UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Amendment No. 1 on Form 10Q/A
to Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
---
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
-----------------------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
---
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-14161
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KEYSPAN CORPORATION
---------------------
(Exact name of Registrant as specified in its charter)
New York 11-3431358
----------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One MetroTech Center, Brooklyn, New York 11201
175 East Old Country Road, Hicksville, New York 11801
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(718) 403-1000 (Brooklyn)
(631) 755-6650 (Hicksville)
-----------------------------
(Registrant's telephone number, including area code)
(Former name,former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding at October 26, 2000
--------------------------- --------------------------------
$.01 par value 134,642,772
<PAGE>
EXPLANATORY NOTE:
The Company hereby amends Part I of its quarterly report on Form 10-Q
for the period ended September 30, 2000 to reflect the inclusion of a new
footnote No. 9, which footnote includes summary financial data of KeySpan Gas
East Corporation, a wholly owned subsidiary of the Company, as required by Staff
Accounting Bulletin 53. No other changes to the financial statements set forth
herein have been made.
KEYSPAN CORPORATION AND SUBSIDIARIES
INDEX
Part I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Consolidated Balance Sheet -
September 30, 2000 and December 31, 1999 3
Consolidated Statement of Income -
Nine Months Ended September 30, 2000 and 1999 5
Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Signatures 17
2
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<TABLE>
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
<CAPTION>
SEPTEMBER 30, 2000 December 31, 1999
----------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and temporary cash investments $ 63,618 $ 128,602
Customer accounts receivable 609,890 425,643
Other accounts receivable 222,478 235,156
Allowance for uncollectible accounts (26,281) (20,294)
Special deposits 42,485 60,863
Gas in storage, at average cost 260,738 144,256
Materials and supplies, at average cost 95,004 84,813
Other 88,629 98,914
--------------------- ---------------------
1,356,561 1,157,953
--------------------- ---------------------
EQUITY INVESTMENTS AND OTHER 427,557 391,731
--------------------- ---------------------
PROPERTY
Electric 1,386,206 1,346,851
Gas 3,584,690 3,449,384
Other 393,252 375,657
Accumulated depreciation (1,688,283) (1,589,287)
Gas exploration and production, at cost 1,346,357 1,177,916
Accumulated depletion (582,912) (520,509)
--------------------- ---------------------
4,439,310 4,240,012
--------------------- ---------------------
DEFERRED CHARGES
Regulatory assets 320,931 319,167
Goodwill, net of amortizations 350,552 255,778
Other 357,610 366,050
--------------------- ---------------------
1,029,093 940,995
--------------------- ---------------------
--------------------- ---------------------
TOTAL ASSETS $ 7,252,521 $ 6,730,691
===================== =====================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
3
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
<CAPTION>
SEPTEMBER 30, 2000 December 31, 1999
----------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
Current redemption of preferred stock $ - $ 363,000
Accounts payable and accrued expenses 670,869 645,347
Commercial paper 382,090 208,300
Dividends payable 61,276 61,306
Taxes accrued 90,195 50,437
Customer deposits 30,552 31,769
Interest accrued 23,879 28,093
----------------- -----------------
1,258,861 1,388,252
----------------- -----------------
DEFERRED CREDITS AND OTHER LIABILITIES
Regulatory liabilities 44,350 26,618
Deferred income tax 238,748 186,230
Postretirement benefits and other reserves 542,596 501,603
Other 95,018 66,200
----------------- -----------------
920,712 780,651
----------------- -----------------
CAPITALIZATION
Common stock, $.01 par value, authorized
450,000,000 shares; outstanding 134,575,028 and
133,866,077 shares stated at 2,987,242 2,973,388
Retained earnings 481,658 456,882
Accumulated foreign currency adjustment (6,476) 7,714
Treasury stock purchased (702,435) (722,959)
----------------- -----------------
Total common shareholders' equity 2,759,989 2,715,025
Preferred stock 84,323 84,339
Long-term debt 2,120,752 1,682,702
----------------- -----------------
TOTAL CAPITALIZATION 4,965,064 4,482,066
----------------- -----------------
MINORITY INTEREST IN SUBSIDIARY COMPANIES 107,884 79,722
----------------- -----------------
TOTAL LIABILITIES AND CAPITALIZATION $ 7,252,521 $ 6,730,691
================= =================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
4
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
THREE MONTHS Three Months NINE MONTHS Nine Months
ENDED Ended ENDED Ended
SEPTEMBER 30, September 30, SEPTEMBER 30, September 30,
