CH ENERGY GROUP, INC. & CENTRAL HUDSON GAS & ELECTRIC CORP. QUARTERLY FINANCIAL REPORT for the period ended JUNE 30, 2014
FINANCIAL STATEMENTS (Unaudited) QUARTER ENDED JUNE 30, 2014 TABLE OF CONTENTS CH Energy Group, Inc. PAGE Consolidated Statement of Income Three and Six Months Ended June 30, 2014 and 2013 3 Consolidated Statement of Comprehensive Income Three and Six Months Ended June 30, 2014 and 2013 4 Consolidated Statement of Cash Flows Six Months Ended June 30, 2014 and 2013 5 Consolidated Balance Sheet June 30, 2014, December 31, 2013 and June 30, 2013 6 Consolidated Statement of Equity Six Months Ended June 30, 2014 and 2013 8 Central Hudson Gas & Electric Corporation Statement of Income Three and Six Months Ended June 30, 2014 and 2013 9 Statement of Comprehensive Income Three and Six Months Ended June 30, 2014 and 2013 9 Statement of Cash Flows Six Months Ended June 30, 2014 and 2013 10 Balance Sheet June 30, 2014, December 31, 2013 and June 30, 2013 11 Statement of Equity Six Months Ended June 30, 2014 and 2013 13 NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 14 INTERIM MANAGEMENT DISCUSSION and ANALYSIS 53
Financial Statements (Unaudited) CH ENERGY GROUP CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) (In Thousands) Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 Operating Revenues Electric $ 131,960 $ 120,577 $ 306,376 $ 258,740 Natural gas 41,666 32,342 114,099 88,642 Total Operating Revenues 173,626 152,919 420,475 347,382 Operating Expenses Operation: Purchased electricity and fuel used in electric generation 49,360 38,532 134,582 88,941 Purchased natural gas 22,894 13,167 61,788 36,566 Other expenses of operation - regulated activities 60,053 58,387 124,945 125,179 Other expenses of operation - competitive business subsidiaries 34 318 100 665 Merger related costs (513) 14,755 (99) 15,142 Depreciation and amortization 10,683 9,983 21,368 19,938 Regulatory Debits - 40,000-40,000 Taxes, other than income tax 13,378 12,625 29,027 27,481 Total Operating Expenses 155,889 187,767 371,711 353,912 Operating Income (Loss) 17,737 (34,848) 48,764 (6,530) Other Income and Deductions Income from unconsolidated affiliates 194 77 551 276 Interest on regulatory assets and other interest income 915 2,028 2,225 3,450 Regulatory adjustments for interest costs 318 328 633 652 Other - net (96) - (304) 3 Total Other Income 1,331 2,433 3,105 4,381 Interest Charges Interest on long-term debt 5,898 6,435 11,845 12,865 Interest on regulatory liabilities and other interest 2,237 1,963 4,619 3,878 Total Interest Charges 8,135 8,398 16,464 16,743 Income before income taxes 10,933 (40,813) 35,405 (18,892) Income Tax Expense (Benefit) 5,164 (14,536) 13,994 (6,729) Net Income (Loss) from Continuing Operations 5,769 (26,277) 21,411 (12,163) Discontinued Operations Income (Loss) from discontinued operations before tax 15 (1,830) 6,907 6,360 Gain (Loss) from sale of discontinued operations (38) - 8,036 - Income tax expense (benefit) from discontinued operations (10) (750) 7,255 2,608 Net Income (Loss) from Discontinued Operations (13) (1,080) 7,688 3,752 Net Income (Loss) 5,756 (27,357) 29,099 (8,411) Net Income attributable to non-controlling interest: Dividends declared on Preferred Stock of subsidiary - - - 92 Preferred Stock Redemption Premium - - - 764 Net Income (Loss) Attributable to CH Energy Group 5,756 (27,357) 29,099 (9,267) Dividends declared on Common Stock 5,000-10,000 8,310 Change in Retained Earnings $ 756 $ (27,357) $ 19,099 $ (17,577) The Notes to Financial Statements are an integral part hereof. - 3 -
CH ENERGY GROUP CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) (In Thousands) Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 Net Income (loss) $ 5,756 $ (27,357) $ 29,099 $ (8,411) Other Comprehensive Income (loss): Net unrealized losses on investments held by equity method investees - net of tax of $0 in 2014, $0 and $8 in the three and six months ended June 30, 2013, respectively - - - (12) Other comprehensive (loss) - - - (12) Comprehensive income (loss) 5,756 (27,357) 29,099 (8,423) Comprehensive income attributable to non-controlling interest - - - 856 Comprehensive income (loss) attributable to CH Energy Group $ 5,756 $ (27,357) $ 29,099 $ (9,279) The Notes to Financial Statements are an integral part hereof. - 4 -
CH ENERGY GROUP CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (In Thousands) Six Months Ended June 30, 2014 2013 Operating Activities: Net income $ 29,099 $ (8,411) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 19,800 19,909 Amortization 1,568 2,518 Deferred income taxes - net (8,988) (7,751) Bad debt expense 2,273 1,667 Undistributed equity in earnings of unconsolidated affiliates (289) (277) Pension expense 10,820 10,820 Other post-employment benefits ("OPEB") expense 3,573 3,573 Positive Benefit Adjustment expense - 40,000 Revenue decoupling mechanism recorded 9,545 4,250 Regulatory asset amortization 2,809 2,809 Gain on sale of assets (8,073) (50) Changes in operating assets and liabilities - net: Accounts receivable, unbilled revenues and other receivables (25,727) 823 Fuel, materials and supplies 2,829 4,242 Special deposits and prepayments 8,231 5,400 Income and other taxes 14,416 1,401 Accounts payable (1,189) (6,855) Accrued interest (154) 201 Customer advances (11,055) (11,359) Pension plan contribution (16,711) (26,329) OPEB contribution (2,238) (2,894) Revenue decoupling mechanism collected (2,972) 1,563 Regulatory asset - storm deferral - 3,243 Regulatory asset - manufactured gas plant ("MGP") site remediation 1,866 (3,091) Regulatory asset - Temporary State Assessment 1,542 2,074 Deferred natural gas and electric costs 5,477 (4,128) Other - net 8,674 18,053 Net cash provided by operating activities 45,126 51,401 Investing Activities: Proceeds from sale of assets 95,281 82 Additions to utility and other property and plant (44,873) (53,827) Other - net 1,006 (7,146) Net cash provided by (used in) investing activities 51,414 (60,891) Financing Activities: Redemption of long-term debt (14,066) (528) Proceeds from issuance of long-term debt 30,000 - Borrowings of short-term debt - net - 17,500 Proceeds from issuance of stock - 65,000 Dividends paid on Common Stock (10,000) (16,611) Redemption of Preferred Stock - (9,625) Dividends paid on Preferred Stock of subsidiary - (92) Other - net (161) (85) Net cash provided by financing activities 5,773 55,559 Net Change in Cash and Cash Equivalents 102,313 46,069 Cash and Cash Equivalents at Beginning of Period 20,570 (1) 30,508 Cash and Cash Equivalents at End of Period $ 122,883 $ 76,577 Supplemental Disclosure of Cash Flow Information: Interest paid $ 12,265 $ 13,006 Federal and state income taxes paid $ 15,615 $ 1,737 Additions to plant included in liabilities $ 5,018 $ 5,300 (1) Incudes $2,457 of cash and cash equivalents that were held for sale related to Griffith. The Notes to Financial Statements are an integral part hereof. - 5 -
