CH ENERGY GROUP, INC. & CENTRAL HUDSON GAS & ELECTRIC CORP. ANNUAL FINANCIAL REPORT for the period ended DECEMBER 31, 2017
FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2017 TABLE OF CONTENTS CH Energy Group, Inc. PAGE Consolidated Statement of Income Year Ended December 31, 2017, 2016 and 2015 10 Consolidated Statement of Comprehensive Income Year Ended December 31, 2017, 2016 and 2015 10 Consolidated Statement of Cash Flows Year Ended December 31, 2017, 2016 and 2015 11 Consolidated Balance Sheet December 31, 2017 and 2016 12 Consolidated Statement of Equity Year Ended December 31, 2017, 2016 and 2015 14 Central Hudson Gas & Electric Corporation Statement of Income Year Ended December 31, 2017, 2016 and 2015 15 Statement of Comprehensive Income Year Ended December 31, 2017, 2016 and 2015 16 Statement of Cash Flows Year Ended December 31, 2017, 2016 and 2015 17 Balance Sheet December 31, 2017 and 2016 18 Statement of Equity Year Ended December 31, 2017, 2016 and 2015 19 NOTES TO FINANCIAL STATEMENTS 20 MANAGEMENT S DISCUSSION AND ANALYSIS 88 ANNUAL FINANCIAL REPORT SUPPLEMENT 113
Deloitte & Touche LLP City Place l, 33rd Floor 185 Asylum Street Hartford, CT 06103-3402 USA Tel: +1 860 725 3000 Fax: +1 860 725 3500 www.deloitte.com INDEPENDENT AUDITOR S REPORT To the Board of Directors of CH Energy Group, Inc. We have audited the accompanying consolidated financial statements of CH Energy Group, Inc. and its subsidiaries (the "Company"), which comprise the balance sheet as of December 31, 2017, and the related statements of income, comprehensive income, equity, and cash flows for the year 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 accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from 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 Company'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 Company'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.
2 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CH Energy Group, Inc. and its subsidiaries as of December 31, 2017, and the results of their operations and their cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Predecessor Auditors' Opinion on 2016 and 2015 Financial Statements The financial statements of the Company as of and for the years ended December 31, 2016 and 2015 were audited by other auditors whose report, dated February 9, 2017, expressed an unmodified opinion on those statements. Hartford, Connecticut February 15, 2018
Deloitte & Touche LLP City Place l, 33rd Floor 185 Asylum Street Hartford, CT 06103-3402 USA Tel: +1 860 725 3000 Fax: +1 860 725 3500 www.deloitte.com REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors of Central Hudson Gas & Electric Corporation Opinion on the Financial Statements We have audited the accompanying balance sheet of Central Hudson Gas & Electric Corporation (the Company ) as of December 31, 2017, the related statements of income, comprehensive income, equity, and cash flows, for the year then ended, and the related notes (collectively referred to as the financial statements ). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and the results of its operations and its cash flows for the year ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America. The financial statements of the Company as of and for the years ended December 31, 2016 and 2015, were audited by other auditors whose report, dated February 9, 2017, expressed an unqualified opinion on those statements. We also have audited, in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company s internal control over financial reporting as of December 31, 20017, based on criteria established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 15, 2018 expressed an unqualified opinion on the Company s internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the auditing standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
2 misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Hartford, Connecticut February 15, 2018 We have served as the Company s auditor since 2017.
