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
- ---
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---
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
--------------------
(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 May 3, 2000
- --------------------------- ---------------------------
$.01 par value 133,876,426
<PAGE>
KEYSPAN CORPORATION AND SUBSIDIARIES
INDEX
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Part I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Consolidated Balance Sheet -
March 31, 2000 and December 31, 1999 3
Consolidated Statement of Income -
Three Months Ended March 31, 2000 and 1999 5
Consolidated Statement of Cash Flows -
Three Months Ended March 31, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis Of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 29
Part II. OTHER INFORMATION
Item 1 - Legal Proceedings 29
Item 6 - Exhibits and Reports on Form 8-K 30
Signatures 32
2
<PAGE>
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
MARCH 31, 2000 December 31, 1999
(Unaudited) (Audited)
- --------------------------------------------------------------- ------------------------ -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and temporary cash investments $ 219,338 $ 128,602
Customer accounts receivable 708,183 425,643
Other accounts receivable 263,237 235,156
Allowance for uncollectible accounts (30,893) (20,294)
Special deposits 48,802 60,863
Gas in storage, at average cost 36,397 144,256
Materials and supplies, at average cost 92,367 84,813
Other 73,888 98,914
--------------- ---------------
1,411,319 1,157,953
---------------- ----------------
EQUITY INVESTMENTS AND OTHER 444,542 391,731
---------------- ----------------
PROPERTY
Electric 1,355,217 1,346,851
Gas 3,473,376 3,449,384
Other 389,685 375,657
Accumulated depreciation (1,624,278) (1,589,287)
Gas exploration and production, at cost 1,231,840 1,177,916
Accumulated depletion (541,517) (520,509)
---------------- ----------------
4,284,323 4,240,012
---------------- ----------------
DEFERRED CHARGES
Regulatory assets 322,690 319,167
Goodwill, net of amortizations 332,043 255,778
Other 371,268 366,050
---------------- ----------------
1,026,001 940,995
---------------- ----------------
---------------- ----------------
TOTAL ASSETS $ 7,166,185 $ 6,730,691
================ ================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
3
<PAGE>
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
MARCH 31, 2000 December 31, 1999
(Unaudited) (Audited)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
Current redemption of preferred stock $ 363,000 $ 363,000
Accounts payable and accrued expenses 614,552 645,347
Notes payable - 208,300
Dividends payable 61,321 61,306
Taxes accrued 154,878 50,437
Customer deposits 30,463 31,769
Interest accrued 32,703 28,093
----------------- -----------------
1,256,917 1,388,252
----------------- -----------------
DEFERRED CREDITS AND OTHER LIABILITIES
Regulatory liabilities 37,649 26,618
Deferred income tax 187,512 186,230
Postretirement benefits and other reserves 500,406 501,603
Other 81,702 66,200
----------------- -----------------
807,269 780,651
----------------- -----------------
CAPITALIZATION
Common stock, $.01 par value, authorized
450,000,000 shares; outstanding 133,876,426 and
133,866,077 shares stated at 2,973,388 2,973,388
Retained earnings 558,055 456,882
Accumulated foreign currency adjustment 7,366 7,714
Treasury stock purchased (722,660) (722,959)
----------------- -----------------
Total common shareholders' equity 2,816,149 2,715,025
Preferred stock 84,339 84,339
Long-term debt 2,109,120 1,682,702
----------------- -----------------
TOTAL CAPITALIZATION 5,009,608 4,482,066
----------------- -----------------
MINORITY INTEREST IN SUBSIDIARY COMPANIES 92,391 79,722
----------------- ----------------
TOTAL LIABILITIES AND CAPITALIZATION $ 7,166,185 $ 6,730,691
================= =================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
4
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS Three Months
ENDED Ended
MARCH 31, 2000 March 31, 1999
- -------------------------------------------------------------- ---------------------- ---------------------
<S> <C> <C>
REVENUES
Gas Distribution $ 804,703 $ 718,298
Electric Services 334,404 174,858
Gas Exploration and Production 49,376 26,520
Energy Related Services and Other 128,130 41,432
------------ ----------------
Total Revenues 1,316,613 961,108
------------ ----------------
OPERATING EXPENSES
Purchased gas 412,005 324,269
Purchased fuel 68,493 -
Operations and maintenance 354,605 232,535
Depreciation, depletion and amortization 69,581 58,185
Operating taxes 115,423 103,893
------------ ----------------
Total Operating Expenses 1,020,107 718,882
------------ ----------------
OPERATING INCOME 296,506 242,226
------------ ----------------
OTHER INCOME AND (DEDUCTIONS)
Income from equity investments 7,245 2,972
Interest income 2,591 11,043
Minority interest (3,029) (304)
Other 5,128 3,249
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Total Other Income 11,935 16,960
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INCOME BEFORE INTEREST CHARGES
AND INCOME TAXES 308,441 259,186
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INTEREST CHARGES 44,125 35,886
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INCOME TAXES
Current 95,633 46,646
Deferred (3,561) 33,433
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Total Income Taxes 92,072 80,079
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NET INCOME 172,244 143,221
Preferred stock dividend requirements 8,691 8,689
------------ ----------------
EARNINGS FOR COMMON STOCK $ 163,553 $ 134,532
Foreign currency adjustment (348) 3,310
------------ ----------------
COMPREHENSIVE INCOME $ 163,205 $ 137,842
============ ================
AVERAGE COMMON SHARES OUTSTANDING (000) 133,873 142,981
BASIC AND DILUTED EARNINGS PER COMMON SHARE $ 1.22 $ 0.94
============ ================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
5
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS Three Months
ENDED Ended
MARCH 31, 2000 March 31, 1999
- ------------------------------------------------------------------------------- -------------------- -------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 172,244 $ 143,221
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES
Depreciation, depletion and amortization 69,581 58,185
Deferred income tax (3,561) 33,433
Income from equity investments (7,245) (2,972)
Dividends from equity investments 1,863 4,296
CHANGES IN ASSETS AND LIABILITIES
Accounts receivable (215,498) (67,635)
Materials and supplies, fuel oil and gas in storage 101,262 102,612
Accounts payable and accrued expenses 42,769 (85,303)
Interest accrued 4,606 (2,230)
Special deposits 12,061 24,858
Prepayments and other 12,182 (5,279)
--------- --------------
Net Cash Provided by Operating Activities 190,264 203,186
--------- --------------
INVESTING ACTIVITIES
Capital expenditures (111,574) (76,545)
Investments (141,719) (9,786)
Other 7,089 12,438
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Net Cash (Used in) Investing Activities (246,204) (73,893)
--------- --------------
FINANCING ACTIVITIES
Treasury stock purchased - (54,061)
Issuance of notes payable 364,479
Repayment of notes payable (572,779) -
Issuance of long-term debt 430,395 7,000
Payment of long-term debt (4,000) -
Preferred stock dividends paid (8,838) (8,689)
Common stock dividends paid (59,575) (64,360)
Other (3,006) (621)
--------- --------------
Net Cash Provided by (Used in) Financing Activities 146,676 (120,731)
--------- --------------
Net Increase in Cash and Temporary Cash Investments 90,736 8,562
========= ==============
Cash and temporary cash investments at beginning of period $ 128,602 $ 942,776
Net Increase in cash and temporary cash investments 90,736 8,562
--------- --------------
Cash and Temporary Cash Investments at End of Period $ 219,338 $ 951,338
========= ==============
</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 d/b/a KeySpan Energy (the "Company" or "KeySpan Energy")
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.