2000 1999 2000 1999
--------------------------------------------------------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Gas Distribution $ 292,352 $ 208,572 $ 1,458,595 $ 1,208,254
Electric Services 374,517 241,259 1,097,616 606,552
Gas Exploration and Production 62,748 42,081 169,966 103,622
Energy Related Services and Other 217,520 46,557 485,161 124,675
---------- ----------------- ------------------ -----------------
Total Revenues 947,137 538,469 3,211,338 2,043,103
---------- ----------------- ------------------ -----------------
OPERATING EXPENSES
Purchased gas for resale 140,415 68,195 717,140 498,609
Fuel and purchased power 161,086 - 334,135 -
Operations and maintenance 389,116 293,044 1,123,581 765,221
Depreciation, depletion and amortization 72,973 63,130 216,364 180,698
Operating taxes 91,469 77,317 298,010 258,355
---------- ----------------- ------------------ -----------------
Total Operating Expenses 855,059 501,686 2,689,230 1,702,883
---------- ----------------- ------------------ -----------------
OPERATING INCOME 92,078 36,783 522,108 340,220
---------- ----------------- ------------------ -----------------
OTHER INCOME AND (DEDUCTIONS)
Income from equity investments 4,405 4,268 16,333 9,749
Minority interest (5,952) (3,035) (13,747) (5,226)
Interest income and other (259) 4,585 6,510 27,679
---------- ----------------- ------------------ -----------------
Total Other Income (1,806) 5,818 9,096 32,202
---------- ----------------- ------------------ -----------------
INCOME BEFORE INTEREST CHARGES
AND INCOME TAXES 90,272 42,601 531,204 372,422
---------- ----------------- ------------------ -----------------
INTEREST CHARGES 42,781 28,045 120,106 98,824
---------- ----------------- ------------------ -----------------
INCOME TAXES
Current 7,579 (23,111) 116,396 (14,886)
Deferred 25,282 28,651 54,462 113,258
---------- ----------------- ------------------ -----------------
Total Income Taxes 32,861 5,540 170,858 98,372
---------- ----------------- ------------------ -----------------
NET INCOME 14,630 9,016 240,240 175,226
Preferred stock dividend requirements 1,476 8,688 16,453 26,067
---------- ----------------- ------------------ -----------------
EARNINGS FOR COMMON STOCK $ 13,154 $ 328 $ 223,787 $ 149,159
Foreign currency adjustment (4,760) (2,281) (14,190) 3,454
---------- ----------------- ------------------ -----------------
COMPREHENSIVE INCOME (LOSS) $ 8,394 $ (1,953) $ 209,597 $ 152,613
========== ================= ================== =================
BASIC AND DILUTED EARNINGS
PER COMMON SHARE $ 0.10 $ 0.00 $ 1.67 $ 1.06
========== ================= ================== =================
AVERAGE COMMON SHARES OUTSTANDING (000) 134,335 136,506 133,965 140,079
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
5
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(IN THOUSANDS OF DOLLARS)
<CAPTION>
NINE MONTHS Nine Months
ENDED Ended
SEPTEMBER 30, September 30,
2000 1999
------------------------------------------------------- ------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income 240,240 $ 175,226
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Depreciation, depletion and amortization 216,364 180,698
Deferred income tax 54,462 113,258
Income from equity investments (16,333) (9,749)
Dividends from equity investments 19,568 6,375
CHANGES IN ASSETS AND LIABILITIES
Accounts receivable (38,759) 155,538
Materials and supplies, fuel oil and
gas in storage (128,705) (18,997)
Accounts payable and accrued expenses 27,451 (143,858)
Interest accrued (12,269) (11,050)
Special deposits 18,378 55,050
Prepayments and other 86,803 (59,437)
----------------- -----------------
Net Cash Provided by Operating Activities 467,200 443,054
----------------- -----------------
INVESTING ACTIVITIES
Capital expenditures (403,611) (512,991)
Investments (175,977) -
Other 7,599 10,749
----------------- ----------------
Net Cash (Used in) Investing Activities (571,989) (502,242)
----------------- ----------------
FINANCING ACTIVITIES
Treasury stock issued (purchased) 20,951 (289,172)
Issuance of commercial paper, net 173,790 103,950
Issuance of long-term debt 463,627 40,523
Payment of long-term debt (37,000) (397,000)
Payment of preferred stock (363,000) -
Preferred stock dividends paid (18,600) (26,067)
Common stock dividends paid (179,049) (185,375)
Other (20,914) (548)
----------------- ----------------
Net Cash Provided by (Used in) Financing
Activities 39,805 (753,689)
----------------- ----------------
Net (Decrease) in Cash and
Temporary Cash Investments $ (64,984) (812,877)
================= =================
Cash and temporary cash investments at
beginning of period 128,602 $ 942,776
Net (Decrease) in cash and
temporary cash investments (64,984) (812,877)
---------------- -----------------
Cash and Temporary Cash Investments at
End of Period 63,618 $ 129,899
================= =================
</TABLE>
Temporary cash investments are short-term marketable securities purchased with
maturities of three months or less that were carried at cost which approximates
fair value.
