SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period from January 1, 1999 to December 31, 1999
Commission File Number 333-92003-01
KEYSPAN GAS EAST CORPORATION
(Exact name of registrant as specified in its charter)
NEW YORK 11-3434848
(State or other jurisdiction of incorporation (I.R.S. employer
or organization) identification no.)
175 EAST OLD COUNTRY ROAD, HICKSVILLE, NEW YORK 11801
(Address of principal executive offices) (Zip code)
(631) 755-6650
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
(Title of class)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
(Title of class)
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.__
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
Indicate the number of shares outstanding of the registrant's class of
common stock as of March 1, 2000
All common stock, 100 shares, are held by KeySpan Corporation
The registrant meets the conditions set forth in General Instruction
(I)(1)(a) and (b) of Form 10-K and is therefore filing this form with the
reduced disclosure format.
DOCUMENTS INCORPORATED BY REFERENCE
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KEYSPAN GAS EAST CORPORATION
D/B/A BROOKLYN UNION OF LONG ISLAND
INDEX TO FORM 10-K
Page
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PART I
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Item 1. Business................................................................................ 1
Item 2. Properties.............................................................................. 11
Item 3. Legal Proceedings....................................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders..................................... 11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 11
Item 6. Selected Financial Data................................................................. 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................................... 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............................. 21
Item 8. Financial Statements.................................................................... 23
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................................... 48
PART III
Item 10. Directors and Executive Officers of the Registrant...................................... 48
Item 11. Executive Compensation.................................................................. 48
Item 12. Security Ownership of Certain Beneficial Owners and Management 48
Item 13. Certain Relationships and Related Transactions.......................................... 48
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................... 48
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PART I
ITEM 1. BUSINESS
KeySpan Gas East Corporation d/b/a Brooklyn Union of Long Island (the "Company")
is a wholly owned subsidiary of KeySpan Corporation d/b/a KeySpan Energy (the
"Parent"), the successor to the Long Island Lighting Company ("LILCO"), as a
result of a transaction with the Long Island Power Authority ("LIPA") (the "LIPA
Transaction") and following the acquisition (the "KeySpan Acquisition") of
KeySpan Energy Corporation ("KSE"). The Company was formed on May 7, 1998 and on
May 28, 1998 acquired substantially all of the assets related to the gas
distribution business of LILCO immediately prior to the LIPA Transaction. Prior
thereto, the Company was included as part of LILCO's gas and electric
operations. (See Note 8, "Sale of LILCO Assets, Acquisition of KeySpan Energy
Corporation and Transfer of Assets and Liabilities to the Parent".) The Company
provides gas distribution services to customers in the Long Island counties of
Nassau and Suffolk and the Rockaway Peninsula of Queens County and owns
substantially all of the gas distribution assets formerly owned by LILCO.
In 1998, the Company changed its fiscal year end from March 31 to December 31.
For financial reporting purposes, financial statements included, or incorporated
by reference, herein for the period ending December 31, 1998 are for the nine
months then ended. Unless otherwise specified, other information contained in
Part I hereof, for the periods ended December 31, 1998 and 1997 reflect a full
twelve month period.
Certain statements contained in this Annual Report on Form 10-K 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 under the captions "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Item 7A. Quantitative and Qualitative Disclosures About Market
Risk" relating to the Company's future outlook, anticipated capital
expenditures, future cash flows and borrowings, and sources of funding are
forward-looking statements. Such forward-looking statements reflect numerous
assumptions and involve a number of risks and uncertainties and actual results
may differ materially from those discussed in such statements. Among the factors
that could cause actual results to differ materially are: available sources and
cost of fuel; federal and state regulatory initiatives that increase
competition, threaten cost and investment recovery, and impact rate structures;
the ability of the Company to successfully reduce its cost structure;
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
Securities and Exchange Commission ("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.
For additional discussion on these risks, uncertainties and assumptions, see
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"Item 1. Business," "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Item 7A. Quantitative and Qualitative
Disclosures About Market Risk" contained herein.
The Company's principal executive office is located at 175 East Old Country
Road, Hicksville, New York 11801 and its telephone number is (631) 755-6650.