Deloitte & Touche LLP City Place l, 33rd Floor 185 Asylum Street Hartford, CT 06103-3402 USA Tel: +1 860 725 3000 Fax: +1 860 725 3500 www.deloitte.com REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors of Central Hudson Gas & Electric Corporation Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Central Hudson Gas & Electric Corporation (the Company ) as of December 31, 2017, based on criteria established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States) (PCAOB) and in accordance with auditing standards generally accepted in the United States of America, the financial statements as of and for the year ended December 31, 2017, of the Company and our report dated February 15, 2018, expressed an unqualified opinion on those financial statements. Basis for Opinion The Company 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 Report of Management on Internal Control over Financial Reporting Central Hudson. Our responsibility is to express an opinion on the Company s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the auditing standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. 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
2 circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting 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. Hartford, Connecticut February 15, 2018
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, 2017. 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, 2017, the Corporation maintained effective internal control over financial reporting. The effectiveness of the Corporation s internal control over financial reporting as of December 31, 2017, has been audited by Deloitte and Touche LLP, an independent registered public accounting firm, as stated in their report which appears herein. /s/ Michael L. Mosher Michael L. Mosher President and Chief Executive Officer /s/ Christopher M. Capone Christopher M. Capone Executive Vice President and Chief Financial Officer February 15, 2018
CH ENERGY GROUP CONSOLIDATED STATEMENT OF INCOME (In Thousands) Year Ended December 31, 2017 2016 2015 Operating Revenues Electric $ 528,277 $ 510,762 $ 544,296 Natural gas 143,192 128,886 146,562 Total Operating Revenues 671,469 639,648 690,858 Operating Expenses Operation: Purchased electricity and fuel used in electric generation 155,107 157,429 193,920 Purchased natural gas 44,804 32,898 53,890 Other expenses of operation - regulated activities 243,235 229,094 240,302 Other expenses of operation - non-regulated 339 639 75 Depreciation and amortization 50,516 46,509 44,074 Taxes, other than income tax 65,792 63,367 58,065 Total Operating Expenses 559,793 529,936 590,326 Operating Income 111,676 109,712 100,532 Other Income and Deductions Income from unconsolidated affiliates 1,576 876 131 Interest on regulatory assets and other interest income 3,851 2,823 3,585 Regulatory adjustments for interest costs 695 341 653 Other - net 253 190 1,378 Total Other Income 6,375 4,230 5,747 Interest Charges Interest on long-term debt 25,689 24,211 23,549 Interest on regulatory liabilities and other interest 5,924 7,185 7,862 Total Interest Charges 31,613 31,396 31,411 Income before income taxes 86,438 82,546 74,868 Income Tax Expense 32,686 31,641 31,128 Net Income 53,752 50,905 43,740 Dividends declared on Common Stock 22,000 22,000 22,000 Change in Retained Earnings $ 31,752 $ 28,905 $ 21,740 CH ENERGY GROUP CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (In Thousands) Year Ended December 31, 2017 2016 2015 Net Income $ 53,752 $ 50,905 $ 43,740 Other Comprehensive Loss: Net unrealized loss on investments held by equity method investees - net of tax expense of $96, $33 and $210, respectively (144) (50) (316) Other comprehensive loss (144) (50) (316) Comprehensive Income $ 53,608 $ 50,855 $ 43,424 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, 2017 2016 2015 Operating Activities: Net income $ 53,752 $ 50,905 $ 43,740 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 44,695 41,985 40,830 Amortization 5,821 4,524 3,244 Deferred income taxes - net 31,722 34,575 23,065 Bad debt expense 3,196 4,181 7,598 Undistributed equity in earnings of unconsolidated affiliates (727) (327) (131) Pension expense 15,483 15,549 18,138 Other post-employment benefits ("OPEB") expense (2,527) (2,536) 2,394 Regulatory liability - rate moderation (10,153) (16,108) (6,173) Revenue decoupling mechanism recorded (532) 14,952 10,468 Changes in operating assets and liabilities - net: Accounts receivable, unbilled revenues and other receivables (18,971) (10,522) 2,909 Fuel, materials and supplies 267 (5,226) (1,237) Special deposits and prepayments (918) (1,777) (823) Income and other taxes 3,780 32,811 (22,139) Accounts payable 3,543 5,284 (8,978) Accrued interest 645 306 (170) Customer advances (2,591) (1,464) 3,810 Pension plan contribution (14,050) (1,072) (22,387) OPEB contribution (1,533) (1,560) (1,536) Revenue decoupling mechanism refunded - net (16,000) (7,962) (1,258) Regulatory asset - site investigation and remediation ("SIR") 1,684 (11,598) 2,873 Regulatory asset - temporary state assessment 2,376 784 (109) Regulatory liability - energy efficiency programs 31,102 29,967 (2,079) Deferred natural gas and electric costs (4,203) (4,747) 20,095 Other - net 28,199 16,043 (7,863) Net cash provided by operating activities 154,060 186,967 104,281 Investing Activities: Additions to utility and other property and plant (169,643) (175,894) (140,648) Other - net 2,139 (2,744) (4,311) Net cash used in investing activities (167,504) (178,638) (144,959) Financing Activities: Repayment of long-term debt (34,406) (9,314) (1,230) Proceeds from issuance of long-term debt 60,000 54,000 20,000 Repayments of short-term borrowings (56,000) (33,000) (20,000) Proceeds from short-term borrowings 56,000 8,000 45,000 Capital contributions 7,000 130 10,000 Dividends paid on Common Stock (22,000) (22,000) (22,000) Other - net (384) (420) (157) Net cash provided by (used in) financing activities 10,210 (2,604) 31,613 Net Change in Cash and Cash Equivalents (3,234) 5,725 (9,065) Cash and Cash Equivalents at Beginning of Period 19,307 13,582 22,647 Cash and Cash Equivalents at End of Period $ 16,073 $ 19,307 $ 13,582 Supplemental Disclosure of Cash Flow Information: Interest paid $ 25,264 $ 23,959 $ 23,529 Federal and state income taxes paid $ - $ 765 $ 41,712 Non-Cash Investing Activities: Accrued capital expenditures $ 14,575 $ 10,604 $ 12,010 The Notes to Financial Statements are an integral part hereof. - 11 -
CH ENERGY GROUP CONSOLIDATED BALANCE SHEET (In Thousands) December 31, December 31, 2017 2016 ASSETS Utility Plant (Note 2) Electric $ 1,359,187 $ 1,289,880 Natural gas 502,226 457,271 Common 245,762 227,052 Gross Utility Plant 2,107,175 1,974,203 Less: Accumulated depreciation 523,450 500,280 Net 1,583,725 1,473,923 Construction work in progress 81,968 73,273 Net Utility Plant 1,665,693 1,547,196 Non-utility property & plant 524 524 Net Non-Utility Property & Plant 524 524 Current Assets Cash and cash equivalents 16,073 19,307 Accounts receivable from customers - net of allowance for doubtful accounts of $3.0 million and $4.1 million, respectively. 63,949 58,146 Accounts receivable - affiliates (Note 16) 2,879 501 Accrued unbilled utility revenues 22,515 19,775 Other receivables 12,027 7,173 Fuel, materials and supplies (Note 1) 23,742 24,009 Regulatory assets (Note 3) 36,161 25,989 Income tax receivable 1,904 5,636 Fair value of derivative instruments (Note 14) 1,540 3,311 Special deposits and prepayments 23,468 28,074 Total Current Assets 204,258 191,921 Deferred Charges and Other Assets Regulatory assets - pension plan (Note 3) 24,862 52,251 Regulatory assets - other (Note 3) 143,105 137,340 Prefunded OPEB costs (Note 10) 2,784 - Investments in unconsolidated affiliates (Note 5) 8,163 7,719 Other investments (Note 15) 36,077 32,069 Other 4,421 5,183 Total Deferred Charges and Other Assets 219,412 234,562 Total Assets $ 2,089,887 $ 1,974,203 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, 2017 2016 CAPITALIZATION AND LIABILITIES Capitalization (Note 8) CH Energy Group Common Shareholders' Equity Common Stock (30,000,000 shares authorized: $0.01 par value; 15,961,400 shares issued and outstanding) $ 160 $ 160 Paid-in capital 343,036 336,036 Retained earnings 279,836 248,084 Accumulated other comprehensive income - 144 Total Equity 623,032 584,424 Long-term debt (Note 9) Principal amount 582,822 554,325 Unamortized debt issuance costs (4,000) (4,022) Long-term debt less unamortized debt issuance costs 578,822 550,303 Total Capitalization 1,201,854 1,134,727 Current Liabilities Current maturities of long-term debt (Note 9) 31,503 34,406 Accounts payable 48,620 41,942 Accrued interest 6,454 5,809 Accrued vacation and payroll 9,008 8,228 Customer advances 13,922 16,513 Customer deposits 8,414 7,639 Regulatory liabilities (Note 3) 5,489 31,536 Fair value of derivative instruments (Note 14) 1,764 1,198 Accrued environmental remediation costs (Note 12) 27,592 15,501 Other current liabilities 24,078 15,062 Total Current Liabilities 176,844 177,834 Deferred Credits and Other Liabilities Regulatory liabilities - OPEB (Note 3) 35,945 26,966 Regulatory liabilities - other (Note 3) 402,948 162,526 Operating reserves 4,697 3,852 Fair value of derivative instruments (Note 14) 2,011 744 Accrued environmental remediation costs (Note 12) 26,920 57,385 Accrued OPEB costs (Note 10) - 12,024 Accrued pension costs (Note 10) 20,172 39,270 Tax reserve (Note 4) 4,301 1,703 Other liabilities 24,250 20,167 Total Deferred Credits and Other Liabilities 521,244 324,637 Accumulated Deferred Income Tax (Note 4) 189,945 337,005 Commitments and Contingencies Total