CH ENERGY GROUP CONSOLIDATED BALANCE SHEET (UNAUDITED) (In Thousands) June 30, December 31, June 30, 2014 2013 2013 ASSETS Utility Plant Electric $ 1,137,180 $ 1,118,552 $ 1,097,318 Natural gas 363,893 356,627 329,655 Common 177,664 174,898 167,277 Gross Utility Plant 1,678,737 1,650,077 1,594,250 Less: Accumulated depreciation 449,412 434,410 427,088 Net 1,229,325 1,215,667 1,167,162 Construction work in progress 50,025 41,862 55,934 Net Utility Plant 1,279,350 1,257,529 1,223,096 Non-Utility Property & Plant Griffith non-utility property & plant - - 33,348 Other non-utility property & plant 524 524 524 Gross Non-Utility Property & Plant 524 524 33,872 Less: Accumulated depreciation - Griffith - - 23,208 Net Non-Utility Property & Plant 524 524 10,664 Current Assets Cash and cash equivalents 122,883 18,113 76,577 Accounts receivable from customers - net of allowance for doubtful accounts of $4.2 million, $3.9 million and $5.6 million, respectively. 75,430 66,123 89,860 Accounts receivable - affiliates 6 151 - Accrued unbilled utility revenues 11,389 17,210 11,335 Other receivables 4,378 5,583 10,746 Fuel, materials and supplies 15,926 18,632 20,254 Regulatory assets 25,795 37,626 33,521 Income tax receivable - 808 - Fair value of derivative instruments 16,800 8,789 330 Unamortized debt expense 349 334 398 Special deposits and prepayments 12,885 20,531 15,995 Assets held for sale - 105,151 - Accumulated deferred income tax 15,943 12,941 10,913 Total Current Assets 301,784 311,992 269,929 Deferred Charges and Other Assets Regulatory assets - pension plan 38,932 50,577 135,086 Regulatory assets - other 200,173 125,669 89,365 Fair value of derivative instruments 7,253 1,433 976 Goodwill - - 38,981 Other intangible assets - net - - 11,002 Unamortized debt expense 3,918 3,904 4,605 Investments in unconsolidated affiliates 2,329 2,082 2,308 Other investments 27,418 26,855 25,750 Other 3,033 3,769 4,798 Total Deferred Charges and Other Assets 283,056 214,289 312,871 Total Assets $ 1,864,714 $ 1,784,334 $ 1,816,560 The Notes to Financial Statements are an integral part hereof. - 6 -
CH ENERGY GROUP CONSOLIDATED BALANCE SHEET (CONT'D) (UNAUDITED) (In Thousands, except share amounts) CAPITALIZATION AND LIABILITIES Capitalization CH Energy Group Common Shareholders' Equity June 30, December 31, June 30, 2014 2013 2013 Common Stock (30,000,000 shares authorized: $0.01 par value; 15,961,400 shares issued) 15,961,400 shares outstanding, respectively $ 160 $ 160 $ 160 Paid-in capital 325,906 325,906 325,906 Retained earnings 257,218 238,119 230,526 Accumulated other comprehensive income 504 504 368 Total Equity 583,788 564,689 556,960 Long-term debt 524,670 495,275 472,861 Total Capitalization 1,108,458 1,059,964 1,029,821 Current Liabilities Current maturities of long-term debt 8,189 21,650 44,613 Notes payable - - 37,000 Accounts payable 26,717 31,420 40,067 Accrued interest 5,740 5,894 6,132 Accrued vacation and payroll 6,654 6,773 7,994 Customer advances 6,508 15,001 16,950 Customer deposits 7,024 6,818 6,845 Regulatory liabilities 31,367 22,891 10,760 Fair value of derivative instruments 618 46 2,156 Accrued environmental remediation costs 2,805 1,233 2,403 Accrued income and other taxes 19,062-1,890 Deferred revenues - - 3,874 Liabilities held for sale - 29,883 - Other 10,781 12,200 27,604 Total Current Liabilities 125,465 153,809 208,288 Deferred Credits and Other Liabilities Regulatory liabilities - OPEB 53,684 51,590 10,874 Regulatory liabilities - other 168,971 142,931 126,209 Operating reserves 3,809 2,426 3,639 Fair value of derivative instruments - - 147 Accrued environmental remediation costs 105,446 39,569 7,979 Accrued OPEB costs 16,572 18,036 55,852 Accrued pension costs 1,655 17,497 89,112 Tax reserve 2,726 2,539 2,091 Other 17,531 19,312 17,358 Total Deferred Credits and Other Liabilities 370,394 293,900 313,261 Accumulated Deferred Income Tax 260,397 276,661 265,190 Commitments and Contingencies Total Capitalization and Liabilities $ 1,864,714 $ 1,784,334 $ 1,816,560 The Notes to Financial Statements are an integral part hereof. - 7 -
CH ENERGY GROUP CONSOLIDATED STATEMENT OF EQUITY (UNAUDITED) (In Thousands, except share amounts) Common Stock Treasury Stock Shares Issued Amount CH Energy Group Common Shareholders Shares (Repurchased) / Issued Amount Paid-In Capital Capital Stock Expense Retained Earnings Accumulated Other Comprehensive Income / (Loss) Noncontrolling Interest Balance at December 31, 2012 16,862,087 $ 1,686 (1,907,203) $ (90,141) $ 349,428 $ (166) $ 248,103 $ 380 $ - $ 509,290 Comprehensive income: Net income (8,411) (8,411) Preferred Stock Redemption (28) 166 (764) (626) Dividends declared on Preferred Stock of subsidiary (92) (92) Change in fair value: Investments (12) (12) Dividends declared on common stock (8,310) (8,310) Common Stock Cancelled (16,862,087) (1,686) (349,828) (351,514) Common Stock Issued 15,961,400 160 325,906 326,066 Treasury shares activity - net 1,907,203 90,141 428 90,569 Balance at June 30, 2013 15,961,400 $ 160 - $ - $ 325,906 $ - $ 230,526 $ 368 $ - $ 556,960 Total Equity Balance at December 31, 2013 15,961,400 $ 160 - $ - $ 325,906 $ - $ 238,119 $ 504 $ - $ 564,689 Comprehensive income: Net income 29,099 29,099 Dividends declared on common stock (10,000) (10,000) Balance at June 30, 2014 15,961,400 $ 160 - $ - $ 325,906 $ - $ 257,218 $ 504 $ - $ 583,788 The Notes to Financial Statements are an integral part hereof. - 8 -
