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 June 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 August 1, 2000
--------------------------- ------------------------------
$.01 par value 134,262,534
<PAGE>
EXPLANATORY NOTE:
The Company hereby amends Part I of its quarterly report on Form 10-Q
for the period ended June 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 -
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
Signatures 16
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
----------------------------------------------------------------------------------------------------------------------
(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
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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
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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.
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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 the Company. (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 THOUSANDSOF DOLLARS)
----------------------------------------- --------------------------------------
June 30, 2000 December 31, 1999
----------------------------------------- --------------------------------------
Current assets $ 326,758 $ 358,415
Noncurrent assets 1,370,375 1,327,692
Current liabilities 150,190 548,331
Noncurrent liabilities
including long-term debt 857,615 484,702
Net assets (1) $ 689,328 $ 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 the Company (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 $2.9 million and $5.5 million for the three
and six months ended June 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 Six Months Ended Six Months Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------------------------- ---------------------- -------------------- --------------------- ----------------------
<S> <C> <C> <C> <C>
Revenues $118,582 $99,972 $417,241 $368,274
Operating Income (1) $ 642 $9,844 $77,527 $88,833
Net Income (Loss) $(7,379) $(2,184) $36,255 $40,746
------------------------------- ---------------------- -------------------- --------------------- ----------------------
</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
16