Other KeySpan Energy companies market a portfolio of gas-marketing and
energy- related services in the Northeast, own and operate
electric-generation plants in New York City and on Long Island, and provide
operating and customer services to approximately 1.1 million electric
customers of the Long Island Power Authority ("LIPA"). The Company's other
energy activities include: gas exploration and production, primarily through
The Houston Exploration Company ("THEC"); a domestic pipeline and storage
facilities; and international activities, including gas processing in Canada,
and a gas pipeline and local distribution in Northern Ireland. (See Note 2,
"Business Segments" for additional information on each operating segment.)
1. BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited Consolidated
Financial Statements contain all adjustments necessary to present fairly the
financial position of the Company as of March 31, 2000, and the results of
its operations and cash flows for the three months ended March 31, 2000 and
1999. The accompanying financial statements should be read in conjunction
with the consolidated financial statements and notes included in the
Company's 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
The Company has six reportable segments: Gas Distribution, Electric Services,
Gas Exploration and Production, Energy Related Services, Energy Related
Investments and Other.
The Gas Distribution segment consists of the Company's two gas distribution
subsidiaries. The Brooklyn Union Gas Company d/b/a KeySpan Energy Delivery
New York ("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 Gas East Corporation d/b/a KeySpan Energy Delivery
Long Island ("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.
7
<PAGE>
The Electric Services segment consists of Company subsidiaries that operate
the electric transmission and distribution ("T&D") system owned by LIPA, own
and sell capacity and energy to LIPA from the Company's generating facilities
located on Long Island and manage fuel supplies for LIPA to fuel the
Company's Long Island generating facilities through long-term service
contracts having terms that range from eight to fifteen years. The Electric
Services segment also includes Company subsidiaries that own, lease and
operate the 2,168 megawatt Ravenswood electric generation facility
("Ravenswood Facility"), located in Long Island City, Queens. Currently, the
Company's primary electric generation customers are LIPA, and the New York
Independent System Operator ("NYISO") 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 the Company's 70%
equity interest in THEC, an independent natural gas and oil exploration
company, as well as KeySpan Exploration and Production LLC, the Company's
wholly owned subsidiary engaged in a joint venture with THEC. On March 31,
2000, under a pre- existing credit arrangement, approximately $80 million in
debt owed by THEC to the Company was converted into common equity. Upon such
conversion, the Company's common equity ownership interest in THEC increased
from 64% to approximately 70%.
The Company's Energy Related Services segment primarily includes companies
that provide energy services to customers located within the New York City
tri-state metropolitan area and in Rhode Island through the following five
lines of business: (i) equipment installation of plumbing, heating,
ventilation and air conditioning ("HVAC") equipment; (ii) service and
maintenance of energy systems and appliances for commercial, industrial and
residential customers; (iii) energy sales of gas and electricity, including
transportation and related services, largely to retail customers, including
those served by the Company's two gas distribution subsidiaries, as well as
the Ravenswood Facility; (iv) professional engineering-consulting and design
of energy systems for commercial and industrial customers; and (v)
telecommunications which provide various services to carriers of voice and
data transmission on Long Island and in New York City.
Subsidiaries in the Energy Related 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 Transco 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 ("GMS")
and the ownership of certain oil producing properties in Alberta Canada.
These subsidiaries are 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.
The Other segment represents primarily, preferred stock dividends,
unallocated administrative expenses and interest income earned on temporary
cash investments.
8
<PAGE>
The accounting policies of the segments are the same as those used for the
preparation of the Consolidated Financial Statements. The Company's segments
are strategic business units that are managed separately because of their
different operating and regulatory environments. At March 31, 2000, the total
assets of each reportable segment have not changed materially from those
levels reported at December 31, 1999, except for the Energy Related Services
segment whose assets increased by approximately $200 million due primarily to
the acquisition of three 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 months ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31 (In Thousands of Dollars)
- -------------------------------------------------------------------------------------------------------------
Gas Distribution Electric Services
---------------------------- -----------------------------
2000 1999 2000 1999
-------------- -- ------------ ------------- --- ------------
<S> <C> <C> <C> <C>
Revenue $ 804,703 $ 718,298 $ 334,404 $ 174,858
-------------- -------------- -------------- ---------------
Purchased Gas / Fuel 374,890 311,254 68,493 -
Operations and Maintenance 111,963 101,549 133,662 92,167
Depreciation & Amortization 27,296 24,254 12,265 9,928
Operating Taxes 75,496 72,453 39,490 28,991
Intercompany Billings 2,597 3,049 10,882 10,645
-------------- ------------- -------------- ---------------
Total Expense 592,242 512,559 264,792 141,731
-------------- -------------- -------------- ---------------
Operating Income $ 212,461 $ 205,739 $ 69,612 $ 33,127
-------------- -------------- -------------- ---------------
Earnings for Common Stock $ 126,779 $ 120,690 $ 42,679 $ 16,585
-------------- -------------- -------------- ---------------
Basic and Diluted Earnings Per
Share $ 0.95 $ 0.84 $ 0.32 $ 0.12
- ------------------------------------------------ ------------------------------------------ ---------------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31 In Thousands of Dollars)
- ------------------------------------------------------------------------------------------------------------
Gas Exploration and Production Energy Related Services
---------------------------- -----------------------------
2000 1999 2000 1999
-------------- -- ------------ ------------- --- ------------
<S> <C> <C> <C> <C>
Revenue $ 49,376 $ 26,520 $ 126,619 $ 40,834
-------------- -------------- -----------------------------
Purchased Gas - - 37,115 13,015
Operations and Maintenance 11,479 5,959 88,725 30,030
Depreciation, Depletion & Amortization 21,003 17,057 2,186 717
Operating Taxes 538 33 - 3
-------------- -------------- -----------------------------
Total Expense 33,020 23,049 128,026 43,765
-------------- -------------- -----------------------------
Operating Income (Loss) $ 16,356 $ 3,471 $ (1,407) $ (2,931)
-------------- -------------- -----------------------------
Earnings (Loss) for Common Stock $ 5,498 $ 478 $ (1,570) $ (1,637)
-------------- -------------- -----------------------------
Basic and Diluted
Earnings (Loss) Per Share $ 0.04 $ 0.00 $ (0.01) $ (0.01)