CENTRAL HUDSON STATEMENT OF INCOME (UNAUDITED) (In Thousands) Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 Operating Revenues Electric $ 131,960 $ 120,577 $ 306,376 $ 258,740 Natural gas 41,666 32,342 114,099 88,642 Total Operating Revenues 173,626 152,919 420,475 347,382 Operating Expenses Operation: Purchased electricity and fuel used in electric generation 49,360 38,532 134,582 88,941 Purchased natural gas 22,894 13,167 61,788 36,566 Other expenses of operation 60,053 58,387 124,945 125,179 Depreciation and amortization 10,683 9,983 21,368 19,938 Regulatory Debits - 40,000-40,000 Taxes, other than income tax 13,061 12,771 28,388 27,521 Total Operating Expenses 156,051 172,840 371,071 338,145 Operating Income (Loss) 17,575 (19,921) 49,404 9,237 Other Income and Deductions Interest on regulatory assets and other interest income 904 2,016 2,202 3,427 Regulatory adjustments for interest costs 318 328 633 652 Other - net (52) 54 7 115 Total Other Income 1,170 2,398 2,842 4,194 Interest Charges Interest on long-term debt 5,531 5,963 11,023 11,919 Interest on regulatory liabilities and other interest 2,240 1,888 4,619 3,733 Total Interest Charges 7,771 7,851 15,642 15,652 Income (Loss) Before Income Taxes 10,974 (25,374) 36,604 (2,221) Income Tax Expense (Benefit) 4,423 (9,609) 13,801 (825) Net Income (Loss) 6,551 (15,765) 22,803 (1,396) Preferred Stock Redemption Premium - - - 764 Dividends Declared on Cumulative Preferred Stock - - - 92 Income (Loss) Available for Common Stock $ 6,551 $ (15,765) $ 22,803 $ (2,252) CENTRAL HUDSON STATEMENT OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) (In Thousands) Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 Net Income (loss) $ 6,551 $ (15,765) $ 22,803 $ (1,396) Other Comprehensive Income 1 - - - - Comprehensive Income (loss) $ 6,551 $ (15,765) $ 22,803 $ (1,396) The Notes to Financial Statements are an integral part hereof. - 9 -
CENTRAL HUDSON STATEMENT OF CASH FLOWS (UNAUDITED) (In Thousands) Six Months Ended June 30, 2014 2013 Operating Activities: Net income $ 22,803 $ (1,396) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 19,800 18,742 Amortization 1,568 1,196 Deferred income taxes - net (8,850) (7,834) Bad debt expense 2,273 1,104 Pension expense 10,820 10,820 OPEB expense 3,573 3,573 Positive Benefit Adjustment expense - 40,000 Revenue decoupling mechanism recorded 9,545 4,250 Regulatory asset amortization 2,809 2,809 Changes in operating assets and liabilities - net: Accounts receivable, unbilled revenues and other receivables (8,642) (6,589) Fuel, materials and supplies 2,706 2,537 Special deposits and prepayments 7,643 5,934 Income and other taxes 22,855 703 Accounts payable (2,975) (7,553) Accrued interest (66) 201 Customer advances (8,493) (7,446) Pension plan contribution (16,711) (26,329) OPEB contribution (2,238) (2,894) Revenue decoupling mechanism collected (refunded) (2,972) 1,563 Regulatory asset - storm deferral - 3,243 Regulatory asset - MGP site remediation 1,866 (3,091) Regulatory asset - Temporary State Assessment 1,542 2,074 Deferred natural gas and electric costs 5,477 (4,128) Other - net 5,832 17,032 Net cash provided by operating activities 70,165 48,521 Investing Activities: Additions to utility plant (44,742) (53,060) Other - net 1,014 (7,581) Net cash used in investing activities (43,728) (60,641) Financing Activities: Redemption of long-term debt (7,000) - Proceeds from issuance of long-term debt 30,000 - Borrowings of short-term debt - net - 12,000 Equity infusion - 40,000 Redemption of Preferred Stock - (9,653) Dividends paid to parent - CH Energy Group (5,000) (10,000) Dividends paid on cumulative Preferred Stock - (92) Other - net (203) (108) Net cash provided by financing activities 17,797 32,147 Net Change in Cash and Cash Equivalents 44,234 20,027 Cash and Cash Equivalents - Beginning of Period 14,379 24,352 Cash and Cash Equivalents - End of Period $ 58,613 $ 44,379 Supplemental Disclosure of Cash Flow Information: Interest paid $ 11,355 $ 11,910 Federal and state income taxes paid $ - 1 $ - Additions to plant included in liabilities $ 5,018 $ 5,300 The Notes to Financial Statements are an integral part hereof. - 10 -
CENTRAL HUDSON BALANCE SHEET (UNAUDITED) (In Thousands) June 30, December 31, June 30, 2014 2013 2013 ASSETS Utility Plant Electric $ 1,137,180 $ 1,118,552 $ 1,097,318 Natural gas 363,893 356,627 329,655 Common 177,664 174,898 167,277 Gross Utility Plant 1,678,737 1,650,077 1,594,250 Less: Accumulated depreciation 449,412 434,410 427,088 Net 1,229,325 1,215,667 1,167,162 Construction work in progress 50,025 41,862 55,934 Net Utility Plant 1,279,350 1,257,529 1,223,096 Non-Utility Property and Plant 524 524 524 Net Non-Utility Property and Plant 524 524 524 Current Assets Cash and cash equivalents 58,613 14,379 44,379 Accounts receivable from customers - net of allowance for doubtful accounts of $4.2 million, $3.9 million and $4.0 million, respectively 75,430 66,123 61,094 Accrued unbilled utility revenues 11,389 17,210 11,335 Other receivables 2,829 3,827 11,809 Fuel, materials and supplies - at average cost 15,926 18,632 16,726 Regulatory assets 25,795 37,626 33,521 Income tax receivable - 4,379 - Fair value of derivative instruments 16,800 8,789 324 Unamortized debt expense 349 334 398 Special deposits and prepayments 12,817 20,460 12,572 Accumulated deferred income tax 10,170 3,280 3,531 Total Current Assets 230,118 195,039 195,689 Deferred Charges and Other Assets Regulatory assets - pension plan 38,932 50,577 135,086 Regulatory assets - other 200,173 125,669 89,365 Fair value of derivative instruments 7,253 1,433 976 Unamortized debt expense 3,918 3,904 4,605 Other investments 26,621 26,067 24,998 Other 2,352 3,012 1,867 Total Deferred Charges and Other Assets 279,249 210,662 256,897 Total Assets $ 1,789,241 $ 1,663,754 $ 1,676,206 The Notes to Financial Statements are an integral part hereof. - 11 -