See accompanying Notes to the Consolidated Financial Statements.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
KeySpan Corporation (referred to in the notes to the Financial Statements
as "we", "us", and "our") is a holding company operating two utilities that
distribute natural gas to approximately 1.6 million customers in New York
City and on Long Island, making it the fourth largest gas distribution
company in the United States. We are also a major, and growing, generator
of electricity. We own and operate five large generating plants and 42
smaller facilities in Nassau and Suffolk Counties on Long Island and lease
and operate a major facility in Queens County in New York City. Under
contractual arrangements, we provide power, electric transmission-and-
distribution services, billing and other customer services for
approximately one million electric customers of the Long Island Power
Authority. Our other subsidiaries are involved in oil and gas exploration
and production; gas storage; wholesale and retail gas and electric
marketing; appliance service; heating, ventilation and air conditioning
installation and services; large energy-system ownership, installation and
management; telecommunications; and energy-related internet activities. We
also invest in, and participate in the development of, pipelines and other
energy-related projects, domestically and internationally.
1. BASIS OF PRESENTATION
In our opinion, the accompanying unaudited Consolidated Financial
Statements contain all adjustments necessary to present fairly our
financial position as of September 30, 2000, and the results of our
operations for the three and nine months ended September 30, 2000 and
September 30, 1999 and cash flows for the nine months ended September 30,
2000 and September 30, 1999. The accompanying financial statements should
be read in conjunction with the consolidated financial statements and notes
included in our 1999 Annual Report on Form 10-K. Income from interim
periods may not be indicative of future results. Certain reclassifications
were made to conform prior period financial statements with the current
period financial statement presentation. Other than as noted, adjustments
were of a normal, recurring nature.
2. BUSINESS SEGMENTS
We have six reportable segments: Gas Distribution, Electric Services, Gas
Exploration and Production, Energy Services, Energy Investments and Other.
The Gas Distribution segment consists of our two gas distribution
subsidiaries. The Brooklyn Union Gas Company d/b/a KeySpan Energy Delivery
New York provides gas distribution services to customers in the New York
City Boroughs of Brooklyn, Queens and Staten Island. KeySpan Gas East
Corporation d/b/a KeySpan Energy Delivery Long Island provides gas
distribution services to customers in the Long Island counties of Nassau and
Suffolk and the Rockaway Peninsula of the Borough of Queens.
The Electric Services segment consists of subsidiaries that operate the
electric transmission and distribution system owned by the Long Island Power
Authority; own and provide capacity to and
7
<PAGE>
produce energy for the Long Island Power Authority from our generating
facilities located on Long Island; and manage fuel supplies for the Long
Island Power Authority to fuel our Long Island generating facilities, all
through long-term service contracts having terms that range from eight to
fifteen years. The Electric Services segment also includes subsidiaries that
own, lease and operate the 2,168 megawatt Ravenswood electric generation
facility, located in Queens, New York. Our contract with Consolidated Edison
Company of New York, which provided Consolidated Edison with 100% of the
available capacity of the Ravenswood facility on a fixed monthly fee,
expired on April 30, 2000. We now provide all of the energy, capacity and
ancillary services related to the Ravenswood facility to the New York
Independent System Operator. Currently, our primary electric generation
customers are the Long Island Power Authority and the New York Independent
System Operator energy markets.
The Gas Exploration and Production segment is engaged in gas and oil
exploration and production, and the development and acquisition of domestic
natural gas and oil properties. This segment consists of our 70% equity
interest in The Houston Exploration Company, an independent natural gas and
oil exploration company, as well as KeySpan Exploration and Production, LLC,
our wholly owned subsidiary engaged in a joint venture with Houston
Exploration. On March 31, 2000, under a pre-existing credit arrangement,
approximately $80 million in debt owed by Houston Exploration to us was
converted into common equity of Houston Exploration. Upon such conversion,
our common equity ownership interest in Houston Exploration increased from
64% to the current level of approximately 70%.
The Energy Services segment primarily includes companies that provide
energy related services to customers located within the New York tri-state
metropolitan area, Rhode Island and Pennsylvania through the following four
lines of business: (i) Home Energy Services provides residential customers
with service and maintenance of energy systems and appliances, as well as
the retail marketing of natural gas and electricity to residential and
small commercial customers; (ii) Business Solutions provides professional
engineering-consulting and design of energy systems for commercial and
industrial customers, including installation of plumbing, heating,
ventilation and air conditioning equipment; (iii) Commodity Procurement
provides management and procurement services for fuel supply and management
of energy sales, primarily for and from the Ravenswood facility; and (iv)
Telecommunications Services provides various services to carriers of voice
and data transmission on Long Island and in New York City.
