UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-14161
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KEYSPAN CORPORATION
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(Exact name of Registrant as specified in its charter)
New York 11-3431358
----------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One MetroTech Center, Brooklyn, New York 11201
175 East Old Country Road, Hicksville, New York 11801
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(Address of principal executive offices) (Zip Code)
(718) 403-1000 (Brooklyn)
(631) 755-6650 (Hicksville)
-----------------------------
(Registrant's telephone number, including area code)
(Former name,former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding at October 26, 2000
--------------------------- --------------------------------
$.01 par value 134,642,772
<PAGE>
KEYSPAN CORPORATION AND SUBSIDIARIES
INDEX
Part I. FINANCIAL INFORMATION Page No.
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Item 1. Financial Statements
Consolidated Balance Sheet -
September 30, 2000 and December 31, 1999 3
Consolidated Statement of Income -
Nine Months Ended September 30, 2000 and 1999 5
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis Of Financial
Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 36
Part II. OTHER INFORMATION
Item 1 - Legal Proceedings 36
Item 6 - Exhibits and Reports on Form 8-K 37
Signatures 38
2
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<TABLE>
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
<CAPTION>
SEPTEMBER 30, 2000 December 31, 1999
----------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and temporary cash investments $ 63,618 $ 128,602
Customer accounts receivable 609,890 425,643
Other accounts receivable 222,478 235,156
Allowance for uncollectible accounts (26,281) (20,294)
Special deposits 42,485 60,863
Gas in storage, at average cost 260,738 144,256
Materials and supplies, at average cost 95,004 84,813
Other 88,629 98,914
--------------------- ---------------------
1,356,561 1,157,953
--------------------- ---------------------
EQUITY INVESTMENTS AND OTHER 427,557 391,731
--------------------- ---------------------
PROPERTY
Electric 1,386,206 1,346,851
Gas 3,584,690 3,449,384
Other 393,252 375,657
Accumulated depreciation (1,688,283) (1,589,287)
Gas exploration and production, at cost 1,346,357 1,177,916
Accumulated depletion (582,912) (520,509)
--------------------- ---------------------
4,439,310 4,240,012
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DEFERRED CHARGES
Regulatory assets 320,931 319,167
Goodwill, net of amortizations 350,552 255,778
Other 357,610 366,050
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1,029,093 940,995
--------------------- ---------------------
--------------------- ---------------------
TOTAL ASSETS $ 7,252,521 $ 6,730,691
===================== =====================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
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<TABLE>
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
<CAPTION>
SEPTEMBER 30, 2000 December 31, 1999
----------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
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<S> <C> <C>
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
Current redemption of preferred stock $ - $ 363,000
Accounts payable and accrued expenses 670,869 645,347
Commercial paper 382,090 208,300
Dividends payable 61,276 61,306
Taxes accrued 90,195 50,437
Customer deposits 30,552 31,769
Interest accrued 23,879 28,093
----------------- -----------------
1,258,861 1,388,252
----------------- -----------------
DEFERRED CREDITS AND OTHER LIABILITIES
Regulatory liabilities 44,350 26,618
Deferred income tax 238,748 186,230
Postretirement benefits and other reserves 542,596 501,603
Other 95,018 66,200
----------------- -----------------
920,712 780,651
----------------- -----------------
CAPITALIZATION
Common stock, $.01 par value, authorized
450,000,000 shares; outstanding 134,575,028 and
133,866,077 shares stated at 2,987,242 2,973,388
Retained earnings 481,658 456,882
Accumulated foreign currency adjustment (6,476) 7,714
Treasury stock purchased (702,435) (722,959)
----------------- -----------------
Total common shareholders' equity 2,759,989 2,715,025
Preferred stock 84,323 84,339
Long-term debt 2,120,752 1,682,702
----------------- -----------------
TOTAL CAPITALIZATION 4,965,064 4,482,066
----------------- -----------------
MINORITY INTEREST IN SUBSIDIARY COMPANIES 107,884 79,722
----------------- -----------------
TOTAL LIABILITIES AND CAPITALIZATION $ 7,252,521 $ 6,730,691
================= =================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
4
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<TABLE>
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
THREE MONTHS Three Months NINE MONTHS Nine Months
ENDED Ended ENDED Ended
SEPTEMBER 30, September 30, SEPTEMBER 30, September 30,
2000 1999 2000 1999
--------------------------------------------------------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Gas Distribution $ 292,352 $ 208,572 $ 1,458,595 $ 1,208,254
Electric Services 374,517 241,259 1,097,616 606,552
Gas Exploration and Production 62,748 42,081 169,966 103,622
Energy Related Services and Other 217,520 46,557 485,161 124,675
---------- ----------------- ------------------ -----------------
Total Revenues 947,137 538,469 3,211,338 2,043,103
---------- ----------------- ------------------ -----------------
OPERATING EXPENSES
Purchased gas for resale 140,415 68,195 717,140 498,609
Fuel and purchased power 161,086 - 334,135 -
Operations and maintenance 389,116 293,044 1,123,581 765,221
Depreciation, depletion and amortization 72,973 63,130 216,364 180,698
Operating taxes 91,469 77,317 298,010 258,355
---------- ----------------- ------------------ -----------------
Total Operating Expenses 855,059 501,686 2,689,230 1,702,883
---------- ----------------- ------------------ -----------------
OPERATING INCOME 92,078 36,783 522,108 340,220
---------- ----------------- ------------------ -----------------
OTHER INCOME AND (DEDUCTIONS)
Income from equity investments 4,405 4,268 16,333 9,749
Minority interest (5,952) (3,035) (13,747) (5,226)
Interest income and other (259) 4,585 6,510 27,679
---------- ----------------- ------------------ -----------------
Total Other Income (1,806) 5,818 9,096 32,202
---------- ----------------- ------------------ -----------------
INCOME BEFORE INTEREST CHARGES
AND INCOME TAXES 90,272 42,601 531,204 372,422
---------- ----------------- ------------------ -----------------
INTEREST CHARGES 42,781 28,045 120,106 98,824
---------- ----------------- ------------------ -----------------
INCOME TAXES
Current 7,579 (23,111) 116,396 (14,886)
Deferred 25,282 28,651 54,462 113,258
---------- ----------------- ------------------ -----------------
Total Income Taxes 32,861 5,540 170,858 98,372
---------- ----------------- ------------------ -----------------
NET INCOME 14,630 9,016 240,240 175,226
Preferred stock dividend requirements 1,476 8,688 16,453 26,067
---------- ----------------- ------------------ -----------------
EARNINGS FOR COMMON STOCK $ 13,154 $ 328 $ 223,787 $ 149,159
Foreign currency adjustment (4,760) (2,281) (14,190) 3,454
---------- ----------------- ------------------ -----------------
COMPREHENSIVE INCOME (LOSS) $ 8,394 $ (1,953) $ 209,597 $ 152,613
========== ================= ================== =================
BASIC AND DILUTED EARNINGS
PER COMMON SHARE $ 0.10 $ 0.00 $ 1.67 $ 1.06
========== ================= ================== =================
AVERAGE COMMON SHARES OUTSTANDING (000) 134,335 136,506 133,965 140,079
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
5
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<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(IN THOUSANDS OF DOLLARS)
<CAPTION>
NINE MONTHS Nine Months
ENDED Ended
SEPTEMBER 30, September 30,
2000 1999
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<S> <C> <C>
OPERATING ACTIVITIES
Net Income 240,240 $ 175,226
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Depreciation, depletion and amortization 216,364 180,698
Deferred income tax 54,462 113,258
Income from equity investments (16,333) (9,749)
Dividends from equity investments 19,568 6,375
CHANGES IN ASSETS AND LIABILITIES
Accounts receivable (38,759) 155,538
Materials and supplies, fuel oil and
gas in storage (128,705) (18,997)
Accounts payable and accrued expenses 27,451 (143,858)
Interest accrued (12,269) (11,050)
Special deposits 18,378 55,050
Prepayments and other 86,803 (59,437)
----------------- -----------------
Net Cash Provided by Operating Activities 467,200 443,054
----------------- -----------------
INVESTING ACTIVITIES
Capital expenditures (403,611) (512,991)
Investments (175,977) -
Other 7,599 10,749
----------------- ----------------
Net Cash (Used in) Investing Activities (571,989) (502,242)
----------------- ----------------
FINANCING ACTIVITIES
Treasury stock issued (purchased) 20,951 (289,172)
Issuance of commercial paper, net 173,790 103,950
Issuance of long-term debt 463,627 40,523
Payment of long-term debt (37,000) (397,000)
Payment of preferred stock (363,000) -
Preferred stock dividends paid (18,600) (26,067)
Common stock dividends paid (179,049) (185,375)
Other (20,914) (548)
----------------- ----------------
Net Cash Provided by (Used in) Financing
Activities 39,805 (753,689)
----------------- ----------------
Net (Decrease) in Cash and
Temporary Cash Investments $ (64,984) (812,877)
================= =================
Cash and temporary cash investments at
beginning of period 128,602 $ 942,776
Net (Decrease) in cash and
temporary cash investments (64,984) (812,877)
---------------- -----------------
Cash and Temporary Cash Investments at
End of Period 63,618 $ 129,899
================= =================
</TABLE>
Temporary cash investments are short-term marketable securities purchased with
maturities of three months or less that were carried at cost which approximates
fair value.
See accompanying Notes to the Consolidated Financial Statements.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
KeySpan Corporation (referred to in the notes to the Financial Statements
as "we", "us", and "our") is a holding company operating two utilities that
distribute natural gas to approximately 1.6 million customers in New York
City and on Long Island, making it the fourth largest gas distribution
company in the United States. We are also a major, and growing, generator
of electricity. We own and operate five large generating plants and 42
smaller facilities in Nassau and Suffolk Counties on Long Island and lease
and operate a major facility in Queens County in New York City. Under
contractual arrangements, we provide power, electric transmission-and-
distribution services, billing and other customer services for
approximately one million electric customers of the Long Island Power
Authority. Our other subsidiaries are involved in oil and gas exploration
and production; gas storage; wholesale and retail gas and electric
marketing; appliance service; heating, ventilation and air conditioning
installation and services; large energy-system ownership, installation and
management; telecommunications; and energy-related internet activities. We
also invest in, and participate in the development of, pipelines and other
energy-related projects, domestically and internationally.