- ------------------------------------------------ ---------------------------- -----------------------------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31 (In Thousands of Dollars)
- -----------------------------------------------------------------------------------------------------------------
Energy Related Investments Other
---------------------------- -----------------------------
2000 1999 2000 1999
-------------- -- ------------ ------------- --- ------------
<S> <C> <C> <C> <C>
Revenue $ 1,511 $ 598 $ - $ -
-------------- -------------- ---------------- -----------
Operations and Maintenance 1,657 1,272 7,119 1,558
Depreciation & Amortization 384 384 6,447 5,845
Operating Taxes 5 7 (106) 2,406
Intercompany Billings - - (13,479) (13,694)
-------------- -------------- ----------------- ----------
Total Expense 2,046 1,663 (19) (3,885)
-------------- -------------- ----------------- ----------
Operating (Loss) Income $ (535)$ (1,065) $ 19 $ 3,885
-------------- -------------- -----------------------------
Earnings (Loss) for Common Stock $ 3,647 $ 499 $ (13,480) $ (2,083)
-------------- -------------- -----------------------------
Basic and Diluted
Earnings (Loss) Per Share $ 0.02 $ 0.00 $ (0.10) $ (0.01)
- ------------------------------------------------ ---------------------------- -----------------------------
</TABLE>
THREE MONTHS ENDED MARCH 31 (In Thousands of Dollars)
- --------------------------------------------------------------------------------
Consolidated
-------------------------------
2000 1999
--------------------------------
Revenue $ 1,316,613 $ 961,108
--------------------------------
Purchased Gas / Fuel 480,498 324,269
Operations and Maintenance 354,605 232,535
Depreciation, Depletion & Amortization 69,581 58,185
Operating Taxes 115,423 103,893
- --------------- --------------------------------
Total Expense 1,020,107 718,882
--------------------------------
Operating Income $ 296,506 $ 242,226
--------------------------------
Earnings for Common Stock $ 163,553 $ 134,532
--------------------------------
Basic and Diluted Earnings Per Share $ 1.22 $ 0.94
- -------------------------------------------------------------------
3. ENVIRONMENTAL MATTERS
MANUFACTURED GAS PLANT SITES: The Company has identified thirty-four
manufactured gas plant ("MGP") 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 the Company, have been
identified to the New York State Department of Environmental
Conservation ("DEC") for inclusion on appropriate waste site
inventories.
10
<PAGE>
The Company presently estimates the cost of its MGP-related
environmental cleanup activities will be approximately $121 million;
which amount has been accrued by the Company as its current best
estimate of its aggregate environmental liability for known sites.
The currently-known conditions of the former MGP 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. The
Company believes that in the aggregate, the accrued liability for
investigation and remediation of the MGP 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 ("ACO") with the DEC and two are subject
to the negotiation of an ACO or an agreement under DEC's Voluntary
Clean-up Program. The Company's remaining MGP sites, eight of which
have recently been identified to the DEC, may not become subject to
ACOs 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 ("NYPSC") has allowed recovery of costs related to certain
KeySpan Energy Delivery New York MGP sites. The Company believes that
current rate plans in effect for both Gas Distribution subsidiaries
provide for recovery of environmental costs attributable to the Gas
Distribution segment. At March 31, 2000, the Company had a total
regulatory asset of approximately $96 million. Expenditures incurred to
date by the Company with respect to MGP-related activities total
approximately $18 million.
OTHER: The Company will be responsible for environmental obligations
relating to the Ravenswood Facility operations other than liabilities
arising from pre-closing disposal of waste at off-site locations and
any monetary fines arising from the prior owner's pre-closing conduct.
Based on information currently available for environmental
contingencies related to the Ravenswood Facility acquisition, the
Company has accrued an additional $5 million as the minimum liability
expected to be incurred.
4. ISSUANCE OF LONG-TERM DEBT, REPAYMENT OF NOTES PAYABLE AND
FINANCING
In December 1999, KeySpan Energy Delivery Long Island and the Company
jointly filed a shelf registration statement with the Securities and
Exchange Commission ("SEC") in anticipation of issuing, 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 the Company
for its costs in extinguishing certain promissory notes to LIPA that
matured in June 1999. The Medium Term Notes are fully and
unconditionally guaranteed by the Company.
11
<PAGE>
During the quarter ended March 31, 2000, THEC borrowed an additional $2
million under its Credit Facility and then repaid $4 million of
outstanding borrowings; at March 31, 2000, $179 million remained
outstanding. In addition, during the quarter ended March 31, 2000, a
subsidiary in the Energy Related Investments segment increased its
borrowings under a revolving loan agreement with a financial
institution in Canada by U.S. $28.4 million. At March 31, 2000, U.S.
$114.8 million was outstanding at a weighted average annualized
interest rate of 5.81%.
At December 31, 1999, the Company had $208.3 million of outstanding
commercial paper. Additional commercial paper was issued during the
months of January and February 2000. The average outstanding daily
balance during this period was $241.4 million at a weighted average
annualized interest rate of 6.08%. In February 2000, the Company repaid
the entire outstanding balance. At March 31, 2000, the Company had no
commercial paper outstanding.
In connection with the Company's anticipated purchase of Eastern
Enterprises (See Note 5, "Acquisition of Eastern Enterprises") and the
anticipated issuance of long-term debt securities to finance the
acquisition, the Company entered into forward interest rate lock
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 April 30, 2000, the Company has entered into
seven forward interest rate lock agreements with an aggregate notional
amount of $500 million. The interest lock rates range from 7.172% to
7.780%. Under an interest rate lock agreement, the Company agrees to
pay or receive an amount equal to the difference between the net
present value of the cash flows for a notional principal 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 interest rate lock 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. The Company has
entered into interest rate lock agreements with more than one major
financial institution in order to minimize counterparty credit risk.
5. ACQUISITION OF EASTERN ENTERPRISES
On November 4, 1999, the Company and Eastern Enterprises ("Eastern")
announced that the companies had signed a definitive merger agreement
under which the Company will acquire all of the common stock of Eastern
for $64.00 per share in cash. The Agreement and Plan of Merger is
included as an exhibit to the Company's Form 8-K filed on November 5,
1999.
The transaction has a total value of approximately $2.5 billion and
will be accounted for as a purchase. The increased size and scope of
the combined organization should enable the
12
<PAGE>
Company to provide enhanced, cost-effective customer service and to
capitalize on the above-average growth opportunities for natural gas in
the Northeast.