CENTRAL HUDSON BALANCE SHEET (CONT'D) (UNAUDITED) (In Thousands, except share amounts) June 30, December 31, June 30, 2014 2013 2013 CAPITALIZATION AND LIABILITIES Capitalization Common Stock (30,000,000 shares authorized: $5 par value; 16,862,087 shares issued and outstanding) $ 84,311 $ 84,311 $ 84,311 Paid-in capital 239,952 239,952 239,952 Retained earnings 205,415 187,612 177,917 Capital stock expense (4,633) (4,633) (4,633) Total Equity 525,045 507,242 497,547 Long-term debt 505,950 475,950 452,950 Total Capitalization 1,030,995 983,192 950,497 Current Liabilities Current maturities of long-term debt 7,000 14,000 37,000 Notes payable - - 12,000 Accounts payable 26,078 29,886 31,559 Accrued interest 5,684 5,750 5,983 Accrued vacation and payroll 6,654 6,773 6,530 Customer advances 6,508 15,001 10,638 Customer deposits 7,024 6,818 6,793 Regulatory liabilities 31,367 22,891 10,760 Fair value of derivative instruments 618 46 2,156 Accrued environmental remediation costs 2,656 1,233 1,998 Accrued income and other taxes 18,477-3,846 Other 9,949 12,027 22,443 Total Current Liabilities 122,015 114,425 151,706 Deferred Credits and Other Liabilities Regulatory liabilities - OPEB 53,684 51,590 10,874 Regulatory liabilities - other 168,971 142,931 126,209 Operating reserves 3,809 2,426 2,821 Fair value of derivative instruments - - 147 Accrued environmental remediation costs 105,346 39,569 6,984 Accrued OPEB costs 16,572 18,036 55,852 Accrued pension costs 1,655 17,497 89,112 Tax reserve 2,726 2,539 2,091 Other 16,570 18,373 16,155 Total Deferred Credits and Other Liabilities 369,333 292,961 310,245 Accumulated Deferred Income Tax 266,898 273,176 263,758 Commitments and Contingencies Total Capitalization and Liabilities $ 1,789,241 $ 1,663,754 $ 1,676,206 The Notes to Financial Statements are an integral part hereof. - 12 -
CENTRAL HUDSON STATEMENT OF EQUITY (UNAUDITED) (In Thousands, except share amounts) Central Hudson Common Shareholders Common Stock Treasury Stock Capital Stock Expense Accumulated Other Comprehensive Income / (Loss) Shares Issued Shares Amount Repurchased Amount Paid-In Capital Retained Earnings Total Equity Balance at December 31, 2012 16,862,087 $ 84,311 - $ - $ 199,980 $ (4,799) $ 190,169 $ - $ 469,661 Net income (1,396) (1,396) Preferred Stock Redemption (28) 166 (764) (626) Dividends declared: On cumulative Preferred Stock (92) (92) On Common Stock to parent - CH Energy Group (10,000) (10,000) Additional Paid-In Capital 40,000-40,000 Balance at June 30, 2013 16,862,087 $ 84,311 - $ - $ 239,952 $ (4,633) $ 177,917 $ - $ 497,547 Balance at December 31, 2013 16,862,087 $ 84,311 - $ - $ 239,952 $ (4,633) $ 187,612 $ - $ 507,242 Net income 22,803 22,803 Dividends declared: On Common Stock to parent - CH Energy Group (5,000) (5,000) Balance at June 30, 2014 16,862,087 $ 84,311 - $ - $ 239,952 $ (4,633) $ 205,415 $ - $ 525,045 The Notes to Financial Statements are an integral part hereof. - 13 -
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 Summary of Significant Accounting Policies Corporate Structure CH Energy Group is the holding company parent corporation of two principal, wholly owned subsidiaries, Central Hudson Gas & Electric Corporation ( Central Hudson ) and Central Hudson Enterprises Corporation ( CHEC ). Effective as of June 27, 2013, all of CH Energy Group s common stock is indirectly owned by Fortis Inc. ( Fortis ), which is the largest investor-owned gas and electric distribution utility in Canada. Central Hudson is a regulated electric and natural gas subsidiary. CHEC, the parent company of CH Energy Group s non-regulated businesses and investments, had one wholly owned subsidiary, Griffith Energy Services, Inc. ( Griffith ). On March 4, 2014, CHEC completed the sale of Griffith to Star Gas Partners, L.P. Therefore, operating results of Griffith are reported as Discontinued Operations for all periods presented in the Consolidated CH Energy Group Statement of Income and as held for sale in the Consolidated CH Energy Group Balance Sheet as of December 31, 2013. See Note 5 Acquisitions, Divestitures and Investments for further information. CHEC also has ownership interests in certain subsidiaries that are less than 100% owned. Basis of Presentation This Quarterly Financial Report is a combined report of CH Energy Group and Central Hudson. The Notes to the Consolidated Financial Statements apply to both CH Energy Group and Central Hudson. CH Energy Group s Consolidated Financial Statements include the accounts of CH Energy Group and its wholly owned subsidiaries, which include Central Hudson and CHEC. Inter-company balances and transactions have been eliminated in consolidation. CHEC s investments in limited partnerships ( Partnerships ) and limited liability companies are accounted for under the equity method. CH Energy Group s proportionate share of the change in fair value of available for sale securities held by the Partnerships is recorded in CH Energy Group s Consolidated Statement of Comprehensive Income. The Financial Statements were prepared in conformity with accounting principles generally accepted in the United States of America ( GAAP ), which for regulated public utilities, includes specific accounting guidance for regulated operations. For additional information regarding regulatory accounting, see Note 2 Regulatory Matters. Unaudited Financial Statements The accompanying Consolidated Financial Statements of CH Energy Group and Financial Statements of Central Hudson are unaudited but, in the opinion of management, reflect adjustments (which include normal recurring adjustments) - 14 -
necessary for a fair statement of the results for the interim periods presented. These unaudited quarterly Financial Statements do not contain all footnote disclosures concerning accounting policies and other matters which would be included in annual audited Financial Statements and, accordingly, should be read in conjunction with the audited Financial Statements (including the Notes thereto) included in the combined CH Energy Group/Central Hudson Annual Report for the year ended December 31, 2013. The balance sheets of CH Energy Group and Central Hudson as of June 30, 2013 are included for supplemental analysis purposes. Reclassification Certain amounts in the 2013 Financial Statements have been reclassified to conform to the 2014 presentation. For more information regarding reclassification of discontinued operations, see Note 5 Acquisitions, Divestitures and Investments. Revenue Recognition CH Energy Group s deferred revenue balances as of December 31, 2013 and June 30, 2013 were $4.8 million and $3.9 million, respectively. The December 31, 2013 balance was included in held for sale. There was no deferred revenue balance as of June 30, 2014 as a result of the sale of Griffith on March 4, 2014. As required by the New York State Public Service Commission ( PSC ), Central Hudson records gross receipts tax revenues and expenses on a gross income statement presentation basis (i.e., included in both revenue and expenses). Sales and use taxes for Central Hudson are accounted for on a net basis (excluded from revenue). Fuel, Materials & Supplies The following is a summary of CH Energy Group s and Central Hudson s inventories (In Thousands): CH Energy Group Central Hudson June 30, December 31, June 30, June 30, December 31, June 30, 2014 2013 2013 2014 2013 2013 Natural gas $ 4,515 $ 8,078 $ 5,921 $ 4,515 $ 8,078 $ 5,921 Petroleum products and propane (1) - - 2,193 - - - Fuel used in electric generation 415 430 292 415 430 292 Materials and supplies (1) 10,996 10,124 11,848 10,996 10,124 10,513 Total $ 15,926 $ 18,632 $ 20,254 $ 15,926 $ 18,632 $ 16,726 (1) Petroleum products and propane of $3,857 and materials and supplies of $1,493 related to Griffith have been excluded from the CH Energy Group December 31, 2013 balances and designated as Assets held for sale under current accounting guidance in the CH Energy Group Consolidated Balance Sheet. For further details, see Note 5 - "Acquisitions, Divestitures and Investments." - 15 -