Subsidiaries in the Energy Investments segment hold a 20% equity interest in
the Iroquois Gas Transmission System LP, a pipeline that transports Canadian
gas supply to markets in the Northeastern United States; a 50% interest in
the Premier Transmission Pipeline and a 24.5% interest in Phoenix Natural
Gas, both in Northern Ireland; investments in certain midstream natural gas
assets in Western Canada owned jointly with Gulf Canada Resources Limited,
through the Gulf Midstream Services Partnership and the ownership of certain
oil producing properties in Alberta, Canada. These subsidiaries are
primarily accounted for under the equity method. Accordingly, equity income
from these investments is reflected in other income and (deductions) in the
Consolidated Statement of Income. In October 2000, we sold our interest in
certain oil producing properties in Alberta, Canada. An after-tax gain of
approximately $1.3 million from the sale will be reported in the fourth
quarter of 2000. Further, also in October 2000, we acquired the remaining
50% interest in Gulf Midstream, making us the sole owner of Gulf Midstream.
The
8
<PAGE>
transaction required us to borrow an additional $48 million from a Canadian
bank. For future financial reporting purposes, the operations of Gulf
Midstream, which will now be known as KeySpan Energy Canada, will be fully
consolidated in our financial statements.
The Other segment represents primarily unallocated administrative and
general expenses, interest income earned on temporary cash investments, and
preferred stock dividends.
The accounting policies of the segments are the same as those used for the
preparation of the Consolidated Financial Statements. Our segments are
strategic business units that are managed separately because of their
different operating and regulatory environments. At September 30, 2000, the
total assets of certain reportable segments increased from levels reported
at December 31, 1999 as follows: the Energy Services segment's assets
increased by approximately $260 million due primarily to the acquisition of
four additional companies that provide energy-related services and the
investment in MyHomeKey.com, Inc. The segment information presented below
reflects amounts reported in the Consolidated Financial Statements for the
three and nine months ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
-----------------------------------------------------------------------------------------------------------------------------------
Gas Electric Gas Exploration Energy Energy
Distribution Services and Production Services Investments Other Eliminations Consolidated
------------------------------------- ------------- ----------------- ----------- ------------- ------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED
SEPTEMBER 30, 2000
Unaffiliated Revenue $ 292,352 $ 374,517 $ 62,748 $ 215,871 $ 1,649 $ - $ - $ 947,137
Intersegment Revenue 15,903 (15,903) -
Operating Income (21,542) 73,007 30,985 19,653 (969) (9,056) - 92,078
Earnings for
Common Stock (28,033) 31,796 13,418 9,636 2,687 (16,350) - 13,154
Basic and Diluted
Earnings Per Share $(0.21) $0.24 $0.10 $0.07 $0.02 $(0.12) $- $0.10
THREE MONTHS ENDED
SEPTEMBER 30, 1999
Unaffiliated Revenue $ 208,572 $ 241,259 $ 42,081 $ 46,096 $ 461 $ - $ - $ 538,469
Intersegment Revenue - - - - - - - -
Operating Income (28,635) 49,392 15,798 - (1,234) 1,462 - 36,783
Earnings for
Common Stock (29,037) 28,164 5,435 116 2,821 (7,171) - 328
Basic and Diluted
Earnings Per Share $(0.21) $0.21 $0.04 $0.00 $0.02 $ (0.06) $ - $0.00
--------------------- ----------- ------------- ----------------- -------------- ------------- ----------- ------------- ------
</TABLE>
9
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<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
-----------------------------------------------------------------------------------------------------------------------------------
Gas Electric Gas Exploration Energy Energy
Distribution Services and Production Services Investments Other Eliminations Consolidated
----------------------- -------------- ------------- ----------------- ----------- ----------- ------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NINE MONTHS ENDED
SEPTEMBER 30, 2000
Unaffiliated Revenue $ 1,458,595 $ 1,097,616 $ 169,966 $ 480,511 $ 4,650 $ - $ - $ 3,211,338
Intersegment Revenue - - - 48,677 - - (48,677) -
Operating Income 212,688 204,834 72,514 51,958 (4,022) (15,864) - 522,108
Earnings for
Common Stock 101,025 103,316 29,381 25,221 7,877 (43,033) - 223,787
Basic and Diluted
Earnings Per Share $0.75 $0.77 $0.22 $0.19 $0.06 $(0.32) $ - $1.67
NINE MONTHS ENDED
SEPTEMBER 30, 1999
Unaffiliated Revenue $ 1,208,254 $ 606,552 $ 103,622 $ 123,165 $ 1,510 $ - $ - $ 2,043,103
Intersegment Revenue - - - - - - - -
Operating Income 198,565 112,652 29,879 (4,491) (3,949) 7,564 - 340,220
Earnings for
Common Stock 92,873 59,786 9,239 (2,384) 5,937 (16,292) - 149,159
Basic and Diluted
Earnings Per Share $0.66 $0.43 $0.07 $(0.02) $0.04 $(0.12) $ - $1.06
------------------------- -------------- ------------- -------------- ----------- -------- --------- ------------- -----------
</TABLE>
3. ENVIRONMENTAL MATTERS
MANUFACTURED GAS PLANT SITES: We have identified thirty-four manufactured
gas plant sites that were historically owned or operated by KeySpan Energy
Delivery New York and KeySpan Energy Delivery Long Island (or such
companies' predecessors). These former sites, some of which are no longer
owned by us, have been identified to the New York State Department of
Environmental Conservation for inclusion on appropriate waste site
inventories.