In connection with the merger, Eastern has amended its merger agreement
with EnergyNorth, Inc. ("EnergyNorth") to provide for an all cash
acquisition by Eastern of EnergyNorth shares at a price per share of
$61.13. The restructured EnergyNorth merger is expected to close
contemporaneously with the KeySpan/Eastern transaction. This
transaction has a total value of approximately $250 million.
It is anticipated that the combined company will have assets of $8.8
billion, $4.3 billion in revenues, and earnings before interest, taxes,
depreciation and amortization ("EBITDA") of approximately $950 million.
The combined companies will serve approximately 2.4 million customers.
The Company expects pre-tax annual cost savings will 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. The Company expects to achieve the majority of
the reductions through a variety of programs which would include hiring
freezes, attrition and separation programs. The Company expects to
issue approximately $2.0 billion of long-term debt to acquire the
combined common stock of Eastern and EnergyNorth. The Company
anticipates issuing several different maturities of long-term debt to
balance its current capital structure and maturity structure.
Following the closing of these transactions, the Company will become
subject to regulation of the SEC as a registered holding company under
the Utility Holding Company Act of 1935, as amended.
The merger is conditioned upon the approval of the SEC. Shareholders of
both Eastern and EnergyNorth, as well as the New Hampshire Utility
Commission (with respect to Eastern's acquisition of EnergyNorth) have
approved the transactions. The Company anticipates that the transaction
will be consummated in the third or fourth quarter of 2000, but is
unable to determine when or if the required approval will be obtained.
Eastern owns and operates Boston Gas Company, Colonial Gas Company,
Essex Gas Company, Midland Enterprises Inc. ("Midland"), Transgas Inc.
("Transgas"), and ServicEdge Partners, Inc. ("ServicEdge").
6. NEW YORK STATE INDEPENDENT SYSTEM OPERATOR ("NYISO") ISSUES
The Company currently realizes revenues from its 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
13
<PAGE>
to be generated due to the unexpected loss of a major facility. Due to
the increase in the market-clearing price of certain ancillary services
in February 2000, the NYISO has imposed a bid cap on these services
retroactive to March 1, 2000. Further, the NYISO has asked the Federal
Energy Regulatory Commission ("FERC") to review the pricing of certain
ancillary services, implement bid caps for these services and initiate
an Alternative Dispute Resolution process designed at arriving at a
settlement that would involve the payment of refunds of so- called
alleged "excess payments" received by sellers into the ancillary
services market, including the Ravenswood Facility and LIPA during the
period January 29 through February 29, 2000. Other market participants,
including buyers of ancillary services and electric utilities as load
serving entities ("LSEs") have also filed petitions with and intervened
in the various pending FERC proceedings and have proposed alternative
remedies, including refunds back to the inception of the NYISO in
November 1999 and the revocation of the authority of the Ravenswood
Facility to charge market-based prices for ancillary services. In
addition, one LSE has petitioned the FERC to suspend the use of
market-based pricing in the energy market until alleged problems with
the operations of the NYISO are resolved.
The Company is opposing the relief requested by the NYISO and the LSEs
and believes that the ultimate resolution of this issue will not have a
material effect on its consolidated financial position.
7. NEW FINANCIAL ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board ("FASB") issued
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. The Company 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. It 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. All of
the Company's derivative financial instruments, except for certain
interest rate swaps, are cash-flow hedges. As a result, implementation
of SFAS No. 133 when adopted, is not expected to have a material effect
on the Company's 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. Under SFAS No. 133,
periodic changes in market value are recorded as comprehensive income,
subject to effectiveness, and then included in net income to match the
underlying transactions.
14
<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 months
ended March 31, 2000 compared to the three months ended March 31, 1999. All per
share amounts are stated on a diluted basis. For the quarter ended March 31,
2000 and March 31, 1999 diluted earnings per share is the same as basic earnings
per share, since there was no effect on earnings per share from the Company's
options and those of its subsidiary, The Houston Exploration Company ("THEC").
(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.)
Earnings Summary
- ----------------
Consolidated earnings (loss) by reporting segment is set forth in the following
table for the periods indicated:
(IN THOUSANDS OF DOLLARS)
Three Months Three Months
Ended Ended
March 31, 2000 March 31, 1999
- ------------------------------------ ------------------- ----------------------
Gas Distribution $ 126,779 $ 120,690
Electric Services 42,679 16,585
Gas Exploration and
Production 5,498 478
Energy Related Services (1,570) (1,637)
Energy Related Investments 3,647 499
Other (13,480) (2,083)
- --------------------------------------------------------------------------------
$ 163,553 $ 134,532
- ------------------------------------ -------------- ---------------------------
Consolidated earnings for the first quarter of 2000 were 22% higher than the
corresponding quarter last year. The increase in earnings reflects, primarily
the Company's investment in the 2,168 megawatt Ravenswood electric generating
facility ("Ravenswood Facility") located in Queens New York, which was acquired
in June 1999. Earnings from the Ravenswood Facility were $32.8 million for the
first quarter of 2000. Since the facility was acquired in June 1999, there are
no comparative earnings attributable to that facility for the first quarter of
1999. The increase in earnings from the Gas Distribution segment reflects
revenue benefits from continued gas sales growth and favorable gas prices as
compared to oil prices.
15
<PAGE>
Consolidated earnings also reflect improved performance from the Company's Gas
Exploration and Production segment, which benefitted from significantly higher
realized gas prices and increased production volumes, as well as improved
performance from the Company's Energy Related Investments segment. Partially
offsetting the aforementioned benefits to comparative earnings, was a decrease
in interest income on temporary cash investments. Interest income has been
decreasing as the Company used cash to finance acquisitions and repurchase
shares of its common stock in 1999.
Consolidated earnings per share was $1.22 for the first quarter of 2000, as
compared to $0.94 for the first quarter of last year, an increase of 30%. In
addition to the earnings enhancements noted above, comparative earnings per
share also reflects a six percent decrease in the Company's average common
shares outstanding for the first quarter of 2000 as compared to the first
quarter last year. During 1999, the Company repurchased its common stock market
on the open market.
Revenues
- --------
Consolidated revenues were $1.3 billion for the first quarter of 2000, as
compared to $961.1 million for the first quarter of last year, an increase of
$355.5 million or 37%. The increase in revenues is due to: (i) the addition of
the Ravenswood Facility which contributed $148.1 million in revenues during the
first quarter; (ii) an increase of $86.4 million in Gas Distribution revenues;
and (iii) an increase of $85.8 million in revenues from subsidiaries comprising
the Energy Related Services segment. Revenues from the Gas Distribution segment
benefitted from continued gas sales growth and favorable gas prices as compared
to oil prices. The increase in revenues from the Energy Related Services segment
resulted from recent acquisitions of companies providing various energy- related
services throughout the New York tri-state area and Rhode Island, and sales
growth related to the Company's gas marketing subsidiary.