1. BASIS OF PRESENTATION
In our opinion, the accompanying unaudited Consolidated Financial
Statements contain all adjustments necessary to present fairly our
financial position as of September 30, 2000, and the results of our
operations for the three and nine months ended September 30, 2000 and
September 30, 1999 and cash flows for the nine months ended September 30,
2000 and September 30, 1999. The accompanying financial statements should
be read in conjunction with the consolidated financial statements and notes
included in our 1999 Annual Report on Form 10-K. Income from interim
periods may not be indicative of future results. Certain reclassifications
were made to conform prior period financial statements with the current
period financial statement presentation. Other than as noted, adjustments
were of a normal, recurring nature.
2. BUSINESS SEGMENTS
We have six reportable segments: Gas Distribution, Electric Services, Gas
Exploration and Production, Energy Services, Energy Investments and Other.
The Gas Distribution segment consists of our two gas distribution
subsidiaries. The Brooklyn Union Gas Company d/b/a KeySpan Energy Delivery
New York provides gas distribution services to customers in the New York
City Boroughs of Brooklyn, Queens and Staten Island. KeySpan Gas East
Corporation d/b/a KeySpan Energy Delivery Long Island provides gas
distribution services to customers in the Long Island counties of Nassau and
Suffolk and the Rockaway Peninsula of the Borough of Queens.
The Electric Services segment consists of subsidiaries that operate the
electric transmission and distribution system owned by the Long Island Power
Authority; own and provide capacity to and
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produce energy for the Long Island Power Authority from our generating
facilities located on Long Island; and manage fuel supplies for the Long
Island Power Authority to fuel our Long Island generating facilities, all
through long-term service contracts having terms that range from eight to
fifteen years. The Electric Services segment also includes subsidiaries that
own, lease and operate the 2,168 megawatt Ravenswood electric generation
facility, located in Queens, New York. Our contract with Consolidated Edison
Company of New York, which provided Consolidated Edison with 100% of the
available capacity of the Ravenswood facility on a fixed monthly fee,
expired on April 30, 2000. We now provide all of the energy, capacity and
ancillary services related to the Ravenswood facility to the New York
Independent System Operator. Currently, our primary electric generation
customers are the Long Island Power Authority and the New York Independent
System Operator energy markets.
The Gas Exploration and Production segment is engaged in gas and oil
exploration and production, and the development and acquisition of domestic
natural gas and oil properties. This segment consists of our 70% equity
interest in The Houston Exploration Company, an independent natural gas and
oil exploration company, as well as KeySpan Exploration and Production, LLC,
our wholly owned subsidiary engaged in a joint venture with Houston
Exploration. On March 31, 2000, under a pre-existing credit arrangement,
approximately $80 million in debt owed by Houston Exploration to us was
converted into common equity of Houston Exploration. Upon such conversion,
our common equity ownership interest in Houston Exploration increased from
64% to the current level of approximately 70%.
The Energy Services segment primarily includes companies that provide
energy related services to customers located within the New York tri-state
metropolitan area, Rhode Island and Pennsylvania through the following four
lines of business: (i) Home Energy Services provides residential customers
with service and maintenance of energy systems and appliances, as well as
the retail marketing of natural gas and electricity to residential and
small commercial customers; (ii) Business Solutions provides professional
engineering-consulting and design of energy systems for commercial and
industrial customers, including installation of plumbing, heating,
ventilation and air conditioning equipment; (iii) Commodity Procurement
provides management and procurement services for fuel supply and management
of energy sales, primarily for and from the Ravenswood facility; and (iv)
Telecommunications Services provides various services to carriers of voice
and data transmission on Long Island and in New York City.
Subsidiaries in the Energy Investments segment hold a 20% equity interest in
the Iroquois Gas Transmission System LP, a pipeline that transports Canadian
gas supply to markets in the Northeastern United States; a 50% interest in
the Premier Transmission Pipeline and a 24.5% interest in Phoenix Natural
Gas, both in Northern Ireland; investments in certain midstream natural gas
assets in Western Canada owned jointly with Gulf Canada Resources Limited,
through the Gulf Midstream Services Partnership and the ownership of certain
oil producing properties in Alberta, Canada. These subsidiaries are
primarily accounted for under the equity method. Accordingly, equity income
from these investments is reflected in other income and (deductions) in the
Consolidated Statement of Income. In October 2000, we sold our interest in
certain oil producing properties in Alberta, Canada. An after-tax gain of
approximately $1.3 million from the sale will be reported in the fourth
quarter of 2000. Further, also in October 2000, we acquired the remaining
50% interest in Gulf Midstream, making us the sole owner of Gulf Midstream.
The
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transaction required us to borrow an additional $48 million from a Canadian
bank. For future financial reporting purposes, the operations of Gulf
Midstream, which will now be known as KeySpan Energy Canada, will be fully
consolidated in our financial statements.
The Other segment represents primarily unallocated administrative and
general expenses, interest income earned on temporary cash investments, and
preferred stock dividends.
The accounting policies of the segments are the same as those used for the
preparation of the Consolidated Financial Statements. Our segments are
strategic business units that are managed separately because of their
different operating and regulatory environments. At September 30, 2000, the
total assets of certain reportable segments increased from levels reported
at December 31, 1999 as follows: the Energy Services segment's assets
increased by approximately $260 million due primarily to the acquisition of
four additional companies that provide energy-related services and the
investment in MyHomeKey.com, Inc. The segment information presented below
reflects amounts reported in the Consolidated Financial Statements for the
three and nine months ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
-----------------------------------------------------------------------------------------------------------------------------------
Gas Electric Gas Exploration Energy Energy
Distribution Services and Production Services Investments Other Eliminations Consolidated
------------------------------------- ------------- ----------------- ----------- ------------- ------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED
SEPTEMBER 30, 2000
Unaffiliated Revenue $ 292,352 $ 374,517 $ 62,748 $ 215,871 $ 1,649 $ - $ - $ 947,137
Intersegment Revenue 15,903 (15,903) -
Operating Income (21,542) 73,007 30,985 19,653 (969) (9,056) - 92,078
Earnings for
Common Stock (28,033) 31,796 13,418 9,636 2,687 (16,350) - 13,154
Basic and Diluted
Earnings Per Share $(0.21) $0.24 $0.10 $0.07 $0.02 $(0.12) $- $0.10
THREE MONTHS ENDED
SEPTEMBER 30, 1999
Unaffiliated Revenue $ 208,572 $ 241,259 $ 42,081 $ 46,096 $ 461 $ - $ - $ 538,469
Intersegment Revenue - - - - - - - -
Operating Income (28,635) 49,392 15,798 - (1,234) 1,462 - 36,783
Earnings for
Common Stock (29,037) 28,164 5,435 116 2,821 (7,171) - 328
Basic and Diluted
Earnings Per Share $(0.21) $0.21 $0.04 $0.00 $0.02 $ (0.06) $ - $0.00
--------------------- ----------- ------------- ----------------- -------------- ------------- ----------- ------------- ------
</TABLE>
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<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
-----------------------------------------------------------------------------------------------------------------------------------
Gas Electric Gas Exploration Energy Energy
Distribution Services and Production Services Investments Other Eliminations Consolidated
----------------------- -------------- ------------- ----------------- ----------- ----------- ------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NINE MONTHS ENDED
SEPTEMBER 30, 2000
Unaffiliated Revenue $ 1,458,595 $ 1,097,616 $ 169,966 $ 480,511 $ 4,650 $ - $ - $ 3,211,338
Intersegment Revenue - - - 48,677 - - (48,677) -
Operating Income 212,688 204,834 72,514 51,958 (4,022) (15,864) - 522,108
Earnings for
Common Stock 101,025 103,316 29,381 25,221 7,877 (43,033) - 223,787
Basic and Diluted
Earnings Per Share $0.75 $0.77 $0.22 $0.19 $0.06 $(0.32) $ - $1.67
NINE MONTHS ENDED
SEPTEMBER 30, 1999
Unaffiliated Revenue $ 1,208,254 $ 606,552 $ 103,622 $ 123,165 $ 1,510 $ - $ - $ 2,043,103
Intersegment Revenue - - - - - - - -
Operating Income 198,565 112,652 29,879 (4,491) (3,949) 7,564 - 340,220
Earnings for
Common Stock 92,873 59,786 9,239 (2,384) 5,937 (16,292) - 149,159
Basic and Diluted
Earnings Per Share $0.66 $0.43 $0.07 $(0.02) $0.04 $(0.12) $ - $1.06
------------------------- -------------- ------------- -------------- ----------- -------- --------- ------------- -----------
</TABLE>
3. ENVIRONMENTAL MATTERS
MANUFACTURED GAS PLANT SITES: We have identified thirty-four manufactured
gas plant sites that were historically owned or operated by KeySpan Energy
Delivery New York and KeySpan Energy Delivery Long Island (or such
companies' predecessors). These former sites, some of which are no longer
owned by us, have been identified to the New York State Department of
Environmental Conservation for inclusion on appropriate waste site
inventories.
We presently estimate that the remaining cost of our manufactured gas
plant-related environmental cleanup activities will be approximately $119
million; which amount has been accrued as our current best estimate of our
aggregate environmental liability for known sites. The currently-known
conditions of the former manufactured gas plant sites, their period and
magnitude of operation, generally observed cleanup requirements and costs in
the industry, current land use and ownership, and possible reuse have been
considered in establishing contingency reserves. We believe that in the
aggregate, the accrued liability for investigation and remediation of the
manufactured gas plant sites identified above are reasonable estimates of
likely cost within a range of reasonable, foreseeable costs.
Thirteen of the identified sites are currently the subject of Administrative
Consent Orders with the Department of Environmental Conservation and another
site is subject to the negotiation of an Administrative Consent Order or an
agreement under the Department of Environmental Conservation's Voluntary
Clean-up Program. Our remaining manufactured gas plant sites may
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not become subject to Administrative Consent Orders in the future, and
accordingly no liability has been accrued for these sites.
Under prior rate orders, the Public Service Commission of the State of New
York has allowed recovery of costs related to certain KeySpan Energy
Delivery New York manufactured gas plant sites. We believe that current rate
plans in effect for both Gas Distribution subsidiaries provide for recovery
of environmental costs attributable to the Gas Distribution segment. At
September 30, 2000, we had a total regulatory asset of approximately $98
million. Expenditures incurred to date by us with respect to manufactured
gas plant-related activities total approximately $20 million.
4. LIQUIDITY AND FINANCINGS
During the nine months ended September 30, 2000, we issued $1.6 billion and
repaid $1.4 billion of commercial paper to satisfy working capital needs and
the mandatory redemption of preferred stock as discussed below. At September
30, 2000, we had $382.1 million of commercial paper outstanding at an
average annualized interest rate of 6.73%.
