CH ENERGY GROUP, INC. & CENTRAL HUDSON GAS & ELECTRIC CORP. ANNUAL FINANCIAL REPORT for the period ended DECEMBER 31, 2014
Report of Independent Auditors The Board of Directors of Fortis Inc. We have audited the accompanying consolidated financial statements of CH Energy Group, Inc. and subsidiaries, which comprise the consolidated balance sheets as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income (loss), equity and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CH Energy Group, Inc. and subsidiaries at December 31, 2014 and 2013, and the consolidated results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
Change in Accounting Principle As discussed in Note 5 to the consolidated financial statements, in 2013 CH Energy Group, Inc. changed its presentation of the operating results of one of its subsidiaries to report them as discontinued operations for all periods presented in the consolidated financial statements. Report of Adjustments to 2012 Financial Statements We also audited the adjustments described in Note 5 that were applied to restate the 2012 consolidated financial statements. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review or apply any procedures to the 2012 consolidated financial statements of the Company other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2012 consolidated financial statements as a whole. Report of Other Auditors on 2012 Financial Statements Except for the adjustments described in Note 5, the consolidated financial statements of CH Energy Group, Inc. and subsidiaries for the years ended December 31, 2012 were audited by other auditors who expressed an unmodified opinion on those statements on February 25, 2013. Toronto, Canada February 18, 2015
Report of Independent Auditors The Board of Directors of Fortis Inc. We have audited the accompanying balance sheets of Central Hudson Gas & Electric Corporation as of December 31, 2014 and 2013, and the related statements of income (loss), comprehensive income (loss), equity and cash flows for each of the two years in the period ended December 31, 2014. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of Central Hudson Gas & Electric Corporation for the year ended December 31, 2012, were audited by other auditors who expressed an unmodified opinion on those statements on February 25, 2013. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Central Hudson Gas & Electric Corporation at December 31, 2014 and 2013, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Central Hudson Gas & Electric Corporation's internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 18, 2015 expressed an unqualified opinion thereon. Toronto, Canada February 18, 2015
Report of Independent Auditors The Board of Directors of Fortis Inc. We have audited Central Hudson Gas & Electric Corporation s internal control over financial reporting as of 31 December 2014, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Central Hudson Gas & Electric Corporation s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Central Hudson Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Central Hudson Gas & Electric Corporation maintained, in all material respects, effective internal control over financial reporting as of 31 December 2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheet of Central Hudson Gas & Electric Corporation as of December 31, 2014, and the related statements of income, comprehensive income, equity and cash flows in the period ended December 31, 2014 and our report dated February 18, 2015 expressed an unqualified opinion thereon. Toronto, Canada February 18, 2015
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING CENTRAL HUDSON The management of Central Hudson Gas & Electric Corporation ( management ) is responsible for establishing and maintaining adequate internal control over financial reporting for Central Hudson Gas & Electric Corporation (the Corporation ) as defined in Rules 13a-15(f) and 15d- 15(f) under the Securities Exchange Act of 1934. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those policies and procedures that: pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Corporation; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the Corporation are being made only in accordance with authorization of management and directors of the Corporation; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements. Internal control over financial reporting includes the controls themselves, monitoring (including internal auditing practices) and actions taken to correct deficiencies as identified. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Corporation s internal control over financial reporting as of December 31, 2014. Management based this assessment on criteria for effective internal control over financial reporting described in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management determined that, as of December 31, 2014, the Corporation maintained effective internal control over financial reporting. The effectiveness of the Corporation s internal control over financial reporting as of December 31, 2014, has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which appears herein. /s/ James P. Laurito James P. Laurito Chief Executive Officer /s/ Christopher M. Capone Christopher M. Capone Executive Vice President and Chief Financial Officer February 18, 2015
FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2014 TABLE OF CONTENTS CH Energy Group, Inc. PAGE Consolidated Statement of Income Year Ended December 31, 2014, 2013 and 2012 9 Consolidated Statement of Comprehensive Income Year Ended December 31, 2014, 2013 and 2012 10 Consolidated Statement of Cash Flows Year Ended December 31, 2014, 2013 and 2012 11 Consolidated Balance Sheet December 31, 2014 and 2013 12 Consolidated Statement of Equity Year Ended December 31, 2014, 2013 and 2012 14 Central Hudson Gas & Electric Corporation Statement of Income Year Ended December 31, 2014, 2013 and 2012 15 Statement of Comprehensive Income Year Ended December 31, 2014, 2013 and 2012 15 Statement of Cash Flows Year Ended December 31, 2014, 2013 and 2012 16 Balance Sheet December 31, 2014 and 2013 17 Statement of Equity Year Ended December 31, 2014, 2013 and 2012 19 NOTES TO FINANCIAL STATEMENTS 20
Financial Statements CH ENERGY GROUP CONSOLIDATED STATEMENT OF INCOME (In Thousands) Year Ended December 31, 2014 2013 2012 Operating Revenues Electric $ 579,757 $ 532,539 $ 512,081 Natural gas 163,005 135,904 132,434 Total Operating Revenues 742,762 668,443 644,515 Operating Expenses Operation: Purchased electricity and fuel used in electric generation 232,990 185,736 175,721 Purchased natural gas 78,765 51,342 49,276 Other expenses of operation - regulated activities 250,046 241,366 232,222 Other expenses of operation - non-regulated 7,129 992 1,985 Merger related costs 86 16,292 10,058 Depreciation and amortization 43,859 40,218 38,139 Regulatory Debits - 40,000 - Taxes, other than income tax 55,497 53,499 50,945 Total Operating Expenses 668,372 629,445 558,346 Operating Income 74,390 38,998 86,169 Other Income and Deductions Income from unconsolidated affiliates 586 505 174 Interest on regulatory assets and other interest income 4,395 5,884 6,178 Regulatory adjustments for interest costs 1,259 1,280 1,307 Other - net (700) (600) (603) Total Other Income 5,540 7,069 7,056 Interest Charges Interest on long-term debt 23,528 25,443 24,949 Interest on regulatory liabilities and other interest 9,575 8,316 6,696 Total Interest Charges 33,103 33,759 31,645 Income before income taxes 46,827 12,308 61,580 Income Tax Expense 20,196 7,574 24,827 Net Income from Continuing Operations 26,631 4,734 36,753 Discontinued Operations Income from discontinued operations before tax 6,908 7,540 5,246 Gain from sale of discontinued operations 8,036 - - Income tax expense from discontinued operations 7,255 3,092 2,152 Net Income from Discontinued Operations 7,689 4,448 3,094 Net Income 34,320 9,182 39,847 Net Income attributable to non-controlling interest: Dividends declared on Preferred Stock of subsidiary - 92 624 Preferred Stock Redemption Premium - 764 342 Net Income Attributable to CH Energy Group 34,320 8,326 38,881 Dividends declared on Common Stock 75,000 18,310 33,169 Change in Retained Earnings $ (40,680) $ (9,984) $ 5,712 The Notes to Financial Statements are an integral part hereof. - 9 -
CH ENERGY GROUP CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (In Thousands) Year Ended December 31, 2014 2013 2012 Net Income $ 34,320 $ 9,182 $ 39,847 Other Comprehensive Income: Net unrealized gains on investments held by equity method investees net of tax of ($3), ($83) and ($17), respectively 6 124 26 Other comprehensive income 6 124 26 Comprehensive income 34,326 9,306 39,873 Comprehensive income attributable to non-controlling interest - 856 966 Comprehensive income attributable to CH Energy Group $ 34,326 $ 8,450 $ 38,907 The Notes to Financial Statements are an integral part hereof. - 10 -
CH ENERGY GROUP CONSOLIDATED STATEMENT OF CASH FLOWS (In Thousands) Year Ended December 31, 2014 2013 2012 Operating Activities: Net income $ 34,320 $ 9,182 $ 39,847 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 40,702 39,938 37,898 Amortization 3,157 5,274 4,883 Deferred income taxes - net 15,741 9,655 25,303 Bad debt expense 6,645 3,829 6,331 Undistributed equity in earnings of unconsolidated affiliates 171 (505) (174) Pension expense 21,152 20,601 22,767 Other post-employment benefits ("OPEB") expense 6,803 6,803 6,832 Positive Benefit Adjustment expense - 40,000 - Regulatory liability - rate moderation - - (1,107) Revenue decoupling mechanism recorded 3,245 2,774 (4,194) Regulatory asset amortization 4,554 4,554 4,610 Gain on sale of assets (8,073) (70) (103) Changes in operating assets and liabilities - net: Accounts receivable, unbilled revenues and other