Operating Expenses
- ------------------
Consolidated operating expenses were $1.0 billion for the first quarter of 2000
as compared to $718.9 million for the corresponding period last year. The
increase in operating expenses of $301.2 million, or 42%, was primarily the
result of higher purchased gas and fuel costs, and higher operations and
maintenance expense. The increase in gas costs in the first quarter of 2000, as
compared to first quarter of last year, resulted from the increase in gas sales
growth associated with the Company's two gas distribution subsidiaries and its
gas marketing subsidiary, as well as higher gas prices. Variations in utility
gas costs have little impact on operating results as the current gas rate
structure of each of the Company's 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. Operations and maintenance expense has increased by $122.1 million or
52% as a result of recent acquisitions of companies providing various
energy-related services, as discussed above. Further, the operations of the
Ravenswood Facility also contributed to the increase in operating expenses for
the first quarter of 2000.
16
<PAGE>
Other Income and (Deductions)
- -----------------------------
Other income includes equity earnings from subsidiaries comprising the Energy
Related Investments segment, primarily the Company's investments in Canada. In
addition, other income also includes interest income from temporary cash
investments. During the first quarter of 2000, the Company recognized equity
earnings from its Canadian investments of $6.3 million, compared to $2.6 million
during the first quarter of 1999. As previously mentioned, interest income has
been decreasing as the Company used cash to finance acquisitions and repurchase
shares of its common stock.
Other Expenses
- --------------
Interest expense for the first quarter of 2000 was $44.1 million as compared to
$35.9 million for the corresponding period last year, an increase of $8.2
million or 23%. Interest expense reflects higher levels of debt outstanding,
primarily related to the Company's Canadian investments and higher carrying
charges associated with certain outstanding regulatory issues. These increases
to interest expense were partially offset by a decrease to interest expense due
to the Company extinguishing a $397 million promissory note to LIPA in June
1999, and not issuing a replacement series of debt until February 1, 2000. (See
Note 4 to the Consolidated Financial Statements, "Issuance of Long- Term Debt,
Repayment of Notes Payable, and Financing" for further information on the
extinguishment and issuance of the debt instruments.)
Income tax expense reflects the higher level of pre-tax income for the quarter
ended March 31, 2000, as compared to the corresponding quarter last year.
SEGMENT RESULTS
Gas Distribution
- ----------------
With the exception of a portion of Queens County, the Company's gas distribution
subsidiaries are the only providers of gas distribution services in the New York
City counties of Kings, Richmond and Queens and the Long Island counties of
Nassau and Suffolk. 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.
17
<PAGE>
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
- -------------------------------------- ------------------------------ -------------------------
<S> <C> <C>
Revenues $ 804,703 $ 718,298
Purchased gas 374,890 311,254
Revenue taxes 44,541 44,307
- -------------------------------------------------------------------------------------
Net Revenues 385,272 362,737
- -------------------------------------------------------------------------------------
Operations and maintenance 114,560 104,598
Depreciation and amortization 27,296 24,254
Operating taxes 30,955 28,146
- -------------------------------------------------------------------------------------
Total Operating Expenses 172,811 156,998
- -------------------------------------- -------------------- -------------------------
Operating Income $ 212,461 $ 205,739
- -------------------------------------- -------------------- -------------------------
Earnings for Common Stock $ 126,779 $ 120,690
- -------------------------------------- -------------------- -------------------------
Firm gas sales (MDTH) 78,734 78,313
Firm transportation (MDTH) 10,483 8,226
Transportation - Electric
Generation (MDTH) 12,786 8,488
Other sales (MDTH) 20,167 16,840
Warmer than normal 8.7% 8.2%
- -------------------------------------- -------------------- -------------------------
</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 first quarter of 2000, as compared to the
first quarter of last year, by $22.5 million or 6.2%, due to continued gas sales
growth and favorable gas prices as compared to oil prices. Firm gas sales
margins grew approximately $10 million during the first quarter of 2000 through
the addition of new gas customers and oil to gas conversions, primarily in the
Long Island market. Long Island has a very low natural gas saturation rate and
significant gas sales growth opportunities are believed to be available. The
Company estimates that only 28% of one and two-family homes on Long Island
currently use natural gas for space heating, while 28% of the multi-family
market and 69% of the commercial market use gas for space heating. In this
service area, the Company will seek growth through the expansion of its
distribution system as well as through the conversion of residential homes 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
18
<PAGE>
with prices of alternative fuel, including No. 2 and No. 6 grade heating oil.
Due to the recent increase in the price of heating grade fuel oil, gas is
currently selling at a discount to heating oil. The Company increased sales in
these markets in the first quarter of 2000 by approximately $9 million, through
aggressive unit pricing and customer additions.
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.
The Company's gas distribution subsidiaries operate under utility tariffs that
contain 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 first quarter
of 2000 reflect the increase in normalized firm sales, as discussed above. Firm
gas transportation volumes increased in the first quarter of 2000, as the
Company continues its natural gas deregulation initiatives. The Company's net
margins are not affected by customers opting to purchase their gas supply from
sources other than the Company, 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 the Company's electric generating facilities located on
Long Island. Net revenues from these quantities are minimal.
Other sales quantities include on-system interruptible quantities, off-system
sales quantities (sales made to customers outside of the Company's service
territories) and related transportation. For the first quarter of 2000, as
compared to the corresponding period last year, the Company realized higher
on-system interruptible sales due to customer additions. Effective April 1,
2000, the Company entered into an agreement with Coral Energy Resources, L.P., a
subsidiary of Shell Oil Company ("Coral"). Coral assists in the origination,
structuring, valuation and execution of energy-related transactions. A sharing
agreement exists between gas ratepayers and the Company's 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.
19
<PAGE>
OPERATING EXPENSES
Comparative operating expenses increased by $15.8 million, or 10%, in the first
quarter of 2000 as compared to the corresponding period last year. Operations
and maintenance expense in the first quarter of 2000 reflects, generally, higher
labor costs and associated employee benefit expenses and higher accruals for
uncollectible accounts. The increase in depreciation and amortization expense
generally reflects continued property additions. Further, operating taxes which
include state and local taxes on property have increased as the applicable
property base and tax rates generally have increased.
Electric Services
The Electric Services segment primarily consists of subsidiaries that own and
operate oil and gas fired generating plants in Queens and Long Island, and
through long-term contracts, manage the electric T&D system, the fuel and
electric purchases, and the off-system electric sales for LIPA.
Selected financial data for the Electric Services segment is set forth in the
table below for the periods indicated.