Houston Exploration also issued and repaid commercial paper to satisfy
working capital needs during the nine months ended September 30, 2000. For
the nine months ended September 30, 2000, Houston Exploration borrowed $30
million under its credit facility with a commercial bank and repaid $37
million of outstanding borrowings. At September 30, 2000, $174 million
remained outstanding under this facility at a weighted average annualized
interest rate of 7.84%. In addition, during the nine months ended September
30, 2000, a subsidiary in the Energy Investments segment increased its
borrowings under a revolving loan agreement with a financial institution in
Canada by $33.6 million. At September 30, 2000, $118 million was outstanding
at a weighted average annualized interest rate of 6.48%.
In August, we filed a shelf registration statement with the Securities and
Exchange Commission for the issuance of up to $1.65 billion of debt
securities. We intend to issue the debt securities to replace short term
borrowings to be entered into in connection with our acquisition of Eastern
Enterprises and EnergyNorth, Inc. (See note 5 Acquisition of Eastern
Enterprises.)
On June 1, 2000, we redeemed, at maturity, all 14,520,000 outstanding shares
of our 7.95% Preferred Stock Series AA. Our obligation of $370.2 million
included the mandatory redemption price of $25 per share totaling $363.0
million and dividends payable totaling $7.2 million. The redemption was
satisfied through utilization of internally generated funds and proceeds
from the issuance of commercial paper.
KeySpan Energy Delivery Long Island filed a shelf registration statement
with the Securities and Exchange Commission in December 1999 for the
issuance of up to $600 million of medium term notes. On February 1, 2000,
KeySpan Energy Delivery Long Island issued $400 million 7.875% Notes due
February 1, 2010. The net proceeds from the issuance were used to repay our
treasury for costs in extinguishing $397 million of promissory notes to the
Long Island Power Authority
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that matured in June 1999. The medium term notes are fully and
unconditionally guaranteed by us. Currently,$200 million of medium term
notes remain available for issuance under this shelf registration statement.
5. ACQUISITION OF EASTERN ENTERPRISES
On November 4, 1999, we and Eastern Enterprises announced that the companies
had signed a definitive merger agreement under which we will acquire all of
the common stock of Eastern for $64.00 per share in cash, subject to
adjustment. The Agreement and Plan of Merger is included as an exhibit to
our Form 10K for the year ended December 31, 1999. The transaction has a
total value of approximately $2.5 billion and will be accounted for
utilizing purchase accounting.
In connection with the merger, Eastern has amended its merger agreement with
EnergyNorth, Inc. to provide for an all cash acquisition by Eastern of
EnergyNorth shares at a price per share of $61.13, subject to adjustment.
The restructured EnergyNorth merger is expected to close contemporaneously
with the KeySpan/Eastern transaction. The EnergyNorth transaction has a
total value of approximately $250 million.
We intend to access the financial markets in the fourth quarter of 2000 to
finance approximately $2 billion for the Eastern and EnergyNorth
transactions. We intend to use bridge financing to fund these transactions
initially and then replace the bridge financing with $1.65 billion of long-
term debt securities as soon as practicable thereafter. The remaining
balance will be financed through the issuance of commercial paper. We
anticipate issuing several different maturities of long-term debt to balance
our future debt capital maturity structure.
We expect pre-tax annual cost savings resulting from the transactions to be
approximately $40 million. These cost savings result primarily from the
elimination of duplicate corporate and administrative programs, greater
efficiencies in operations and business processes, and increased purchasing
efficiencies. We expect to achieve the majority of the reductions through a
variety of programs which would include hiring freezes, attrition and
separation programs, including implementation of an early retirement program
and targeted severance programs. We have begun to initiate some of these
programs and will report the potential effect of these initiatives on
earnings and cash flow from operations when job positions and cost estimates
have been finalized.
Following the closing of these transactions, we will become subject to the
regulation of the Securities and Exchange Commission as a registered holding
company under the Public Utility Holding Company Act of 1935, as amended. As
such, our corporate and financial activities as well as our subsidiaries,
including such entities' ability to pay dividends, will be subject to
Securities and Exchange Commission regulation. The merger is conditioned
upon the approval of the Securities and Exchange Commission. Shareholders of
both Eastern and EnergyNorth, as well as the New Hampshire Public Utility
Commission (with respect to Eastern's acquisition of EnergyNorth) have
approved the transactions. We anticipate that the transaction will be
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consummated in the fourth quarter of 2000, but are unable to determine when
or if the required Securities and Exchange Commission approval will be
obtained.
6. NEW YORK STATE INDEPENDENT SYSTEM OPERATOR MATTERS
We currently realize revenues from our investment in the Ravenswood facility
through the wholesale sale of energy, capacity and ancillary services.
Ancillary services include spinning reserves and non-spinning reserves
available to replace energy that is unable to be delivered due to the
unexpected loss of a major energy source.
Due to the increase in the market-clearing price of spinning and
non-spinning reserves during the first quarter of 2000, the New York
Independent System Operator requested that the Federal Energy Regulatory
Commission approve a bid cap on reserves as well as requiring a refunding of
so-called alleged "excess payments" received by sellers into the ancillary
services market, including the Ravenswood facility and the Long Island Power
Authority. Other market participants, including buyers of reserves and
electric utilities as load serving entities also filed complaints with the
Federal Energy Regulatory Commission and intervened in the various Federal
Energy Regulatory Commission proceedings related to reserves, and proposed
alternative remedies.
On May 31, 2000, the Federal Energy Regulatory Commission issued an order
on reserves that granted approval of a bid cap for non-spinning reserves
which includes payments for the opportunity cost of not making energy
sales. The other requests - such as a bid cap for spinning reserves,
retroactive refunds, recalculation of reserve prices for March 2000, and
convening a technical conference and settlement proceeding - were rejected.
Pursuant to the May 31, 2000 order, the New York Independent System
Operator made its first compliance filing to the Federal Energy Regulatory
Commission on June 15, 2000. However, the New York Independent System
Operator and several other market participants have requested rehearing of
the May 31, 2000 order. In response to the New York Independent System
Operator request, the Federal Energy Regulatory Commission has allowed the
New York Independent System Operator to recalculate prices for reserves for
the March 2000 period as if the bid cap approved effective April 1, 2000
had been effective for March, pending its review on the rehearing requests
of the May 31, 2000 order.
On September 5, 2000 New York State Electric and Gas Corporation filed a
lawsuit against the New York Independent System Operator, in Supreme Court
Broome County, seeking recovery of overcharges and damages related to the
New York Independent System Operator's administration of the reserves
market. We are not a party to the lawsuit.
Additionally, the wholesale energy market has also been the focus of
increased market based pricing. On June 30, 2000, the New York Independent
System Operator petitioned the Federal Energy Regulatory Commission to
approve a $1,300 megawatt/hour ("MWh") bid cap in the energy market to be
effective July 6, 2000 through October 28, 2000. The New York Independent
System Operator requested the bid cap because it believed that there was a
lack of price responsive demand and that the start-up problems associated
with implementation of the New
13
<PAGE>
York Independent System Operator might cause severe price spikes during the
summer peak months. In response, on July 26, 2000, the Federal Energy
Regulatory Commission issued an order approving a $1,000/MWh bid cap in the
energy market effective July 26, 2000 through October 28, 2000. The July 26,
2000 order also required the New York Independent System Operator to
identify certain "market flaw problems" and to report them to the Federal
Energy Regulatory Commission by September 1, 2000.
On September 8, 2000 the New York Independent System Operator issued to the
Federal Energy Regulatory Commission revised tariff sheets and a corrected
combined compliance filing and report related to reserve markets. The
compliance filing proposes tariff changes to become effective November 1,
2000 with the exception of the effective date for the payment of lost
opportunity costs to suppliers of 10-minute reserves, where such filing
proposes an effective date of May 31, 2000. The compliance filing proposed a
number of changes, including the gradual removal of the bid cap in the
reserve market from $15.00/MWh on November 1, 2000, to $30.00/MWh on January
1, 2001 and to eliminate it completely on May 1, 2001. Various parties filed
comments to the compliance filing requesting additional changes including
extending the $1,000/MWh energy price cap beyond October 28, 2000. The
compliance filing and comments are pending the Federal Energy Regulatory
Commission review.
We are opposing the relief requested by the New York Independent System
Operator and the load serving entities and believe that the ultimate
resolution of these issues will not have a material effect on our
consolidated financial position or results of operations.
7. DERIVATIVE FINANCIAL INSTRUMENTS
In connection with our anticipated purchase of Eastern (See Note 5,
"Acquisition of Eastern Enterprises") and the anticipated issuance of
long-term debt securities to finance the acquisition, we entered into
forward starting swap agreements to hedge a portion of the risk that the
cost of the future issuance of fixed-rate debt may be adversely affected by
changes in interest rates. Through September 30, 2000, we have entered into
$1.5 billion of forward starting swap agreements. The interest lock rates
range from 6.86% to 7.78% and have maturities that range from 5 to 30
years. Under a forward starting swap agreement, we agree to pay or receive
an amount equal to the difference between the net present value of the cash
flows for a notional amount of indebtedness based on the existing yield of
a hedging instrument at the date of the agreement and at the date the
agreement is settled. Gains and losses on these agreements will be deferred
and amortized over the life of the underlying debt to be issued. The
notional amounts of the agreements are not exchanged. We have entered into
these agreements with more than one major financial institution in order to
minimize counter party credit risk.
14
<PAGE>
Based on interest rates effective as of October 30, 2000, we estimate that
we may be obligated to pay counterparties approximately $60 million at the
time of the issuance of the long-term debt. This amount will be amortized
over the life of the long-term debt, with maturities that are estimated to
range from 5 to 30 years. This amount reflects the significant decrease in
interest rates since we entered into the forward starting swap lock
agreements. As a result of the significant decrease in interest rates, we
will be able to issue the anticipated long-term debt at lower rates.
Also during the quarter, we have engaged in the use of derivative swap
instruments to fix the selling price on a portion of our estimated 2001
summer peak electric energy sales from the Ravenswood facility and to fix
the purchase price of fuel used to generate electricity. For the months of
July and August 2001, we have hedged the sales price on 105,600 megawatt
hours of summer peak electric sales to protect against a potential
degradation in market prices during the summer. Under these swap agreements,
we will receive a fixed price per megawatt hour of electricity sold during
summer peak hours and pay the counter party the then current floating market
price for peak electric supply. We will receive the then current floating
market price of peak electric energy when the Ravenswood facility sells
electric energy to the New York Independent System Operator. These
derivatives are accounted for as hedges. We also have a tolling arrangement
with two counter parties under which we have "locked-in" a profit margin on
52,800 megawatt hours of summer season sales and 211,200 megawatt hours of
winter sales. Under these arrangements, we will receive an up-front fee and
will pay the counter party, on a monthly basis, our realized profit margin
from the sale of electric energy. As a result of these hedging arrangements,
we have hedged approximately 9% of our estimated peak 2001 summer electric
sales and approximately 6% of our estimated 2001 yearly electric sales.