THE COMPANY
OVERVIEW
The Company sells, distributes and transports natural gas in a service territory
of approximately 1,233 square miles on Long Island. The Company owns and
operates gas distribution, transmission and storage systems that consist of
approximately 6,348 miles of distribution pipelines, 331 miles of transmission
pipelines and a gas storage facility. The Company serves approximately 478,000
customers, of which approximately 426,000 or 89%, are residential. Gas is
offered for sale to residential customers on a "firm" basis, and to commercial
and industrial customers on a "firm" or "interruptible" basis. "Firm" service is
offered to customers under schedules or contracts which anticipate no
interruptions, whereas "interruptible" service is offered to customers under
schedules or contracts which anticipate and permit interruption on short notice,
generally in peak-load seasons. Gas is available at any time of the year on an
interruptible basis, if the supply is sufficient and the supply system is
adequate. The Company also participates in the interstate markets by releasing
pipeline capacity or bundling pipeline capacity with gas for "off-system" sales.
An "off-system" customer consumes gas at facilities located outside the
Company's service territories, by connecting to the Company's facilities or one
of its transporter's facilities, at a point of delivery agreed to by the Company
and the customer. The Company purchases its natural gas for sale to its
customers under long-term supply contracts and short-term spot contracts. Such
gas is transported under both firm and interruptible transportation contracts.
In addition, the Company has commitments for the provision of gas storage
capability and peaking supplies.
For the year ended December 31, 1999, gas revenues were $637.1 million, and
operating income was $115.1 million.
The Company's operations can be significantly affected by seasonal weather
conditions. Traditionally, annual revenues are substantially realized during the
heating season as a result of higher sales of gas due to cold weather.
Accordingly, operating results historically are most favorable in the first and
fourth calendar quarters. However, the Company's gas utility tariff contains a
weather normalization adjustment that provides for recovery from or refund to
firm customers of material shortfalls or excesses of firm net revenues (revenues
less applicable gas costs, if any) during a heating season due to variations
from normal weather.
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SALES AND DISTRIBUTION
Gas sales and revenues for 1999 by class of customer are set forth below:
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Sales Revenues Revenues
Customer (MDTH) (thousands of $) (% of Total)
- ----------------------------------------------------- -------------- --------------------- ---------------------
FIRM
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Residential Heating.................................. 35,348 $ 339,643 53.31
Residential Non-Heating.............................. 2,828 39,599 6.22
Commercial/Industrial................................ 17,330 128,493 20.17
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Total Firm........................................... 55,506 507,735 79.70
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Firm Transportation.................................. 5,121 10,429 1.64
Transportation - Electric Generation................. 82,503 15,150 2.38
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Total Firm Transportation............................ 87,624 25,579 4.02
-------------- --------------------- ---------------------
Total Firm Gas Sales and Transportation............ 143,130 533,314 83.72
INTERRUPTIBLE........................................ 9,327 32,825 5.15
OFF-SYSTEM SALES..................................... 13,962 31,833 4.99
TRANSPORTATION....................................... 1,470 6,351 1.00
-------------- --------------------- ---------------------
Total Gas Sales and Transportation................. 167,889 604,323 94.86
OTHER RETAIL SERVICES................................ N/A 32,765 5.14
-------------- --------------------- ---------------------
Total Sales and Revenues*.......................... 167,889 $ 637,088 100.00
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*Excludes lost and unaccounted for gas.
Set forth below is information concerning certain operating statistics
applicable to the Company for the twelve months ended December 31:
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1999 1998 1997
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Revenues ($000)...................................... 637,088 628,528 667,157
Net Income ($000).................................... 41,517 34,373 * 41,198
Firm Gas Sales and Transportation (MDTH)............. 60,627 55,118 65,385
Transportation - Electric Generation (MDTH).......... 82,503 40,614 -
Other Deliveries (MDTH).............................. 24,759 28,353 19,280
Residential heating customers........................ 269,000 260,000 255,000
Degree Days, Cooler (Warmer) than Normal %........... (10.0) (17.5) 0.2
Capital Expenditures ($000).......................... 102,007 74,583 79,187
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*Excludes non-recurring and special charges associated with the LIPA Transaction
and KeySpan acquisition. - 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.
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The Company sells gas to its firm gas customers at the Company's cost for such
gas, plus a charge designed to recover the costs of distribution (including a
return of and a return on invested capital). The Company shares with its firm
gas customers net revenues (operating revenues less the cost of gas purchased
for resale) from off-system sales and, in addition, credits its firm gas
customers net revenues from on-system interruptible gas sales, thereby reducing
its rates to these firm customers.
The yearly variations in firm gas sales and transportation quantities is due,
primarily, to variations in weather between the periods presented. Measured in
annual degree days, weather was 10% warmer than normal in 1999, 17.5% warmer
than normal in 1998 and 0.2% colder than normal in 1997. After normalizing for
weather, firm sales volumes increased by 3.7% in 1999, as compared to 1998. Firm
sales quantities, after normalizing for weather, were approximately the same in
1998 as compared to 1997.