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
- ------------------------------------ ----------------------------- ----------------------------------
<S> <C> <C>
Revenues
LIPA service agreements $ 185,409 $ 174,858
Ravenswood Facility 148,139 -
Other 856 -
- ------------------------------------ ------------------- ----------------------------------
Total Revenues 334,404 174,858
- ------------------------------------ ------------------- ----------------------------------
Operating expenses
Fuel purchased 68,493 -
Operations and maintenance 144,544 102,812
Depreciation 12,265 9,928
Operating taxes 39,490 28,991
- ------------------------------------ ------------------- ----------------------------------
Total Operating Expenses 264,792 141,731
- ------------------------------------ ------------------- ----------------------------------
Operating Income $ 69,612 $ 33,127
- ------------------------------------ ------------------- ----------------------------------
Earnings for Common Stock $ 42,679 $ 16,585
- ------------------------------------ ------------------- ----------------------------------
</TABLE>
20
<PAGE>
REVENUES
Electric revenues increased by $159.5 million, or 91%, in the first quarter of
2000 as compared to the comparable period last year. The increase in electric
revenues is due primarily to the Ravenswood Facility. As previously mentioned,
the Company acquired its interest in the Ravenswood Facility in June 1999 and as
a result there are no comparable revenues attributable to that facility for the
first quarter of 1999.
In addition, revenues from the Company's service agreements with LIPA were $10.6
million higher in the first quarter of 2000 as compared to the first quarter of
1999. The increase in comparative revenues is primarily the result of a major
construction project being performed by the Company on behalf of LIPA. In
February 2000, the Company began the installation of an underground transmission
line to reinforce the electric system capacity on the southfork of Long Island.
The project is being performed under a fixed fee contract with LIPA as part of
the Management Services Agreement. The Company can earn a profit from this
project if its actual cost to install the transmission line is less than the
budgeted cost under the contract. (For a description of the LIPA service
agreements, refer to the Company's Annual Report on Form 10K for the year ended
December 31, 1999.)
Electric revenues also include the sale of ancillary services from the
Ravenswood Facility and through the Energy Management Agreement with LIPA.
Ancillary services include primarily spinning reserves and non-spinning
reserves. Due to the significant increase in the market-clearing price of
certain ancillary services in February 2000, the New York Independent System
Operator ("NYISO") has imposed a bid cap on these services retroactive to March
1, 2000. Further, the NYISO has asked FERC to review the pricing of certain
ancillary services and initiate an Alternative Dispute Resolution. The Company,
LIPA, and certain other New York state utilities and generators are contesting
the NYISO's position and/or are seeking alternative relief. (See Note 6 to the
Consolidated Financial Statements, "New York Independent System Operator
("NYISO") Issues" for further details on this topic.)
OPERATING EXPENSES
Operating expenses for the first quarter of 2000, as compared to the first
quarter of 1999, increased by $123.1 million or 87%. The Ravenswood Facility
added $98.8 million to first quarter 2000 operating expenses, including fuel
charges of $68.5 million. Operating expenses incurred by the Company under the
LIPA Service Agreements were approximately 20% higher in the first quarter of
2000 as compared to the first quarter of 1999, reflecting, primarily costs
incurred to install the new electric transmission line discussed above.
21
<PAGE>
OTHER ISSUES
In the first quarter of 2000, LIPA's board of trustees approved a resolution to
negotiate a contract with the Company to build a 79-megawatt natural gas-fired
peaking unit located on Long Island. The unit will be used to accommodate peak
loads during high electricity demand and is expected to be available in 2002.
The Company expects to begin constructing the project within the next year and
will own and operate the peaking unit upon its completion. In addition, the
Company is proceeding with its application for a new cogeneration facility at
the Ravenswood Facility for submission to the NYPSC. The proposed new facility
is a 250 MW state-of-the-art gas turbine to generate both electricity and steam.
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 the Company's 70% equity interest in
THEC, as well as KeySpan Exploration and Production LLC, the Company's wholly
owned subsidiary engaged in a joint venture with THEC. On March 31, 2000, under
a pre-existing credit arrangement, approximately $80 million in debt owed by
THEC to the Company was converted into common equity. Upon such conversion, the
Company's common equity ownership interest in THEC increased from 64% to
approximately 70%.
22
<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.
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
- -------------------------------------------- ----------------------------- ------------------------
<S> <C> <C>
Revenues $ 49,376 $ 26,520
Operating Expenses 33,020 23,049
- -------------------------------------------- -------------------- ------------------------------
Operating Income $ 16,356 $ 3,471
- -------------------------------------------- -------------------- ------------------------------
Earnings for Common Stock $ 5,498 $ 478
- -------------------------------------------- -------------------- ------------------------------
Natural gas production (Mmcfe) 19,917 16,465
Natural gas (per Mcf) realized $ 2.43 $ 1.61
Proved reserves (BCFe) 558 480
- -------------------------------------------- -------------------- ------------------------------
</TABLE>
Operating income above represents 100% of the Company's gas exploration and
production subsidiaries' results for the periods indicated. Earnings, however,
are adjusted to reflect the Company's minority interest and, accordingly,
include 64% of THEC's results. Gas reserves and production are stated in BCFe
and Mmcfe, which includes equivalent oil reserves.
OPERATING INCOME
Operating income increased by $12.9 million in the first quarter of 2000 as
compared to the first quarter of 1999, reflecting the benefits derived from a
21% increase in production volumes, combined with a 51% increase in average
realized gas prices (average wellhead price received for production including
hedging gains and losses). All of the new production was internally generated
through successful drilling and workover activity. At March 31, 2000 the
Company's gas exploration and production subsidiaries had 558 BCFe of net proved
reserves of natural gas, of which approximately 75% is classified as proved
developed.
Energy Related Services
- -----------------------
The Company's Energy Related Services segment primarily includes companies that
provide services through five lines of business to clients located within the
New York City tri-state metropolitan area and in Rhode Island. The lines of
business include: equipment installation services; service and maintenance of
energy equipment for commercial, industrial and residential customers; marketing
of gas and electricity; professional engineering, consulting and the design of
energy systems; and telecommunications.
In February 2000, the Company acquired three additional companies that provide
energy-related services within these five lines of business. In addition, the
Company is also involved, through a
23
<PAGE>
joint venture, in providing energy-related services to consumers through the
MyHomeKey.com website, a personalized Internet-based home management system.
MyHomeKey.com is currently under development and is anticipated to be launched
in the summer of 2000.
Selected financial data for the Energy Related Services segment is set forth in
the following table for the periods indicated.
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
- -------------------------------------------- ----------------------------- ------------------------------
<S> <C> <C>
Revenues $ 126,619 $ 40,834
Cost of goods sold 106,353 34,558
- -------------------------------------------- -------------------- ------------------------------
Gross profit margin 20,266 6,276
Operating expenses 21,673 9,207
- -------------------------------------------- -------------------- ------------------------------
Operating Income (Loss) $ (1,407) $ (2,931)
- -------------------------------------------- -------------------- ------------------------------
Earnings (Loss) for Common Stock $ (1,570) $ (1,637)
- -------------------------------------------- -------------------- ------------------------------
</TABLE>
Results of operations of the Energy Related Services segment remained constant
for the first quarter of 2000 as compared to the first quarter of 1999.