Capitalization and Liabilities $ 2,089,887 $ 1,974,203 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 Accumulated Other Shares Issued Amount Paid-In Capital Retained Earnings Comprehensive Income / (Loss) Total Equity Balance at December 31, 2014 15,961,400 $ 160 $ 325,906 $ 197,439 $ 510 $ 524,015 Net income 43,740 43,740 Capital Contribution 10,000 10,000 Change in fair value: Investments (316) (316) Dividends declared on common stock (22,000) (22,000) Balance at December 31, 2015 15,961,400 $ 160 $ 335,906 $ 219,179 $ 194 $ 555,439 Net income 50,905 50,905 Capital Contribution 130 130 Change in fair value: Investments (50) (50) Dividends declared on common stock (22,000) (22,000) Balance at December 31, 2016 15,961,400 $ 160 $ 336,036 $ 248,084 $ 144 $ 584,424 Net income 53,752 53,752 Capital Contribution 7,000 7,000 Change in fair value: Investments (144) (144) Dividends declared on common stock (22,000) (22,000) Balance at December 31, 2017 15,961,400 $ 160 $ 343,036 $ 279,836 $ - $ 623,032 The Notes to Financial Statements are an integral part hereof. - 14 -
CENTRAL HUDSON STATEMENT OF INCOME (In Thousands) Year Ended December 31, 2017 2016 2015 Operating Revenues Electric $ 528,277 $ 510,762 $ 544,296 Natural gas 143,192 128,886 146,562 Total Operating Revenues 671,469 639,648 690,858 Operating Expenses Operation: Purchased electricity and fuel used in electric generation 155,107 157,429 193,920 Purchased natural gas 44,804 32,898 53,890 Other expenses of operation 243,235 229,094 240,302 Depreciation and amortization 50,516 46,509 44,074 Taxes, other than income tax 65,705 63,006 57,903 Total Operating Expenses 559,367 528,936 590,089 Operating Income 112,102 110,712 100,769 Other Income and Deductions Interest on regulatory assets and other interest income 3,829 2,795 3,551 Regulatory adjustments for interest costs 695 341 653 Other - net 519 812 1,869 Total Other Income 5,043 3,948 6,073 Interest Charges Interest on long-term debt 24,575 23,007 22,259 Interest on regulatory liabilities and other interest 5,924 7,177 7,849 Total Interest Charges 30,499 30,184 30,108 Income Before Income Taxes 86,646 84,476 76,734 Income Tax Expense 31,610 31,832 31,146 Net Income $ 55,036 $ 52,644 $ 45,588 CENTRAL HUDSON STATEMENT OF COMPREHENSIVE INCOME (In Thousands) Year Ended December 31, 2017 2016 2015 Net Income $ 55,036 $ 52,644 $ 45,588 Other comprehensive income 1 1 - - - Comprehensive Income $ 55,036 $ 52,644 $ 45,588 The Notes to Financial Statements are an integral part hereof. - 15 -
CENTRAL HUDSON STATEMENT OF CASH FLOWS (In Thousands) Year Ended December 31, 2017 2016 2015 Operating Activities: Net income $ 55,036 $ 52,644 $ 45,588 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 44,695 41,985 40,830 Amortization 5,821 4,524 3,244 Deferred income taxes - net 31,355 34,726 22,777 Bad debt expense 3,196 4,181 7,598 Pension expense 15,483 15,549 18,138 OPEB expense (2,527) (2,536) 2,394 Regulatory liability - rate moderation (10,153) (16,108) (6,173) Revenue decoupling mechanism recorded (532) 14,952 10,468 Changes in operating assets and liabilities - net: Accounts receivable, unbilled revenues and other receivables (18,835) (9,921) 1,923 Fuel, materials and supplies 267 (5,226) (1,237) Special deposits and prepayments (923) (1,788) (825) Income and other taxes 3,415 29,576 (22,528) Accounts payable 3,560 5,589 (8,930) Accrued interest 649 311 (167) Customer advances (2,591) (1,464) 3,810 Pension plan contribution (14,050) (1,072) (22,064) OPEB contribution (1,533) (1,560) (1,536) Revenue decoupling mechanism refunded - net (16,000) (7,962) (1,258) Regulatory asset - SIR 1,684 (11,598) 2,873 Regulatory asset - temporary state assessment 2,376 784 (109) Regulatory liability - energy efficiency programs 31,102 29,967 (2,079) Deferred natural gas and electric costs (4,203) (4,747) 20,095 Other - net 27,594 14,653 (2,633) Net cash provided by operating activities 154,886 185,459 110,199 Investing Activities: Additions to utility plant (169,643) (175,894) (140,648) Other - net 2,121 3,266 (4,238) Net cash used in investing activities (167,522) (172,628) (144,886) Financing Activities: Repayment of long-term debt (33,000) (8,000) - Proceeds from issuance of long-term debt 60,000 54,000 20,000 Repayments of short-term borrowings (56,000) (35,000) (20,000) Proceeds from short-term borrowings 56,000 8,000 47,000 Dividends paid to parent - CH Energy Group (13,262) (24,524) (24,524) Other - net (384) (420) (157) Net cash provided by (used in) financing activities 13,354 (5,944) 22,319 Net Change in Cash and Cash Equivalents 718 6,887 (12,368) Cash and Cash Equivalents - Beginning of Period 12,822 5,935 18,303 Cash and Cash Equivalents - End of Period $ 13,540 $ 12,822 $ 5,935 Supplemental Disclosure of Cash Flow Information: Interest paid $ 24,146 $ 22,750 $ 22,235 Federal and state income taxes paid $ - $ 913 $ 44,798 Non-Cash Investing Activities: Accrued capital expenditures $ 14,575 $ 10,604 $ 12,010 The Notes to Financial Statements are an integral part hereof. - 16 -