Depreciation and Amortization Current accounting guidance related to asset retirements precludes the recognition of expected future retirement obligations as a component of depreciation expense or accumulated depreciation. Central Hudson, however, is required to use depreciation methods and rates approved by the PSC under regulatory accounting. These depreciation rates include a charge for the cost of future removal and retirement of fixed assets. In accordance with current accounting guidance for regulated operations, Central Hudson continues to accrue for the future cost of removal for its rate-regulated natural gas and electric utility assets. In accordance with current accounting guidance related to asset retirements, Central Hudson has classified $47.8 million, $46.7 million, and $45.6 million of cost of removal as regulatory liabilities as of June 30, 2014, December 31, 2013, and June 30, 2013, respectively. This liability represents the portion of the cost of removal charge in excess of the amount reported as an Asset Retirement Obligation under GAAP. Parental Guarantees As a result of the sale of Griffith by CHEC on March 4, 2014, there are no parental guarantees outstanding as of June 30, 2014. Common Stock Dividends CH Energy Group s ability to pay dividends is affected by the ability of its subsidiaries to pay dividends. The Federal Power Act limits the payment of dividends by Central Hudson to its 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, Central Hudson is currently restricted to a maximum annual payment of $32.9 million in dividends to CH Energy Group. 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 any of CH Energy Group s or Central Hudson s affiliates. Further restrictions are imposed for any downgrades below this level. In addition, Central Hudson would not be allowed to pay dividends if its average common equity ratio for the 13 months prior to the proposed dividend were more than 200 basis points below the ratio used in setting rates. During the six months ended June 30, 2014, the Board of Directors of Central Hudson authorized and Central Hudson paid dividends of $5.0 million to parent CH Energy Group. CH Energy Group s other subsidiaries do not have express restrictions on their ability to pay dividends. See Note 8 - Capitalization-Common and Preferred Stock for information regarding dividends declared. - 16 -
NOTE 2 Regulatory Matters Summary of Regulatory Assets and Liabilities The following table sets forth Central Hudson s regulatory assets and liabilities (In Thousands): June 30, December 31, June 30, 2014 2013 2013 Regulatory Assets (Debits): Current: Deferred purchased electric and natural gas costs $ 15,616 $ 21,093 $ 15,495 Deferred unrealized losses on derivatives - Electric (Note 14) 618-1,707 Deferred unrealized losses on derivatives - Gas (Note 14) - 46 449 PSC General and Temporary State Assessment and carrying charges 2,525 3,962 4,352 RDM and carrying charges - Electric - 2,451 1,466 Residual natural gas deferred balances 1,772 4,554 4,554 Deferred debt expense on re-acquired debt 555 625 601 Deferred and accrued costs - MGP site remediation and carrying charges 4,605 4,605 4,605 Other 104 290 292 25,795 37,626 33,521 Long-term: Deferred pension costs 38,932 50,577 135,086 Deferred unrealized losses on derivatives - Electric (Note 14) - - 147 Carrying charges - pension reserve 15,226 13,264 11,383 Deferred and accrued costs - MGP site remediation and carrying charges 104,609 39,233 8,951 Deferred debt expense on re-acquired debt 4,718 4,978 4,436 Deferred Medicare Subsidy taxes 8,696 8,400 8,103 Residual natural gas deferred balances and carrying charges 1,097 1,060 2,725 Income taxes recoverable through future rates 42,873 37,223 36,441 Energy efficiency incentives 2,719 2,719 2,719 Other 20,235 18,792 14,460 239,105 176,246 224,451 Total Regulatory Assets $ 264,900 $ 213,872 $ 257,972 Regulatory Liabilities (Credits): Current: RDM and carrying charges - Electric $ 1,742 $ - $ - RDM and carrying charges - Gas 6,295 3,888 3,952 Deferred unrealized gains on derivatives - Electric (Note 14) 16,800 8,465 324 Deferred unrealized gains on derivatives - Gas (Note 14) - 324 - Income taxes refundable through future rates 4,406 4,209 4,275 Deferred unbilled gas revenues 2,124 6,005 2,209 31,367 22,891 10,760 Long-term: Customer benefit fund 6,273 6,505 7,010 Deferred cost of removal (Note 1) 47,820 46,655 45,650 Rate Base impact of tax repair project and carrying charges 12,865 12,336 9,658 Excess electric depreciation reserve carrying charges 1,586 1,586 1,586 Deferred unrealized gains on derivatives - Electric (Note 14) 7,253 1,433 976 Income taxes refundable through future rates 37,078 27,484 21,086 Deferred OPEB costs 53,684 51,590 10,874 Carrying charges - OPEB reserve 18,014 15,197 12,506 PBA - Electric and carrying charges 12,624 12,242 11,654 PBA - Gas and carrying charges 3,202 3,105 3,009 Other 22,256 16,388 13,074 222,655 194,521 137,083 Total Regulatory Liabilities $ 254,022 $ 217,412 $ 147,843 Net Regulatory Assets/(Liabilities) $ 10,878 $ (3,540) $ 110,129-17 -
