CH Energy Group (NYSE: CHG) is an investor-owned holding corporation that owns two subsidiaries, Central Hudson and CHEC. The company makes money by providing electric and gas power to New York State. The company serves a territory extending about 85 miles along the Hudson River and about 25 to 40 miles east and west of the Hudson River. Because the Mid-Atlantic region of the US experiences seasonal fluctuations in temperature, the end uses of space heating and air conditioning directly affects the sales volumes CH Energy may participate in.
CH Energy Group derives the majority of its revenues, roughly 90%, from Central Hudson. However, besides electricity generation in New York State, CH Energy's CHEC subsidiary participates in cogeneration, wind generation, biomass energy projects, landfill gas projects and alternate fuel and energy production projects in New Jersey, New Hampshire, New York, Wisconsin and Pennsylvania, and a corn-ethanol plant in Nebraska. As a result, the company is still heavily tied to the Mid-Atlantic population for utilities generation.
While other companies such as UniSource Energy (UNS) have started to diversify their power plant offerings into Renewable Energy, CH Energy has started to divest some of their alternative energy holdings. For example, Duke Energy Corporation (DUK) has recently in May 2011 agreed to purchase the eight-turbine wind farm 30 miles south-east of Green Bay from CHG. Instead though, the company is focusing on managing its existing clients' efficiency. The town of Red Hook, the village of Red Hook and the village of Tivoli for example are working together to launch a pilot project to help residents and small business owners better manage their energy use and to reduce electric usage during periods of peak demand, a win-win for both parties.
As for the company's top line, revenues have been increasing by 4.4% in FY2010, after decreasing roughly 18.2% in FY2009. With gross profit margins still holding at around 40%-50% though, it is apparent that the company has been able to control its costs in lieu of declining business from a weakened economy.
The Mid-Atlantic region is often wrought with catastrophic risk from hurricane damage. Failure of critical equipment from such events will halt service to CHG's customers, which in turn lead to directly lowered sales volumes. Furthermore, the infrastructure that receives damage from catastrophic risk would lead to disruptions, which if not resolved in a timely manner or is not alleviated through insurance policies will lead to severely reduced cash flows, thereby hurting the company's ability to pay back its debt.
A coastal region like the Mid-Atlantic brings humid summers and snowy winters. As such, air conditioning is heavily used in the summer time (requiring electricity), and heating is heavily used in the winter (requiring natural gas). Because CHG is heavily invested in both natural gas and electricity, the combination of two operating segments tend to smooth out earnings better than companies that focus solely on one or the other. Regardless, both sources are heavily dependent upon several key inputs such as Natural Gas, Coal and Oil. The price at which CHG may acquire these inputs determine how much the company may charge to its customers.
To date, the primary source of competition is solar net metered systems, which are currently capped at 12 MW. Central Hudson is authorized by the PSC to defer lost revenues attributable to photovoltaic net metering, so solar energy continues to be its greatest threat.