8. NEW FINANCIAL ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of SFAS No. 133." SFAS No. 137 defers the effective date of
SFAS No. 133 to fiscal years beginning after July 15, 2000. We will
therefore adopt SFAS No. 133 in the first quarter of fiscal year 2001. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - An Amendment of FASB
Statement No 133." SFAS No. 138 amends the accounting and reporting
standards of SFAS No. 133 for a number of transactions. The most significant
amendment to SFAS 133 as it relates to our operations is that the normal
purchases and normal sales exception found in SFAS 133 may now be applied to
contracts that implicitly or explicitly permit net settlement, and contracts
that have a market mechanism to facilitate net settlement. Therefore, under
SFAS 138 our gas procurement contracts are not considered derivative
financial instruments.
All of our derivative financial instruments, except for an interest rate
swap, are cash-flow hedges. SFAS No. 133 requires that an entity recognize
all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Periodic
changes in market value of derivatives which meet the definition of a
cash-flow hedge are recorded as comprehensive income, subject to
effectiveness, and then included in net income to match the underlying
hedged transactions. Our derivative instruments currently in place qualify
for hedge
15
<PAGE>
accounting, and as a result implementation of SFAS No. 133 and SFAS No. 138
when adopted are not expected to have a material effect on our net income,
but could have a significant effect on comprehensive income because of
fluctuations in the market value of the derivatives employed for hedging
certain risks.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
The following is a summary of items affecting comparative earnings and a
discussion of material changes in revenues and expenses during the three and
nine month periods ended September 30, 2000 compared to the three and nine month
periods ended September 30, 1999. Capitalized terms used in the discussions to
follow but not otherwise defined, have the same meaning as when used in the
Footnotes to the Consolidated Financial Statements included under Item 1.
References to "we", "us", and "our" mean KeySpan Corporation, together with its
consolidated subsidiaries. For all periods presented, diluted earnings per share
is the same as basic earnings per share, since there was no effect on earnings
per share from our outstanding options.
Earnings Summary
Earnings (loss) by reporting segment is set forth in the following table for the
periods indicated:
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
-----------------------------------------------------------------------------------------------------------------------------------
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gas Distribution $ (28,033) $ (29,037) $ 101,025 $ 92,873
Electric Services 31,796 28,164 103,316 59,786
Gas Exploration and
Production 13,418 5,435 29,381 9,239
Energy Services 9,636 116 25,221 (2,384)
Energy Investments 2,687 2,821 7,877 5,937
Other (16,350) (7,171) (43,033) (16,292)
-----------------------------------------------------------------------------------------------------------------------------------
Consolidated Earnings $ 13,154 $ 328 $ 223,787 $ 149,159
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Consolidated earnings per share were $0.10 and $1.67 for the three and nine
months ended September 30, 2000, respectively compared to $0.00 and $1.06 for
the corresponding periods last year. Our average common shares outstanding for
the quarter and nine months ended September 30, 2000 were approximately two and
four percent lower, respectively than the same periods last year due to a stock
repurchase program in 1999.
17
<PAGE>
The increase in consolidated earnings in both periods reflects, primarily the
operations associated with our investment in the Ravenswood facility which was
acquired in June 1999, as well as, earnings from our Energy Services segment
which reflect, primarily earnings from intercompany fuel procurement and energy
management services provided to the Ravenswood facility. Consolidated earnings
for the three and nine months ended September 30, 2000, also reflect improved
performance from our Gas Exploration and Production segment, which benefitted
from significantly higher realized gas prices and increased production volumes
compared to last year. In addition, on March 31, 2000 we increased our ownership
in Houston Exploration from 64% to 70%.
Gas distribution earnings for quarters ended September 30 generally are
unprofitable due to the seasonal nature of gas heating sales. The increase in
earnings from the Gas Distribution segment for the nine months ended September
30, 2000, compared to the corresponding period last year reflects revenue
benefits from continued gas sales growth and favorable gas prices compared to
oil prices.
Partially offsetting the aforementioned benefits to comparative earnings are
certain corporate expenses which have not been allocated to the operating
segments. Further, we made an additional contribution to the KeySpan Foundation,
a not-for-profit philanthropic foundation that makes donations to local
charitable community organizations. In addition, for the nine months ended
September 30, 2000, we realized lower interest income on temporary cash
investments as compared to the comparable period last year. Interest income has
been decreasing as we used cash to finance acquisitions and repurchase shares of
our common stock in 1999.
Revenues
--------
Consolidated revenues were $947.1 million for the three months ended September
30, 2000, compared to $538.5 million for the corresponding period last year, an
increase of $408.6 million or 76%. For the nine months ended September 30, 2000
consolidated revenues were $3.2 billion, compared to $2.0 billion for the
corresponding period last year, an increase of $1.2 billion or 57%. The
increases in revenues are due primarily to: (i) increases in revenues from the
Ravenswood facility of $139.8 million and $457.8 million for the three and nine
months ended September 30, 2000, respectively; (ii) increases in Gas
Distribution revenues of $83.8 million and $250.3 million for the three and nine
months ended September 30, 2000, respectively; and (iii) increases of $169.8
million and $357.3 million in revenues for the three and nine months ended
September 30, 2000, respectively from the Energy Services segment.
Revenues from the Ravenswood facility benefitted from the sale of energy,
capacity and ancillary services to the New York Independent System Operator at
competitive market prices. Prior to the start of the New York Independent System
Operator on November 19 1999, all of the energy and capacity from the Ravenswood
facility was sold to Consolidated Edison on a cost recovery and fixed fee basis.
Revenues from the Gas Distribution segment benefitted from continued gas sales
growth and favorable gas prices as compared to oil prices. Revenues from the Gas
Distribution segment
18
<PAGE>
also include recovery of gas costs, which have been significantly higher in 2000
compared to 1999. The increase in revenues from the Energy Services segment
resulted from recent acquisitions of companies providing various energy-related
services throughout the New York tri-state metropolitan area and Rhode Island,
and sales growth related to our gas and electric marketing subsidiary.
Operating Expenses
------------------
Consolidated operating expenses were $855.1 million for the third quarter of
2000, compared to $501.7 million for the corresponding period last year, an
increase of $353.4 million, or 70%. For the nine months ended September 30, 2000
consolidated operating expenses were $2.7 billion compared to $1.7 billion for
the corresponding period last year, an increase of $1.0 billion, or 58%. The
increases in operating expenses were primarily the result of higher purchased
fuel and gas costs, and higher operations and maintenance expenses. Fuel and
purchased power expense for the operation of the Ravenswood facility was $94.5
million and $235.1 million for the quarter and period ended September 30, 2000,
respectively. We did not incur any fuel costs for the Ravenswood facility for
the corresponding periods last year. The prior owner of the Ravenswood facility,
Consolidated Edison, owned and supplied the fuel necessary to operate the
Ravenswood facility from June 19, 1999 until the start of the New York
Independent System Operator's operations on November 19, 1999. During this time,
all of the energy generated by the Ravenswood facility was supplied to
Consolidated Edison. Fuel and purchased power expense also reflects costs
incurred by our gas and electric marketing subsidiary. This subsidiary has been
providing residential, and small commercial and industrial customers with
electric sales since January 2000.
The increase in gas costs for both periods of 2000 compared to the comparable
periods last year, resulted from gas sales growth associated with our two gas
distribution subsidiaries and our gas and electric marketing subsidiary, as well
as significantly higher gas prices. Variations in utility gas costs have little
impact on operating results as the current gas rate structure of each of our gas
distribution utilities includes a gas adjustment clause, pursuant to which
variations between actual gas costs and gas cost recoveries are deferred and
subsequently refunded to or collected from customers. Fluctuations in gas costs,
however, can affect earnings of our gas and electric marketing subsidiary. This
subsidiary employs derivative financial instruments to hedge a portion of the
risk associated with higher future gas costs.
Operations and maintenance expenses increased by $96.1 million or 33%, for the
three months ended September 30, 2000, and by $358.4 million or 47%, for the
nine months ended September 30, 2000 compared to the corresponding periods last
year, primarily as a result of recent acquisitions of companies providing
various energy-related services, the operations of the Ravenswood facility and
the installation of an underground transmission line to reinforce the electric
system capacity on the southfork of Long Island on behalf of the Long Island
Power Authority.
19
<PAGE>
Other Income and (Deductions)
-----------------------------
Other income includes equity income from subsidiaries comprising the Energy
Investments segment, primarily our investments in Canada. In addition, other
income also includes interest income from temporary cash investments and the
effect on net income from the minority interest associated primarily with
Houston Exploration, as well as certain non-operating expenses.
As previously mentioned, we incurred an expense of $5 million in the quarter
ended September 30, 2000, reflecting a contribution to the KeySpan Foundation.
Further, for the nine months ended September 30, 2000, other income includes a
charge of $9 million related to certain rate settlement issues, compared to a
charge of $6 million recorded in the nine months ended September 30, 1999. We
also realized lower interest income on temporary cash investments as compared to
the comparable period last year.
Other Expenses
--------------
Interest expense was $14.7 million and $21.3 million higher for the three and
nine months ended September 30, 2000, respectively compared to the corresponding
periods last year. Interest expense for both periods ended September 30, 2000
reflects higher levels of debt outstanding, primarily related to the medium term
notes issued in February 2000, and debt associated with our Canadian
investments, as well as higher commercial paper borrowings.
Income tax expense reflects the higher level of pre-tax income for the quarter
and nine months ended September 30, 2000, compared to the corresponding periods
last year. Further, during the three months ended September 30, 2000, we changed
our basis for computing certain local income taxes which contributed to the
increase in income tax expense for both the quarter and period ended September
30, 2000.
Income tax expense for the nine months ended September 30, 1999 reflects an
adjustment to deferred tax expense and current tax expense for the utilization
of previously deferred net operating loss carryforwards recorded in 1998. In
1998, we recorded as a deferred tax asset, a benefit of $71.1 million for net
operating loss carryforwards. We estimated that $57.4 million of the benefits
from the net operating loss carryforwards from 1998 would be realized in our
consolidated 1999 federal and state income tax returns and, accordingly, we
applied the net operating loss benefits in our 1999 federal and state tax
provisions.