Transportation volumes related to electric generation, reflect the
transportation of gas to the Parent's electric generating facilities located on
Long Island. The Company has been reporting these sales since its inception in
May 1998.
For additional details on gas revenues, gas sales quantities and market
saturation, see "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations".
SUPPLY AND STORAGE
The Company has contracts for the purchase of firm long-term transportation and
storage services. The Company's gas supplies are purchased under long-term
contracts and on the spot market and are transported by interstate pipelines
from domestic and Canadian sources. Storage and peaking supplies are available
to meet system requirements during winter periods.
Regulatory actions, economic factors and changes in customers and their
preferences continue to reshape the Company's gas operations markets. A number
of multi-family, commercial and industrial customers and a growing number of
residential customers currently purchase their gas supplies from natural gas
marketers and then contract with the Company for local transportation, balancing
and other unbundled services. Since these customers are no longer reliant on the
Company for sales service, the quantity of gas that the Company must obtain to
meet remaining sales customers' requirements has been reduced. This trend is
likely to continue as state regulators continue to implement policies designed
to encourage customers to purchase their gas from suppliers other than the
traditional gas utilities. In October 1999, the Company filed a proposal with
the State of New York Public Service Commission ("NYPSC") consistent with the
NYPSC's policy objective of local distribution companies ending their role as
providers of merchant sales service for the natural gas commodity. For further
information, see "NYPSC Regulation" below.
PEAK-DAY CAPABILITY. The design criteria for the Company's gas system assumes an
average temperature of 0(0)F for peak-day demand. Under such criteria, the
Company estimates that the requirements to supply its firm gas customers would
amount to approximately 683 MDTH of gas for a peak-day during the 1999/2000
winter season and that the gas supplies available to the
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Company on such a peak-day amounts to approximately 745 MDTH. For the 2000/2001
winter season, the Company estimates that the peak-day requirements would amount
to approximately 712 MDTH and that the gas supplies available to the Company on
such a peak day amounts to approximately 732 MDTH. The 1999/2000 winter peak-day
throughput to the Company's customers was 642 MDTH, which occurred on January
17, 2000, at an average temperature of 9 degrees Fahrenheit, representing 86% of
the Company's per day capability at that time. The Company had sufficient gas
available to meet the requirements of firm gas customers for the 1999/2000
winter season, and projects that it also will have sufficient gas supply
available to meet such requirements for the 2000/2001 winter season. The
Company's firm gas peak-day capability is summarized in the following table:
Source MDTH per day % of Total
- ------ ------------ ----------
Pipeline................................. 263 35
Underground Storage...................... 294 40
Peaking Supplies......................... 188 25
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Total................................ 745 100
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PIPELINES. The Company purchases natural gas for sale to its customers under
contracts with suppliers located in domestic and Canadian supply basins and
arranges for its transportation to the Company's facilities under firm long-term
contracts with interstate pipeline companies. For the 1999/2000 winter,
approximately 74% of the Company's natural gas supply was available from
domestic sources and 26% from Canadian sources. The Company has available under
firm contract 263 MDTH per day of year-round and seasonal pipeline
transportation capacity to its facilities in the New York City metropolitan
area. Major providers of interstate pipeline capacity and related services to
the Company include: Transcontinental Gas Pipe Line Corporation ("Transco"),
Texas Eastern Transmission Corporation ("Texas Eastern"), Iroquois Gas
Transmission System ("Iroquois"), Tennessee Gas Pipeline Company ("Tennessee"),
and CNG Transmission Corporation ("CNG").
STORAGE. In order to meet higher winter demand, the Company also has long-term
contracts with Transco, Texas Eastern, Tennessee, CNG, and Honeoye Storage
Corporation, for underground storage capacity of 22,534 MDTH for the winter
season, with 294 MDTH per day, maximum deliverability.
PEAKING SUPPLIES. In addition to the pipeline and storage supply, the Company
supplements its winter supply with peaking supplies which are available on the
coldest days of the year to enable the Company to economically meet the
increased requirements of its heating customers. The Company's peaking supplies
include gas provided by the Company's liquefied natural gas ("LNG") plant and
under peaking supply contracts with four cogeneration facilities/independent
power producers located in its franchise areas. For the 1999/2000 winter season,
the Company has the capability to provide a maximum peak-day supply of 188 MDTH
on extremely cold days. The LNG plant has
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storage capacity of approximately 568 MDTH and peak-day throughput capacity of
103 MDTH, or 14% of peak-day supply. The Company has contract rights with Trigen
Services Corporation, Brooklyn Navy Cogeneration Partners, LP, Nissequogue Cogen
Partners and the New York Power Authority to purchase peaking supplies with a
maximum daily capacity of 85 MDTH and total available peaking supplies during
the winter season of 2,869 MDTH.
