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 June 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 August 1, 2000
--------------------------- ------------------------------
$.01 par value 134,262,534
<PAGE>
KEYSPAN CORPORATION AND SUBSIDIARIES
INDEX
Part I. FINANCIAL INFORMATION Page No.
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Item 1. Financial Statements
Consolidated Balance Sheet -
June 30, 2000 and December 31, 1999 3
Consolidated Statement of Income -
Three and Six Months Ended June 30, 2000 and 1999 5
Consolidated Statement of Cash Flows -
Three and Six Months Ended June 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 16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 33
Part II. OTHER INFORMATION
Item 1 - Legal Proceedings 34
Item 4 - Submission of Matters to a Vote of Security Holders 34
Item 6 - Exhibits and Reports on Form 8-K 35
Signatures 45
2
<PAGE>
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
--------------------------------------------------------------------- ---- ---------------------------- ---- ------------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current Assets
Cash and temporary cash investments $ 92,127 $ 128,602
Customer accounts receivable 620,739 425,643
Other accounts receivable 268,464 235,156
Allowance for uncollectible accounts (27,762) (20,294)
Special deposits 42,325 60,863
Gas in storage, at average cost 145,896 144,256
Materials and supplies, at average cost 85,206 84,813
Other 92,433 98,914
----------------- ------------------------
1,319,428 1,157,953
----------------- ------------------------
Equity Investments and Other 428,828 391,731
----------------- ------------------------
Property
Electric 1,367,512 1,346,851
Gas 3,522,284 3,449,384
Other 387,523 375,657
Accumulated depreciation (1,655,540) (1,589,287)
Gas exploration and production, at cost 1,278,786 1,177,916
Accumulated depletion (561,966) (520,509)
----------------- ------------------------
4,338,599 4,240,012
----------------- ------------------------
Deferred Charges
Regulatory assets 334,976 319,167
Goodwill, net of amortizations 328,510 255,778
Other 369,811 366,050
----------------- ------------------------
1,033,297 940,995
----------------- ------------------------
----------------- ------------------------
Total Assets $ 7,120,152 $ 6,730,691
================= ========================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
3
<PAGE>
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
June 30, 2000 December 31, 1999
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(Unaudited) (Audited)
<S> <C> <C>
LIABILITIES AND CAPITALIZATION
Current Liabilities
Current redemption of preferred stock $ - $ 363,000
Accounts payable and accrued expenses 684,291 645,347
Commercial paper 262,481 208,300
Dividends payable 61,071 61,306
Taxes accrued 64,917 50,437
Customer deposits 30,607 31,769
Interest accrued 44,033 28,093
--------- ---------
1,147,400 1,388,252
--------- ---------
Deferred Credits and Other Liabilities
Regulatory liabilities 39,520 26,618
Deferred income tax 223,551 186,230
Postretirement benefits and other reserves 528,700 501,603
Other 98,677 66,200
--------- ---------
890,448 780,651
--------- ---------
Capitalization
Common stock, $.01 par value, authorized
450,000,000 shares; outstanding 133,896,426
and 133,866,077 shares stated at 2,985,936 2,973,388
Retained earnings 528,082 456,882
Accumulated foreign currency adjustment (1,716) 7,714
Treasury stock purchased (722,080) (722,959)
--------- ---------
Total common shareholders' equity 2,790,222 2,715,025
Preferred stock 84,339 84,339
Long-term debt 2,112,377 1,682,702
--------- ---------
Total Capitalization 4,986,938 4,482,066
--------- ---------
Minority Interest in Subsidiary Companies 95,366 79,722
--------- ---------
Total Liabilities and Capitalization $ 7,120,152 $ 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 Six Months Six Months
Ended Ended Ended Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
--------------------------------------------------------------------------------------------- -------------------------------------
<S> <C> <C> <C> <C>
Revenues
Gas Distribution $ 361,540 $ 281,384 $ 1,166,243 $ 999,682
Electric Services 388,695 190,435 723,099 365,293
Gas Exploration and Production 57,842 35,021 107,218 61,541
Energy Related Services and Other 139,511 36,686 267,641 78,118
----------- ------------------ ----------------- -----------------
Total Revenues 947,588 543,526 2,264,201 1,504,634
----------- ------------------ ----------------- -----------------
Operating Expenses
Purchased gas for resale 197,378 106,145 609,125 430,414
Purchased fuel 72,772 - 140,649 -
Operations and maintenance 378,986 239,642 734,465 472,177
Depreciation, depletion and amortization 73,810 59,383 143,391 117,568
Operating taxes 91,118 77,145 206,541 181,038
----------- ------------------ ----------------- -----------------
Total Operating Expenses 814,064 482,315 1,834,171 1,201,197
----------- ------------------ ----------------- -----------------
Operating Income 133,524 61,211 430,030 303,437
----------- ------------------ ----------------- -------------
Other Income and (Deductions)
Income from equity investments 4,683 2,509 11,928 5,481
Interest income 4,290 7,746 6,881 18,789
Minority interest (4,766) (1,887) (7,795) (2,191)
Other 3,816 1,056 (112) 4,305
----------- ------------------ ----------------- -----------------
Total Other Income 8,023 9,424 10,902 26,384
----------- ------------------ ----------------- -----------------
Income Before Interest Charges
and Income Taxes 141,547 70,635 440,932 329,821
----------- ------------------ ----------------- -----------------
Interest Charges 42,256 34,893 77,325 70,779
----------- ------------------ ----------------- -----------------
Income Taxes
Current 13,184 (39,505) 108,817 7,141
Deferred 32,741 52,258 29,180 85,691
----------- ------------------ ----------------- -----------------
Total Income Taxes 45,925 12,753 137,997 92,832
----------- ------------------ ----------------- -----------------
Net Income 53,366 22,989 225,610 166,210
Preferred stock dividend requirements 6,286 8,690 14,977 17,379
----------- ------------------ ----------------- -----------------
Earnings for Common Stock $ 47,080 $ 14,299 $ 210,633 $ 148,831
Foreign currency adjustment (9,082) 2,425 (9,430) 5,735
----------- ------------------ ----------------- -----------------
Comprehensive Income $ 37,998 $ 16,724 $ 201,203 $ 154,566
=========== ================== ================= =================
Average Common Shares Outstanding (000) 133,889 140,749 133,881 141,865
Basic and Diluted Earnings Per
Common Share $ 0.35 $ 0.10 $ 1.57 $ 1.05
=========== ================== ================= =================
</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 Six Months Six Months
Ended Ended Ended Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
--------------------------------------------------------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 53,366 $ 22,989 $ 225,610 $ 166,210
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation, depletion and amortization 73,810 59,383 143,391 117,568
Deferred income tax 32,741 52,258 29,180 85,691
Income from equity investments (4,683) (2,509) (11,928) (5,481)
Dividends from equity investments 9,944 - 11,807 4,296
Changes in assets and liabilities
Accounts receivable 76,154 217,523 (139,344) 146,397
Materials and supplies, fuel oil and
gas in storage (102,777) (54,475) (1,515) 48,252
Accounts payable and accrued expenses (12,093) (75,596) 30,676 (161,065)
Interest accrued 11,326 (2,433) 15,932 (4,647)
Special deposits 6,477 12,449 18,538 37,307
Prepayments and other 32,317 (52,218) 44,499 (57,534)
-------------- ------------------ ----------------- ----------------
Net Cash Provided by Operating Activities 176,582 177,371 366,846 376,994
-------------- ------------------ ----------------- -----------------
Investing Activities
Capital expenditures (125,577) (288,353) (237,151) (374,684)
Investments - - (141,719) -
Other (1,935) (3,563) 5,154 12,451
-------------- ------------------- ----------------- -----------------
Net Cash (Used in) Investing Activities (127,512) (291,916) (373,716) (362,233)
-------------- ------------------- ----------------- -----------------
FINANCING ACTIVITIES
Treasury stock purchased - (68,671) - (122,732)
Issuance of commercial paper 262,481 - 54,181 -
Issuance of long-term debt 19,232 8,000 449,627 15,000
Payment of long-term debt (16,000) (397,000) (20,000) (397,000)
Payment of preferred stock (363,000) - (363,000) -
Preferred stock dividends paid (8,286) (8,690) (17,124) (17,379)
Common stock dividends paid (59,584) (63,323) (119,159) (127,683)
Other (11,124) 186 (14,130) (448)
-------------- ------------------- ----------------- -----------------
Net Cash (Used in) Financing Activities (176,281) (529,498) (29,605) (650,242)
-------------- ------------------- ----------------- -----------------
Net (Decrease) in Cash and $ $
Temporary Cash Investments $ (127,211) (644,043) $ (36,475) (635,481)
============== ================== ================= =================
Cash and temporary cash investments at
beginning of period $ 219,338 $ 951,338 $ 128,602 $ 942,776
Net (Decrease) in cash and
temporary cash investments (127,211) (644,043) (36,475) (635,481)
-------------- ------------------ ----------------- -----------------
Cash and Temporary Cash Investments at
End of Period $ 92,127 $ 307,295 $ 92,127 $ 307,295
============== ================== ================= =================
</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 June 30, 2000, and the results of
its operations and cash flows for the three and six months ended June 30,
2000 and June 30, 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 Services, Energy
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. 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.