CENTRAL HUDSON BALANCE SHEET (In Thousands) December 31, December 31, 2017 2016 ASSETS Utility Plant (Note 2) Electric $ 1,359,187 $ 1,289,880 Natural gas 502,226 457,271 Common 245,762 227,052 Gross Utility Plant 2,107,175 1,974,203 Less: Accumulated depreciation 523,450 500,280 Net 1,583,725 1,473,923 Construction work in progress 81,968 73,273 Net Utility Plant 1,665,693 1,547,196 Non-Utility Property and Plant 524 524 Net Non-Utility Property and Plant 524 524 Current Assets Cash and cash equivalents 13,540 12,822 Accounts receivable from customers - net of allowance for doubtful accounts of $3.0 million and $4.1 million, respectively. 63,949 58,146 Accrued unbilled utility revenues 22,515 19,775 Other receivables 14,148 7,052 Fuel, materials and supplies (Note 1) 23,742 24,009 Regulatory assets (Note 3) 36,161 25,989 Income tax receivable 2,229 5,620 Fair value of derivative instruments (Note 14) 1,540 3,311 Special deposits and prepayments 23,430 28,031 Total Current Assets 201,254 184,755 Deferred Charges and Other Assets Regulatory assets - pension plan (Note 3) 24,862 52,251 Regulatory assets - other (Note 3) 143,105 137,340 Prefunded OPEB costs (Note 10) 2,784 - Other investments (Note 15) 35,305 31,322 Other 4,455 4,753 Total Deferred Charges and Other Assets 210,511 225,666 Total Assets $ 2,077,982 $ 1,958,141 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, 2017 2016 CAPITALIZATION AND LIABILITIES Capitalization (Note 8) 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 307,414 265,640 Capital stock expense (4,633) (4,633) Total Equity 627,044 585,270 Long-term debt (Note 9) Principal amount 568,950 538,950 Unamortized debt issuance costs (3,926) (3,938) Long-term debt less unamortized debt issuance costs 565,024 535,012 Total Capitalization 1,192,068 1,120,282 Current Liabilities Current maturities of long-term debt (Note 9) 30,000 33,000 Accounts payable 49,117 42,420 Accrued interest 6,411 5,762 Accrued vacation and payroll 9,008 8,228 Customer advances 13,922 16,513 Customer deposits 8,414 7,639 Regulatory liabilities (Note 3) 5,489 31,536 Fair value of derivative instruments (Note 14) 1,764 1,198 Accrued environmental remediation costs (Note 12) 27,592 15,501 Other current liabilities 22,888 13,282 Total Current Liabilities 174,605 175,079 Deferred Credits and Other Liabilities Regulatory liabilities - OPEB (Note 3) 35,945 26,966 Regulatory liabilities - other (Note 3) 402,948 162,526 Operating reserves 4,697 3,852 Fair value of derivative instruments (Note 14) 2,011 744 Accrued environmental remediation costs (Note 12) 26,920 57,385 Accrued OPEB costs (Note 10) - 12,024 Accrued pension costs (Note 10) 19,940 39,038 Tax reserve (Note 4) 4,301 1,703 Other liabilities 22,198 18,836 Total Deferred Credits and Other Liabilities 518,960 323,074 Accumulated Deferred Income Tax (Note 4) 192,349 339,706 Commitments and Contingencies Total Capitalization and Liabilities $ 2,077,982 $ 1,958,141 The Notes to Financial Statements are an integral part hereof. - 18 -
CENTRAL HUDSON STATEMENT OF EQUITY (In Thousands, except share amounts) Common Stock Central Hudson Common Shareholders Shares Issued Amount Paid-In Capital Capital Stock Expense Retained Earnings Accumulated Other Comprehensive Income / (Loss) Total Equity Balance at December 31, 2014 16,862,087 $ 84,311 $ 239,952 $ (4,633) $ 216,456 $ - $ 536,086 Net income 45,588 45,588 Dividends declared on Common Stock to parent - CH Energy Group (24,524) (24,524) Balance at December 31, 2015 16,862,087 $ 84,311 $ 239,952 $ (4,633) $ 237,520 $ - $ 557,150 Net income 52,644 52,644 Dividends declared on Common Stock to parent - CH Energy Group (24,524) (24,524) Balance at December 31, 2016 16,862,087 $ 84,311 $ 239,952 $ (4,633) $ 265,640 $ - $ 585,270 Net income 55,036 55,036 Dividends declared on Common Stock to parent - CH Energy Group (13,262) (13,262) Balance at December 31, 2017 16,862,087 $ 84,311 $ 239,952 $ (4,633) $ 307,414 $ - $ 627,044 The Notes to Financial Statements are an integral part hereof. - 19 -