GAS SUPPLY MANAGEMENT. The Company and the Parent's other gas distribution
subsidiary, The Brooklyn Union Gas Company ("Brooklyn Union"), (collectively,
the Company and Brooklyn Union are referred to as the "Gas Companies") entered
into an agreement with Coral Energy Resources, L.P., a subsidiary of Shell Oil
Company ("Coral"). Coral assists the Gas Companies in the origination,
structuring, valuation and execution of energy-related transactions. A sharing
agreement exists between gas ratepayers and 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.
GAS COSTS. Gas costs for 1999 were $284.9 million and reflect warmer than normal
weather during the year. Variations in gas costs have little impact on operating
results of the Company since its current gas rate structure includes a gas
adjustment clauses whereby variations between actual gas costs and gas cost
recoveries are deferred and subsequently refunded to or collected from
customers.
REGULATION AND RATE MATTERS
Gas utility companies may be subject to either or both state and federal
regulation. In general, state public utility commissions, such as the NYPSC,
regulate the provision of retail services, including the distribution and sale
of natural gas to consumers. FERC regulates interstate natural gas
transportation and has jurisdiction over certain wholesale natural gas sales.
NYPSC REGULATION
NATURAL GAS UTILITIES. The NYPSC is the principal agency in the State of New
York which regulates, as "gas corporations" - companies that own, operate or
manage pipelines and other facilities used to distribute or sell natural gas.
The NYPSC regulates the construction, use and maintenance of intrastate natural
gas facilities, the retail rates, terms and conditions of service offered by gas
corporations, as well as matters relating to the quality, reliability and safety
of service. The NYPSC also regulates the corporate, financial and affiliate
activities of gas corporations. Brooklyn Union of Long Island is subject to the
full scope of NYPSC regulation.
Beginning in the mid-1980's, the NYPSC has taken a number of steps to require
the "unbundling" of natural gas sales and other services from the distribution
of natural gas through pipelines in order to encourage competition among gas
sellers and energy service providers. In 1985, the NYPSC ordered the major gas
utilities in the state to offer transportation service for large volume
customers who choose to purchase natural gas from other suppliers. Subsequently,
the NYPSC required that transportation service be made available to all
customers beginning on May 1, 1996. Brooklyn
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Union of Long Island has been providing a transportation service option to all
its customers in compliance with that NYPSC requirement.
In April 1997, the NYPSC ordered gas utilities to cease providing non-safety
related appliance repair service by no later than May 1, 2000. The Company
ceased providing non-emergency appliance repair services on July 1, 1999. During
a transition period from September 22, 1999 through April 30, 2000, the Company
is implementing a transition program to assist customers in their change to new
non-emergency appliance service providers.
In November 1998, the NYPSC issued a policy statement that anticipated that
natural gas utilities would cease sales of gas, and become transportation-only
providers, within three to seven years. Marketers, including those that are
affiliated with the natural gas utilities, are permitted to compete for retail
natural gas sales. The NYPSC's policy statement envisions proceedings to
restructure the operations of natural gas utilities in order to facilitate the
achievement of the objectives articulated in the policy statement.
On October 18, 1999, the Company and Brooklyn Union filed a Joint Restructuring
Proposal (the "Proposal") with the NYPSC. The Proposal outlines how the Gas
Companies would restructure their operations by encouraging all gas consumers to
migrate to transportation-only service. The Proposal is designed to (i) provide
significant impetus towards the Gas Companies exiting the gas supply business
and (ii) present opportunities for the development of a competitive unbundled
gas supply market for all customers. Settlement discussions with the Staff of
the NYPSC and other interested parties have been held regarding the Gas
Companies' restructuring proposals. The Company is unable to predict the outcome
of this matter. For more information on gas deregulation, see Item 7A,
Quantitative and Qualitative Disclosures About Market Risk.
The Company currently is operating under a three-year rate plan. The rate plan
applies to the period December 1, 1997 through November 30, 2000. Under the
plan, if the Company's earned return on common equity devoted to its operations
exceeds 11.10%, it must credit back to certain customers 60% of earnings up to
100 basis points above the 11.10% and 50% of any earnings in excess of a 12.10%
return. Both a customer service and a safety and reliability incentive
performance program became effective on December 1, 1997, with maximum pre-tax
return on equity penalties of 40 and 12 basis points, respectively, if the
Company fails to achieve certain performance standards in these areas. At the
conclusion of its rate plan on November 30, 2000, the Company or the NYPSC on
its own motion, may initiate a proceeding to revise the rates and charges of the
Company.