The Electric Services segment consists of Company subsidiaries that operate
the electric transmission and distribution ("T&D") system owned by LIPA,
own and provide capacity to and produce energy for 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, all through
long-term service contracts having terms that range from eight to fifteen
years. The
7
<PAGE>
Electric Services segment also includes Company subsidiaries that own, lease
and operate the 2,168 megawatt Ravenswood electric generation facility
("Ravenswood Facility"), located in Queens, New York. The Company's contract
with Consolidated Edison Company of New York ("Con Ed"), which provided Con
Ed with 100% of the available capacity of the Ravenswood Facility on a fixed
monthly fee, expired on April 30, 2000. The Company now provides all of the
energy, capacity and ancillary services related to the Ravenswood Facility
to the New York Independent System Operator ("NYISO"). Currently, the
Company's primary electric generation customers are LIPA and the 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 of THEC.
Upon such conversion, the Company's common equity ownership interest in THEC
increased from 64% to the current level of approximately 70%.
The Company's Energy 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 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
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 ("HVAC") equipment; (iii) commodity
procurement provides management and procurement services for fuel supply and
management of energy sales, primarily for 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 ("GMS") 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 primarily reflected in other income and
(deductions) in the Consolidated Statement of Income.
The Other segment represents primarily unallocated administrative 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. The Company's
segments are strategic business units that are managed separately because
of their different operating and regulatory environments. At June
8
<PAGE>
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 $200 million during the three
months ended March 31, 2000, 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 and
six months ended June 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
June 30, 2000
Unaffiliated Revenue $ 361,540 $ 388,695 $ 57,842 $ 138,021 $ 1,490 $ - $ - $ 947,588
Intersegment Revenue - - - 32,158 - - (32,158) -
Operating Income 21,769 62,215 25,173 33,712 (2,518) (6,827) - 133,524
Earnings for
Common Stock 2,279 28,841 10,465 17,155 1,543 (13,203) - 47,080
Basic and Diluted
Earnings Per Share $0.02 $0.22 $0.08 $0.13 $0.01 $(0.11) $ - $0.35
Three Months Ended
June 30, 1999
Unaffiliated Revenue $ 281,384 $ 190,435 $ 35,021 $ 36,235 $ 451 $ - $ - $ 543,526
Intersegment Revenue - - - - - - - -
Operating Income 21,461 30,133 10,610 (1,561) (1,650) 2,218 - 61,211
Earnings for
Common Stock 1,220 15,037 3,326 (851) 2,605 (7,038) - 14,299
Basic and Diluted
Earnings Per Share $0.01 $0.11 $0.02 $(0.01) $0.02 $(0.05) $ - $0.10
====================================================================================================================================
</TABLE>
<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>
Six Months Ended
June 30, 2000
Unaffiliated Revenue $ 1,166,243 $ 723,099 $ 107,218 $ 264,640 $ 3,001 $ - $ - $ 2,264,201
Intersegment Revenue - - - 32,774 - - (32,774) -
Operating Income 234,230 131,827 41,529 32,305 (3,053) (6,808) - 430,030
Earnings for
Common Stock 129,058 71,520 15,963 15,585 5,190 (26,683) - 210,633
Basic and Diluted
Earnings Per Share $0.96 $0.53 $0.12 $0.12 $0.04 $(0.20) $- $1.57
Six Months Ended
June 30, 1999
Unaffiliated Revenue $ 999,682 $ 365,293 $ 61,541 $ 77,069 $ 1,049 $ - $ - $ 1,504,634
Intersegment Revenue - - - - - - - -
Operating Income 227,200 63,260 14,081 (4,492) (2,715) 6,103 - 303,437
Earnings for
Common Stock 121,910 31,622 3,804 (2,500) 3,116 (9,121) - 148,831
Basic and Diluted
Earnings Per Share $0.86 $0.22 $0.03 $(0.02) $0.02 $(0.06) $- $1.05
</TABLE>
9
<PAGE>
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.
The Company presently estimates that the remaining cost of its MGP-related
environmental cleanup activities will be approximately $120 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 another site is subject to the
negotiation of an ACO or an agreement under DEC's Voluntary Clean-up
Program. The Company's remaining MGP sites 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 June
30, 2000, the Company had a total regulatory asset of approximately $98
million. Expenditures incurred to date by the Company with respect to
MGP-related activities total approximately $19 million.
4. LIQUIDITY AND FINANCINGS
On June 1, 2000, the Company redeemed, at maturity, all 14,520,000
outstanding shares of its 7.95% Preferred Stock Series AA. The Company's
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.
During the six months ended June 30, 2000, the Company issued and repaid
commercial paper to satisfy working capital needs and the mandatory
redemption of preferred stock as discussed above. During the second quarter
of 2000, the Company issued $319 million of commercial paper
10
<PAGE>
and repaid $56.5 million. At June 30, 2000, the Company had $262.5 million
of commercial paper outstanding at an average annualized interest rate of
6.91%.
KeySpan Energy Delivery Long Island filed a shelf registration statement
with the Securities and Exchange Commission ("SEC") 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 the
Company for its costs in extinguishing $397 million of promissory notes to
LIPA that matured in June 1999. The Medium Term Notes are fully and
unconditionally guaranteed by the Company. At June 30, 2000, $200 million of
Medium Term Notes remain available for issuance under the shelf registration
statement.
During the quarter ended June 30, 2000, THEC borrowed $14 million under its
credit facility with a commercial bank and repaid $16 million of outstanding
borrowings. At June 30, 2000, $177 million remained outstanding under this
facility at a weighted average annualized interest rate of 7.71%. In
addition, during the quarter ended June 30, 2000, a subsidiary in the Energy
Investments segment increased its borrowings under a revolving loan
agreement with a financial institution in Canada by $5.2 million U.S. . At
June 30, 2000, $120 million U.S. was outstanding at a weighted average
annualized interest rate of 6.51%.
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, subject to adjustment. 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 utilizing purchase accounting.
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, 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. Proforma
financial statements for the Eastern and EnergyNorth transactions are
included as an exhibit to this Form 10-Q.
The Company intends to access the financial markets in the fourth quarter of
2000 to finance approximately $2 billion for the Eastern and EnergyNorth
transactions. The Company intends 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.
The Company anticipates issuing several different maturities of long-term
debt to balance its future debt capital maturity structure.
11
<PAGE>
The Company expects 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. The Company expects 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 voluntary severance program in
the third and fourth quarters of 2000. The Company is currently in the
process of finalizing 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, the Company will become subject
to the regulation of the SEC as a registered holding company under the
Public Utility Holding Company Act of 1935, as amended. As such, the
corporate and financial activities of the Company and its subsidiaries,
including such entities' ability to pay dividends, will be subject to SEC
regulation. The merger is conditioned upon the approval of the SEC.
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. The Company anticipates that
the transaction will be consummated in the fourth quarter of 2000, but is
unable to determine when or if the required SEC approval will be obtained.
Eastern owns and operates Boston Gas Company, Colonial Gas Company, Essex
Gas Company, Midland Enterprises Inc., Transgas Inc., and ServicEdge
Partners, Inc., which primarily serve the Massachusetts area.
6. NEW YORK STATE INDEPENDENT SYSTEM OPERATOR ("NYISO") MATTERS
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 ("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 Reserves during the
first quarter of 2000, the NYISO requested that the Federal Energy
Regulatory Commission ("FERC") 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 LIPA. Other market participants, including buyers of Reserves
and electric utilities as load serving entities ("LSEs") also filed
complaints with FERC and intervened in the various FERC proceedings related
to Reserves and proposed alternative remedies.
On May 31, 2000, FERC issued an order on Reserves (the "Reserves Order")
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
12
<PAGE>
conference and settlement proceeding - were rejected by FERC. Pursuant to
the Reserves Order, the NYISO made its first compliance filing to FERC on
June 15, 2000. However, the NYISO and several other market participants have
requested rehearing of the Reserves Order. In response to a NYISO request,
FERC has allowed the NYISO to recalculate Reserve prices for the March 2000
period applying the bid cap that FERC had previously rejected, pending its
review on the rehearing requests of the Reserves Order.
Additionally, the wholesale energy market has also been the focus of
increased market based pricing. On June 30, 2000, the NYISO petitioned FERC
to approve a $1,300/MWh bid cap in the energy market to be effective July 6,
2000 through October 28, 2000. The NYISO requested the bid cap because it
believes that there is a purported lack of price responsive demand and the
start- up problems associated with implementation of the NYISO might cause
severe price spikes during the summer peak months. In response, on July 26,
2000, the FERC issued an order (the "Energy Market Order") approving a
$1,000/MWh bid cap in the energy market effective July 26, 2000 through
October 28, 2000. The Energy Market Order also requires the NYISO to
identify certain "market flaw problems" and to report them to FERC by
September 1, 2000.