ANTICIPATED FUTURE DEVELOPMENTS
Acquisition of Eastern Enterprises
----------------------------------
On November 4, 1999, we and Eastern announced that the companies had signed a
definitive merger agreement under which we will acquire all of the common stock
of Eastern for $64.00 per share,
20
<PAGE>
subject to adjustment. Further, in connection with the merger, Eastern has
amended its merger agreement with EnergyNorth, Inc. to provide for an all cash
acquisition by Eastern of EnergyNorth at price of $61.13 per share, subject to
adjustment. The proposed transactions are expected to close contemporaneously in
the fourth quarter of calendar year 2000. See Note 5 to the Consolidated
Financial Statements, "Acquisition of Eastern Enterprises" for a further
explanation of the proposed transactions.
We expect to raise approximately $2 billion in financing for the transactions.
The goodwill associated with the transactions is currently estimated to be
approximately $1.3 billion. Consolidated proforma results of operations for a
twelve month period, including future interest expense and the amortization of
goodwill, indicate that the transactions will have a dilutive effect on net
income. However, the consolidated proforma results do not take into account: i)
continued gas sales growth throughout our current and future service territory,
especially on Long Island and New England; ii) earnings enhancement from our
investment in the Ravenswood facility; iii) the continued successful integration
of acquired companies providing energy-related services within our Energy
Services segment; and iv) anticipated before-tax synergy savings of $40 million
annually starting in 2001. We currently expect that these earnings enhancements
will offset the dilutive effects of the Eastern and EnergyNorth transactions.
Based on current forecasts, we believe that year-end earnings in 2000 could be
as much as 40% higher than earnings achieved in 1999, excluding the impact of
transaction, restructuring and early retirement charges to be recorded in the
fourth quarter which we currently estimate will be at least $50 million. In line
with our objective to realize synergy savings, we have implemented an early
retirement program and targeted severance programs. We are also completing our
resource allocation process for 2001 and are encouraged that we will achieve the
growth and synergy savings projected as part of the Eastern and EnergyNorth
acquisitions. Currently, we are hopeful that we can exceed the First Call
consensus earnings forecast of $2.41 per share in 2001. Moreover, we anticipate
disposing of certain non-core assets (i.e., assets other than those associated
with our gas distribution and electric generation operations) within the next
several years. However, we are unable to predict when or if any such sales will
occur or their impact on our results of operations or financial condition.
Following the announcement that we had entered into an agreement to purchase
Eastern, Standard & Poor's Rating Services placed our and certain of our
subsidiaries', as well as Eastern's corporate credit, senior unsecured debt, and
preferred stock on Credit Watch with negative implications. Similarly, Moody's
Investors Service also placed our and certain of our subsidiaries', as well as
Eastern's corporate credit, senior unsecured debt, commercial paper and
preferred stock on review for possible downgrade. Moody's has finalized its
review process and has reaffirmed our long-term A3 Issuer Rating. We anticipate
that Standard & Poor's will finalize its review process in our fourth quarter.
21
<PAGE>
SEGMENT RESULTS
Gas Distribution
----------------
KeySpan Energy Delivery New York provides gas distribution services to customers
in the New York City Boroughs of Brooklyn, Queens and Staten Island, and KeySpan
Energy Delivery Long Island provides gas distribution services to customers in
the Long Island counties of Nassau and Suffolk and the Rockaway Peninsula of the
Borough of Queens.
The table below highlights certain significant financial data and operating
statistics for the Gas Distribution segment for the periods indicated.
<TABLE>
(IN THOUSANDS OF DOLLARS)
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
--------------------------------------------- --------------------- ---------------------- ---------------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 292,352 $ 208,572 $ 1,458,595 $ 1,208,254
Purchased gas for resale 132,617 62,560 663,246 470,633
Revenue taxes 14,615 12,675 78,695 75,578
--------------------------------------------- -------------------- ---------------------- ---------------------- --------------
Net Revenues 145,120 133,337 716,654 662,043
--------------------------------------------- -------------------- ---------------------- ---------------------- --------------
Operations and maintenance 103,876 108,849 323,401 306,364
Depreciation and amortization 29,330 24,630 86,698 73,235
Operating taxes 33,456 28,493 93,867 83,879
--------------------------------------------- --------------------- ---------------------- --------------------- --------------
Total Operating Expenses 166,662 161,972 503,966 463,478
--------------------------------------------- --------------------- ---------------------- ---------------------- ---------------
Operating Income (Loss) $(21,542)$ (28,635) $ 212,688 $ 198,565
--------------------------------------------- --------------------- ---------------------- ---------------------- ---------------
Earnings (Loss) for Common Stock $(28,033)$ (29,037) $ 101,025 $ 92,873
--------------------------------------------- --------------------- ---------------------- ---------------------- ---------------
Firm gas sales (MDTH) 17,547 16,353 125,318 120,401
Firm transportation (MDTH) 3,679 2,889 19,306 15,030
Transportation - Electric
Generation (MDTH) 14,711 32,352 45,342 61,763
Other sales (MDTH) 24,887 12,441 67,380 38,279
Warmer than normal N/A N/A 5.9% 9.7%
--------------------------------------------- --------------------- ---------------------- ---------------------- ---------------
</TABLE>
An MDTH is 10,000 therms (British Thermal Units) and reflects the heating
content of approximately one million cubic feet of gas. A therm reflects the
heating content of approximately 100 cubic feet of gas. One billion cubic feet
(BCF) of gas equals approximately 1,000 MDTH.
NET REVENUES
Net gas revenues increased during the third quarter of 2000, compared to the
third quarter of last year, by $11.8 million or 9%. For the nine months ended
September 30, 2000, net gas revenues increased by $54.6 million or 8% compared
to the corresponding period of last year. These increases in net gas revenues
were due to continued gas sales growth and favorable gas prices compared to oil
prices. Firm net gas revenues grew approximately $7 million and $26 million for
the three and nine
22
<PAGE>
months ended September 30, 2000, respectively over the corresponding periods in
1999, through the addition of new gas customers and oil to gas conversions,
primarily in the Long Island market. Long Island has a low natural gas
saturation rate and significant gas sales growth opportunities are believed to
be available. We estimate that on Long Island less than 30% of the residential
and multi-family markets, and approximately 70% of the commercial market
currently use natural gas for space heating. In the Long Island service area, we
will continue to seek growth through the expansion of our distribution system,
as well as through the conversion of residential homes from oil-to-gas for space
heating purposes and the pursuit of opportunities to grow multi-family,
industrial and commercial markets.
In the large volume heating markets and other interruptible markets, which
include large apartment houses, government buildings and schools, gas service is
provided under rates that are set to compete with prices of alternative fuel,
including No. 2 and No. 6 grade heating oil. The price of both heating grade
fuel oil and natural gas has increased significantly during the past few months.
During the three and nine months ended September 30, 2000 gas generally sold at
a slight discount to heating oil. We increased sales in these markets by
approximately $3 million and $23 million for the three and nine months ended
September 30, 2000, respectively compared to the same periods last year, through
aggressive unit pricing and the addition of two large commercial and industrial
customers.
The Gas Distribution segment is influenced by seasonal weather conditions.
Annual gas revenues are substantially realized during the heating season
(November 1 to April 30) as a result of the large proportion of heating sales,
primarily residential, compared with total sales. Accordingly, results of
operations for gas distribution operations historically are most favorable in
the three months ended March 31, with results of operations being next most
favorable in the three months ended December 31. Results for the quarter ended
June 30 are marginally profitable or unprofitable, and losses are generally
incurred in the quarter ended September 30.
Our gas distribution subsidiaries each operate under a utility tariff that
contains a weather normalization adjustment that largely offsets shortfalls or
excesses of firm net revenues (i.e., revenues less gas costs and revenue taxes)
during a heating season due to variations from normal weather.
SALES, TRANSPORTATION AND OTHER QUANTITIES
Comparative firm gas sales and transportation quantities for the three and nine
months ended September 30, 2000, reflect the increase in firm sales, as
discussed above. Firm gas transportation quantities increased in both the three
and nine months ended September 30, 2000, as we continue our natural gas
deregulation initiatives. Our net margins are currently not affected by
customers opting to purchase their gas supply from other sources, since
distribution rates charged to transportation customers are the same as those
charged to full sales service customers.
Transportation quantities related to electric generation reflect the
transportation of gas to our electric generating facilities located on Long
Island. Net revenues from these services are minimal.
23
<PAGE>
Other sales quantities include on-system interruptible quantities, off-system
sales quantities (sales made to customers outside of our service territories)
and related transportation. Effective April 1, 2000, we entered into an
agreement with Coral Resources, L.P., a subsidiary of Shell Oil Company. Coral
assists in the origination, structuring, valuation and execution of
energy-related transactions. A sharing exists between gas ratepayers and our two
gas distribution subsidiaries (collectively referred to as the "Gas Companies")
for off-system gas transactions. The Gas Companies' share of the profits on such
transactions is then shared with Coral. The Gas Companies also share in revenues
arising from certain transactions initiated by Coral. Prior to this agreement
with Coral, KeySpan Energy Delivery New York had an agreement with Enron Capital
and Trade Resources Corp., a subsidiary of Enron Corp., which expired on March
30, 2000. Pursuant to this agreement, Enron provided gas supply and asset
management services to KeySpan Energy Delivery New York for a fee, and obtained
the right to earn revenues based upon its management of KeySpan Energy Delivery
New York's gas supply requirements, storage arrangements and off-system
capacity. As a result of this agreement, KeySpan Energy Delivery New York did
not report any off-system sales quantities in 1999.
OPERATING EXPENSES
Operating expenses increased by $4.7 million, or 3%, in the third quarter of
2000 compared to the corresponding quarter last year, and by $40.5 million, or
9% for the nine months ended September 30, 2000 compared to the nine months
ended September 30, 1999. Operations and maintenance expense in both periods
reflects, generally higher labor costs and associated employee benefit expenses,
and higher marketing costs and incentives related to our gas expansion
initiatives on Long Island. The increase in depreciation and amortization
expense generally reflects continued property additions, and the amortization of
certain regulatory items previously deferred and now being recovered through
revenue recovery mechanisms. Further, operating taxes which include state and
local taxes on property have increased as the applicable property base and tax
rates generally have increased.
EARNINGS
In addition to the aforementioned, earnings available for common stock also
reflect interest expense and federal income tax provisions. Interest expense for
the quarter ended September 30, 2000 is $2.3 million higher as compared to the
comparable period last year due to the issuance of $400 million of medium term
notes in February 2000.