receivables (25,700) (7,677) (7,195) Fuel, materials and supplies 1,209 513 746 Special deposits and prepayments (4,357) (2,739) 531 Income and other taxes (16,208) 106 1,372 Accounts payable 17,201 (7,534) 2,717 Accrued interest (221) (37) (402) Customer advances (3,396) (6,229) 5,782 Pension plan contribution (16,986) (26,641) (28,579) OPEB contribution (2,238) (2,894) (3,269) Revenue decoupling mechanism collected (5,105) 1,956 1,660 Regulatory asset - storm deferral (5,108) 3,450 (6,183) Regulatory asset - manufactured gas plant ("MGP") site remediation 4,202 (1,453) 1,657 Regulatory asset - Temporary State Assessment 1,185 2,220 1,132 Deferred natural gas and electric costs (8,389) (9,726) (592) Other - net 23,065 13,170 19,651 Net cash provided by operating activities 87,571 98,520 131,921 Investing Activities: Proceeds from sale of assets 95,281 103 173 Additions to utility and other property and plant (113,321) (110,972) (111,161) Acquisitions made by competitive business subsidiaries - - (3,499) Other - net 1,861 (5,312) (84) Net cash provided by (used in) investing activities (13,722) (116,181) (114,571) Financing Activities: Redemption of long-term debt (21,651) (47,777) (37,007) Proceeds from issuance of long-term debt 30,000 46,700 72,000 Borrowings of short-term debt - net - (19,500) 13,000 Proceeds from issuance of stock - 65,000 - Dividends paid on Common Stock (75,000) (26,611) (33,137) Redemption of Preferred Stock - (9,625) (12,180) Dividends paid on Preferred Stock of subsidiary - (92) (866) Shares repurchased - - (2,993) Other - net (207) (372) (940) Net cash provided (used in) by financing activities (66,858) 7,723 (2,123) Cash Included in Net Current Assets Held for Sale - (2,457) Net Change in Cash and Cash Equivalents 4,534 (9,938) 15,227 Cash and Cash Equivalents at Beginning of Period 18,113 30,508 15,281 Cash and Cash Equivalents at End of Period $ 22,647 $ 18,113 $ 30,508 Supplemental Disclosure of Cash Flow Information: Interest paid $ 24,147 $ 26,048 $ 26,008 Federal and state income taxes paid $ 17,000 $ 2,158 $ 574 Additions to plant included in liabilities $ 7,495 $ 5,901 $ 10,893 The Notes to Financial Statements are an integral part hereof. - 11 -
CH ENERGY GROUP CONSOLIDATED BALANCE SHEET (In Thousands) December 31, December 31, 2014 2013 ASSETS Utility Plant Electric $ 1,160,643 $ 1,118,552 Natural gas 380,966 356,627 Common 184,804 174,898 Gross Utility Plant 1,726,413 1,650,077 Less: Accumulated depreciation 458,155 434,410 Net 1,268,258 1,215,667 Construction work in progress 57,543 41,862 Net Utility Plant 1,325,801 1,257,529 Non-utility property & plant 524 524 Net Non-Utility Property & Plant 524 524 Current Assets Cash and cash equivalents 22,647 18,113 Accounts receivable from customers - net of allowance for doubtful accounts of $4.8 million and $3.9 million, respectively. 69,072 66,123 Accounts receivable - affiliates - 151 Accrued unbilled utility revenues 16,866 17,210 Other receivables 4,704 5,583 Fuel, materials and supplies 17,546 18,632 Regulatory assets 56,272 37,626 Income tax receivable 10,694 808 Fair value of derivative instruments - 8,789 Unamortized debt expense 347 334 Special deposits and prepayments 25,473 20,531 Assets held for sale - 105,151 Accumulated deferred income tax 11,955 12,941 Total Current Assets 235,576 311,992 Deferred Charges and Other Assets Regulatory assets - pension plan 94,426 50,577 Regulatory assets - other 195,303 125,669 Fair value of derivative instruments 570 1,433 Unamortized debt expense 3,749 3,904 Investments in unconsolidated affiliates 1,726 2,082 Other investments 27,666 26,855 Other 3,001 3,769 Total Deferred Charges and Other Assets 326,441 214,289 Total Assets $ 1,888,342 $ 1,784,334 The Notes to Financial Statements are an integral part hereof. - 12 -
CH ENERGY GROUP CONSOLIDATED BALANCE SHEET (CONT'D) (In Thousands, except share amounts) December 31, December 31, 2014 2013 CAPITALIZATION AND LIABILITIES Capitalization CH Energy Group Common Shareholders' Equity Common Stock (30,000,000 shares authorized: $0.01 par value; 15,961,400 shares issued) 15,961,400 shares outstanding, respectively $ 160 $ 160 Paid-in capital 325,906 325,906 Retained earnings 197,439 238,119 Accumulated other comprehensive income 510 504 Total Equity 524,015 564,689 Long-term debt 524,045 495,275 Total Capitalization 1,048,060 1,059,964 Current Liabilities Current maturities of long-term debt 1,230 21,650 Accounts payable 44,312 31,420 Accounts payable - affiliates 9 - Accrued interest 5,673 5,894 Accrued vacation and payroll 9,513 6,773 Customer advances 14,167 15,001 Customer deposits 6,948 6,818 Regulatory liabilities 16,058 22,891 Fair value of derivative instruments 7,727 46 Accrued environmental remediation costs 13,425 1,233 Liabilities held for sale - 29,883 Other 17,966 12,200 Total Current Liabilities 137,028 153,809 Deferred Credits and Other Liabilities Regulatory liabilities - OPEB 47,339 51,590 Regulatory liabilities - other 156,473 142,931 Operating reserves 4,118 2,426 Accrued environmental remediation costs 93,700 39,569 Accrued OPEB costs 24,836 18,036 Accrued pension costs 68,507 17,497 Tax reserve 2,693 2,539 Other 19,651 19,312 Total Deferred Credits and Other Liabilities 417,317 293,900 Accumulated Deferred Income Tax 285,937 276,661 Commitments and Contingencies Total Capitalization and Liabilities $ 1,888,342 $ 1,784,334 The Notes to Financial Statements are an integral part hereof. - 13 -