2010 Rate Order and 2013 Joint Petition From July 1, 2010 through June 30, 2013, Central Hudson operated under the terms of the 2010 Rate Order. On June 26, 2013 the PSC issued its Order Authorizing Acquisition Subject to Conditions in Case 12-M-0192 (the 2013 Joint Petition ), which was accepted on June 27, 2013. The Order adopted the terms of the Joint Proposal dated January 25, 2013 for the acquisition of CH Energy Group, owner of Central Hudson, by Fortis along with additional commitments by the companies to enhance financial protection for ratepayers and other community and economic development benefits. A summary of the key terms of the 2010 Order and the 2013 Joint Petition are as follows: Description 2010 Rate Order 2013 Joint Petition Electric delivery revenue increases $9.1 million 7/1/12 $0 effective 7/1/13 (6) Natural gas delivery revenue increases $1.6 million 7/1/12 $0 effective 7/1/13 (6) ROE 10.00% 10.00% Earnings sharing Yes (1) Yes (7) Capital structure common equity 48% 48% Positive benefit adjustments N/A $35.0 million (8) Community benefit fund N/A $5.0 million (8) Synergy Savings N/A $1.85 million (9) Targets with true-up provisions -% of revenue requirement to defer for shortfalls Net plant balances 100% 100% Transmission and distribution ROW maintenance 100% 100% RDMs electric and natural gas (2) Yes Yes New deferral accounting for full recovery Fixed debt costs Yes (3) N/A (10) Transmission sag mitigation Yes N/A (10) New York State Temporary Assessment Yes N/A (10) Material regulatory actions Yes (4) N/A (10) Property taxes Deferral for 90% of excess/deficiency relative to revenue requirement Yes (5) N/A (10) (1) ROE > 10.5%, 50% to customers, > 11.0%, 80% to customers, > 11.5%, 90% to customers. (2) Electric is based on revenue dollars; gas is based on usage per customer. (3) Deferral authorization in RY2 and RY3 only. (4) Legislative, governmental or regulatory actions with individual impacts greater than or equal to 2% of net income of the applicable department. (5) The Company s pre-tax gain or loss limited to $0.8 million per rate year. (6) There is a rate freeze on Central Hudson electric and gas delivery rates through July 1, 2015. (7) ROE > 10.0% and up to 10.5%, 50% to customers, > 10.5%, 90% to customers. (8) To cover expenses normally required by rate payers, such as storm restoration costs and for economic development and lowincome customer assistance programs. (9) Guaranteed annual synergy savings of $1.85 million to ratepayers for 5 years. (10) There were no new deferrals granted in the 2013 Joint Petition. - 18 -
Other PSC Proceedings On October 29, 2012, Central Hudson s service territory was impacted by Superstorm Sandy, and approximately 103,000 electric customers were affected. On April 2, 2014 the PSC issued an Order authorizing deferral of $9.965 million of the Sandy incremental storm restoration expenses, with carrying charges which had been deferred on Central Hudson s books. On April 22, 2013, the PSC issued Orders approving deferral of $8.9 million and denying deferral of $3.7 million of the incremental electric storm restoration expense related to Tropical Storm Irene and the October 2011 snowstorm, respectively. On May 22, 2013, Central Hudson filed a petition for reconsideration and rehearing on these Orders challenging the exclusion of Central Hudson s normalization adjustments used to measure earnings and seeking recovery of $3.7 million that was denied. On April 2, 2014 the PSC issued an Order affirming the previous Irene and October snowstorm PSC Orders and denying Central Hudson s rehearing petitions. On June 13, 2014 Central Hudson and New York State Department of Public Service Staff ( Staff ) filed a Joint Proposal to the PSC regarding the disposition of property tax refunds received by Central Hudson. The Joint Proposal calls for the sharing of the refund, including interest, after deducting cost-to-achieve, on an 85%/15% customer/company basis. The Company has deferred 85% of the net refund for future pass back to customers. Other Regulatory Matters Unbilled Electric Revenues Pursuant to regulatory requirements, a portion of unbilled electric revenues is not recorded. The amount not recorded as of June 30, 2014, December 31, 2013 and June 30, 2013, which would have been reflected as an increase to receivables and regulatory liabilities if recorded, was $10.8 million, $13.0 million and $10.7 million, respectively. - 19 -
NOTE 3 - New Accounting Guidance Newly adopted and soon to be adopted accounting guidance is summarized below, including explanations for any new guidance issued in 2014 (except that which is not currently applicable) and the expected impact on CH Energy Group and its subsidiaries. Impact Category Accounting Reference Title 1 Liabilities (Topic 405) ASU No. 2013-04 Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date 1 Income Taxes (Topic 740) ASU No. 2013-11 Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists Issued Date Feb-13 Jul-13 Effective Date Jan-14 Jan-14 2 Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (Topic 360) ASU No. 2014-08 Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity April-14 Jan-15 2 Compensation-Stock Compensation (Topic 718) ASU No. 2014-12 Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period Jun-14 Jan-16 3 Revenue from Contracts with Customers (Topic 606) ASU No. 2014-09 Revenue from Contracts with Customers May-14 Jan-17 Impact Key: (1) No current impact on the financial condition, results of operations and cash flows of CH Energy Group and its subsidiaries when adopted on the effective date noted. Additional disclosures have been added or presentation of information modified where required. (2) No anticipated impact on the financial condition, results of operations and cash flows of CH Energy Group and its subsidiaries upon future adoption. (3) CH Energy Group and its subsidiaries are assessing the impact that the adoption of this standard will have on the financial condition, results of operations and cash flows. - 20 -