We presently estimate that the remaining cost of our manufactured gas
plant-related environmental cleanup activities will be approximately $119
million; which amount has been accrued as our current best estimate of our
aggregate environmental liability for known sites. The currently-known
conditions of the former manufactured gas plant sites, their period and
magnitude of operation, generally observed cleanup requirements and costs in
the industry, current land use and ownership, and possible reuse have been
considered in establishing contingency reserves. We believe that in the
aggregate, the accrued liability for investigation and remediation of the
manufactured gas plant sites identified above are reasonable estimates of
likely cost within a range of reasonable, foreseeable costs.
Thirteen of the identified sites are currently the subject of Administrative
Consent Orders with the Department of Environmental Conservation and another
site is subject to the negotiation of an Administrative Consent Order or an
agreement under the Department of Environmental Conservation's Voluntary
Clean-up Program. Our remaining manufactured gas plant sites may
10
<PAGE>
not become subject to Administrative Consent Orders in the future, and
accordingly no liability has been accrued for these sites.
Under prior rate orders, the Public Service Commission of the State of New
York has allowed recovery of costs related to certain KeySpan Energy
Delivery New York manufactured gas plant sites. We believe that current rate
plans in effect for both Gas Distribution subsidiaries provide for recovery
of environmental costs attributable to the Gas Distribution segment. At
September 30, 2000, we had a total regulatory asset of approximately $98
million. Expenditures incurred to date by us with respect to manufactured
gas plant-related activities total approximately $20 million.
4. LIQUIDITY AND FINANCINGS
During the nine months ended September 30, 2000, we issued $1.6 billion and
repaid $1.4 billion of commercial paper to satisfy working capital needs and
the mandatory redemption of preferred stock as discussed below. At September
30, 2000, we had $382.1 million of commercial paper outstanding at an
average annualized interest rate of 6.73%.
Houston Exploration also issued and repaid commercial paper to satisfy
working capital needs during the nine months ended September 30, 2000. For
the nine months ended September 30, 2000, Houston Exploration borrowed $30
million under its credit facility with a commercial bank and repaid $37
million of outstanding borrowings. At September 30, 2000, $174 million
remained outstanding under this facility at a weighted average annualized
interest rate of 7.84%. In addition, during the nine months ended September
30, 2000, a subsidiary in the Energy Investments segment increased its
borrowings under a revolving loan agreement with a financial institution in
Canada by $33.6 million. At September 30, 2000, $118 million was outstanding
at a weighted average annualized interest rate of 6.48%.
In August, we filed a shelf registration statement with the Securities and
Exchange Commission for the issuance of up to $1.65 billion of debt
securities. We intend to issue the debt securities to replace short term
borrowings to be entered into in connection with our acquisition of Eastern
Enterprises and EnergyNorth, Inc. (See note 5 Acquisition of Eastern
Enterprises.)
On June 1, 2000, we redeemed, at maturity, all 14,520,000 outstanding shares
of our 7.95% Preferred Stock Series AA. Our obligation of $370.2 million
included the mandatory redemption price of $25 per share totaling $363.0
million and dividends payable totaling $7.2 million. The redemption was
satisfied through utilization of internally generated funds and proceeds
from the issuance of commercial paper.
KeySpan Energy Delivery Long Island filed a shelf registration statement
with the Securities and Exchange Commission in December 1999 for the
issuance of up to $600 million of medium term notes. On February 1, 2000,
KeySpan Energy Delivery Long Island issued $400 million 7.875% Notes due
February 1, 2010. The net proceeds from the issuance were used to repay our
treasury for costs in extinguishing $397 million of promissory notes to the
Long Island Power Authority
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that matured in June 1999. The medium term notes are fully and
unconditionally guaranteed by us. Currently,$200 million of medium term
notes remain available for issuance under this shelf registration statement.