CH ENERGY GROUP CONSOLIDATED STATEMENT OF EQUITY (In Thousands, except share amounts) CH Energy Group Common Shareholders Common Stock Treasury Stock Capital Stock Expense Accumulated Other Comprehensive Income / (Loss) Noncontrolling Interest Total Equity Shares Issued Amount Shares Repurchased Amount Paid-In Capital Retained Earnings Balance at December 31, 2011 16,862,087 $ 1,686 (1,967,123) $ (92,908) $ 351,053 $ (328) $ 242,391 $ 354 $ - $ 502,248 Comprehensive Income: Net income 39,847 39,847 Preferred Stock Redemption 162 (342) (180) Dividends declared on Preferred Stock of subsidiary (624) (624) Change in fair value: Investments 26 26 Dividends declared on common stock (33,169) (33,169) Treasury shares activity - net 1 59,920 2,767 (1,625) 1,142 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 9,182 9,182 Preferred Stock Redemption (28) 166 (764) (626) Dividends declared on Preferred Stock of subsidiary (92) (92) Change in fair value: Investments 124 124 Dividends declared on common stock (18,310) (18,310) 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 December 31, 2013 15,961,400 $ 160 - $ - $ 325,906 $ - $ 238,119 $ 504 $ - $ 564,689 Comprehensive Income: Net income 34,320 34,320 Change in fair value: Investments 6 6 Dividends declared on common stock (75,000) (75,000) Balance at December 31, 2014 15,961,400 $ 160 - $ - $ 325,906 $ - $ 197,439 $ 510 $ - $ 524,015 The Notes to Financial Statements are an integral part hereof. - 14 -
CENTRAL HUDSON STATEMENT OF INCOME (In Thousands) Year Ended December 31, 2014 2013 2012 Operating Revenues Electric $ 579,757 $ 532,539 $ 512,081 Natural gas 163,005 135,904 132,434 Total Operating Revenues 742,762 668,443 644,515 Operating Expenses Operation: Purchased electricity and fuel used in electric generation 232,990 185,736 175,721 Purchased natural gas 78,765 51,342 49,276 Other expenses of operation 250,046 241,366 232,222 Depreciation and amortization 43,859 40,218 38,139 Regulatory Debits - 40,000 - Taxes, other than income tax 54,726 53,334 50,644 Total Operating Expenses 660,386 611,996 546,002 Operating Income 82,376 56,447 98,513 Other Income and Deductions Interest on regulatory assets and other interest income 4,355 5,838 6,127 Regulatory adjustments for interest costs 1,259 1,280 1,307 Other - net (214) 105 (330) Total Other Income 5,400 7,223 7,104 Interest Charges Interest on long-term debt 22,031 23,570 23,008 Interest on regulatory liabilities and other interest 9,540 8,153 6,648 Total Interest Charges 31,571 31,723 29,656 Income Before Income Taxes 56,205 31,947 75,961 Income Tax Expense 22,361 11,648 28,791 Net Income 33,844 20,299 47,170 Preferred Stock Redemption Premium - 764 342 Dividends Declared on Cumulative Preferred Stock - 92 624 Income Available for Common Stock $ 33,844 $ 19,443 $ 46,204 CENTRAL HUDSON STATEMENT OF COMPREHENSIVE INCOME (LOSS) (In Thousands) Year Ended December 31, 2014 2013 2012 Net Income $ 33,844 $ 20,299 $ 47,170 Other Comprehensive Income 1 - - - Comprehensive Income $ 33,844 $ 20,299 $ 47,170 The Notes to Financial Statements are an integral part hereof. - 15 -
CENTRAL HUDSON STATEMENT OF CASH FLOWS (In Thousands) Year Ended December 31, 2014 2013 2012 Operating Activities: Net income $ 33,844 $ 20,299 $ 47,170 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 40,702 37,589 35,765 Amortization 3,157 2,629 2,374 Deferred income taxes - net 10,976 8,812 27,154 Bad debt expense 6,645 3,484 5,616 Pension expense 20,597 20,601 22,767 OPEB expense 6,803 6,803 6,832 Positive Benefit Adjustment expense - 40,000 - Regulatory liability - rate moderation - - (1,107) Revenue decoupling mechanism recorded 3,245 2,774 (4,194) Regulatory asset amortization 4,554 4,554 4,610 Changes in operating assets and liabilities - net: Accounts receivable, unbilled revenues and other receivables (9,162) (8,095) (4,942) Fuel, materials and supplies 1,086 632 1,773 Special deposits and prepayments (4,958) (1,988) (117) Income and other taxes (8,289) (7,522) 1,084 Accounts payable 12,396 (9,556) 3,080 Accrued interest (132) (33) (400) Customer advances (834) (3,083) 3,480 Pension plan contribution (16,986) (26,641) (28,579) OPEB contribution (2,238) (2,894) (3,269) Revenue decoupling mechanism collected (refunded) (5,105) 1,956 1,660 Regulatory asset - storm deferral (5,108) 3,450 (6,183) Regulatory asset - MGP site remediation 4,202 (1,453) 1,657 Regulatory