Electric Services
-----------------
The Electric Services segment primarily consists of subsidiaries that own, lease
and operate oil and gas fired generating plants in Queens and Long Island and,
through long-term contracts, manage the electric transmission and distribution
system, the fuel and electric purchases, and the off-system electric sales for
the Long Island Power Authority.
24
<PAGE>
Selected financial data for the Electric Services segment is set forth in the
table below for the periods indicated.
<TABLE>
(IN THOUSANDS OF DOLLARS)
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
---------------------------------------- ---------------------- ----------------------- ------------------------ -----------------
<S> <C> <C> <C> <C>
Revenues
LIPA service agreements $ 173,277 $ 179,835 $ 569,691 $ 536,428
Ravenswood Facility 201,240 61,424 527,925 70,124
---------------------------------------- --------------------- ----------------------- ----------------------- ----------------
Total Revenues 374,517 241,259 1,097,616 606,552
Purchased fuel 94,482 - 235,131 -
---------------------------------------- --------------------- ----------------------- ------------------------ ----------------
Net Revenues 280,035 241,259 862,485 606,552
---------------------------------------- --------------------- ----------------------- ------------------------ -----------------
Operations and maintenance 154,357 142,748 503,234 367,078
Depreciation 12,253 12,395 36,814 32,660
Operating taxes 40,418 36,724 117,603 94,162
---------------------------------------- --------------------- ----------------------- ------------------------ -----------------
Total Operating Expenses 207,028 191,867 657,651 493,900
---------------------------------------- --------------------- ----------------------- ------------------------ -----------------
Operating Income $ 73,007 $ 49,392 $ 204,834 $ 112,652
---------------------------------------- --------------------- ----------------------- ------------------------ -----------------
Earnings for Common Stock $ 31,796 $ 28,164 $ 103,316 $ 59,786
---------------------------------------- --------------------- ----------------------- ------------------------ -----------------
Electric sales (MWH) 1,465,196 2,155,496 4,013,843 2,155,496
Degree Days 761 1,013 1,124 1,416
Capacity (MW) 2,294 2,120 2,294 2,120
---------------------------------------- --------------------- ----------------------- ------------------------ -----------------
</TABLE>
NET REVENUES
Net revenues increased by $38.8 million, or 16%, and by $255.9 million, or 42%
in the three and nine months ended September 30, 2000, respectively, compared to
the comparable periods last year. The increase in net revenues is due primarily
to the Ravenswood facility that we acquired in June 1999. Revenues from the
Ravenswood facility benefitted from the sale of energy, capacity and ancillary
services to the New York Independent System Operator at competitive market
prices, and from effective hedging strategies. Prior to the start of operations
of the New York Independent System Operator on November 19, 1999, all of the
energy and capacity from the Ravenswood facility was sold to Consolidated Edison
on a cost recovery and fixed fee basis. Further, there were no sales of
ancillary services in 1999.
Purchased fuel expense for the operation of the Ravenswood facility was $94.5
million and $235.1 million for the quarter and period ended September 30, 2000,
respectively. We did not incur any fuel costs for the Ravenswood facility for
the corresponding period last year. The prior owner of the Ravenswood facility,
Consolidated Edison, owned and supplied the fuel necessary to operate the
25
<PAGE>
Ravenswood facility from June 19, 1999 until the start of the New York
Independent System Operator on November 19, 1999.
Revenues from our service agreements with the Long Island Power Authority were
$33.3 million higher for the nine months ended September 30, 2000 compared to
the comparable period last year, but were $6.6 million lower in the third
quarter of 2000 compared to the third quarter of 1999. The increase in
comparative nine month revenues is primarily the result of a major construction
project performed by us on behalf of The Long Island Power Authority. In June
2000, we completed the installation of an underground transmission line to
reinforce the electric system capacity on the southfork of Long Island. The
project was performed under a fixed fee contract with the Long Island Power
Authority, as part of the management services agreement. Further, revenues for
nine months ended September 30, 2000 include $14 million of off-system sales
from our Long Island electric generation units. Under the terms of the energy
management agreement, we are entitled to one-third of the profit from any
off-system electricity sales arranged by us on the Long Island Power Authority's
behalf. (For a description of Long Island Power Authority service agreements,
see our Annual Report on Form 10K for the year ended December 31, 1999.)
We have realized significant revenues and profits from the sale of energy,
capacity and ancillary services from the Ravenswood facility and through the
energy management agreement. (Ancillary services include primarily spinning
reserves and non-spinning reserves.) Due to the significant increase in the
market-clearing price for electricity and certain ancillary services, the New
York Independent System Operator and other market participants have requested
that the Federal Energy Regulatory Commission cap the sales prices for both
energy sales and the sale of ancillary services. See Note 6 to the Consolidated
Financial Statements, "New York State Independent System Operator Matters" for a
further discussion of these matters.
OPERATING EXPENSES
Operating expenses for the third quarter of 2000 increased by $15.2 million or
8% compared to the third quarter of 1999. Operating expenses for the nine months
ended September 30, 2000, increased by $163.8 million or 33%, compared to the
comparable period in 1999. The increase in operating expenses for both periods
in 2000, reflects primarily the operations of the Ravenswood facility. Operating
expenses associated with the Ravenswood facility increased by $29.5 million and
$120.2 million for the three and nine months ended September 30, 2000,
respectively, compared to the corresponding periods of 1999. Included in
operating expenses for the Ravenswood facility are charges of $15.9 million and
$48.7 million for the quarter and nine months ended September 30, 2000,
respectively for fuel management services provided by one of our subsidiaries
within the Energy Services segment. There were no comparable charges in 1999.
Further, since the Ravenswood facility was acquired by us in June 1999,
operating expenses for the period ended September 30, 2000 reflect a full nine
months of operations compared to only three months of operations for the period
ended September 30, 1999. Operating expenses incurred under Long Island Power
Authority Service Agreements decreased by $14.3 million for the three months
ended
26
<PAGE>
September 30, 2000 compared to the same period in 1999. Operating expenses
incurred under these service agreements increased by $43.5 million for the nine
months ended September 30, 2000 compared to the comparable period last year due
primarily to costs incurred to install the new electric transmission line
discussed above.
EARNINGS
In addition to the aforementioned, earnings available for common stock also
reflect interest expense, as well as city, state and federal income tax
provisions. During the three months ended September 30, 2000, we changed our
basis for computing certain local income taxes and, as a result, recorded higher
taxes in 2000 compared to 1999. Further, for the nine months ended September 30,
2000, earnings also include an after-tax charge of $2.2 million for the loss on
the sale of certain assets.
OTHER ISSUES
We have filed an application with the New York State Public Service Commission
to build a new 250 MW cogeneration facility at the Ravenswood facility site. The
new facility, which will generate electricity and steam, is expected to be in
service in 2003. Further, we continue to evaluate the electric needs on Long
Island and may, if economic circumstances and energy needs so warrant, proceed
with strategies to add additional electric capacity on Long Island.
Gas Exploration and Production
The Gas Exploration and Production segment is engaged in gas and oil exploration
and production, and the development and acquisition of domestic natural gas and
oil properties. This segment consists of our 70% equity interest in Houston
Exploration, as well as KeySpan Exploration and Production LLC, our wholly owned
subsidiary engaged in a joint venture with Houston Exploration. On March 31,
2000, under a pre-existing credit arrangement, approximately $80 million in debt
owed by Houston Exploration to us was converted into Houston Exploration common
equity. Upon such conversion, our common equity ownership interest in Houston
Exploration increased from 64% to approximately 70%.
<PAGE>
Selected financial data and operating statistics for the Gas Exploration and
Production segment are set forth in the following table for the periods
indicated.
<TABLE>
(IN THOUSANDS OF DOLLARS)
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
-------------------------------------------- ---------------------- ---------------------- ---------------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 62,748 $ 42,081 $ 169,966 $ 103,622
Depreciation and amortization 22,008 18,644 65,257 53,673
Other operating expenses 9,755 7,639 32,195 20,070
-------------------------------------------- ---------------------- ---------------------- ---------------------- ---------------
Operating Income $ 30,985 $ 15,798 $ 72,514 $ 29,879
-------------------------------------------- ---------------------- ---------------------- ---------------------- ---------------
Earnings for Common Stock $ 13,418 $ 5,435 $ 29,381 $ 9,239
-------------------------------------------- ---------------------- ---------------------- ---------------------- ---------------
Natural gas production (Mmcfe) 19,172 17,922 58,228 51,572
Natural gas (per Mcf) realized $ 3.24 $ 2.33 $ 2.88 $ 2.00
Natural gas (per Mcf) unhedged $ 4.22 $ 2.47 $ 3.33 $ 2.05
-------------------------------------------- ---------------------- ---------------------- ---------------------- ---------------
</TABLE>
Operating income above represents 100% of our gas exploration and
production subsidiaries' results for the periods indicated. Earnings,
however, are adjusted to reflect minority interest and, accordingly,
include 70% of Houston Exploration's results since April 1, 2000 and 64%
of Houston Exploration's results for all periods prior to March 31, 2000.
Gas reserves and production are stated in BCFe and Mmcfe, which includes
equivalent oil reserves.
OPERATING INCOME
Operating income increased by $15.2 million and $42.6 million for the three and
nine months ended September 30, 2000, respectively compared to corresponding
periods in 1999. The increase in operating income for the third quarter of 2000
compared to the third quarter of 1999 reflects the benefits derived from an 7%
increase in production volumes, combined with a 39% increase in average realized
gas prices (average wellhead price received for production plus hedging gains
and losses). For the nine months ended September 30, 2000, operating income
reflects the benefits derived from a 13% increase in production volumes,
combined with a 44% increase in average realized gas prices over comparable
amounts for the corresponding period in 1999.
At December 31, 1999 our gas exploration and production subsidiaries had 553
BCFe of net proved reserves of natural gas, of which approximately 75% were
classified as proved developed.
Energy Services
---------------
The Energy Services segment primarily includes companies that provide services
through four lines of business to clients located within the New York tri-state
metropolitan area, Rhode Island and Pennsylvania. The lines of business include:
home energy services; business solutions; commodity procurement; and
telecommunications services.
In February 2000, we acquired three additional companies that provide
energy-related services within these lines of business. Further, in August 2000,
we acquired another company that builds, installs and services heating,
ventilation and air-conditioning equipment throughout New Jersey and Eastern
Pennsylvania, with customers ranging from small industrial facilities to large
pharmaceutical plants. This company has 400 employees and reported revenues of
$93 million in 1999. In addition, we are also involved, through a joint venture,
in providing energy-related services to consumers through the MyHomeKey.com
website. MyHomeKey is a personalized, Internet-based home management system that
puts service providers at customers' fingertips, delivers advice and one-stop
shopping for most home products and services. MyHomeKey.com was launched in
September 2000.