5. ACQUISITION OF EASTERN ENTERPRISES
On November 4, 1999, we and Eastern Enterprises announced that the companies
had signed a definitive merger agreement under which we will acquire all of
the common stock of Eastern for $64.00 per share in cash, subject to
adjustment. The Agreement and Plan of Merger is included as an exhibit to
our Form 10K for the year ended December 31, 1999. The transaction has a
total value of approximately $2.5 billion and will be accounted for
utilizing purchase accounting.
In connection with the merger, Eastern has amended its merger agreement with
EnergyNorth, Inc. to provide for an all cash acquisition by Eastern of
EnergyNorth shares at a price per share of $61.13, subject to adjustment.
The restructured EnergyNorth merger is expected to close contemporaneously
with the KeySpan/Eastern transaction. The EnergyNorth transaction has a
total value of approximately $250 million.
We intend to access the financial markets in the fourth quarter of 2000 to
finance approximately $2 billion for the Eastern and EnergyNorth
transactions. We intend to use bridge financing to fund these transactions
initially and then replace the bridge financing with $1.65 billion of long-
term debt securities as soon as practicable thereafter. The remaining
balance will be financed through the issuance of commercial paper. We
anticipate issuing several different maturities of long-term debt to balance
our future debt capital maturity structure.
We expect pre-tax annual cost savings resulting from the transactions to be
approximately $40 million. These cost savings result primarily from the
elimination of duplicate corporate and administrative programs, greater
efficiencies in operations and business processes, and increased purchasing
efficiencies. We expect to achieve the majority of the reductions through a
variety of programs which would include hiring freezes, attrition and
separation programs, including implementation of an early retirement program
and targeted severance programs. We have begun to initiate some of these
programs and will report the potential effect of these initiatives on
earnings and cash flow from operations when job positions and cost estimates
have been finalized.
Following the closing of these transactions, we will become subject to the
regulation of the Securities and Exchange Commission as a registered holding
company under the Public Utility Holding Company Act of 1935, as amended. As
such, our corporate and financial activities as well as our subsidiaries,
including such entities' ability to pay dividends, will be subject to
Securities and Exchange Commission regulation. The merger is conditioned
upon the approval of the Securities and Exchange Commission. Shareholders of
both Eastern and EnergyNorth, as well as the New Hampshire Public Utility
Commission (with respect to Eastern's acquisition of EnergyNorth) have
approved the transactions. We anticipate that the transaction will be
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consummated in the fourth quarter of 2000, but are unable to determine when
or if the required Securities and Exchange Commission approval will be
obtained.
6. NEW YORK STATE INDEPENDENT SYSTEM OPERATOR MATTERS
We currently realize revenues from our investment in the Ravenswood facility
through the wholesale sale of energy, capacity and ancillary services.
Ancillary services include spinning reserves and non-spinning reserves
available to replace energy that is unable to be delivered due to the
unexpected loss of a major energy source.
Due to the increase in the market-clearing price of spinning and
non-spinning reserves during the first quarter of 2000, the New York
Independent System Operator requested that the Federal Energy Regulatory
Commission approve a bid cap on reserves as well as requiring a refunding of
so-called alleged "excess payments" received by sellers into the ancillary
services market, including the Ravenswood facility and the Long Island Power
Authority. Other market participants, including buyers of reserves and
electric utilities as load serving entities also filed complaints with the
Federal Energy Regulatory Commission and intervened in the various Federal
Energy Regulatory Commission proceedings related to reserves, and proposed
alternative remedies.
On May 31, 2000, the Federal Energy Regulatory Commission issued an order
on reserves that granted approval of a bid cap for non-spinning reserves
which includes payments for the opportunity cost of not making energy
sales. The other requests - such as a bid cap for spinning reserves,
retroactive refunds, recalculation of reserve prices for March 2000, and
convening a technical conference and settlement proceeding - were rejected.
Pursuant to the May 31, 2000 order, the New York Independent System
Operator made its first compliance filing to the Federal Energy Regulatory
Commission on June 15, 2000. However, the New York Independent System
Operator and several other market participants have requested rehearing of
the May 31, 2000 order. In response to the New York Independent System
Operator request, the Federal Energy Regulatory Commission has allowed the
New York Independent System Operator to recalculate prices for reserves for
the March 2000 period as if the bid cap approved effective April 1, 2000
had been effective for March, pending its review on the rehearing requests
of the May 31, 2000 order.