NOTE 1 Summary of Significant Accounting Policies Corporate Structure CH Energy Group is the holding company parent corporation of four principal, wholly owned subsidiaries, Central Hudson Gas & Electric Corporation ( Central Hudson or the Company ), Central Hudson Electric Transmission LLC ( CHET ), Central Hudson Enterprises Corporation ( CHEC ) and Central Hudson Gas Transmission LLC ( CHGT ). CH Energy Group s common stock is indirectly owned by Fortis Inc. ( Fortis ), which is a leader in the North American regulated electric and gas utility industry. Central Hudson is a regulated electric and natural gas transmission and distribution utility. CHET was formed to engage in Federal Energy Regulatory Commission ( FERC ) electric transmission projects and has a 6.1% ownership interest in New York Transco LLC ( Transco ). In the first quarter of 2016, CHGT was formed to hold CH Energy Group s ownership stake in possible gas transmission pipeline opportunities in New York State. As of December 31, 2017 there has been no activity in CHGT. CHEC has ownership interests in certain non-regulated subsidiaries that are less than 100% owned. Basis of Presentation This Annual 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, CHET, CHGT and CHEC. All intercompany balances and transactions have been eliminated in consolidation. CHEC s investments in limited partnerships ( Partnerships ) and limited liability companies and CHET s investment in Transco are accounted for under the equity method. CHEC 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 have been prepared in accordance with accounting principles generally accepted in the United States of America ( GAAP ), which for regulated utilities, includes specific accounting guidance for regulated operations. Regulatory Accounting Policies Regulated companies, such as Central Hudson, defer costs and credits on the balance sheet as regulatory assets and liabilities when it is probable that those costs and credits will be recoverable through the rate-making process in a period different from when they otherwise would have been reflected in income. For Central Hudson, these deferred regulatory assets and liabilities, and the related deferred taxes, are recovered from or reimbursed to customers either by offset as directed by the New York State Public Service Commission ( PSC or Commission ) or through incorporation in the determination of revenue requirement used to set new rates. Changes in regulatory assets and liabilities are reflected in the Consolidated Statement of Income in the period in which the amounts are reflected in rates. Current accounting practices reflect the regulatory accounting authorized in Central Hudson s most - 20 -
recent rate order. See Note 3 Regulatory Matters for additional information regarding regulatory accounting. Rates, Revenues, and Cost Adjustment Mechanisms Central Hudson s electric and natural gas retail rates are regulated by the PSC. Transmission rates, facilities charges, and rates for electricity sold for resale in interstate commerce are regulated by the FERC. Central Hudson s tariffs for retail electric and natural gas service include purchased electricity and purchased natural gas cost adjustment mechanisms by which electric and natural gas rates are adjusted to recover the actual purchased electricity and purchased natural gas costs including hedging 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 authorized by the PSC and used for the development of rates for most of Central Hudson s customers. 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, liabilities and the disclosures of the contingent assets and liabilities at the date of the financial statements and the 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, pension and other post-retirement benefits, as well as, for certain commitments and contingencies. Revenue Recognition Effective July 1, 2016, in accordance with the Order Approving Rate Plan ( 2015 Rate Order ) in Cases 14-E-0318 and 14-G-0319, Central Hudson implemented monthly billing to a majority of its customers. Central Hudson records revenue for the amounts billed to customers monthly, which is based on either the customers meter read or estimated usage for the month. Based on the Order Approving Accounting Change with Modifications, issued and effective July 20, 2016, Central Hudson also records an estimate of unbilled revenue for service rendered to customers subsequent to their billing date and through the end of the month. Unbilled balances from the previous month reverse as current month actual bills are processed. As a result of this order, the net change to unbilled revenue is reflected on the income statement. Between the dates of July 1, 2015 and July 1, 2016, prior to monthly billing and in accordance with the 2015 Rate Order, Central Hudson recorded an estimate of unbilled revenue for service rendered to bimonthly customers whose meters were read in the prior month. The estimate covered the 30 days subsequent to the meter read date while the remaining estimate of unbilled revenue exceeding 30 days, as defined under GAAP, was recorded with an offsetting regulatory liability balance. See Note 3 Regulatory Matters for additional information. - 21 -