The Company is opposing the relief requested by the NYISO and the LSEs and
believes that the ultimate resolution of these issues will not have a
material effect on its consolidated financial position or results of
operations.
7. DERIVATIVE FINANCIAL INSTRUMENTS
In connection with the Company's anticipated purchase of Eastern (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 June 30, 2000, the Company
has entered into $1.25 billion of forward interest rate lock agreements. The
interest lock rates range from 7.070% to 7.780% and have maturities that
range from 5 to 30 years. The Company estimates that it has hedged
approximately 76% of the estimated long-term debt financing associated with
the purchase of Eastern. However, interest rates associated with these
forward lock agreements could change if the Company's bond rating at the
time of the debt issuance changes. 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 counter party credit risk.
Also during the quarter, the Company entered into a number of derivative
swap instruments to fix the selling price on a portion of its estimated
summer peak electric sales through the Ravenswood Facility. For the months
of June through August, the Company hedged the sales price on
13
<PAGE>
approximately 30%, or 552,800 megawatt hours, of the Ravenswood Facility's
estimated summer peak electric sales (or approximately 10% of the Ravenswood
Facility's estimated yearly electric sales) to protect against a potential
degradation in market prices during the summer. Under these swap agreements,
the Company will receive a fixed price of $109 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. The Company will
receive the then current floating market price of peak electric energy when
the Ravenswood Facility sells electric energy to the NYISO. These
derivatives have been accounted for as cash-flow hedges. The Company also
has a modest tolling arrangement with a counter party under which it has
"locked-in" approximately five percent of its estimated summer season profit
margin. Under this arrangement, the Company has received an up-front fee and
will pay the counter party, on a monthly basis, its actual realized profit
margin from the sale of electric energy.
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. 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.
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 the Company 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 the Company's gas procurement contracts are not considered
derivative financial instruments.
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 and 138 when adopted, are 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 of derivatives which meet the definition of a hedge
are recorded as comprehensive income, subject to effectiveness, and then
included in net income to match the underlying hedged 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 and six
month periods ended June 30, 2000 compared to the three and six month periods
ended June 30, 1999. All per share amounts are stated on a diluted basis. 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 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:
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
---------------------------------------------------------------------------------------------------------------------------------
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gas Distribution $ 2,279 $ 1,220 $ 129,058 $ 121,910
Electric Services 28,841 15,037 71,520 31,622
Gas Exploration and
Production 10,465 3,326 15,963 3,804
Energy Services 17,155 (851) 15,585 (2,500)
Energy Investments 1,543 2,605 5,190 3,116
Other (13,203) (7,038) (26,683) (9,121)
----------------------------------------------------------------------------------------------------------------------------------
$ 47,080 $ 14,299 $ 210,633 $ 148,831
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Consolidated earnings per share were $0.35 and $1.57 for the three and six
months ended June 30, 2000, respectively compared to $0.10 and $1.05 for the
corresponding periods last year. The Company's average common shares outstanding
for both periods ended June 30, 2000 were approximately five percent less than
the same periods last year due to a stock repurchase program in 1999.
The increase in consolidated earnings in both periods 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
15
<PAGE>
$22.8 million and $55.6 million for the three and six months ended June 30,
2000, respectively. Since the facility was acquired in June 1999, earnings
attributable to that facility for the three and six months ended June 30 1999
were minimal. Results of operations of the Energy Services segment reflect,
primarily, earnings from intercompany fuel procurement and energy management
services provided to the Ravenswood Facility. Gas distribution earnings for
quarters ended June 30 generally are marginally profitable or unprofitable due
to the seasonal nature of gas heating sales. The increase in earnings from the
Gas Distribution segment for the six months ended June 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.
Consolidated earnings for the three and six months ended June 30, 2000, 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 compared to last year. In addition, on March 31,
2000 the Company increased its ownership in THEC from 64% to 70%.
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.
Revenues
--------
Consolidated revenues were $947.6 million for the three months ended June 30,
2000, compared to $543.5 million for the corresponding period last year, an
increase of $404.1 million or 74%. For the six months ended June 30, 2000
consolidated revenues were $2.3 billion, compared to $1.5 billion for the
corresponding period last year, an increase of $759.6 million or 50%. The
increases in revenues are due primarily to: (i) the addition of the Ravenswood
Facility which contributed $178.5 million and $326.7 million in revenues during
the three and six months ended June 30, 2000, respectively; (ii) increases in
Gas Distribution revenues of $80.2 million and $166.6 million for the three and
six months ended June 30, 2000, respectively; and (iii) increases of $101.8
million and $187.6 million in revenues for the three and six months ended June
30, 2000, respectively from the Energy Services segment. 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
also include recovery of gas costs, which have been 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 City tri-state metropolitan area and Rhode Island, and
sales growth related to the Company's gas marketing subsidiary.
Operating Expenses
------------------
Consolidated operating expenses were $814.1 million for the second quarter of
2000 compared to $482.3 million for the corresponding period last year, an
increase of $331.7 million, or 69%. For the six months ended June 30, 2000
consolidated operating expenses were $1.8 billion compared to $1.2 billion for
the corresponding period last year, an increase of $633.0 million, or 53%. The
increases in operating expenses were primarily the result of higher purchased
fuel and gas costs, and higher
16
<PAGE>
operations and maintenance expenses. Purchased fuel expense for the operation of
the Ravenswood Facility was $72.8 million and $140.6 million for the quarter and
period ended June 30, 2000, respectively. The Company 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 Company of New York
("Con Ed") 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 ("NYISO") on November 19, 1999. During this time, all of the energy
generated by the Ravenswood Facility was supplied to Con Ed.
The increase in gas costs for both periods of 2000 compared to the comparable
periods last year, resulted from 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 expenses have increased by $139.3 million or 58% for
the three months ended June 30, 2000 and by $262.3 million or 56% for the six
months ended June 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 ("LIPA"). Costs to install the underground transmission line are
currently being recovered from LIPA as part of the Management Services
Agreement.
Other Income and (Deductions)
-----------------------------
Other income includes equity income from subsidiaries comprising the Energy
Investments segment, primarily the Company's 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
THEC. During the second quarter of 2000, the Company recognized equity income
from its Canadian investments of $4.5 million, compared to $2.5 million during
the second quarter of 1999. The Company's Canadian investments contributed $10.8
million of equity income for the six months ended June 30, 2000 compared to $5.2
million for the corresponding period last year. As previously mentioned,
interest income has been decreasing as the Company used cash to finance
acquisitions and repurchase shares of its common stock. Further, for the six
months ended June 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 three and six months ended June 30, 1999.
Other Expenses
--------------
Interest expense for the second quarter of 2000 was $42.3 million compared to
$34.9 million for the corresponding period last year, an increase of $7.4
million or 21%. Interest expense for the six months ended June 30, 2000 was
$77.3 million compared to $70.8 million for the corresponding
17
<PAGE>
period last year, an increase of $6.5 million or 9%. Interest expense for both
periods ended June 30, 2000 reflects higher levels of debt outstanding,
primarily related to the Medium Terms Notes issued in February 2000, the
Company's Canadian investments and higher commercial paper borrowings.
Income tax expense reflects the higher level of pre-tax income for the quarter
and six months ended June 30, 2000, compared to the corresponding periods last
year. Income tax expense for the quarter and six months ended June 30, 1999
reflects an adjustment to deferred tax expense and current tax expense for the
utilization of previously deferred net operating loss ("NOL") carryforwards
recorded in 1998. In 1998, the Company recorded as a deferred tax asset, a
benefit of $71.1 million for NOL carryforwards. The Company estimated that $57.4
million of the benefits from the NOL carryforwards from 1998 would be realized
in its consolidated 1999 federal and state income tax returns, and accordingly,
applied the NOL benefits in its 1999 federal and state tax provisions.
ANTICIPATED FUTURE DEVELOPMENTS
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. Further, 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. 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.
The Company expects to raise approximately $2 billion in financing for the
transactions and the goodwill associated with the transactions is currently
estimated to be approximately $1 billion. Consolidated twelve month proforma
statements, 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 statements, which have been included as an
exhibit to this Form 10Q, do not include: i) continued gas sales growth
throughout the Company's current and future service territory, especially on
Long Island and New England; ii) earnings enhancement from the Company's
investment in the Ravenswood Facility; iii) the continued successful integration
of acquired companies providing energy-related services within the Company's
Energy Services segment; and iv) anticipated before-tax synergy savings of $40
million annually starting in 2001. The Company currently expects that these
earnings enhancements will offset the dilutive effects of the Eastern and
EnergyNorth transactions. Further, the Company anticipates that the transactions
will be accretive to cash flow immediately following the closing of the
transactions.
In line with the Company's objective to realize synergy savings, the Company
intends to implement an early retirement program and a targeted voluntary
severance program in the third and fourth quarters of 2000. The Company is
currently in the process of finalizing 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.