As part of the settlement agreement approved by the NYPSC in connection with its
approval of the KeySpan Acquisition (the "Stipulation"), the Company and
Brooklyn Union are subject to certain affiliate transaction restrictions, cost
allocation and financial integrity conditions and a code of conduct governing
affiliate relationships.
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FEDERAL REGULATION
NATURAL GAS COMPANIES. The Federal Energy Regulatory Commission ("FERC") has
jurisdiction to regulate certain natural gas sales for resale in interstate
commerce, the transportation of natural gas in interstate commerce, and, unless
an exemption applies, companies engaged in such activities. The natural gas
distribution activities of the Company and certain related intrastate gas
transportation functions are not subject to FERC jurisdiction. However, to the
extent that the Company sells gas for resale in interstate commerce, such sales
are subject to FERC jurisdiction and have been authorized by the FERC.
ENVIRONMENTAL MATTERS
OVERVIEW
The Company's ordinary business operations subject it to various federal, state
and local laws, rules and regulations dealing with the environment, including
hazardous waste, and its business operations are regulated by various federal,
regional, state and local authorities, including the Department of Environmental
Protection ("DEC") and the Nassau and Suffolk County Departments of Health.
These requirements govern both the normal, ongoing operations of the Company and
the remediation of contaminated properties historically used in utility
operations. Potential liability associated with the Company's historical
operations may be imposed without regard to fault, even if the activities were
lawful at the time they occurred.
Except as set forth below, no material proceedings relating to environmental
matters have been commenced or, to the knowledge of the Company, are
contemplated by any federal, state or local agency against the Company, and the
Company is not a defendant in any material litigation with respect to any matter
relating to the protection of the environment. The Company believes that its
operations are in substantial compliance with environmental laws and that
requirements imposed by environmental laws are not likely to have a material
adverse impact upon the Company. The Company believes that all prudently
incurred costs not recoverable through insurance or some other means with
respect to environmental requirements will be recoverable from its customers.
The Company also is pursuing claims against insurance carriers and potentially
responsible parties which seek the recovery of certain costs associated with the
investigation and remediation of contaminated properties.
REMEDIATION OF CONTAMINATED PROPERTY
SUPERFUND SITES. Federal and New York State Superfund laws impose liability,
regardless of fault, upon generators of hazardous substances for costs
associated with remediating contaminated property. In the course of its business
operations, the Company generates materials which are subject to these laws.
From time to time, the Company has received notices under these laws concerning
possible claims with respect to sites at which hazardous substances generated by
the Company and other potentially responsible parties ("PRPs") allegedly were
disposed.
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The DEC has notified the Company, pursuant to the State Superfund program, that
the Company may be responsible for the disposal of hazardous substances at the
Huntington/East Northport Site, a municipal landfill property. The DEC
investigation is in its preliminary stages, and the Company currently is unable
to estimate its share, if any, of the costs required to investigate and
remediate this site.
MANUFACTURED GAS PLANT SITES. The Company has identified, to date, nineteen
manufactured gas plant ("MGP") sites which were historically owned or operated
by the Company or its predecessors. Operations at these plants in the early
1900's may have resulted in the release of hazardous substances. These former
sites, some of which are no longer owned by the Company, have been identified to
both the DEC for inclusion on appropriate waste site inventories and the NYPSC.
The currently-known conditions of these 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 that are discussed below.
In 1998 the DEC notified the Company that the Sag Harbor and Rockaway Park MGP
sites owned by the Company would require remediation under the State's Superfund
program. Accordingly, the Sag Harbor and Rockaway Park sites became the subject
of one Administrative Consent Order ("ACO"), between the Company and the DEC in
March 1999. Four other MGP sites, Bay Shore, Glen Cove, Halesite and Hempstead
are the subject of a second ACO, which the Company executed with the DEC in
September 1999. Field investigations and, in some cases, interim remedial
measures, are underway or scheduled to occur at each of these sites under the
supervision of the DEC and the New York State Department of Health.
The Company was also requested by the DEC to perform preliminary site
assessments at the Patchogue, Babylon, Far Rockaway, Garden City and Hempstead
(Clinton St.) MGP sites, each of which were formerly owned by LILCO, under a
third ACO entered into in September 1999. Initial studies based on existing
available documentation have been completed for each such site and the DEC has
requested that the Company collect additional samples at each of the subject
properties.