Significantly greater gross profit margins were realized for each line of
business primarily 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. Earnings for this segment are projected to be
profitable in 2000.
Energy Related Investments
- --------------------------
Earnings for this segment are derived, primarily, from the Company's: 20%
interest in the Iroquois Gas Transmission System LP ("Iroquois"); 50% ownership
interest in Gulf Midstream Services Partnership ("GMS"); ownership interest in
certain oil producing properties in Alberta, Canada; and 50% interest in the
Premier Transco Pipeline and a 24.5% interest in Phoenix Natural Gas, both in
Northern Ireland.
Earnings for this segment increased by $3.1 million in the first quarter of 2000
as compared to the corresponding period last year, reflecting higher earnings
from the Company's Canadian investments. Results of operations from Canadian gas
and oil operations were enhanced through the acquisition, in the later part
1999, of the Paddle River Gas Plant and certain oil producing properties in
Alberta, Canada, and more efficient operations of GMS. In addition, Iroquois
realized higher transportation sales quantities and revenues from its
interruptible customers during the first quarter of 2000 as compared with the
same period last year. Since natural gas is currently selling at a discount to
fuel oil throughout the Northeast, interruptible customers are electing to use
natural gas
24
<PAGE>
rather than fuel oil in their operations. Earnings for the first quarter of 2000
from the Company's investments in Northern Ireland were essentially the same as
earnings for the first quarter of last year. The subsidiaries in this segment
are, primarily accounted for under the equity method since the Company's
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 a loss of $13.5 million for the first quarter of 2000
compared to a loss of $2.1 million for the first quarter of 1999 and, generally,
reflects preferred stock dividends and charges incurred by the corporate and
administrative areas of the Company that have not been allocated to the various
business segments, offset, in part, by interest income earned on temporary cash
investments. Interest income has decreased as the Company utilized cash to
finance certain acquisitions and repurchase shares of its common stock. Further,
during the first quarter of 2000, the Company recorded carrying charges
associated with certain outstanding regulatory issues.
LIQUIDITY, CAPITAL EXPENDITURES AND FINANCING
LIQUIDITY
Cash flow provided by operating activities for the three months ended March 31,
2000 reflects stable growth from the Company's gas distribution operations, as
well as positive contributions from the Ravenswood Facility. The decrease in
cash flow provided by operating activities for the first quarter of 2000 as
compared to the first quarter of last year, however, reflects a decrease in
interest income and negative operating cash flow from the Company's Energy
Related Services segment.
At March 31, 2000, the Company had cash and temporary cash investments of $219.3
million. In addition, the Company has a $700 million revolving credit agreement,
with a one-year term and one- year renewal option, with a commercial bank. This
credit facility is used to support the Company's $700 million commercial paper
program. At December 31, 1999, $208.3 million of commercial paper was
outstanding. In addition, commercial paper was issued during the months of
January and February 2000. The average outstanding daily balance during this
time was $241.4 million at a weighted average annualized interest rate of 6.08%.
In February 2000, the Company repaid the outstanding balance.
THEC 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 first quarter of 2000, THEC borrowed an additional $2
million under its Credit Facility and repaid $4 million of outstanding
borrowings; at March 31, 2000, $179 million remained outstanding. Also, a
subsidiary included in the Energy Related Investments segment has a revolving
loan agreement with a financial
25
<PAGE>
institution in Canada. Borrowings under this agreement during the first quarter
of 2000 were U.S. $28.4 million and, at March 31, 2000, U.S. $114.8 million was
outstanding. (See Note 4 to the Consolidated Financial Statements, "Issuance of
Long-Term Debt, Repayment of Notes Payable, and Financing" for further
information.)
CAPITAL EXPENDITURES
Construction Expenditures
The table below sets forth the Company's construction expenditures by segment
for the periods indicated:
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
- ------------------------------------ ------------------------------- -----------------------------
<S> <C> <C>
Gas Distribution $ 39,162 $ 34,590
Electric Services 10,235 3,658
Gas Exploration and Production 53,954 35,399
Energy Related Services 3,133 161
Other 5,090 2,737
- ----------------------------------- ------------------------------- ------------------
$ 111,574 $ 76,545
- ------------------------------------ ------------------------------- ------------------
</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 the Company's electric generating
facilities. 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 the Company's joint venture with THEC to explore for natural gas and
oil.
Equity Investments
- ------------------
In February 2000, the Energy Related Services segment acquired three additional
companies located in the New York City metropolitan area. The newly acquired
companies include, an engineering- consulting firm, a plumbing and mechanical
contracting firm, and a firm specializing in mechanical contracting and heating,
ventilation and air conditioning ("HVAC"). Combined, these companies have over
900 employees and revenues of approximately $170 million. Further, capital
expenditures for equity investments during the first quarter of 2000 reflect
incremental investments in Canadian affiliates.
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 into the project; Bechtel Enterprises has also invested
$5 million. MyHomeKey, formerly
26
<PAGE>
MyHomeLink, 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. The MyHomeKey portal is currently
under development and is expected to be launched in the summer of 2000. TXU
Energy Services is a unit of TXU - an investor-owned energy service company with
over $40 billion in assets. Bechtel Enterprises is an affiliate of Bechtel with
an asset value exceeding $18 billion.
FINANCING
In December 1999, KeySpan Energy Delivery Long Island and the Company jointly
filed a shelf registration statement with the Securities and Exchange Commission
in anticipation of issuing 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 repay the
Company for its costs in extinguishing certain promissory notes to LIPA that
matured in June 1999. The notes issued are fully and unconditionally guaranteed
by the Company.
In June 2000, the Company will redeem $363 million of preferred stock 7.95%
Series AA with corporate cash and is currently evaluating its alternatives for
the permanent financing of this issue.
On November 4, 1999, the Company entered into a definitive agreement with
Eastern Enterprises ("Eastern"), pursuant to which the Company will acquire all
of the outstanding common stock of Eastern for $64.00 per share in cash. The
transaction has a total value of approximately $2.5 billion. Eastern owns and
operates, among other entities, Boston Gas Company, Colonial Gas Company, Essex
Gas Company and Midland Enterprises Inc. In connection with this merger, Eastern
has amended its merger agreement with EnergyNorth, Inc. ("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. This transaction has a total value of approximately
$250 million.
The Company intends to access the financial markets in 2000 to finance
approximately $2 billion for the Eastern and EnergyNorth transactions. The
Company anticipates issuing several different maturities of long-term debt to
balance its current capital structure and maturity structure. (See Note 5 to the
Consolidated Financial Statements "Acquisition of Eastern Enterprises" for more
information.)