18
<PAGE>
Following the announcement that the Company had entered into an agreement to
purchase Eastern, Standard & Poor's Rating Services placed the Company's and
certain of its 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 the Company's and certain of
its subsidiaries', as well as Eastern's corporate credit, senior unsecured debt,
commercial paper and preferred stock on review for possible downgrade. The
Company anticipates that both Standard & Poor's and Moody's will finalize their
review process by the Company's fourth calender quarter. At this point in time,
the Company can not predict the outcome of these evaluations. However, if the
rating of the Company's long-term debt were to decrease below the "A" range by
at least two credit rating agencies, the Company would be required to post an
approximately $600 million letter of credit to service the Company's obligations
under existing promissory notes issued to LIPA. In August, Standard and Poor's
announced that the Company will be added to the natural gas industry group of
the Standard and Poor's 500 Index. The Company had previously been included in
the Standard and Poor's MidCap 400 Index.
<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>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
-----------------------------------------------------------------------------------------------------------------------------------
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 361,540 $ 281,384 $ 1,166,243 $ 999,682
Purchased gas for resale 155,997 96,819 530,629 408,073
Revenue taxes 19,538 18,596 64,079 62,903
-------------------------------------------------------------------------------------------------------------------------------
Net Revenues 186,005 165,969 571,535 528,706
-------------------------------------------------------------------------------------------------------------------------------
Operations and maintenance 104,708 92,917 219,526 197,515
Depreciation and amortization 30,072 24,351 57,368 48,605
Operating taxes 29,456 27,240 60,411 55,386
-------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 164,236 144,508 337,305 301,506
-------------------------------------------------------------------------------------------------------------------------------
Operating Income $ 21,769 $ 21,461 $ 234,230 $ 227,200
-------------------------------------------------------------------------------------------------------------------------------
Earnings for Common Stock $ 2,279 $ 1,220 $ 129,058 $ 121,910
-------------------------------------------------------------------------------------------------------------------------------
Firm gas sales (MDTH) 29,037 25,735 107,771 104,048
Firm transportation (MDTH) 5,144 3,915 15,627 12,141
Transportation - Electric
Generation (MDTH) 17,845 20,923 30,631 29,411
Other sales (MDTH) 22,326 8,998 42,493 25,838
Warmer than normal 8.7% 14.2% 5.9% 9.1%
------------------------------------ ----------------- ---------------------- ---------------------- -------------------------
</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 second quarter of 2000, compared to the
second quarter of last year, by $20.0 million or 12%. For the six months ended
June 30, 2000, net gas revenues increased by $42.8 million or 8% compared to the
corresponding period of last year. The increase in net gas revenues for both
periods was due to continued gas sales growth and favorable gas prices compared
to oil prices. Firm net gas revenues grew approximately $9 million and $19
million for the three and six months ended June 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. The Company estimates 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, the Company will continue to seek growth through the
expansion of its 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. Due to the 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 by approximately $11 million and
$20 million for the three and six months ended June 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.
The Company's gas distribution subsidiaries operate under utility tariffs that
each 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.
20
<PAGE>
SALES, TRANSPORTATION AND OTHER QUANTITIES
Comparative firm gas sales and transportation quantities for the three and six
months ended June 30, 2000 reflect the increase in firm sales, as discussed
above. Firm gas transportation quantities increased in both the three and six
months ended June 30, 2000, as the Company continues its natural gas
deregulation initiatives. The Company's net margins are currently 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 services 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. Effective April 1, 2000, the Company
entered into an agreement with Coral Energy Resources, L.P., ("Coral") 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 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. Prior to this agreement with Coral, KeySpan Energy Delivery
New York had an agreement with Enron Capital and Trade Resources Corp.,
("Enron") 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 $19.7 million, or 14%, in the second quarter of
2000 compared to the corresponding quarter last year, and by $35.8 million, or
12% for the six months ended June 30, 2000 compared to the six months ended June
30, 1999. Operations and maintenance expense in both periods reflects, generally
higher labor costs and associated employee benefit expenses, higher accruals for
uncollectible accounts and higher marketing costs and incentives related to the
Company's 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.
21
<PAGE>
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 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.
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
----------------------------------------------------------------------------------------------------------------------------------
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
LIPA service agreements $ 210,150 $ 181,734 $ 395,560 $ 356,592
Ravenswood Facility 178,545 8,701 326,685 8,701
Other - - 854 -
----------------------------------------------------------------------------------------------------------------------------------
Total Revenues 388,695 190,435 723,099 365,293
Purchased fuel 72,772 - 140,649 -
----------------------------------------------------------------------------------------------------------------------------------
Net Revenues 315,923 190,435 582,450 365,293
----------------------------------------------------------------------------------------------------------------------------------
Operations and
maintenance 203,717 121,518 348,877 224,330
Depreciation 12,296 10,337 24,561 20,265
Operating taxes 37,695 28,447 77,185 57,438
----------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 253,708 160,302 450,623 302,033
----------------------------------------------------------------------------------------------------------------------------------
Operating Income $ 62,215 $ 30,133 $ 131,827 $ 63,260
----------------------------------------------------------------------------------------------------------------------------------
Earnings for Common Stock $ 28,841 $ 15,037 $ 71,520 $ 31,622
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NET REVENUES
Electric net revenues increased by $125.5 million, or 66%, and by $217.2
million, or 59% in the three and six months ended June 30, 2000, respectively
compared to the comparable periods last year. The increase in electric net
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 revenues attributable to that facility for the second quarter of 1999
were minimal. Purchased fuel expense for the operation of the Ravenswood
Facility was $72.8 million and $140.6 million for the quarter and period ended
June 30, 2000, respectively. The Company 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 Company of New York ("Con Ed"),
owned and supplied the fuel necessary to operate the Ravenswood Facility from
June 19, 1999 until the start of the NYISO on November 18, 1999. During this
time, all of the energy generated by the Ravenswood Facility was supplied to Con
Ed.
22
<PAGE>
Net revenues from the Company's service agreements with LIPA were $28.4 million
higher in the second quarter of 2000 compared to the second quarter of 1999, and
$39.0 million higher for the six months ended June 30, 2000 compared to the
comparable period last year. The increase in comparative revenues is primarily
the result of a major construction project being performed by the Company on
behalf of LIPA. In June 2000, the Company 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 LIPA as part of the Management Services Agreement ("MSA"). The Company can
earn incentives from this project if its actual cost to install the transmission
line is less than the budgeted cost under the contract.
Further, revenues for both the quarter and six months ended June 30, 2000
include $10 million of off-system sales from the Company's Long Island electric
generation units. Under the terms of Energy Management Agreement ("EMA"), the
Company is entitled to one-third of the profit from any off-system electricity
sales arranged by the Company on LIPA's behalf. (For a description of the LIPA
service agreements, see the Company's Annual Report on Form 10K for the year
ended December 31, 1999.)
The Company has realized significant revenues and profits from the sale of
energy, capacity and ancillary services from the Ravenswood Facility and through
the EMA. (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 NYISO and other market
participants have requested that FERC 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 ("NYISO") Matters" for a
further discussion of these matters.
OPERATING EXPENSES
Operating expenses for the second quarter of 2000 increased by $93.4 million or
58% compared to the second quarter of 1999. Operating expenses for the six
months ended June 30, 2000, increased by $148.6 million or 49%, 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 $59.8 million and
$90.7 million for the three and six months ended June 30, 2000, respectively,
compared to the corresponding periods of 1999. Included in operating expenses
for the Ravenswood Facility are charges of $32.2 million and $32.8 million for
the quarter and six months ended June 30, 2000, respectively for fuel management
services provided by a Company subsidiary within the Energy Services segment.
There were no comparable charges in 1999. Operating expenses incurred by the
Company under the LIPA Service Agreements increased by $33.6 million and $57.9
million for the three and six months ended June 30, 2000, respectively,
primarily reflecting costs incurred to install the new electric transmission
line discussed above.
EARNINGS
In addition to the aforementioned, earnings available for common stock also
reflect an allocation for interest expense, state and federal income tax
provisions, and, for the three and six months ended June 30, 2000, a charge, net
of tax, of $2.2 million for the loss on the sale of certain assets.
23
<PAGE>
OTHER ISSUES
The Company has filed an application with the NYPSC to build a new 250 MW
cogeneration facility at the Ravenswood Facility. The facility, which will
generate electricity and steam, is expected to be in service in 2003. Further,
the Company continues 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 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 THEC common equity. Upon such conversion,
the Company's common equity ownership interest in THEC increased from 64% to
approximately 70%.
