction (32) (64) (127) (127) (127) (127) (127) -------- -------- --------- --------- --------- --------- --------- H. Net Subject to Gross-up 775 1,551 3,103 3,103 3,103 3,103 3,103 I. Ratio of Earnings before Income Taxes to Net Income (C/A) 1.243 1.479 1.736 1.677 1.542 1.545 1.476 -------- -------- --------- --------- --------- --------- --------- J. Pref. Dividend (Pre-tax) (H x L) 963 2,294 5,387 5,204 4,785 4,794 4,580 K. Plus Allowable Dividend Deduction 32 64 127 127 127 127 127 -------- -------- --------- --------- --------- --------- --------- L. Preferred Dividend Factor 995 2,358 5,514 5,331 4,912 4,921 4,707 M. Fixed Charges (D) 8,927 19,001 36,055 31,701 30,997 28,682 27,670 -------- -------- --------- --------- --------- --------- --------- N. Total Fixed Charges and Preferred Dividends $ 9,922 $ 21,359 $ 41,569 $ 37,032 $ 35,909 $ 33,603 $ 32,377 ======== ======== ========= ========= ========= ========= ========= O. Ratio of Earnings to Fixed Charges (E/D) 1.41 2.21 2.91 3.78 3.58 3.83 3.94 ======== ======== ========= ========= ========= ========= ========= P. Ratio of Earnings to Fixed Charges and Preferred Dividends (E/N) 1.27 1.97 2.52 3.24 3.09 3.27 3.37 ======== ======== ========= ========= ========= ========= =========
(*) Restated to properly reflect the exclusion of AFUDC from fixed charges.