asset - Temporary State Assessment 1,185 2,220 1,132 Deferred natural gas and electric costs (8,389) (9,726) (592) Other - net 16,427 12,564 15,346 Net cash provided by operating activities 104,618 97,376 132,117 Investing Activities: Additions to utility plant (113,190) (108,817) (108,290) Other - net 1,703 (6,370) (469) Net cash used in investing activities (111,487) (115,187) (108,759) Financing Activities: Redemption of long-term debt (14,000) (46,700) (36,000) Proceeds from issuance of long-term debt 30,000 46,700 72,000 Borrowings of short-term debt - net - - (1,500) Equity infusion - 40,000 - Redemption of Preferred Stock - (9,653) (12,180) Dividends paid to parent - CH Energy Group (5,000) (22,000) (22,000) Dividends paid on cumulative Preferred Stock - (92) (866) Other - net (207) (417) (981) Net cash provided by financing activities 10,793 7,838 (1,527) Net Change in Cash and Cash Equivalents 3,924 (9,973) 21,831 Cash and Cash Equivalents - Beginning of Period 14,379 24,352 2,521 Cash and Cash Equivalents - End of Period $ 18,303 $ 14,379 $ 24,352 Supplemental Disclosure of Cash Flow Information: Interest paid $ 22,560 $ 24,024 $ 23,901 Federal and state income taxes paid $ 20,003 $ 10,370 $ - Additions to plant included in liabilities $ 7,495 $ 5,901 $ 10,893 The Notes to Financial Statements are an integral part hereof. - 16 -
CENTRAL HUDSON BALANCE SHEET (In Thousands) December 31, December 31, 2014 2013 ASSETS Utility Plant Electric $ 1,160,643 $ 1,118,552 Natural gas 380,966 356,627 Common 184,804 174,898 Gross Utility Plant 1,726,413 1,650,077 Less: Accumulated depreciation 458,155 434,410 Net 1,268,258 1,215,667 Construction work in progress 57,543 41,862 Net Utility Plant 1,325,801 1,257,529 Non-Utility Property and Plant 524 524 Net Non-Utility Property and Plant 524 524 Current Assets Cash and cash equivalents 18,303 14,379 Accounts receivable from customers - net of allowance for doubtful accounts of $4.8 million and $3.9 million, respectively. 69,072 66,123 Accrued unbilled utility revenues 16,866 17,210 Other receivables 3,696 3,827 Fuel, materials and supplies - at average cost 17,546 18,632 Regulatory assets 56,272 37,626 Income tax receivable 12,668 4,379 Fair value of derivative instruments - 8,789 Unamortized debt expense 347 334 Special deposits and prepayments 25,418 20,460 Accumulated deferred income tax 5,603 3,280 Total Current Assets 225,791 195,039 Deferred Charges and Other Assets Regulatory assets - pension plan 94,426 50,577 Regulatory assets - other 195,303 125,669 Fair value of derivative instruments 570 1,433 Unamortized debt expense 3,749 3,904 Other investments 26,856 26,067 Other 2,387 3,012 Total Deferred Charges and Other Assets 323,291 210,662 Total Assets $ 1,875,407 $ 1,663,754 The Notes to Financial Statements are an integral part hereof. - 17 -
CENTRAL HUDSON BALANCE SHEET (CONT'D) (In Thousands, except share amounts) December 31, December 31, 2014 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 Paid-in capital 239,952 239,952 Retained earnings 216,456 187,612 Capital stock expense (4,633) (4,633) Total Equity 536,086 507,242 Long-term debt 505,950 475,950 Total Capitalization 1,042,036 983,192 Current Liabilities Current maturities of long-term debt - 14,000 Accounts payable 44,446 29,886 Accrued interest 5,618 5,750 Accrued vacation and payroll 6,400 6,773 Customer advances 14,167 15,001 Customer deposits 6,948 6,818 Regulatory liabilities 16,058 22,891 Fair value of derivative instruments 7,727 46 Accrued environmental remediation costs 13,345 1,233 Other 15,992 12,027 Total Current Liabilities 130,701 114,425 Deferred Credits and Other Liabilities Regulatory liabilities - OPEB 47,339 51,590 Regulatory liabilities - other 156,473 142,931 Operating reserves 4,118 2,426 Accrued environmental remediation costs 93,598 39,569 Accrued OPEB costs 24,836 18,036 Accrued pension costs 67,952 17,497 Tax reserve 2,693 2,539 Other 17,870 18,373 Total Deferred Credits and Other Liabilities 414,879 292,961 Accumulated Deferred Income Tax 287,791 273,176 Commitments and Contingencies Total Capitalization and Liabilities $ 1,875,407 $ 1,663,754 The Notes to Financial Statements are an integral part hereof. - 18 -
CENTRAL HUDSON STATEMENT OF EQUITY (In Thousands, except share amounts) Common Stock Treasury Stock Central Hudson Common Shareholders Capital Stock Expense Accumulated Other Comprehensive Income / (Loss) Total Equity Shares Issued Amount Shares Repurchased Amount Paid-In Capital Retained Earnings Balance at December 31, 2011 16,862,087 $ 84,311 - $ - $ 199,980 $ (4,961) $ 165,965 $ - $ 445,295 Net income 47,170 47,170 Preferred Stock Redemption 162 (342) (180) Dividends declared On cumulative Preferred Stock (624) (624) On Common Stock to parent - CH Energy Group - (22,000) (22,000) Balance at December 31, 2012 16,862,087 $ 84,311 - $ - $ 199,980 $ (4,799) $ 190,169 $ - $ 469,661 Net income 20,299 20,299 Preferred Stock Redemption (28) 166 (764) (626) Dividends declared On cumulative Preferred Stock (92) (92) On Common Stock to parent - CH Energy Group (22,000) (22,000) Additional Paid-in Capital 40,000-40,000 Balance at December 31, 2013 16,862,087 $ 84,311 - $ - $ 239,952 $ (4,633) $ 187,612 $ - $ 507,242 Net income 33,844 33,844 Dividends declared On Common Stock to parent - CH Energy Group (5,000) (5,000) Balance at December 31, 2014 16,862,087 $ 84,311 - $ - $ 239,952 $ (4,633) $ 216,456 $ - $ 536,086 The Notes to Financial Statements are an integral part hereof. - 19 -