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>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
-----------------------------------------------------------------------------------------------------------------------------------
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 57,842 $ 35,021 $ 107,218 $ 61,541
Depreciation and amortization 22,246 17,972 43,249 35,029
Other operating expenses 10,423 6,439 22,440 12,431
-----------------------------------------------------------------------------------------------------------------------------------
Operating Income $ 25,173 $ 10,610 $ 41,529 $ 14,081
-----------------------------------------------------------------------------------------------------------------------------------
Earnings for Common Stock $ 10,465 $ 3,326 $ 15,963 $ 3,804
-----------------------------------------------------------------------------------------------------------------------------------
Natural gas production (Mmcfe) 19,151 17,185 39,068 33,650
Natural gas (per Mcf) realized $ 2.98 $ 2.03 $ 2.70 $ 1.82
Natural gas (per Mcf) unhedged $ 3.37 $ 2.03 $ 2.88 $ 1.82
Proved reserves (BCFe) 569 480 569 480
-----------------------------------------------------------------------------------------------------------------------------------
</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 70% of THEC's results for the quarter ending June
30, 2000 and 64% of THEC'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.
24
<PAGE>
OPERATING INCOME
Operating income increased by $14.6 million and $27.4 million for the three and
six months ended June 30, 2000, respectively compared to corresponding periods
in 1999. The increase in operating income for the second quarter of 2000
compared to the second quarter of 1999 reflects the benefits derived from an 11%
increase in production volumes, combined with a 47% increase in average realized
gas prices (average wellhead price received for production plus hedging gains
and losses). For the six months ended June 30, 2000, operating income reflects
the benefits derived from a 16% increase in production volumes, combined with a
48% increase in average realized gas prices over comparable amounts for the
corresponding period in 1999. At June 30, 2000 the Company's gas exploration and
production subsidiaries had 569 BCFe of net proved reserves of natural gas, of
which approximately 75% are classified as proved developed.
Energy Services
---------------
The Company's 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 and in Rhode Island. The lines of business include:
home energy services; business solutions; commodity procurement; and
telecommunications services.
In February 2000, the Company acquired three additional companies that provide
energy-related services within these lines of business. In addition, the Company
is 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 is currently under development and is anticipated to be
launched in the summer of 2000.
Selected financial data for the Energy Services segment is set forth in the
following table for the periods indicated.
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
-----------------------------------------------------------------------------------------------------------------------------------
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unaffiliated revenues $ 138,021 $ 36,235 $ 264,640 $ 77,069
Intersegment revenues 32,158 - 32,774 -
Cost of goods sold 116,240 29,669 222,593 64,047
------------------------------------------------------------------------------------------------------------------------------------
Gross Profit Margin 53,939 6,566 74,821 13,022
Depreciation and amortization 2,399 653 4,585 1,370
Other operating expenses 17,828 7,474 37,931 16,144
-----------------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) $ 33,712 $ (1,561) $ 32,305 $ (4,492)
----------------------------------------------- ------------ -------------------- --------------------- ------------------------
Earnings (Loss) for Common Stock $ 17,155 $ (851) $ 15,585 $ (2,500)
----------------------------------------------- ------------ -------------------- --------------------- ------------------------
</TABLE>
The increase in results of operations of the Energy Services segment for both
the three and six months ended June 30, 2000 compared to the corresponding
periods in 1999, reflects primarily fuel- management services provided to the
Ravenswood Facility. For the three and six months ended June 30, 2000, these
services provided this segment with earnings of $17.0 million and $17.4 million,
respectively. A subsidiary within this segment (KeySpan Energy Supply, or
"KESp") 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, KESp 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 KESp and the Ravenswood Facility in 1999.
This segment also realized significantly greater gross profit margins for both
the three and six months ended June 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.
<PAGE>
Energy Investments
------------------
Earnings for this segment are derived, primarily, from the Company's 20%
interest in the Iroquois Gas Transmission System LP ("Iroquois"); its 50%
ownership interest in Gulf Midstream Services Partnership ("GMS"); its ownership
interest in certain oil producing properties in Alberta, Canada; and its 50%
interest in the Premier Transmission Pipeline and a 24.5% interest in Phoenix
Natural Gas, both in Northern Ireland.
Earnings for this segment decreased slightly in the second quarter of 2000
compared to the corresponding quarter last year, due to a write-off of
approximately $1 million, after-tax, of certain projects that the Company has
decided were no longer feasible. Earnings for the six months ended June 30, 2000
increased by $2.1 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 GMS. 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 the Company's 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 the
Company's ownership interests are 50% or less. Accordingly, income from these
investments is reflected, primarily in other income and (deductions) in the
Consolidated Statement of Income.
<PAGE>
Other
-----
The Other segment incurred losses of $13.2 million and $26.7 million for the
three and six months ended June 30, 2000, respectively compared to losses of
$7.0 million and $9.1 million for the three and six months ended June 30, 1999,
respectively. Results for the Other segment generally reflect 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 six
months ended June 30, 2000, the Company recorded charges of $9 million
associated with certain outstanding regulatory issues, compared to a similar
charge of $6 million in three and six months ended June 30, 1999. Moreover, the
Company recorded an after-tax charge of $3.6 million in June 2000 to write-off a
computer system that will not be utilized as a result of the proposed Eastern
acquisition.
LIQUIDITY, CAPITAL EXPENDITURES AND FINANCING
LIQUIDITY
Cash flow provided by operating activities for the three and six months ended
June 30, 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 both periods ended
June 30, 2000 compared to the corresponding periods last year, however, reflects
a decrease in interest income, negative operating cash flow from the Company's
Energy Services segment, and an increase in the cost of gas in storage, which
will be recovered from customers in later periods. Further, cash flow from
operations in 1999 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 June 30, 2000, the Company had cash and temporary cash investments of $92.1
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. During the six months ended June 30, 2000, the Company repaid its
$208.3 million commercial paper balance outstanding at December 31, 1999, and
during the quarter ended June 30, 2000 issued $319.0 million of commercial paper
and repaid $56.5 million. Commercial paper was issued during the six months
ended June 30, 2000 to support ongoing working capital needs and the mandatory
redemption of the Company's preferred stock 7.95% Series AA. At June 30, 2000,
$262.5 million of commercial paper remained outstanding at a weighted average
annualized interest rate of 6.91%. The Company had available borrowing of $437.5
million at June 30, 2000.
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 three months ended June 30, 2000, THEC borrowed an
additional $14.0 million under its credit facility and then repaid $16.0 million
of outstanding borrowings; at June 30, 2000, $177.0 million remained outstanding
at a weighted average annualized interest rate of 7.71%. At June 30, 2000, THEC
had available borrowing of $32.6 million. Also, a subsidiary included in the
Energy Investments
26
<PAGE>
segment has a revolving loan agreement with a financial institution in Canada.
Borrowings under this agreement during the three months ended June 30, 2000 were
$5.2 million U.S. and, at June 30, 2000, $120.0 million U.S. was outstanding at
a weighted average annualized interest rate of 6.51%. At June 30, 2000, the
Energy Investments segment had available borrowing of $15.5 million U.S.
The Company satisfies its seasonal working capital requirements primarily
through internally generated funds and the issuance of commercial paper. In
addition, beginning in the third quarter of 2000, the Company intends to issue
shares of its common stock out of treasury to satisfy the requirements of its
common stock plans. The Company believes that its sources of funds are
sufficient to meet its seasonal working capital needs.
CAPITAL EXPENDITURES
Construction Expenditures
The table below sets forth the Company's construction expenditures by segment
for the periods indicated:
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
-----------------------------------------------------------------------------------------------------------------------------------
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
---------------------------------------- ------------------------ ------------------------ ---------------------- ---------------
<S> <C> <C> <C> <C>
Gas Distribution $ 53,474 $ 47,924 $ 92,636 $ 82,514
Electric Services 13,411 206,854 23,646 213,243
Gas Exploration and Production 40,576 32,377 94,530 67,776
Energy Services 5,199 586 8,332 747
Energy Investments and Other 12,917 612 18,007 10,404
-----------------------------------------------------------------------------------------------------------------------------------
$ 125,577 $ 288,353 $ 237,151 $ 374,684
---------------------------------------- ------------------------ ------------------------ ---------------------- ---------------
</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
and, for 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 the Company's
joint venture with THEC to explore for natural gas and oil. Energy Investments
and Other construction expenditures reflect, primarily costs related to Canadian
affiliates.
Equity Investments
During the first quarter of 2000, the Energy Services segment acquired three
additional companies located in the New York tri-state metropolitan area. The
newly acquired companies included, an engineering-consulting firm, a plumbing
and mechanical contracting firm, and a firm specializing in mechanical
contracting and heating, ventilation and air conditioning contracting. Combined,
27
<PAGE>
these companies have over 900 employees and revenues of approximately $170
million. There were no additional acquisitions made during the second quarter of
2000.
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 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, the Company 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. The Company's 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. The Company anticipates 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 SEC 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 repay the Company for its costs in extinguishing $397 million of
promissory notes to LIPA that matured in June 1999. The notes issued are fully
and unconditionally guaranteed by the Company. 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, the Company entered into a
definitive agreement with Eastern, pursuant to which the Company 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".)