Thus, the eleven sites discussed above are currently the subject of ACOs between
the Company and the DEC. The final end uses for these sites and therefore,
acceptable remediation goals have not yet been determined. The Company is
required to prepare a feasibility study for the remediation of each such site,
based on cleanup levels derived from risk analyses associated with the proposed
or anticipated future use of the properties. The schedule for completing this
phase of the work under the ACOs for the identified sites discussed above
extends through 2001.
The Company has recently identified eight additional sites to the DEC,
Brooklyn/Kings County Lighting, Brooklyn (New Utrecht Avenue), Glenwood Landing,
Riverhead, Inwood, Saltaire, Southold and East Hampton. The Company has not been
requested to conduct site investigation activity by the DEC at these eight sites
and is currently unable to determine what, if any, additional costs will be
incurred to remediate these eight sites.
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It is also possible, based on future investigation, that the Company may be
required to undertake investigation and potential remediation efforts at other
currently unknown former MGP sites. However, the Company is currently unable to
determine whether or to what extent such additional costs may be incurred.
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.
Accordingly, the Company presently estimates the cost of its MGP-related
environmental cleanup activities will be $76.7 million; which amount has been
accrued by the Company as its current best estimate of its aggregate
environmental liability for known sites. As previously indicated, the total
MGP-related costs may be substantially higher, depending upon remediation
experience, selected end use for each site, and actual environmental conditions
encountered.
The Company's NYPSC approved rate plan provides for the recovery of such
investigation and remediation costs. At December 31, 1999, the Company has
reflected a regulatory asset of $77.4 million. Expenditures incurred through
December 31, 1999 by the Company with respect to MGP-related activities total
$5.3 million.
Periodic discussions by the Company with insurance carriers and third parties
for reimbursement of some portion of MGP site investigation and remediation
costs continue. In December 1996, LILCO filed a complaint in the United States
District Court for the Southern District of New York against fourteen insurance
companies that issued general comprehensive liability policies to LILCO. In
January 1998, LILCO commenced a similar action against the same, and additional,
insurance companies in New York State Supreme Court, and the federal court
action subsequently was dismissed. The state court action is being conducted by
the Parent on behalf of the Company. The outcome of this proceeding cannot yet
be determined.
EMPLOYEE MATTERS
On December 31, 1999, the Company had 626 employees. Of that total, 529
employees are covered under collective bargaining agreements; 452 employees are
represented by Local 1049 of the International Brotherhood of Electrical Workers
(the "IBEW") and 77 employees are represented by Local 1381 of the IBEW.
The Company maintains collective bargaining agreements covering both of the
collective bargaining units detailed above, both of which expire in 2001. The
Company has not experienced any work stoppage during the past five years and
considers its relationship with employees, including those covered by collective
bargaining agreements, to be good.
ITEM 2. PROPERTIES
Information with respect to the Company's material properties used in the
conduct of its business is set forth in, or incorporated by reference in, Item 1
hereof. Except where otherwise specified, all
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such properties are owned or, in the case of certain rights of way used in the
conduct of its gas distribution business, held pursuant to municipal consents,
easements or long-term leases by the Company or the Parent. In addition to the
information set forth therein with respect to properties utilized by the
Company, the Parent owns or leases a variety of office space used for
administrative operations. The Parent then allocates applicable lease costs to
its various affiliates including the Company. In the case of leased office
space, the Parent anticipates no significant difficulty in leasing alternative
space at reasonable rates in the event of the expiration, cancellation or
termination of a lease.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is subject to various legal proceedings arising
out of the ordinary course of its business. The Company does not consider any of
such proceedings to be material to its business or likely to result in a
material adverse effect on its results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not required.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
KeySpan Corporation is the holder of record of all 100 shares of common stock of
the Company.
ITEM 6. SELECTED FINANCIAL DATA
Not required
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Current period results of operations are reported for the year ended December
31, 1999. In 1998 the Company changed its fiscal year end from March 31 to
December 31. Therefore, results of operations for the period ended December 31,
1998 reflect the nine month transition period April 1, 1998 to December 31, 1998
(the "Transition Period").
Due to the change in the Company's fiscal year in 1998, results of operations
for the year ended December 31, 1999 and for the Transition Period are not truly
comparable. As mentioned, results of operations for the Transition Period
reflect results for the period April 1, 1998 through December 31, 1998. As a
result, the Transition Period does not reflect earnings from gas heating-season
operations for the months of January through March. The Company realizes a
significant portion of its earnings during the months of January through March,
due to the large percentage of gas heating sales to total gas sales.