28
<PAGE>
Selected financial data for the Energy Services segment is set forth in the
following table for the periods indicated.
<TABLE>
(IN THOUSANDS OF DOLLARS)
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------------------------------------- ---------------------- -------------------- ---------------------- ------------------
<S> <C> <C> <C> <C>
Unaffiliated revenues $ 215,871 $ 46,096 $ 480,511 $ 123,165
Intersegment revenues 15,903 - 48,677 -
Cost of goods sold 188,026 36,659 408,985 100,706
------------------------------------------ ---------------------- --------------------- ---------------------- ------------------
Gross Profit Margin 43,748 9,437 120,203 22,459
Depreciation and amortization 2,665 938 7,252 2,292
Other operating expenses 21,430 8,499 60,993 24,658
------------------------------------------ --------------------- -------------------- ---------------------- -------------------
Operating Income (Loss) $ 19,653 $ - $ 51,958 $ (4,491)
------------------------------------------- --------------------- -------------------- ---------------------- -------------------
Earnings (Loss) for Common Stock $ 9,636 $ 116 $ 25,221 $ (2,384)
------------------------------------------- --------------------- -------------------- ---------------------- -------------------
</TABLE>
The increase in earnings of the Energy Services segment for both the three and
nine months ended September 30, 2000 compared to the corresponding periods in
1999, reflects primarily fuel- management services provided to the Ravenswood
facility. For the three and nine months ended September 30, 2000, these services
provided this segment with earnings of $8.4 million and $25.7 million,
respectively. A subsidiary within this segment, KeySpan Energy Supply, provides
the Ravenswood facility with energy procurement advisory services and acts as an
energy broker for the sale of electricity and ancillary services. For these
services, KeySpan Energy Supply receives a management fee and shares in the
operating profit generated by the Ravenswood facility on the sale of electricity
and ancillary services. There was no energy procurement and fuel-management
advisory services agreement between KeySpan Energy Supply and the Ravenswood
facility in 1999.
This segment also realized significantly greater gross profit margins for both
the three and nine months ended September 30, 2000, compared to the
corresponding periods last year, for each of its other lines of business. These
gross margin enhancements resulted from recent acquisitions of companies
providing energy-related services and through customer additions related to
energy sales. These benefits to gross profit margins, however, were offset by
increases in general and administrative expenses. This segment is expected to
continue to realize earnings from its energy procurement and fuel-management
advisory services for the remainder of 2000 and the other business lines are
projected to be profitable in 2000.
29
<PAGE>
Energy Investments
------------------
Earnings for this segment are derived, primarily, from our 20% interest in the
Iroquois Gas Transmission System LP; our 50% ownership interest in Gulf
Midstream; our ownership interest in certain oil producing properties in
Alberta, Canada; and our 50% interest in the Premier Transmission Pipeline and
24.5% interest in Phoenix Natural Gas, both in Northern Ireland. In October
2000, we sold our interest in certain oil producing properties in Alberta,
Canada. An after- tax gain of approximately $1.3 million from the sale will be
reported in the fourth quarter of 2000. Further, also in October 2000, we
acquired the remaining 50% interest in Gulf Midstream making us the sole owner
of Gulf Midstream. The transaction required us to borrow an additional $48
million from a Canadian bank. For financial reporting purposes, the operations
of Gulf Midstream will now be fully consolidated for financial reporting
services.
Earnings for this segment remained relatively constant in the third quarter of
2000 compared to the corresponding quarter last year. Earnings for the nine
months ended September 30, 2000 increased by $2.0 million over the comparable
period last year reflecting earnings growth from the Company's Canadian
investments. Results of operations from Canadian gas and oil operations were
enhanced through the acquisition, in the fourth quarter 1999, of the Paddle
River Gas Plant and certain oil producing properties in Alberta, Canada, and
more efficient operations of Gulf Midstream. In addition, Iroquois realized
higher transportation sales quantities and revenues from its interruptible
customers during this period compared with the same period last year. Earnings
from our investments in Northern Ireland in 2000 are essentially the same as
earnings for last year. The subsidiaries in this segment are primarily accounted
for under the equity method since our ownership interests are 50% or less.
Accordingly, income from these investments is reflected, in other income and
(deductions) in the Consolidated Statement of Income.
Other
The Other segment incurred losses of $16.4 million and $43.0 million for the
three and nine months ended September 30, 2000, respectively compared to losses
of $7.1 million and $16.3 million for the three and nine months ended September
30, 1999, respectively. Results for the Other segment generally reflect charges
incurred by our corporate and administrative areas that have not been allocated
to the various business segments and preferred stock dividends, offset, in part,
by interest income earned on temporary cash investments. During the quarter
ended September 30, 2000 we incurred an expense of $5 million for an additional
contribution to the KeySpan Foundation. Further, during the nine months ended
September 30, 2000, we recorded charges of $9 million associated with certain
outstanding regulatory issues, compared to a similar charge of $6 million in the
nine months ended September 30, 1999. Moreover, we incurred an expense of $5.6
million in the nine months ended September 30, 2000 to write-off a computer
system that will not be utilized as a result of the proposed Eastern
acquisition. Finally, interest income has been decreasing as we utilized cash to
finance certain acquisitions and repurchase shares of our common stock.
30
<PAGE>
LIQUIDITY, CAPITAL EXPENDITURES AND FINANCING
LIQUIDITY
The increase in cash flow provided by operating activities for the nine months
ended September 30, 2000 reflects stable growth from our gas distribution
operations, as well as positive contributions from the Ravenswood facility.
Further, during the third quarter of 2000, we received a cash payment of
approximately $48 million from the Long Island Power Authority representing
amounts due for past services performed by us under the various Long Island
Power Authority service agreements. These benefits to cash flow from operations
were offset, in part, by a decrease in interest income, negative operating cash
flow from our Energy Services segment, an increase in the cost of gas in
storage, which will be recovered from customers in later periods and an increase
in interest payments due to increased levels of outstanding debt. Further, for
the nine months ended September 30 1999 cash flow from operations reflects the
cash utilization of a $57.4 million federal income tax net operating loss on
income tax payments for 1999, as previously discussed.
At September 30, 2000, we had cash and temporary cash investments of $63.6
million. In addition, we have a $700 million revolving credit agreement, with a
one-year term and one-year renewal option, with a commercial bank syndicate.
This credit facility is used to support our $700 million commercial paper
program. During the nine months ended September 30, 2000, we issued $1.6 billion
of commercial paper and repaid $1.4 billion, including the outstanding balance
at December 31, 1999. Commercial paper was issued during the nine months ended
September 30, 2000 to support ongoing working capital needs and the mandatory
redemption of our preferred stock 7.95% Series AA. At September 30, 2000, $382.1
million of commercial paper remained outstanding at a weighted average
annualized interest rate of 6.73%. We had available borrowing of $317.9 million
at September 30, 2000.
Houston Exploration has an unsecured available line of credit with a commercial
bank that provides for a maximum commitment of $250 million, subject to certain
conditions. During the nine months ended September 30, 2000, Houston Exploration
borrowed $30 million under its credit facility and repaid $37 million; at
September 30, 2000, $174 million remained outstanding at a weighted average
annualized interest rate of 7.84%. At September 30, 2000, Houston Exploration
had available borrowing of $35.6 million. Also, a subsidiary included in the
Energy Investments segment has a revolving loan agreement with a financial
institution in Canada. Borrowings under this agreement during the nine months
ended September 30, 2000 were $33.6 million and, at September 30, 2000, $118
million was outstanding at a weighted average annualized interest rate of 6.48%.
Further, subsequent to September 30, 2000, an additional $48 million was
borrowed to finance the acquisition of the remaining 50% of Gulf Midstream. The
Energy Investments segment now has available borrowing of $50.1 million.
We satisfy our seasonal working capital requirements primarily through
internally generated funds and the issuance of commercial paper. In addition,
beginning in the third quarter of 2000, we began issuing shares of our common
stock out of treasury to satisfy the requirements of our common stock
31
<PAGE>
plans. We believe that our sources of funds are sufficient to meet our seasonal
working capital needs.
CAPITAL EXPENDITURES
Construction Expenditures
The table below sets forth our construction expenditures by segment for the
periods indicated:
<TABLE>
(IN THOUSANDS OF DOLLARS)
-----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------------------------------ ------------------------ ------------------------ ---------------------- -------------------
<S> <C> <C> <C> <C>
Gas Distribution $ 67,925 $ 54,289 $ 160,561 $ 136,803
Electric Services 18,775 16,552 42,421 229,795
Gas Exploration and Production 68,913 44,230 163,443 112,006
Energy Services 2,467 2,576 10,799 3,323
Energy Investments and Other 8,380 20,660 26,387 31,064
------------------------------------ ------------------------ ------------------------ ---------------------- -------------------
$ 166,460 $ 138,307 $ 403,611 $ 512,991
------------------------------------ ------------------------ ------------------------ ---------------------- -------------------
</TABLE>
Construction expenditures related to Gas Distribution were primarily for the
renewal and replacement of mains and services and for the expansion of the gas
distribution system on Long Island. Electric Service's construction expenditures
reflect primarily costs to maintain our electric generating facilities and, for
the nine months ended September 30, 1999, reflect the acquisition of the
Ravenswood facility. Construction expenditures related to Gas Exploration and
Production reflect, in part, costs related to the development of properties
acquired in Southern Louisiana and in the Gulf of Mexico in 1999 and costs
related to the continued development of other properties previously acquired.
Expenditures also include our joint venture with Houston Exploration to explore
for natural gas and oil. Energy Investments and Other construction expenditures
reflect, primarily costs related to Canadian affiliates.
Equity Investments
During the nine months ended September 30, 2000, the Energy Services segment
acquired four additional companies located in the New York tri-state
metropolitan area. The newly acquired companies specialize in
engineering-consulting, plumbing and mechanical contracting, and heating,
ventilation and air conditioning contracting. Combined, these companies have
over 1,300 employees and revenues of approximately $260 million.
In addition, in March 2000, the Company and TXU Energy Services formed a joint
venture with MyHomeKey.com, Inc. The Company and TXU Energy Services have each
invested $12.5 million
32
<PAGE>
in the project; Bechtel Enterprises has also invested $5 million. TXU Energy
Services is a unit of TXU - an investor-owned energy service company and Bechtel
Enterprises is an affiliate of Bechtel.