NOTE 4 Income Tax In September of 2010, Central Hudson filed a request with the Internal Revenue Service ( IRS ) to change the Company s tax accounting method related to costs to repair and maintain utility assets. The change was effective for the tax year ending December 31, 2009. This change allows Central Hudson to take a current tax deduction for a significant amount of repair costs that were previously capitalized for tax purposes. In September 2012, Central Hudson filed corporate income tax returns for the year ended December 31, 2011. With that filing, Central Hudson included an election to adopt the provisions of Revenue Procedure 2011-43 ( Rev Proc ), which provided IRS guidance related to the repair deduction previously taken on electric transmission and distribution property. As such, tax reserves related to the electric transmission and distribution repair deductions, which were established prior to issuance of the Rev Proc were reclassified to deferred tax liability accounts. IRS guidance with respect to repairs taken on Gas Transmission and Distribution repairs is still pending. Therefore, remaining reserves related to the gas repair deduction continue to be shown as Tax Reserve under the Deferred Credits and Other Liabilities section of the Central Hudson Balance Sheet. Other than the uncertain tax position related to Central Hudson s accounting method change for gas transmission and distribution repairs, there are no other uncertain tax positions. Increases to the tax reserve during 2013 and 2014 reflect the ongoing uncertainty related to Gas Transmission and Distribution repair deductions. The following is a summary of activity related to uncertain tax positions (In Thousands): Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 Tax reserve balance at the beginning of the period 1 $ 2,614 $ 2,047 1 $ 2,539 $ 2,000 Adjustments related to tax accounting method change 112 44 187 91 Tax reserve balance at the end of the period $ 2,726 $ 2,091 $ 2,726 $ 2,091 Jurisdiction Tax Years Open for Audit Federal (1) 2011 2013 New York State (2) 2010-2013 (1) Completed audit adjustments for the years 2007-2010 were received from IRS Appeals on December 23, 2013; adjustments have been approved by the IRS Joint Committee. (2) In June 2014, the NY State Department of Taxation and Finance commenced an income tax audit for the years 2010-2012. - 21 -
Reconciliation - CH Energy Group The following is a reconciliation between the amount of federal income tax computed on income before taxes at the statutory rate and the amount reported in CH Energy Group s Consolidated Statement of Income (In Thousands): Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 Net income (loss) from Continuing Operations $ 5,769 $ (26,277) $ 21,411 $ (12,163) Federal income tax 12,349 (2,770) 20,702 2,013 State income tax 1,634 217 2,280 217 Deferred federal income tax (9,132) (9,863) (9,420) (7,030) Deferred state income tax 313 (2,120) 432 (1,929) Income before taxes $ 10,933 $ (40,813) $ 35,405 $ (18,892) Computed federal tax at 35% statutory rate $ 3,827 $ (14,285) $ 12,392 $ (6,613) State income tax net of federal tax benefit 1,402 (1,713) 2,977 (1,273) State income tax rate change (19) - (998) - Depreciation flow-through 902 850 1,813 1,741 Cost of Removal (607) (611) (1,216) (1,227) Merger Transaction Costs (209) 1,000 (221) 1,084 Other (132) 223 (753) (441) Total income tax $ 5,164 $ (14,536) $ 13,994 $ (6,729) Effective tax rate - federal 29.4 % 31.0 % 31.9 % 26.6 % Effective tax rate - state 17.8 % 4.7 % 7.7 % 9.1 % Effective tax rate - combined 47.2 % 35.7 % 39.6 % 35.7 % The increase in the effective rate in the quarter and year to date is the result of Central Hudson having more losses from prior years available to reduce its NYS taxable income than were available at the Consolidated level. This resulted in a higher tax liability at the CH Energy Consolidated basis. - 22 -
Reconciliation - Central Hudson The following is a reconciliation between the amount of federal income tax computed on income before taxes at the statutory rate and the amount reported in Central Hudson s Statement of Income (In Thousands): Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 Net income (loss) $ 6,551 $ (15,765) $ 22,803 $ (1,396) Federal income tax 13,103 1,337 22,488 6,655 State income tax 163 354 163 354 Deferred federal income tax (9,179) (9,938) (9,467) (7,373) Deferred state income tax 336 (1,362) 617 (461) Income before taxes $ 10,974 $ (25,374) $ 36,604 $ (2,221) Computed federal tax at 35% statutory rate $ 3,841 $ (8,881) $ 12,811 $ (777) State income tax net of federal tax benefit 461 (1,132) 1,721 (231) State income tax rate change (19) - (998) - Depreciation flow-through 902 850 1,813 1,741 Cost of Removal (607) (611) (1,216) (1,227) Other (155) 165 (330) (331) Total income tax $ 4,423 $ (9,609) $ 13,801 $ (825) Effective tax rate - federal 35.8 % 33.9 % 35.6 % 32.3 % Effective tax rate - state 4.5 % 4.0 % 2.1 % 4.8 % Effective tax rate - combined 40.3 % 37.9 % 37.7 % 37.1 % For the quarter ended June 30, 2014, the higher effective tax rate was driven by an increase in book reserves which are not deductible for tax purposes. For the six months ended June 30, 2014, the impact of the increase in reserves on the state effective rate was more than offset by an adjustment recorded at March 31, 2014 to long term NYS tax liabilities based on a law enacted to reduce the NYS corporate tax rate from 7.1% to 6.5% effective January 1, 2016. NOTE 5 Acquisitions, Divestitures and Investments Acquisitions During the six months ended June 30, 2014 and 2013, neither CH Energy Group nor Central Hudson made any acquisitions. Divestitures During the first quarter of 2014, CHEC divested Griffith. The results of operations of Griffith for the current and prior periods are presented in discontinued operations in the CH Energy Group Consolidated Statement of Income. Management has elected to include cash flows from discontinued operations of those investments with those from continuing operations in - 23 -
the CH Energy Group Consolidated Statement of Cash Flows. The details of the sale transaction are as follows (In Thousands): Griffith Date of Sale 3/4/2014 Assets: Cash $ 4,151 Accounts Receivable, net of allowance 47,160 Fuel, Materials and Supplies 5,228 Other Current Assets 6,681 Total Current Assets 63,220 Net Intangibles 48,660 Other Assets 1,227 Property, Plant and Equipment: Property, plant and equipment 34,711 Less: Accumulated depreciation 24,235 Total property, plant and equipment, net 10,476 Assets sold $ 123,583 Liabilities: Accounts Payable $ 10,978 Deferred Revenue 4,448 Accrued Expenses 2,325 Accrued Vacation and Payroll 2,070 Other Current Liabilities 6,765 Total Current Liabilities 26,586 Other Liabilities 4,863 Liabilities sold $ 31,449 Net Assets Sold $ 92,134 Net Proceeds from Sale $ 100,208 Pre-tax gain on sales transaction $ 8,074 Net Increase to Earnings $ 3,153 The table below provides additional detail of the financial results of the discontinued operations (In Thousands): Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Revenues from discontinued operations $ - $ 57,261 $ 85,856 $ 161,171 Income (loss) from discontinued operations before tax 15 (1,830) 6,907 6,360 Gain (loss) from sale of discontinued operations (38) - 8,036 - Income tax expense (benefit) from discontinued operations (10) (750) 7,255 2,608-24 -