The Company intends to access the financial markets in the fourth quarter of
2000 to finance approximately $2 billion for the Eastern and EnergyNorth
transactions. The Company intends 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. The Company
anticipates issuing several different maturities of long-term debt to balance
its future capital maturity structure.
In connection with the Company's anticipated Eastern and EnergyNorth
transactions, and the anticipated issuance of long-term debt securities, the
Company has 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
28
<PAGE>
principal amount of $1.25 billion. (See Note 4 to the Consolidated Financial
Statements, "Liquidity and Financings" for additional details.)
In addition to the Company's strategies associated with its financing of the
Eastern and EnergyNorth transactions and its intention to issue preferred stock
during 2001, the Company also intends to increase its current commercial paper
facility to $1.4 billion in the last quarter of 2000. The Company anticipates
that it may issue approximately $600 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. The
Company believes that its sources of funding, i.e. anticipated long-term debt
and preferred stock issuances and commercial paper borrowings will be sufficient
to meet its anticipated cash needs.
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 merger of KeySpan Energy Corporation and LILCO 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 $125
million and has recorded a related liability for such amount. Further, as of
June 30, 2000, the Company has expended a total of approximately $19 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
29
<PAGE>
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.
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. However, during the second
quarter of 2000, the Company has entered into a number of additional derivative
financial instruments to limit its exposure to interest rate fluctuations and to
lock-in the sales price on a portion of its estimated summer electric sales.
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 during the quarter ended
June 30, 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. (See Note 7 to the Consolidated Financial
Statements, "Derivative Financial Instruments" for a further discussion of these
agreements.)
Also during the quarter, the Company entered into a number of derivative swap
instruments to lock- in the selling price on a portion of its estimated summer
electric sales. These derivatives have been accounted for as cash-flow hedges.
For the months of June through August, the Company has hedged the sales price on
approximately 30% of its estimated summer peak electric sales or approximately
10% of its estimated yearly electric sales. (See Note 7 to the Consolidated
Financial Statements, "Derivative Financial Instruments" for a further
explanation of these instruments.)
30
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A meeting of the shareholders of the Company was held at the Tilles Center for
the Performing Arts, C.W. Post Campus, Long Island University, 720 Northern
Boulevard, Greenvale, New York, on the 11th day of May, 2000 at 10:00 a.m., for
the election of directors and ratification of independent public accountants,
and for the transaction of such other business as may properly come before the
meeting.
At the close of business on March 13, 2000, the record date for determining
shareholders entitled to vote at the meeting, there were outstanding 133,876,426
shares of common stock of the Company, of which each share was entitled to one
vote. There were present at the meeting, either in person or represented by
valid and effective proxies, the holders of 117,282,142 shares of common stock
of the Company entitled to vote thereat, constituting a quorum.
Election of Directors
---------------------
The names of the persons who received a plurality of the votes cast by the
holders of shares entitled to vote thereon, and who were accordingly elected
Directors of the Company for one year or until their successors are duly elected
or chosen and qualified are as follows:
VOTES VOTES TOTAL
DIRECTOR FOR WITHHELD VOTES
Lilyan H. Affinito 115,263,906 2,018,236 117,282,142
George Bugliarello 115,259,308 2,022,834 117,282,142
Robert B. Catell 115,418,359 1,863,783 117,282,142
Howard R. Curd 115,478,648 1,803,494 117,282,142
Richard N. Daniel 115,402,006 1,880,136 117,282,142
Donald H. Elliott 115,362,709 1,919,433 117,282,142
Alan H. Fishman 115,499,015 1,783,127 117,282,142
James R. Jones 115,420,271 1,861,871 117,282,142
Stephen W. McKessy 115,465,643 1,816,499 117,282,142
Edward D. Miller 115,462,631 1,819,511 117,282,142
Basil A. Paterson 115,091,594 2,190,548 117,282,142
James Q. Riordan 115,314,836 1,967,306 117,282,142
Vincent Tese 115,391,292 1,890,850 117,282,142
31
<PAGE>
Ratification of Arthur Andersen LLP as Independent Public Accountants for the
--------------------------------------------------------------------------------
Fiscal Year Ending December 31, 2000
------------------------------------
Arthur Andersen LLP received a majority of the votes cast by the holders of
shares entitled to vote thereon, and was accordingly ratified Independent Public
Accounts of the Company for the fiscal year ending December 31, 2000.
ARTHUR ANDERSEN LLP VOTES CAST
FOR 115,658,161
AGAINST 724,050
ABSTAIN 899,931
TOTAL 117,282,142
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit I - Unaudited Proforma Consolidated Condensed
Financial Statements
(27)* Financial Data Schedule on Schedule U-T for the quarter
ended June 30, 2000.
(b) Reports on Form 8-K
NONE
-------------------------
*Filed Herewith
<PAGE>
Exhibit I
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
KEYSPAN ENERGY / EASTERN ENTERPRISES / ENERGYNORTH MERGERS
The unaudited pro forma consolidated condensed balance sheet as of June 30, 2000
and the unaudited pro forma consolidated condensed income statements for the six
months ended June 30, 2000 and the year ended December 31, 1999 combine the
historical information of KeySpan Corporation d/b/a KeySpan Energy ("KeySpan
Energy"), Eastern Enterprises ("Eastern") and EnergyNorth Inc. ("EnergyNorth").
The unaudited pro forma consolidated condensed financial statements have been
prepared to reflect the mergers under the purchase method of accounting (KeySpan
Energy will acquire Eastern and EnergyNorth). Under the purchase method of
accounting, assets acquired and liabilities assumed are recorded at their
estimated fair values. The excess of the purchase price, including estimated
fees and expenses directly related to the merger, in excess of the fair value of
the net assets acquired is classified as goodwill on the accompanying unaudited
pro forma consolidated condensed balance sheet. The estimated fair values and
useful lives of assets acquired and liabilities assumed and any resulting
goodwill, are subject to final valuation adjustments in accordance with
generally accepted accounting principles.
The pro forma adjustments reflected in the unaudited pro forma consolidated
condensed balance sheet are as if the transactions had occurred on June 30,
2000. The unaudited pro forma consolidated condensed income statement for the
six months ended June 30, 2000 assumes that these transactions were completed on
January 1, 2000. The unaudited pro forma consolidated condensed income statement
for the year ended December 31, 1999 assumes that these transactions were
completed on January 1, 1999. The unaudited pro forma consolidated condensed
financial statements assume that KeySpan Energy will purchase all of the
outstanding common stock of Eastern for $64.00 in cash and will purchase all of
the outstanding common stock of EnergyNorth for $61.13 in cash. The proposed
transactions are expected to close contemporaneously in the fourth quarter of
calendar year 2000.
On August 31, 1999, Eastern completed a merger with Colonial Gas Company
("Colonial") which was accounted for using the purchase method of accounting;
Eastern was the acquiring company for financial reporting purposes. The
unaudited pro forma consolidated condensed income statement for the year ended
December 31, 1999, therefore, reflects the results of operations of Colonial for
the four month period September 1, 1999 through December 31, 1999.
The unaudited pro forma consolidated condensed financial statements do not
reflect the anticipated cost savings that may be obtained from the elimination
of duplicate corporate and administrative programs in connection with the
mergers or operating efficiencies that may result. KeySpan has identified
before-tax synergy savings to be approximately $40 million annually.
<PAGE>
The following unaudited pro forma consolidated condensed financial statements
should be read in conjunction with the historical consolidated financial
statements and related notes thereto of KeySpan Energy, Eastern and EnergyNorth.
The following statements are not necessarily indicative of the financial
position or operating results that would have occurred had the proposed
transactions been consummated on the date, or at the beginning of the period,
for which the proposed transactions are being given effect nor are they
necessarily indicative of future operating results or financial position.