FINANCING
In June 2000, we redeemed, at maturity, preferred stock 7.95% Series AA through
the utilization of internally generated funds and the proceeds from the issuance
of commercial paper. Our obligation of $370.2 million included the mandatory
redemption price of $25 per share totaling $363.0 million and a dividend payable
totaling $7.2 million. We anticipate issuing up to $400 million in preferred
stock during 2001 to replace outstanding commercial paper.
KeySpan Energy Delivery Long Island has an effective shelf registration
statement on file with the Securities and Exchange Commission for the issuance
of up to $600 million of medium term notes. On February 1, 2000, KeySpan Energy
Delivery Long Island issued $400 million 7.875% Notes due February 1, 2010. The
net proceeds from this issuance were used to reimburse our treasury for costs in
paying $397 million of promissory notes to the Long Island Power Authority that
matured in June 1999. The medium term notes issued are fully and unconditionally
guaranteed by us. At June 30, 2000, $200 million of medium term notes remain
available for issuance under the shelf registration statement.
As previously indicated, on November 4, 1999, we entered into a definitive
agreement with Eastern, pursuant to which we will acquire all of the outstanding
common stock of Eastern. In connection with this merger, Eastern has amended its
merger agreement with EnergyNorth to provide for an all cash acquisition by
Eastern of EnergyNorth common stock. The restructured EnergyNorth merger is
expected to close contemporaneously with the KeySpan/Eastern transaction. (See
Note 5 to the Consolidated Financial Statements "Acquisition of Eastern
Enterprises".)
We intend to access the financial markets in the fourth quarter of 2000 to
finance approximately $2 billion for the Eastern and EnergyNorth transactions.
We intend to use bridge financing with a commercial bank to fund $1.65 billion
of these transactions initially and then replace the bridge financing with $1.65
billion of long-term debt securities as soon as practicable thereafter. The
remaining balance will be financed through the issuance of commercial paper. We
anticipate issuing several different maturities of long-term debt to balance our
future capital maturity structure. In August, we filed a shelf registration
statement with the Securities and Exchange Commission for the issuance of up to
$1.65 billion of debt securities.
In connection with our anticipated Eastern and EnergyNorth transactions, and the
anticipated issuance of long-term debt securities, we have entered into forward
starting swap agreements to hedge a portion of the risk that the cost of the
future issuance of fixed-rate debt may be adversely affected by changes in
interest rates. The agreements have a total notional principal amount of $1.5
33
<PAGE>
billion. (See Note 4 to the Consolidated Financial Statements, "Liquidity and
Financings" for additional details.)
In addition to our strategies associated with our financing of the Eastern and
EnergyNorth transactions and our intention to issue preferred stock during 2001,
we also intend to increase our current commercial paper program to $1.4 billion
in the last quarter of 2000. We anticipate that we may issue approximately $800
million in commercial paper in the last quarter of 2000 to finance a portion of
the Eastern acquisition and meet the combined seasonal working capital needs of
KeySpan, Eastern and EnergyNorth. We believe that our sources of funding, i.e.
anticipated long- term debt and preferred stock issuances and commercial paper
borrowings will be sufficient to meet our anticipated cash needs. At the close
of the Eastern acquisition, we anticipate that our debt (including commercial
paper) to capitalization ratio will be approximately 65%. However, if we divest
of certain non-core assets, we believe that we can achieve a debt to
capitalization ratio of 45% to 50% within the next several years.
GAS DISTRIBUTION - RATE MATTERS
By orders dated February 5, 1998 and April 14, 1998 the New York State Public
Service Commission approved a Stipulation and Agreement among KeySpan Energy
Delivery New York, the Long Island Lighting Company, the Staff of the New York
State Public Service Commission and six other parties that in effect approved
the merger of KeySpan Energy Corporation and the Long Island Lighting Company
and established gas distribution rates for our two gas distribution subsidiaries
that are currently in effect. On November 30, 2000, KeySpan Energy Delivery Long
Island's rate agreement with the New York State Public Service Commission
expires. Under the terms of the agreement, current gas distribution rates will
remain in effect for 2001 unless either KeySpan Energy Delivery Long Island or
the New York State Public Service Commission initiate a rate proceeding. We do
not intend to initiate such a proceeding and at this time we have no reason to
believe that the New York State Public Service Commission will initiate a
proceeding. Therefore, we expect current gas distribution rates for our two gas
distribution utilities to remain in effect through 2001. (For more information
on these agreements refer to our Annual Report on Form 10-K for the year ended
December 31, 1999.)
ENVIRONMENTAL MATTERS
We are subject to various federal, state and local laws and regulatory programs
related to the environment. Ongoing environmental compliance activities, which
have not been material, are charged to operation and maintenance activities. We
estimate that the remaining minimum cost of our manufactured gas plant-related
environmental cleanup activities, including costs of $5.0 million associated
with the Ravenswood facility, will be approximately $119 million and we have
recorded a related liability for such amount. Further, as of September 30, 2000,
we have expended a total of approximately $20 million. (See Note 3 to the
Consolidated Financial Statements "Environmental Matters".)
34
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q concerning expectations, beliefs,
plans, objectives, goals, strategies, future events or performance and
underlying assumptions and other statements which are other than statements of
historical facts, are "forward-looking statements" within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended. Without limiting the
foregoing, all statements relating to our future outlook, anticipated capital
expenditures, future cash flows and borrowings, pursuit of potential future
acquisition opportunities and sources of funding are forward-looking statements.
Such forward-looking statements reflect numerous assumptions and involve a
number of risks and uncertainties and actual results may differ materially from
those discussed in such statements. Among the factors that could cause actual
results to differ materially are: general economic trends; fluctuations in gas
and electric prices; available sources and cost of fuel; federal and state
regulatory initiatives that increase competition, threaten cost and investment
recovery, and impact rate structures; our ability to successfully reduce our
cost structure; the successful integration of our subsidiaries, including the
Eastern companies; the degree to which we develop unregulated business ventures;
our ability to identify and make complementary acquisitions, as well as the
successful integration of such acquisitions; inflationary trends and interest
rates; and other risks detailed from time to time in other reports and other
documents filed by us with the Securities and Exchange Commission. For any of
these statements, we claim the protection of the safe harbor for forward-looking
information contained in the Private Securities Litigation Reform Act of 1995,
as amended.
35
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to various risk exposures and uncertainties associated with our
operations. The most significant contingency involves the evolution of the gas
distribution industry toward a more competitive and deregulated environment.
Most important to us, is the evolution of regulatory policy as it pertains to
our fixed charges associated with our firm gas purchase contracts. In addition,
we are exposed to commodity price risk, interest rate risk and foreign currency
translation risk. Our exposure to the aforementioned market risks has remained
substantially unchanged from December 31, 1999. However, during the nine months
ended September 30, 2000, we have entered into a number of derivative financial
instruments to limit our exposure to interest rate fluctuations and to lock-in
the sales price on a portion of our estimated 2001 summer electric sales.
As previously mentioned, in anticipation of our purchase of Eastern and the
anticipated issuance of long-term debt securities, we have entered into forward
starting swap agreements during the nine months ended September 30, 2000 to
hedge a portion of the risk that the cost of the future issuance of fixed-rate
debt may be adversely affected by changes in interest rates. We may, from time
to time, enter into additional derivative instruments to hedge this risk
exposure, if market conditions so warrant. (See Note 7 to the Consolidated
Financial Statements, "Derivative Financial Instruments" for a further
discussion of these agreements.)
Also, during the quarter ended September 30 we entered into a number of
derivative swap instruments to lock-in the selling price on a portion of our
2001 estimated electric sales. These derivatives have been accounted for as
cash-flow hedges. So far we have hedged the sales price on approximately 6% of
our total estimated electric sales for 2001. We intend to enter into additional
derivative instruments to hedge approximately 30% of our estimated 2001 summer
electric sales. (See Note 7 to the Consolidated Financial Statements,
"Derivative Financial Instruments" and Note 8 "New Financial Accounting
Standards" for a further explanation of derivative instruments.)
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are subject to various legal proceedings arising out of
the ordinary course of our business. Except as described below, we do not
consider any of such proceedings to be material to our business or likely to
result in a material adverse effect on our results of operations or financial
condition.
In October 1998, the County of Suffolk and the Towns of Huntington and Babylon
commenced an action against the Long Island Power Authority, us, the New York
Public Service Commission and others in the United States District Court for the
Eastern District of New York (the "Huntington Lawsuit"). The Huntington Lawsuit
alleges, among other things, that the Long Island Lighting
36
<PAGE>
Company ratepayers (i) have a property right to receive or share in the alleged
capital gain that resulted from the transaction with the Long Island Power
Authority (which gain is alleged to be at least $1 billion); and (ii) that the
Long Island Lighting Company was required to refund to ratepayers the amount of
a Shoreham-related deferred tax reserve (alleged to be at least $800 million)
carried on the books of the Long Island Lighting Company at the consummation of
the Long Island Power Authority transaction. In December 1998, and again in June
1999, the plaintiffs amended their complaint. The amended complaint contains
allegations relating to certain payments the Long Island Lighting Company had
determined were payable in connection with the Long Island Power Authority
transaction and KeySpan Acquisition to the Long Island Lighting Company's
Chairman and certain former officers and adds the recipients of the payments as
defendants. In June 1999, we were served with the second amended complaint. On
June 16, 2000, we filed a motion to dismiss the second amended complaint. On
August 14, 2000, the Court granted our motion and dismissed the plaintiffs'
second amended complaint in its entirety. The plaintiffs have filed a notice of
appeal of that decision. At this time we are unable to determine the outcome of
this appeal.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27)* Financial Data Schedule on Schedule U-T for the quarter ended
June 30, 2000.
(b) Reports on Form 8-K
In our report on Form 8-K dated July 12, 2000, we filed pro-forma
financial information for the periods ended December 31, 1999 and
March 31, 2000.
In our report on Form 8-K dated July 26, 2000, we filed as an exhibit
thereto, a press release discussing earnings for the quarter ended
June 30, 2000.
In our report on Form 8-K dated October 6, 2000, we filed as an
exhibit thereto, certain historical financial information of Eastern.
-------------------------
*Filed Herewith
37
<PAGE>
KEYSPAN CORPORATION AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf of the undersigned
there unto duly authorized.
KEYSPAN CORPORATION
(Registrant)
Date: October 31, 2000 /s/ Gerald Luterman
---------------------------------
Gerald Luterman
Senior Vice President and
Chief Financial Officer
Date: October 31, 2000 /s/ Ronald S. Jendras
--------------------------------
Ronald S. Jendras
Vice President, Controller
and Chief Accounting Officer
38