In connection with the Company's anticipated Eastern and EnergyNorth
transactions, and the anticipated issuance of long-term debt securities, the
Company entered into forward interest rate lock 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 $500 million. (See Note 4 to the Consolidated
Financial Statements, "Issuance of Long- Term Debt, Repayment of Notes Payable,
and Financing" for additional details.)
27
<PAGE>
GAS DISTRIBUTION - RATE MATTERS
By orders dated February 5, 1998 and April 14, 1998 the NYPSC approved a
Stipulation and Agreement ("Stipulation") among KeySpan Energy Delivery New
York, LILCO, the Staff of the NYPSC and six other parties that in effect
approved the KeySpan Acquisition and established gas rates for the Company's two
gas distribution subsidiaries that are currently in effect. (For more
information on these agreements refer to the Company's Annual Report on Form
10-K for the year ended December 31, 1999.)
ENVIRONMENTAL MATTERS
The Company is 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. The Company estimates that the remaining minimum cost of
its MGP-related environmental cleanup activities, including costs of $5.0
million associated with the Ravenswood Facility, will be approximately $126
million and has recorded a related liability for such amount. Further, as of
March 31, 2000, the Company has expended a total of approximately $18 million.
(See Note 3 to the Consolidated Financial Statements "Environmental Matters".)
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 the Company's 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: available sources and cost of
fuel; federal and state regulatory initiatives that increase competition,
threaten cost and investment recovery, and impact rate structures; the ability
of the Company to successfully reduce its cost structure; the successful
integration of the Company's subsidiaries, including the Eastern Transaction
companies; the degree to which the Company develops unregulated business
ventures; the ability of the Company 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 the Company with the SEC. For
any of these statements, the Company claims the protection of the safe harbor
for forward-looking information contained in the Private Securities Litigation
Reform Act of 1995, as amended.
28
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company and its subsidiaries are subject to various risk exposures and
uncertainties associated with their operations. The most significant contingency
involves the evolution of the gas distribution industry toward a more
competitive and deregulated environment. Most important to the Company, is the
evolution of regulatory policy as it pertains to the Company's fixed charges
associated with its firm gas purchase contracts related to its historical gas
merchant role. In addition, the Company is exposed to commodity price risk,
interest rate risk and, to a much less degree, foreign currency translation
risk. The Company's exposure to the aforementioned market risks has remained
substantially unchanged from December 31, 1999. As previously mentioned, in
anticipation of the Company's purchase of Eastern and the anticipated issuance
of long-term debt securities, the Company entered into additional forward
interest rate lock agreements in April 2000, to hedge a larger 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 Company may, from time to time, enter
into additional interest rate lock agreements to hedge this risk exposure, if
market conditions so warrant. The Company can not predict the timing or notional
amount of potential future interest rate lock agreements.
PART II. OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is subject to various legal proceedings arising
out of the ordinary course of its business. Except as described below or in its
Annual Report on Form 10K for the year ended December 31, 1999, the Company does
not consider any of such proceedings to be material to its business or likely to
result in a material adverse effect on its results of operations or financial
condition.
A class settlement, which became effective in June 1989 (COUNTY OF SUFFOLK, ET
AL., V. LONG ISLAND LIGHTING COMPANY, ET AL.), resolved a civil lawsuit against
LILCO brought under the federal Racketeer Influenced and Corrupt Organizations
Act, alleging that LILCO made inadequate disclosures before the NYPSC concerning
the construction and completion of nuclear generating facilities. The class
settlement provided electric customers with rate reductions of $390 million that
were being reflected as adjustments to their monthly electric bills over a
ten-year period which began on June 1, 1990. The class settlement obligation of
approximately $7.9 million at March 31, 2000 reflects the present value of the
remaining reductions to be refunded to customers. As a result of the LIPA
Transaction, LIPA is providing the remaining balance to its electric customers
as an adjustment to their monthly electric bills. The Company will then, in
turn, reimburse LIPA on a monthly basis for such reductions on the customer's
monthly bill. The Company remains ultimately obligated for amounts due under the
class settlement. In November 1999, class counsel for the
29
<PAGE>
LILCO ratepayers served a motion, in the United States District Court for the
Eastern District of New York, seeking an order directing the Company to pay $42
million, in addition to the amounts remaining to be paid under the class
settlement based upon their contention that the required rate reductions should
have been exclusive of gross receipts taxes. The Company filed its opposition in
January 2000 and class counsel filed their reply papers in February 2000. In
their February papers, class counsel revised their demand to seek an order
directing the Company to pay approximately $22 million, plus interest, in
addition to the amounts remaining to be paid under the class settlement. The
Company filed its rebuttal papers March 1, 2000 and an oral argument was held
March 6, 2000. On March 9, 2000, an order was issued by the court granting class
counsel's motion. On April 3, 2000, the Corrected Final Order and Judgment was
filed with the District Court. Under this order, the total amount due the class
settlement, including pre-judgment interest, but excluding post- judgment
interest, was set forth at approximately $29.7 million. On April 7, 2000, the
Company filed its Notice of Appeal, appealing the matter to the United States
Court of Appeals for the Second Circuit. The Company is unable to determine the
outcome of this proceeding, or what effect, if any, such outcome will have on
its financial condition or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27)* Financial Data Schedule on Schedule U-T for the quarter ended
March 31, 2000.
(b) Reports on Form 8-K
In its Report on Form 8-K dated March 27, 2000, the Company reported
(1) its anticipated earnings for the first quarter of 2000.
(2) that it has made an investment in MyHomeKey.com, a personalized,
Internet-based home management system.
In its Report on Form 8-K dated February 1, 2000, the Company reported that on
February 1, 2000, KeySpan Gas East Corporation d/b/a KeySpan Energy Delivery
Long Island, a wholly owned subsidiary of the Company, issued $400,000,000
aggregate principal amount of Medium-Term Notes, titled 77/8% Notes Due February
1, 2010.
In its Report on Form 8-K dated January 27, 2000, the Company issued a press
release reporting its operating results for the year ended December 31, 1999.
In its Report on Form 8-K dated January 19, 2000, the Company reported that it
is currently seeking to resolve remaining issues concerning compliance with the
Ravenswood generation facility
30
<PAGE>
December 15 post-closing conditions and, in connection therewith, is seeking
extensions of the deadlines for certain of the conditions.
- -------------------------
*Filed Herewith
31
<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: May 12, 2000 /s/ Gerald Luterman
----------------------
Gerald Luterman
Senior Vice President and
Chief Financial Officer
Date: May 12, 2000 /s/ Ronald S. Jendras
------------------------
Ronald S. Jendras
Vice President, Controller
and Chief Accounting Officer
32
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