Since the reporting periods are not truly comparable, we have provided, in
addition to the discussion of the results of operations between periods that
follows, a discussion of operating results for the year ended December 31, 1999
compared to the full twelve months ended December 31, 1998. The intent of this
additional disclosure is to provide an explanation of the variations in
operating results between two comparable twelve month periods. (See "Review of
Operations - Comparable Twelve Month Comparison".)
The commentary that follows should be read in conjunction with the Notes to the
Financial Statements.
REVIEW OF HISTORICAL RESULTS
- ----------------------------
EARNINGS SUMMARY
Earnings for 1999 were $41.5 million, compared to a loss of $12.9 million for
the Transition Period. Earnings for the fiscal year ended March 31, 1998 were
$33.8 million. The significant increase in earnings for 1999 as compared to the
Transition period, is primarily due to the fact that earnings for the Transition
Period do not include earnings from heating season operations (months of January
through March) when the Company realizes the majority of its earnings. For the
months of January 1998 through March 1998, the Company realized earnings of
$39.5 million. Further, during the Transition Period, the Company: (i) incurred
special charges associated with the KeySpan Acquisition of $2.2 million
after-tax, and (ii) incurred charges amounting to $5.6 million after-tax
associated with an early retirement program initiated by the Parent. (See Note 9
to the Financial
12
<PAGE>
Statements, "Tax Benefits and Costs Related to the LIPA Transaction and Special
Charges" for further details of these charges.)
The decrease in earnings for the Transition Period as compared to the fiscal
year ended March 31, 1998 is also due to the absence of heating season
operations, for the months of January through March, during the Transition
Period.
REVENUES
The increase in revenues of $280.5 million, or 79%, in 1999, as compared to the
Transition Period, reflects primarily revenues from gas heating sales. For the
months of January 1999 through March 1999, revenues were $268.3 million or
approximately 40% of total gas distribution revenues for the entire year. The
Transition Period, which reflects the period April 1, 1998 through December 31,
1998, does not include revenues from heating season operations for the months of
January through March.
Revenues for the Transition Period decreased by $289.0, or 45%, as compared to
the fiscal year ended March 31, 1998, and reflects, primarily, the fact that
revenues for the Transition Period do not include revenues from heating season
operations for the months of January through March.
OPERATING EXPENSES
Operating expenses were $522.0 million in 1999, and $331.8 million and $523.0
million for the Transition Period and fiscal year ended March 31, 1998,
respectively. The increase in 1999 as compared to the Transition Period of
$190.2 million, or 57%, is due, primarily to the difference in reporting
periods. The decrease in operating expenses for the Transition Period as
compared to the fiscal year ended March 31, 1998 of $191.2 million or 37%, is
due, primarily to the shorter reporting period.
PURCHASED GAS
Variations in gas costs have little impact on operating results as the current
gas rate structure 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. Comparative variations between the
reported periods are due to changes in gas volumes and prices, and the
differences in the reporting periods.
13
<PAGE>
OPERATIONS AND MAINTENANCE EXPENSE
Operations and maintenance expense was $120.6 million in 1999, and $109.1
million and $107.2 million for the Transition Period and fiscal year ended March
31, 1998, respectively. The increase in operations and maintenance expense in
1999 as compared to the Transition Period of $11.5 million, or 11%, is primarily
due to the difference in reporting periods. The increase in operations and
maintenance expense for the Transition period compared to the fiscal year ended
March 31, 1998 is primarily due to a before-tax charge of $8.7 million,
associated with an early retirement program initiated by the Parent. Excluding
this charge, operations and maintenance expense for the Transition Period
decreased by $6.8 million or 6% as compared to the fiscal year ended March 31,
1998 due to the shorter reporting period.
On a comparable twelve month basis , the Company has realized significant
reductions in operations and maintenance expense derived, in part, from cost
reduction measures and operating efficiencies employed during the past few
years. To gain a better perspective of operations and maintenance expense on a
comparable twelve month basis see "Review of Operations - Comparable Twelve
Month Comparison".
OTHER OPERATING EXPENSES
Variations between the reported periods for depreciation and amortization
expense reflects gas utility property additions in all periods and the
differences in the reporting periods. Further, for the fiscal year ended March
31, 1998, depreciation and amortization expense includes $11.2 million of
expense associated with the amortization of certain regulatory assets. Operating
taxes include state and local taxes on utility revenues and property. The
applicable property base and tax rates generally have increased in all periods.