NOTES TO FINANCIAL STATEMENTS NOTE 1 Summary of Significant Accounting Policies Corporate Structure CH Energy Group is the holding company parent corporation of three principal, wholly owned subsidiaries, Central Hudson Gas & Electric Corporation ( Central Hudson ), Central Hudson Electric Transmission LLC ( CHET ) 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. CHET was formed to engage in transmission projects and has 6% ownership in New York Transco LLC ( Transco ). CHEC, the parent company of CH Energy Group s non-regulated businesses and investments, had one wholly owned operating subsidiary during the first quarter of 2014, 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, Investments and Divestitures for further information. CHEC also has ownership interests in certain subsidiaries that are less than 100% owned. Basis of Presentation This Annual 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, CHET 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. Reclassification Certain amounts in the 2013 and 2012 Financial Statements have been reclassified to conform to the 2014 presentation. For more information regarding reclassification of discontinued operations, see Note 5 Acquisitions, Investments and Divestitures. - 20 -
Use of Estimates Preparation of the financial statements in accordance with GAAP includes the use of estimates and assumptions by management that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. As with all estimates, actual results may differ from those estimated. Expense items most affected by the use of estimates are depreciation and amortization (including amortization of intangible assets), reserves for uncollectible accounts receivable, tax reserves, other operating reserves, unbilled revenues, and pension and other post-retirement benefits. Depreciation and amortization is based on estimates of the useful lives and estimated net salvage value of properties (as described in this Note under the caption Depreciation and Amortization ). Amortizable intangible assets included trademarks, covenants not to compete and customer relationships related to Griffith, prior to the sale in March 2014. These assets were amortized based on an assessment of customer attrition as described in Note 6 - Goodwill and Other Intangible Assets. These intangible assets were included in Assets held for sale as of December 31, 2013, in the CH Energy Group Consolidated Balance Sheet and the related amortization is included in Discontinued Operations in the 2013 and 2012 CH Energy Group Consolidated Statement of Income. There was no amortization of intangible assets recorded in 2014 under accounting guidance once the asset was designated as held for sale. Estimates for uncollectible accounts are based on customer accounts receivable aging data as well as consideration of various quantitative and qualitative factors, including special collection issues. In the current year, the increase in the allowance for doubtful accounts reflects the impact of higher energy prices experienced in the beginning of 2014. The tax reserve recorded by Central Hudson relates to a change in 2010 to its tax return methodology for claiming deductions for incidental repair and maintenance expenditures on its utility assets. Although Management believes that its methodology for claiming the deduction is consistent with the Internal Revenue Code and case law, Management cannot predict whether the Internal Revenue Service will accept the entirety of the deduction claimed. See Note 4 Income Tax for further discussion of the tax reserve established. The estimates for other operating reserves are based on assessments of future obligations related to injuries and damages and workers compensation claims. Unbilled revenues are determined based on the estimated sales for bimonthly accounts that have not been billed by Central Hudson in the current month. The estimation methods used in determining these sales are the same methods used for billing customers when actual meter readings cannot be obtained. Estimated unbilled revenues are reported as current assets, and include amounts recorded both in revenues and as regulatory liabilities. Revenues include an estimate for unbilled revenues of $11.0 million for 2014 and $11.2 million for both 2013 and 2012. Pursuant to regulatory requirements, a portion of unbilled revenue is offset by a regulatory liability and is not included in revenues. The portion of unbilled revenues offset by a regulatory liability at December 31, 2014, 2013 and 2012 were $6.0 million, respectively. - 21 -