On September 5, 2000 New York State Electric and Gas Corporation filed a
lawsuit against the New York Independent System Operator, in Supreme Court
Broome County, seeking recovery of overcharges and damages related to the
New York Independent System Operator's administration of the reserves
market. We are not a party to the lawsuit.
Additionally, the wholesale energy market has also been the focus of
increased market based pricing. On June 30, 2000, the New York Independent
System Operator petitioned the Federal Energy Regulatory Commission to
approve a $1,300 megawatt/hour ("MWh") bid cap in the energy market to be
effective July 6, 2000 through October 28, 2000. The New York Independent
System Operator requested the bid cap because it believed that there was a
lack of price responsive demand and that the start-up problems associated
with implementation of the New
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York Independent System Operator might cause severe price spikes during the
summer peak months. In response, on July 26, 2000, the Federal Energy
Regulatory Commission issued an order approving a $1,000/MWh bid cap in the
energy market effective July 26, 2000 through October 28, 2000. The July 26,
2000 order also required the New York Independent System Operator to
identify certain "market flaw problems" and to report them to the Federal
Energy Regulatory Commission by September 1, 2000.
On September 8, 2000 the New York Independent System Operator issued to the
Federal Energy Regulatory Commission revised tariff sheets and a corrected
combined compliance filing and report related to reserve markets. The
compliance filing proposes tariff changes to become effective November 1,
2000 with the exception of the effective date for the payment of lost
opportunity costs to suppliers of 10-minute reserves, where such filing
proposes an effective date of May 31, 2000. The compliance filing proposed a
number of changes, including the gradual removal of the bid cap in the
reserve market from $15.00/MWh on November 1, 2000, to $30.00/MWh on January
1, 2001 and to eliminate it completely on May 1, 2001. Various parties filed
comments to the compliance filing requesting additional changes including
extending the $1,000/MWh energy price cap beyond October 28, 2000. The
compliance filing and comments are pending the Federal Energy Regulatory
Commission review.
We are opposing the relief requested by the New York Independent System
Operator and the load serving entities and believe that the ultimate
resolution of these issues will not have a material effect on our
consolidated financial position or results of operations.
7. DERIVATIVE FINANCIAL INSTRUMENTS
In connection with our anticipated purchase of Eastern (See Note 5,
"Acquisition of Eastern Enterprises") and the anticipated issuance of
long-term debt securities to finance the acquisition, we entered into
forward starting swap agreements to hedge a portion of the risk that the
cost of the future issuance of fixed-rate debt may be adversely affected by
changes in interest rates. Through September 30, 2000, we have entered into
$1.5 billion of forward starting swap agreements. The interest lock rates
range from 6.86% to 7.78% and have maturities that range from 5 to 30
years. Under a forward starting swap agreement, we agree to pay or receive
an amount equal to the difference between the net present value of the cash
flows for a notional amount of indebtedness based on the existing yield of
a hedging instrument at the date of the agreement and at the date the
agreement is settled. Gains and losses on these agreements will be deferred
and amortized over the life of the underlying debt to be issued. The
notional amounts of the agreements are not exchanged. We have entered into
these agreements with more than one major financial institution in order to
minimize counter party credit risk.
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Based on interest rates effective as of October 30, 2000, we estimate that
we may be obligated to pay counterparties approximately $60 million at the
time of the issuance of the long-term debt. This amount will be amortized
over the life of the long-term debt, with maturities that are estimated to
range from 5 to 30 years. This amount reflects the significant decrease in
interest rates since we entered into the forward starting swap lock
agreements. As a result of the significant decrease in interest rates, we
will be able to issue the anticipated long-term debt at lower rates.
Also during the quarter, we have engaged in the use of derivative swap
instruments to fix the selling price on a portion of our estimated 2001
summer peak electric energy sales from the Ravenswood facility and to fix
the purchase price of fuel used to generate electricity. For the months of
July and August 2001, we have hedged the sales price on 105,600 megawatt
hours of summer peak electric sales to protect against a potential
degradation in market prices during the summer. Under these swap agreements,
we will receive a fixed price per megawatt hour of electricity sold during
summer peak hours and pay the counter party the then current floating market
price for peak electric supply. We will receive the then current floating
market price of peak electric energy when the Ravenswood facility sells
electric energy to the New York Independent System Operator. These
derivatives are accounted for as hedges. We also have a tolling arrangement
with two counter parties under which we have "locked-in" a profit margin on
52,800 megawatt hours of summer season sales and 211,200 megawatt hours of
winter sales. Under these arrangements, we will receive an up-front fee and
will pay the counter party, on a monthly basis, our realized profit margin
from the sale of electric energy. As a result of these hedging arrangements,
we have hedged approximately 9% of our estimated peak 2001 summer electric
sales and approximately 6% of our estimated 2001 yearly electric sales.