<PAGE>
<TABLE>
KeySpan Energy
Unaudited Pro Forma Consolidated Condensed Balance Sheet
June 30, 2000
(In Thousands of Dollars)
<CAPTION>
Trans- Trans-
action action
KeySpan Eastern Adjust- Energy- Adjust-
Energy Enterprises ments Pro Forma North ments Pro Forma
------------ --------------- ------------- ---------------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
------
Current Assets
Cash and temporary cash
investments 92,127 30,898 123,025 726 123,751
Customer accounts receivable,
net 861,441 112,786 974,227 15,886 990,113
Other 365,860 124,431 490,291 11,663 501,954
------------ ------------- ------------ ------------ ------------ --------- -----------
1,319,428 268,115 - 1,587,543 28,275 - 1,615,818
------------ ------------- ------------ ------------ ------------ --------- -----------
Equity Investments and Others 428,828 14,064 - 442,892 - - 442,892
------------ ------------- ------------ ------------ ------------ --------- -----------
Property
Electric 1,367,512 - 1,367,512 - 1,367,512
Gas 3,522,284 1,523,747 5,046,031 177,753 5,223,784
Other 387,523 691,209 1,078,732 8,349 1,087,081
Accumulated depreciation (1,655,540) (936,958) (2,592,498) (59,481) (2,651,979)
Gas exploration and production 1,278,786 - 1,278,786 - 1,278,786
Accumulated depletion (561,966) - (561,966) - (561,966)
------------ ------------- ------------ ------------ ------------ --------- -----------
4,338,599 1,277,998 - 5,616,597 126,621 - 5,743,218
------------ ------------- ------------ ------------ ------------ --------- -----------
Deferred Charges
Goodwill, net of amortization 328,510 243,960 1,067,348 (1) 1,639,818 - 166,546 (7) 1,806,364
Regulatory assets and other 704,787 141,194 845,981 16,168 862,149
------------ ------------ ------------ ------------ ------------ --------- -----------
1,033,297 385,154 1,067,348 2,485,799 16,168 166,546 2,668,513
------------ ------------- ------------ ------------ ------------ --------- -----------
Total Assets 7,120,152 1,945,331 1,067,348 10,132,831 171,064 166,546 10,470,441
============ ============= ============ ============ ============ ========= ===========
LIABILITIES AND
CAPITALIZATION
--------------
Current Liabilities
Current maturities of long-term
debt - 6,746 6,746 849 7,595
Accounts payable and accrued
expenses 884,919 156,782 1,041,701 25,463 1,067,164
Commercial paper 262,481 73,707 261,659 (1) 680,556 14,130 30,562 (7) 740,218
8,100 (2) 2,100 (8)
74,609 (3) 12,870 (9)
---------- ------------ ------------- ---------- ----------- ---------- ------------
1,147,400 237,235 344,368 1,729,003 40,442 45,532 1,814,977
---------- ------------ ------------- ---------- ----------- ---------- ------------
Deferred Credits and Other
Liabilities
Deferred income taxes 223,551 179,591 403,142 21,126 424,268
Reserves and other liabilities 666,897 199,491 866,388 5,738 872,126
---------- ------------ ------------- ---------- ----------- ---------- ------------
890,448 379,082 - 1,269,530 26,864 - 1,296,394
---------- ------------ ------------- ---------- ----------- ---------- ------------
Gas Inventory Financing - 33,567 - 33,567 4,413 - 37,980
---------- ------------ ------------ ---------- ----------- ---------- ------------
Capitalization
Common stock 2,985,936 273,555 (273,555) (1) 3,002,324 35,966 (35,966) (7) 3,004,842
16,388 (3) 2,518 (9)
Retained earnings 528,082 497,942 (497,942) (1) 528,082 18,105 (18,105) (7) 528,082
Accumulated comprehensive
income (1,716) (73) 73 (1) (1,716) - (1,716)
Treasury stock purchased (722,080) (583) 583 (1) (722,080) - (722,080)
---------- ------------ ------------- ---------- ----------- ---------- ------------
Total common shareholders
equity 2,790,222 770,841 (754,453) 2,806,610 54,071 (51,553) 2,809,128
Preferred stock 84,339 21,438 105,777 - 105,777
Long-term debt 2,112,377 503,168 1,477,433 (1) 4,092,978 45,274 172,567 (7) 4,310,819
---------- ------------ ------------- ---------- ----------- ---------- ------------
Total Capitalization 4,986,938 1,295,447 722,980 7,005,365 99,345 121,014 7,225,724
---------- ------------ ------------- ---------- ----------- ---------- ------------
Minority Interest 95,366 - - 95,366 - - 95,366
---------- ------------ ------------- ---------- ----------- ---------- ------------
Total Liabilities and
Capitalization 7,120,152 1,945,331 1,067,348 10,132,831 171,064 166,546 10,470,441
========== ============ ============= ========== =========== ========== ============
</TABLE>
<PAGE>
<TABLE>
KeySpan Energy
Unaudited Pro Forma Consolidated Condensed Income Statement
Six Months Ended June 30, 2000
(In Thousands of Dollars)
<CAPTION>
Trans- Trans-
Eastern action action
Enter- Adjust- Pro Energy- Adjust-
KeySpan prises ments Forma North ments Pro Forma
--------------- ------------- -------------- ------------ ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues
Gas Distribution 1,166,243 483,658 1,649,901 91,401 1,741,302
Marine Services - 141,675 141,675 - 141,675
Electric Services 723,099 - 723,099 - 723,099
Gas Exploration and
Production 107,218 - 107,218 - 107,218
Energy Related Services
and Other 267,641 13,150 280,791 - 280,791
--------------- ------------- ----------- ---------- ------------ ------------- -----------
Total Revenues 2,264,201 638,483 - 2,902,684 91,401 - 2,994,085
--------------- ------------- ----------- ---------- ------------ ------------- -----------
Operating Expenses
Purchased gas 609,125 236,154 845,279 59,531 904,810
Purchased fuel 140,649 - 140,649 - 140,649
Operations and
maintenance 734,465 236,148 970,613 14,955 985,568
Depreciation, depletion
and amortization 143,391 54,809 13,342 (5) 211,542 4,462 2,082 (11) 218,086
Operating taxes 206,541 25,725 232,266 2,022 234,288
--------------- ------------- ----------- ---------- ------------ ------------- -----------
Total Operating 1,834,171 552,836 13,342 2,400,349 80,970 2,082 2,483,401
Expenses
--------------- ------------- ----------- ---------- ------------ ------------- -----------
Operating Income 430,030 85,647 (13,342) 502,335 10,431 (2,082) 510,684
--------------- ------------- ----------- ---------- ------------ ------------- -----------
Other Income and
(Deductions)
Income from equity
investments 11,928 - 11,928 - 11,928
Interest income 6,881 2,423 9,304 - 9,304
Minority interest (7,795) - (7,795) - (7,795)
Other (112) 2,256 2,144 54 2,198
--------------- ------------- ----------- ---------- ------------ ------------- -----------
Total Other Income 10,902 4,679 - 15,581 54 - 15,635
--------------- ------------- ----------- ---------- ------------ ------------- -----------
Income Before Interest
Charges and Income
Taxes 440,932 90,326 (13,342) 517,916 10,485 (2,082) 526,319
Interest Charges 77,325 23,930 71,150 (4) 172,405 2,561 8,496 (10) 183,462
Income Taxes 137,997 28,061 (24,903) (6) 141,155 3,771 (2,974) (12) 141,952
--------------- ------------- ----------- ---------- ------------ ------------- -----------
Net Income 225,610 38,335 (59,589) 204,356 4,153 (7,604) 200,905
Preferred stock dividend
requirements 14,977 757 - 15,734 - - 15,734
--------------- ------------- ----------- ---------- ----------- ------------- ------------
Earnings for Common
Stock 210,633 37,578 (59,589) 188,622 4,153 (7,604) 185,171
=============== ============= =========== ========== ============ ============= ===========
Average shares
outstanding (000) 133,881 133,881 133,881
Basic and Diluted
Earnings Per Common
Share 1.57 1.41 1.38
=============== ============ ===========
</TABLE>
<PAGE>
<TABLE>
KeySpan Energy
Unaudited Pro Forma Consolidated Condensed Income Statement
Year Ended December 31, 1999
(In Thousands of Dollars)
<CAPTION>
Trans- Trans-
Eastern action action
Enter- Adjust- Pro Energy- Adjust-
KeySpan prises ments Forma North ments Pro Forma
----------- ------------- ------------- ------------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues
Gas Distribution 1,753,132 690,809 2,443,941 124,863 2,568,804
Marine Services - 267,269 267,269 - 267,269
Electric Services 861,582 - 861,582 - 861,582
Gas Exploration and
Production 150,581 - 150,581 - 150,581
Energy Related Services
and Other 189,318 20,624 209,942 - 209,942
----------- ------------- ------------- ------------- --------- ------------- ---------
Total Revenues 2,954,613 978,702 - 3,933,315 124,863 - 4,058,178
----------- ------------- ------------- ------------- --------- ------------- ---------
Operating Expenses
Purchased gas 744,432 339,274 1,083,706 73,961 1,157,667
Purchased fuel 17,252 - 17,252 - 17,252
Operations and
maintenance 1,091,166 403,465 1,494,631 27,086 1,521,717
Depreciation, depletion and
amortization 253,440 81,373 26,684 (5) 361,497 7,845 4,164 (11) 373,506
Operating taxes 366,154 41,151 407,305 3,812 411,117
----------- ------------- ------------- ------------- --------- ------------- ---------
Total Operating Expenses 2,472,444 865,263 26,684 3,364,391 112,704 4,164 3,481,259
----------- ------------- ------------- ------------- --------- ------------- ---------
Operating Income 482,169 113,439 (26,684) 568,924 12,159 (4,164) 576,919
----------- ------------- ------------- ------------- --------- ------------- ---------
Other Income and
(Deductions)
Income from equity
investments 15,347 - 15,347 - 15,347
Interest income 26,993 7,964 34,957 - 34,957
Minority interest (11,141) - (11,141) - (11,141)
Other 6,297 8,980 15,277 525 15,802
----------- ------------- ------------- ------------- --------- ------------- ---------
Total Other Income 37,496 16,944 - 54,440 525 - 54,965
----------- ------------- ------------- ------------- --------- ------------- ---------
Income Before Interest
Charges and Income
Taxes 519,665 130,383 (26,684) 623,364 12,684 (4,164) 631,884
Interest Charges 124,692 37,274 142,300 (4) 304,266 4,915 16,993 (10) 326,174
Income Taxes 136,362 36,154 (49,805) (6) 122,711 3,740 (5,947) (12) 120,504
----------- ------------- ------------- ------------- --------- ------------- ---------
NET INCOME 258,611 56,955 (119,179) 196,387 4,029 (15,210) 185,206
Preferred stock dividend
requirements 34,752 1,862 - 36,614 - - 36,614
----------- ------------ ------------ ------------- -------- ------------ ---------
Earnings for Common
Stock 223,859 55,093 (119,179) 159,773 4,029 (15,210) 148,592
=========== ============= ============= ============= ========= ============= =========
Average shares
outstanding (000) 138,526 138,526 138,526
Basic and Diluted Earnings
Per Common Share 1.62 1.15 1.07
=========== =============== =========
</TABLE>
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1. Cash Consideration and Estimated Goodwill Related to the
Eastern Enterprises Merger
Cash consideration to be paid to Eastern shareholders will be paid from the
proceeds of long-term debt and commercial paper issuances. KeySpan Energy will
issue approximately $1.477 billion of long-term debt at an estimated annual
interest rate of 8.0% and approximately $262 million of commercial paper at an
estimated annual interest rate of 7.0% to finance the merger. KeySpan Energy
will acquire all of the outstanding common stock of Eastern for $64.00 per
share, subject to adjustment. The cash consideration of $64.00 per share will be
increased by $0.006 per share for each day after August 6, 2000 through the day
prior to the closing date. This aggregate additional amount will be reduced by
the aggregate amount of any per share increase in any dividend actually paid
that is attributable to any period in which the additional amount accrues.