Central Hudson records gross receipts tax revenues and expenses on a gross income statement presentation basis (i.e., included in both revenue and expenses). Total revenue taxes included in Operating Revenues are $7.6 million, $7.5 million and $7.1 million for the years ended December 31, 2017, 2016 and 2015, respectively. Sales and use taxes charged to customers on Central Hudson s utility revenues are accounted for on a net basis (excluded from revenue). Cash and Cash Equivalents CH Energy Group and Central Hudson consider temporary cash investments with a maturity (when purchased) of three months or less, to be cash equivalents. Accounts Receivable Receivables are carried at net realizable value. The allowance for doubtful accounts reflects management s best estimate of uncollectible accounts receivable balances. 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. Interest is charged on accounts receivable balances that have been outstanding for more than 30 days. Fuel, Materials & Supplies The following is a summary of CH Energy Group s and Central Hudson s inventory of Fuel, Materials & Supplies valued using the average cost method (In Thousands): December 31, December 31, 2017 2016 Natural gas $ 5,075 $ 4,054 Fuel used in electric generation 441 462 Materials and supplies 18,226 19,493 Total $ 23,742 $ 24,009 Utility Plant - Central Hudson The regulated assets of Central Hudson include electric, natural gas and common assets, which are listed under the heading Utility Plant on CH Energy Group s Consolidated Balance Sheet and Central Hudson s Balance Sheet. 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 ); less contributions in aid of construction. - 22 -
AFUDC, 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) is reported as other income. The AFUDC rate was 6.1% in 2017, 5.7% in 2016, and 6.2% in 2015. 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. For additional information see Note 2 Utility Plant Central Hudson. Depreciation and Amortization Central Hudson s depreciation and amortization provisions are computed on the straight-line method using PSC approved rates. The anticipated costs of removing assets upon retirement are generally provided for over the life of those assets as a component of depreciation expense and, for regulatory reporting purposes, is reflected in accumulated depreciation until the costs are incurred, which is consistent with industry practice. 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. Central Hudson reclassifies cost of removal recovered in excess of amounts incurred to date from accumulated depreciation to regulatory liabilities for presentation in its Balance Sheet in accordance with generally accepted accounting principles. 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, inclusive of intangible amortization, were 2.75% in 2017, 2.71% in 2016 and 2.73% in 2015 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, 2017, 2016, and 2015 was 25.1%, 25.6% and 26.1%, respectively. Asset Retirement Obligations Central Hudson records Asset Retirement Obligations ( AROs ) for the incremental removal costs, resulting from legal and environmental obligations associated with the retirement of certain utility plant assets, as a liability at fair value with a corresponding increase to utility capital assets, in the period in which the costs are known and estimable. 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 accrete the liability for the passage of time and record any changes in the estimated future cash flows of the incremental obligation. Accretion and depreciation expense associated with AROs are recorded as regulatory assets. Actual costs incurred reduce the - 23 -
liability. The regulatory assets for accretion and depreciation are recovered through the accumulated depreciation reserve upon retirement of the asset. Impairment of Long-Lived Assets Central Hudson reviews long-lived assets for impairment, at least annually. Asset-impairment testing at the regulated utilities is carried out at the enterprise level to determine if assets are impaired. The recovery of regulated assets carrying value, including a fair rate of return, is provided through customer electricity and natural gas rates approved by the PSC. The net cash flows for regulated enterprises are not asset-specific, but are pooled for the entire regulated utility. Operating Leases CH Energy Group and its subsidiaries recognize operating lease payments as an expense in the Statement of Income on a straight line basis over the lease term. Research and Development Central Hudson is engaged in the conduct and support of research and development ( R&D ) activities that are focused on the improvement of existing energy technologies and the development of new technologies for the delivery and customer use of energy. R&D expenditures are provided for in Central Hudson s rates charged to customers for electric and natural gas delivery service, with any differences between actual R&D expense and the rate allowances deferred for future recovery from or return to