- Investments The value of CHEC's investments as of June 30, 2014 is as follows (In Thousands): CHEC Investment CH-Community Wind Other Equity Description Investment 50% equity interest in a joint venture that owns 18% interest in two operating wind projects 1 $ - Partnerships and an energy sector venture capital fund 2,329 $ 2,329 These remaining investments are not considered a part of the core business; however, management intends to retain these investments at this time. NOTE 6 Goodwill and Other Intangible Assets On March 4, 2014, Griffith was sold, thereby, decreasing customer relationships, trademarks and covenants not to compete to zero. The components of amortizable intangible assets of CH Energy Group are summarized as follows (In Thousands): Gross Carrying Amount Customer relationships $ - 1 June 30, 2014 December 31, 2013 June 30, 2013 Gross Gross Accumulated Carrying Accumulated Carrying Amortization Amount Amortization Amount Accumulated Amortization $ - $ 37,709 $ 28,531 $ 37,709 $ 27,274 Trademarks - - 318 32 318 16 Covenants not to compete - 1 411 196 411 146 Total Amortizable Intangibles (1) $ - $ - $ 38,438 $ 28,759 $ 38,438 $ 27,436 (1) December 31, 2013 balance reflected as "Assets held for sale" in the CH Energy Group Consolidated Balance Sheet. Amortization related to customer relationships, trademarks and covenants not to compete ceased upon sale. Under current accounting guidance following the designation of Griffith intangibles as held for sale at December 31, 2013, amortization ceased. Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 Intangibles Amortization Expense (In Thousands) $ - $ 661 $ - $ 1,322 (1) Included in "Income from discontinued operations" on the CH Energy Group Consolidated Statement of Income. (1) - 25 -
NOTE 7 Short-Term Borrowing Arrangements CH Energy Group and Central Hudson borrowings under their committed and uncommitted short-term borrowing arrangements are as follows (In Thousands): June 30, 2014 December 31, 2013 June 30, 2013 CH Energy Group Holding Company Short-term borrowings $ - $ - $ $25,000 Central Hudson Short-term borrowings - - $12,000 Total CH Energy Group $ - $ - $ $37,000 Total CH Energy Group Weighted Average Interest Rate 1.00% 1.09% 1.00% NOTE 8 Capitalization Common and Preferred Stock For a schedule of activity related to common stock, paid-in capital and capital stock, see the Consolidated Statement of Equity for CH Energy Group and Statement of Equity for Central Hudson. During the three and six months ended June 30, 2014, CH Energy Group paid dividends to FortisUS Inc. ( FortisUS ) of $5.0 million and $10.0 million, respectively. During the six months ended June 30, 2014, Central Hudson paid dividends of $5.0 million to parent CH Energy Group. No dividends were paid in the second quarter of 2014. During the three and six months ended June 30, 2013, Central Hudson paid dividends of $5.0 million and $10.0 million to parent CH Energy Group, respectively. NOTE 9 Capitalization Long-Term Debt In March 2014, Central Hudson issued $30 million of 10-year Series E notes with a floating interest rate of 3 month LIBOR plus 1%. Central Hudson used the proceeds from the sale of the 2014 Series E notes for refunding maturing long term debt, working capital and for general corporate purposes. To mitigate the potential cash flow impact from unexpected increases in short-term interest rates, Central Hudson purchased a 3-year interest rate cap based on 3 month LIBOR. The rate cap is three years in length with a notional amount equal to the outstanding principal amount of the 2014 Series E notes and will expire on April 1, 2017. The cap is based on the quarterly reset of the LIBOR rate on the quarterly interest payment dates. Central Hudson would receive a payout if the LIBOR rate exceeds 4% at the start of any quarterly interest period during the term of the cap. See - 26 -
Note 14 Accounting for Derivative Instruments and Hedging Activities for fair value disclosures related to this instrument. NYSERDA The principal amount of Central Hudson s outstanding Series B NYSERDA Bonds totaled $33.7 million at June 30, 2014. These are tax-exempt multi-modal bonds that are currently in a variable rate mode. In its Orders, the PSC has authorized deferral accounting treatment for variations in the interest costs of these bonds. As such, variations between the actual interest rates on these bonds and the interest rate included in the current delivery rate structure for these bonds are deferred for future recovery from or refund to customers and therefore do not impact earnings. To mitigate the potential cash flow impact from unexpected increases in short-term interest rates on Series B NYSERDA Bonds, on March 27, 2014, Central Hudson purchased an interest rate cap. The rate cap is two years in length with a notional amount equal to the outstanding principal amount of the Series B bonds and will expire on April 1, 2016. The cap is based on the monthly weighted average of an index of taxexempt variable rate debt, multiplied by 175%. Central Hudson would receive a payout if the adjusted index exceeds 5.0% for a given month. The rate cap replaced an expiring rate cap with substantially similar terms. See Note 14 Accounting for Derivative Instruments and Hedging Activities for fair value disclosures related to this instrument. NOTE 10 Post-Employment Benefits Central Hudson provides certain health care and life insurance benefits for retired employees through its post-retirement benefit plans. Central Hudson pension benefits include a Retirement Income Plan ( RIP ) and a non-qualified Supplemental Executive Retirement Plan ( SERP ). In its Orders, the PSC has authorized deferral accounting treatment for any variations between actual pension and other post-employment benefits ( OPEB ) expense and the amount included in the current delivery rate structure. As a result, post-retirement benefit plans at Central Hudson do not have any impact on earnings. The following information is provided in accordance with current accounting requirements. - 27 -