The estimated goodwill reflects the recognition of the excess amount of the
purchase price over the fair value of the net assets to be acquired including
costs to be incurred directly related to the consummation. The following
represents the estimated goodwill calculation:
Common shares outstanding
at June 30, 2000 27,173,322
Share price $ 64.00
-------------------
Purchase price $ 1,739,092,608
Common equity of Eastern (770,841,000)
-------------------
$ 968,251,608
Estimated transaction costs (See Note 2) 8,100,000
Estimated restructuring and other
costs (See Note 3) 90,996,000
- -------------------
Estimated Goodwill $ 1,067,347,608
===================
Amortization period 40
Estimated yearly amortization $ 26,683,690
===================
Estimated six months amortization $ 13,341,845
===================
A final determination of goodwill may reflect certain purchase accounting
adjustments based on actuarial valuations related to employee benefit plans,
estimates with respect to the effect of consolidation of certain corporate and
administrative functions, completion of studies related to
<PAGE>
environmental issues, possible contract and asset impairment charges, possible
asset sales, and other adjustments.
Note 2. Estimated Transaction Costs Associated with the Eastern Enterprises
Merger
KeySpan Energy will incur direct expenses related to the merger, including
accounting, investment banking, legal and consulting fees. The pro forma
adjustments include an estimate for KeySpan's merger-related costs of $8.1
million, which is included in goodwill. These costs will be financed through the
issuance of commercial paper.
Note 3. Estimated Restructuring and Other Costs
Eastern expects to incur direct expenses related to the merger, including
accounting, investment banking, legal and consulting fees of approximately $13.9
million. In addition, Eastern expects to incur expenses of approximately $60.7
million for certain contractual obligations (e.g. "change in control" payments)
and nonqualified stock options that will be "cashed out". These costs will be
expensed as incurred by Eastern and have been included in the calculation of
estimated goodwill. These costs will be financed through the issuance of
commercial paper. Further, certain Eastern options will be converted to options
to purchase KeySpan Energy stock. The estimated value of such options, which are
primarily fully vested, approximate $16.4 million and will be recorded as
additional purchase price consideration by KeySpan Energy at the time of the
merger.
Note 4. Interest Expense
Interest expense reflects the issuance of approximately $1.477 billion of
long-term debt and approximately $262 million of commercial paper to finance the
acquisition of Eastern at estimated annual interest rates of 8.0% and 7.0%,
respectively. Interest expense also reflects the issuance of commercial paper to
finance transaction costs at an estimated annual interest rate of 7.0%. A change
in the actual interest rate of .125%, as compared to the estimated interest
rates, will change net income by approximately $1.5 million annually and by $0.7
million for six months.
Note 5. Amortization of Goodwill Associated with the Eastern Enterprises Merger
Goodwill, which is not tax deductible, will be amortized over a 40 year period.
Note 6. Income Taxes
Income taxes on the unaudited pro forma consolidated condensed income statement
have been adjusted to reflect the tax deduction of interest expense at a rate of
35%. A tax benefit has not been provided for goodwill since it is not tax
deductible.
<PAGE>
Note 7. Cash Consideration and Estimated Goodwill Related to the EnergyNorth
Merger
Cash consideration to be paid to EnergyNorth shareholders will be paid from the
proceeds of long- term debt and commercial paper issuances. KeySpan Energy will
issue approximately $173 million in long-term debt at an estimated annual
interest rate of 8.0% and approximately $30 million of commercial paper at an
estimated annual interest rate of 7.0% to finance the merger. KeySpan Energy
will acquire all of the outstanding common stock of EnergyNorth for $61.13 per
share, subject to adjustment. The cash consideration to be paid to EnergyNorth
shareholders is subject to a per share increase of .589 times the per share
increase amount above $64.00 per share paid to Eastern shareholders. The
estimated goodwill reflects the recognition of the excess amount of the purchase
price over the fair value of the net assets acquired including adjustments for
costs to be incurred directly related to the consummation. The following
represents the estimated goodwill calculation:
Common shares outstanding
at June 30, 2000 3,322,903
Share price $ 61.13
-----------------------
Purchase price $ 203,129,060
Common equity of EnergyNorth (54,071,000)
-----------------------
$ 149,058,060
Estimated transaction costs (See Note 8) 2,100,000
Estimated restructuring and other
costs (See Note 9) 15,388,000
- -----------------------
Estimated Goodwill $ 166,546,060
======================
Amortization period 40
Estimated yearly amortization $ 4,163,652
======================
Estimated six month amortization $ 2,081,826
======================
A final determination of goodwill may reflect certain purchase accounting
adjustments based on actuarial valuations related to employee benefit plans,
estimates with respect to the effect of consolidation of certain corporate and
administrative functions, completion of studies related to environmental issues,
possible contract and asset impairment charges, possible asset sales, and other
adjustments.
Note 8. Estimated Transaction Costs Associated with the EnergyNorth Merger
KeySpan Energy and Eastern will incur direct expenses related to the merger,
including accounting, investment banking, legal and consulting fees. The pro
forma adjustments include an estimate for these costs of $2.1 million, which is
included in goodwill. These costs will be financed through the issuance of
commercial paper.
<PAGE>
Note 9. Estimated Restructuring and Other Costs
EnergyNorth expects to incur direct expenses related to the merger, including
accounting, investment banking, legal and consulting fees of approximately $4.7
million. In addition, EnergyNorth expects to incur expenses of approximately
$8.2 million for certain contractual obligations (e.g. "change in control"
payments). These costs will be expensed as incurred by EnergyNorth and have been
included in the calculation of estimated goodwill. These costs will be financed
through the issuance of commercial paper. Further, EnergyNorth options will be
converted to options to purchase KeySpan Energy stock. The estimated value of
such options, which are primarily fully vested, approximates $2.5 million and
will be recorded as additional purchase price consideration by KeySpan Energy at
the time of the merger.
Note 10. Interest Expense
Interest expense reflects the issuance of approximately $173 million of
long-term debt and approximately $30 million of commercial paper to finance the
acquisition of EnergyNorth at estimated annual interest rates of 8.0% and 7.0%,
respectively. Interest expense also reflects the issuance of commercial paper to
finance transaction costs at an estimated annual interest rate of 7.0%. A change
in the actual interest rate of .125%, as compared to the estimated interest
rates, will have approximately a $0.2 million annual and an immaterial six month
effect on net income.
Note 11. Amortization of Goodwill Associated with the EnergyNorth Merger
Goodwill, which is not tax deductible, will be amortized over a 40 year period.
Note 12. Income Taxes
Income taxes on the unaudited pro forma consolidated condensed income statement
have been adjusted to reflect the tax deduction of interest expense at a rate of
35%. A tax benefit has not been provided for goodwill since it is not tax
deductible.
<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: August 10, 2000 /s/ Gerald Luterman
----------------------------
Gerald Luterman
Senior Vice President and
Chief Financial Officer
Date: August 10, 2000 /s/ Ronald S. Jendras
----------------------------
Ronald S. Jendras
Vice President, Controller
and Chief Accounting Officer