customers. See Note 6 Research and Development for additional details. Debt Issuance Costs Expenses incurred in connection with CH Energy Group s or Central Hudson s debt issuance and any discount or premium on debt are deferred and amortized over the lives of the related issues. When long-term debt is reacquired or redeemed, regulatory accounting permits deferral of related unamortized debt expense and reacquisition costs. These costs are being amortized over the remaining life of the original life of the debt issue retired. The amortization of debt costs for reacquired debt is incorporated in the revenue requirement for delivery rates as authorized by the PSC. See Note 9 Capitalization Long-Term Debt for additional details. Income Tax CH Energy Group and its subsidiaries file consolidated federal income tax returns with FortisUS Inc. ( FortisUS ) and, depending on the state, either standalone or consolidated state income tax returns. Income taxes are deferred, for all differences between the financial statement and the tax basis of assets and liabilities, under the asset and liability method in accordance with current accounting guidance for income taxes. Certain deferred income taxes are recorded with offsetting regulatory assets or liabilities by Central Hudson to recognize that income taxes will be recovered or refunded through future rates. For federal and state income tax purposes, CH Energy Group and its subsidiaries use an accelerated method of depreciation and generally use the shortest life permitted for each class of assets. Central - 24 -
Hudson follows the normalization method of accounting, which spreads the tax benefits associated with utility assets over the same time period that the costs of those assets are recovered from customers. Normalization is required as a prerequisite for utilities claiming accelerated depreciation and certain tax credits. Deferred investment tax credits are amortized over the estimated life of the properties giving rise to the credits. For state income tax purposes, Central Hudson uses book depreciation for property placed in service in 1999 or earlier in accordance with transition property rules under Article 9-A of the New York State Tax Law. CH Energy Group and CHEC file state income tax returns in the states in which it conducts business. See Note 4 Income Tax for additional information regarding income taxes and tax reform. Post-Employment and Other Benefits Central Hudson sponsors a noncontributory Retirement Income Plan ( Retirement Plan ) for all management, professional and supervisory employees hired before January 1, 2008 and for all Union employees hired before May 1, 2008. Benefits are based on years of service and compensation. Central Hudson also provides Other Post-Employment Benefits plans, which include certain health care and life insurance benefits for retirees hired within the same time periods as stated above. Additionally, Central Hudson maintains a Supplemental Executive Retirement Plan ( SERP ) for certain members of management. Central Hudson recognizes any underfunded status of the Retirement Plan and SERP (collectively Pension ) and OPEB defined benefit plans as a liability on its balance sheet. The underfunded status is measured as the difference between the fair value of qualified plans assets and the projected benefit obligation ( PBO ) for the plans. The SERP is a non-qualified plan under the Employee Retirement Income Security Act guidelines and therefore, although funded annually to achieve 110% of the plan s accumulated benefit obligation, the trust assets of this plan are not included in the calculation of the funded status for accounting purposes. The Pension status includes the SERP PBO of approximately $25.8 million and does not take into consideration the SERP trust assets of approximately $23.4 million. Central Hudson recognizes a regulatory asset for the underfunded amount because these future costs are probable for recovery from customers in future rates. Pension and OPEB benefit expenses are determined by actuarial valuations based on assumptions that Central Hudson evaluates at least annually. The PSC has authorized deferral accounting treatment for any variations between actual Pension and OPEB expenses and the amount included in the current delivery rate structure. Any unamortized balances related to net actuarial gains and losses, past service costs and transitional obligations, which would otherwise be recognized in accumulated other comprehensive income are subject to deferral accounting treatment. Central Hudson also sponsors a contributory 401(k) retirement plan ( 401(k) plan ) for its employees. The 401(k) plan provides for employee tax-deferred salary deductions for participating employees, as well as, employer contributions. For more information see Note 10 Post-Employment Benefits. - 25 -