The significant assumptions and estimates used to account for the pension plan and other post-retirement benefit expenses and liabilities are the discount rate, the expected long-term rate of return on the retirement plan and post-retirement plan assets, the rate of compensation increase, the healthcare cost trend rate, mortality assumptions, and the method of amortizing gains and losses. For more information of the significant assumptions and estimates, see Note 10 Post-Employment Benefits. Estimates are also reflected for certain commitments and contingencies where there is sufficient basis to project a future obligation. Disclosures related to these certain commitments and contingencies are included in Note 12 - Commitments and Contingencies. Rates, Revenues, and Cost Adjustment Clauses Central Hudson s electric and natural gas retail rates are regulated by the NYS Public Service Commission ( PSC ). Transmission rates, facilities charges, and rates for electricity sold for resale in interstate commerce are regulated by the Federal Energy Regulatory Commission ( FERC ). Central Hudson s tariffs for retail electric and natural gas service include purchased electricity and purchased natural gas cost adjustment clauses by which electric and natural gas rates are adjusted to collect the actual purchased electricity and purchased natural gas costs incurred in providing these services. Central Hudson s delivery rate structure includes Revenue Decoupling Mechanisms ( RDMs ), which provide the ability to record revenues equal to those forecasted in the development of current rates for most of Central Hudson s customers. Revenue Recognition Central Hudson records revenue on the basis of meters read. In addition, Central Hudson records an estimate of unbilled revenue for service rendered to bimonthly customers whose meters are read in the prior month. The estimate covers 30 days subsequent to the meterread date. Pursuant to regulatory requirements, a portion of unbilled electric revenues is not recorded. As of December 31, 2014, 2013 and 2012, the portion of estimated electric unbilled revenues that is unrecognized in accordance with current regulatory agreements was $13.1 million, $13.0 million and $13.2 million, respectively. The full amounts of estimated natural gas unbilled revenues are recognized on the Consolidated Balance Sheet. As required by the 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). CH Energy Group s deferred revenue balance as of December 31, 2013 was $4.7 million and related to Griffith. The December 31, 2013 balance was included in held for sale. There was no deferred revenue balance as of December 31, 2014 as a result of the sale of Griffith on March 4, 2014. - 22 -
Cash and Cash Equivalents For purposes of the Statement of Cash Flows and the Balance Sheet, CH Energy Group and Central Hudson consider temporary cash investments with a maturity (when purchased) of three months or less, to be cash equivalents. Fuel, Materials and Supplies Fuel, materials and supplies for CH Energy Group are valued using the following accounting methods: Company Central Hudson Griffith Valuation Method Average cost FIFO The following is a summary of CH Energy Group s and Central Hudson s inventories (In Thousands): CH Energy Group Central Hudson December 31, December 31, December 31, December 31, 2014 2013 2014 2013 Natural gas $ 6,323 $ 8,078 $ 6,323 $ 8,078 Fuel used in electric generation 403 430 403 430 Materials and supplies (1) 10,820 10,124 10,820 10,124 Total $ 17,546 $ 18,632 $ 17,546 $ 18,632 (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, Investments and Divestitures." Utility Plant - Central Hudson The regulated assets of Central Hudson include electric, natural gas, and common assets and are listed under the heading Utility Plant on Central Hudson s and CH Energy Group s Consolidated Balance Sheets. The accumulated depreciation associated with these regulated assets is also reported on the Balance Sheets. The cost of additions to utility plant and replacements of retired units of property are capitalized at original cost. Capitalized costs include labor, materials and supplies, indirect charges for such items as transportation, certain administrative costs, certain taxes, pension and other employee benefits, and allowances for funds used during construction ( AFUDC ), as further discussed below. The replacement of minor items of property is included in operating expenses. The original cost of property, together with removal cost less salvage, is charged to accumulated depreciation at the time the property is retired and removed from service as required by the PSC. - 23 -