8. NEW FINANCIAL ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of SFAS No. 133." SFAS No. 137 defers the effective date of
SFAS No. 133 to fiscal years beginning after July 15, 2000. We will
therefore adopt SFAS No. 133 in the first quarter of fiscal year 2001. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - An Amendment of FASB
Statement No 133." SFAS No. 138 amends the accounting and reporting
standards of SFAS No. 133 for a number of transactions. The most significant
amendment to SFAS 133 as it relates to our operations is that the normal
purchases and normal sales exception found in SFAS 133 may now be applied to
contracts that implicitly or explicitly permit net settlement, and contracts
that have a market mechanism to facilitate net settlement. Therefore, under
SFAS 138 our gas procurement contracts are not considered derivative
financial instruments.
All of our derivative financial instruments, except for an interest rate
swap, are cash-flow hedges. SFAS No. 133 requires that an entity recognize
all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Periodic
changes in market value of derivatives which meet the definition of a
cash-flow hedge are recorded as comprehensive income, subject to
effectiveness, and then included in net income to match the underlying
hedged transactions. Our derivative instruments currently in place qualify
for hedge
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accounting, and as a result implementation of SFAS No. 133 and SFAS No. 138
when adopted are not expected to have a material effect on our net income,
but could have a significant effect on comprehensive income because of
fluctuations in the market value of the derivatives employed for hedging
certain risks.
9. KEYSPAN GAS EAST CORPORATION SUMMARY FINANCIAL DATA
KeySpan Gas East Corporation d/b/a/ KeySpan Energy Delivery Long Island is
a wholly owned subsidiary of KeySpan Corporation. KeySpan Energy Delivery
Long Island was formed on May 7, 1998 and on May 28, 1998 acquired all of
the assets related to the gas distribution business of the Long Island
Lighting Company ("LILCO"). KeySpan Energy Delivery Long Island has
established a program for the issuance, from time to time, of up to $600
million aggregate principal amount of Medium-Term Notes, which will be
fully and unconditionally guaranteed by KeySpan Corporation. (See Note 4
"Issuance of Long-Term Debt, Repayment of Notes Payable and Financing.")
On February 1, 2000, KeySpan Energy Delivery Long Island issued $400
million of 7.875% Medium Term Notes due 2010.
The following represents summarized balance sheet data for KeySpan Energy
Delivery Long Island.
(IN THOUSANDS OF DOLLARS)
------------------------------------------ -------------------------------------
September 30, 2000 December 31, 1999
------------------------------------------ -------------------------------------
Current assets $ 294,141 $ 358,415
Noncurrent assets 1,394,346 1,327,692
Current liabilities 126,383 548,331
Noncurrent liabilities
including long-term debt 885,771 484,702
Net assets (1) $ 676,333 $ 653,074
------------------------------------------ -------------------------------------
(1) Net Assets reflect total assets less current and noncurrent liabilities.
Intercompany accounts receivable are included in current assets and long-term
intercompany accounts payable are included in noncurrent liabilities.
Certain common assets which were previously part of LILCO's operations prior to
May 28, 1998 have been transferred to other subsidiaries of KeySpan Corporation
(e.g. common plant, inventory, etc.). Since May 28, 1998, KeySpan Energy
Delivery Long Island has been charged by affiliated companies for the use of
these assets, resulting in an operating expense of $2.6 million and $8.2 million
for the three and nine months ended September 30, 2000, respectively.
The following represents summarized income statement data for KeySpan
Energy Delivery Long Island.
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
------------------------------- ---------------------- -------------------- --------------------- ----------------------
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999 September 30, 2000 September 30, 1999
------------------------------- ---------------------- -------------------- --------------------- ----------------------
<S> <C> <C> <C> <C>
Revenues $95,229 $72,956 $512,470 $441,228
Operating Income (1) $(6,847) $(12,594) $70,680 $76,241
Net Income (Loss) $(12,995) $(15,163) $23,260 $25,578
------------------------------- ---------------------- -------------------- --------------------- ----------------------
</TABLE>
(1) Operating income is defined as revenues less cost of gas and operating
expenses. Operating expenses include the following expenses: operations and
maintenance, depreciation and amortization and operating taxes.
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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: January 10, 2001 /s/ Gerald Luterman
---------------------------------
Gerald Luterman
Senior Vice President and
Chief Financial Officer
Date: January 10, 2001 /s/ Ronald S. Jendras
--------------------------------
Ronald S. Jendras
Vice President, Controller
and Chief Accounting Officer
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