The following summarizes the type and amount of assets included in the electric, natural gas, and common categories of Central Hudson s utility plant balances (In Thousands): Estimated Utility Plant Depreciable December 31, Life in Years 2014 2013 Electric: Production 25-75 $ 37,964 $ 37,865 Transmission 28-70 274,155 260,669 Distribution 7-80 844,438 816,000 Other 37 4,086 4,018 Total $ 1,160,643 $ 1,118,552 Natural Gas: Transmission 18-70 53,800 51,716 Distribution 25-85 326,724 304,469 Other N/A 442 442 Total $ 380,966 $ 356,627 Common: Land and Structures 50 $ 66,750 $ 64,157 Office and Other Equipment, Radios and Tools 8-35 42,760 39,738 Transportation Equipment 10-12 53,936 50,962 Other 5 21,358 20,041 Total $ 184,804 $ 174,898 Utility Plant Intangible Assets Included in the Net Utility Plant balance of $1,326 million and $1,258 million at December 31, 2014 and 2013 is $50.9 million and $44.4 million of intangible utility plant assets and the related amortization of $23.0 million and $19.2 million, respectively. Allowance For Funds Used During Construction Central Hudson s regulated utility plant includes AFUDC, which is defined as the net cost of borrowed funds used for construction purposes and a reasonable rate on other funds when so used. The concurrent credit for the amount so capitalized is reported in the Consolidated Statement of Income as follows: the portion applicable to borrowed funds is reported as a reduction of interest charges while the portion applicable to other funds (the equity component, a noncash item) is reported as other income. The AFUDC rate was 4.6% in 2014, 5.00% in 2013, and 3.25% in 2012. The amounts recorded for borrowed funds for 2014 was $0.4 million, 2013 was $0.4 million and $0.3 million for 2012. The equity component of AFUDC recorded for the years 2014, 2013 and 2012 was $0.6 million, $0.6 million and $0.3 million, respectively. Depreciation and Amortization For financial statement purposes, Central Hudson s depreciation provisions are computed on the straight-line method using rates based on studies of the estimated useful lives and estimated net salvage values of properties. The anticipated costs of removing assets upon retirement are generally provided for over the life of those assets as a component of depreciation expense. This depreciation method is consistent with industry practice, and the applicable depreciation rates have been approved by the PSC. - 24 -
Current accounting guidance related to asset retirement, 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 and $46.7 million of cost of removal as a regulatory liability as of December 31, 2014 and 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. Central Hudson performs depreciation studies periodically and, upon approval by the PSC, adjusts the depreciation rates of its various classes of depreciable property. Central Hudson s composite rates for depreciation were 2.86% in 2014, 2.77% in 2013 and 2.79% in 2012 of the original average cost of depreciable property. The ratio of the amount of accumulated depreciation to the original cost of depreciable property at December 31, 2014, 2013, and 2012 was 26.6%, 26.4% and 26.8%, respectively. See Note 6 - Goodwill and Other Intangible Assets for further discussion of amortization of intangibles (other than goodwill). Asset Retirement Obligations Asset retirement obligations ( AROs ) are recorded as a liability at fair value, with a corresponding increase to utility capital assets. Central Hudson recognizes AROs in the periods in which they are incurred if a reasonable estimate of fair value can be determined. The fair value of AROs is based on an estimate of the present value of expected future cash outlays, discounted at a credit-adjusted risk-free interest rate. AROs are adjusted at the end of each reporting period to reflect the passage of time and any changes in the estimated future cash flows underlying the obligation. Actual costs incurred upon the settlement of AROs are recorded as a reduction in the liabilities. As of December 31, 2014, and 2013 AROs for Central Hudson were approximately $1.2 million and $0.8 million, respectively. These amounts have been classified as Other long-term liabilities, with the offset to Utility Plant assets. Research and Development Central Hudson is engaged in the conduct and support of research and development ( R&D ) activities, which are focused on the improvement of existing energy technologies and the development of new technologies for the delivery and customer use of energy. Central Hudson s R&D expenditures were $3.3 million in 2014, $3.6 million in 2013 and $4.0 million in 2012. These expenditures were for internal research programs and for contributions to research administered by New York State Energy Research and Development Authority ( NYSERDA ), the Electric Power Research Institute, and other industry organizations. R&D expenditures are provided for in Central Hudson s rates charged to customers for electric and - 25 -