OTHER INCOME AND DEDUCTIONS
Other income and deductions for the Transition Period primarily reflects
non-recurring special charges associated with the KeySpan Acquisition. (See Note
9 to the Financial Statements, "Tax Benefits and Costs Related to the LIPA
Transaction and Special Charges.")
Other income and deductions for the fiscal year ended March 31, 1998 primarily
reflects a charge associated with certain benefits earned by officers of LILCO.
14
<PAGE>
INTEREST EXPENSE
The increase in interest expense in 1999 as compared to the Transition Period,
is due to the increased reporting period. The level of debt outstanding has
generally remained constant in all periods reported.
INCOME TAXES
Income tax expense reflects the level of pre-tax income in all periods and for
1999, an adjustment to deferred tax expense and current tax expense for the
utilization of a previously deferred net operating loss ("NOL") carryforward
recorded in 1998. In the Transition Period, the Company recorded, as a deferred
tax asset, a benefit of $19.7 million for the NOL carryforward. The Company
estimated that the entire benefit from the NOL carryforward from 1998 would be
realized in the Parent's consolidated 1999 federal income tax return, and
accordingly, applied the NOL benefit in its 1999 federal tax provision. Pre-tax
income and the related deferred income tax expense for the Transition Period
were affected by charges related to the KeySpan Acquisition and charges related
to the early retirement program. (See Note 2 to the Financial Statements,
"Income Tax.")
15
<PAGE>
REVIEW OF OPERATIONS - COMPARABLE TWELVE MONTH COMPARISON
As previously mentioned, due to the change in the Company's fiscal year end in
1998 results of operations for 1999 are not truly comparable to the results of
operations for the Transition Period. For comparative purposes we have presented
selected financial information for the entire twelve month period ended December
31, 1998, excluding special charges, compared to 1999.
The table below highlights certain significant financial data and operating
statistics for the periods indicated.
(IN THOUSANDS OF DOLLARS)
-------------------------
Year Ended Twelve Months Ended
December 31, 1999 December 31, 1998
- ---------------------------------------- ------------- ----------------
Revenues $ 637,088 $ 628,528
Cost of gas 284,924 279,023
Revenue taxes 30,448 29,968
- ----------------------------------------------------------------------------
Net Revenues 321,716 319,537
- ----------------------------------------------------------------------------
Operations and maintenance 120,628 132,471
Depreciation and amortization 32,801 28,965
Operating taxes 53,185 48,558
- ----------------------------------------------------------------------------
Total Operating Expenses 206,614 209,994
- ----------------------------------------------------------------------------
Operating Income $ 115,102 $ 109,543
============ ===============
Net Income $ 41,517 $ 37,130
============ ===============
Firm gas sales (MDTH) 55,506 51,003
Firm transportation (MDTH) 5,121 4,115
Transportation - Electric Generation (MDTH) 82,503 40,614
Other sales (MDTH) 24,759 28,353
Warmer than normal 10.0% 17.5%
============================================================================
NET REVENUES
Net revenues in 1999 remained relatively constant as compared to net revenues in
1998. Generally, net revenues associated with firm sales additions were
partially offset by rate reductions associated with the KeySpan Acquisition.
Firm sales quantities, normalized for weather variations, increased by 3.7%,
contributing over $11 million to net revenues. Firm sales additions were
generated on Long Island from the addition of new gas customers and oil to gas
conversions. Long Island has a very low natural gas saturation rate
16
<PAGE>
and significant gas-sales growth opportunities remain available. The Company
estimates that only 28% of one and two-family homes on Long Island currently use
natural gas for space heating, while 28% of the multi-family market and 69% of
the commercial market use gas for space heating. In this service area, the
Company will seek growth through the expansion of its distribution system as
well as through the conversion of residential homes and the pursuit of
opportunities to grow multi- family, industrial and commercial markets.
Partially offsetting the benefits derived from gas sales additions, were rate
reductions associated with the KeySpan Acquisition. In 1998 the Company reduced
its rates to core customers by $12.2 million annually effective February 5, 1998
and by an additional $6.3 million annually effective May 29, 1998. For the year
ended December 31, 1999, rate reductions impacted revenues by approximately $7.4
million as compared to 1998.
Also contributing to the variation in comparative net margins in 1999 was a
decrease in certain regulatory incentives earned by the Company, offset, in
part, by revenue benefits associated with colder weather.
SALES, TRANSPORTATION AND OTHER VOLUMES
Comparative firm gas sales volumes increased by 8.8% in 1999, due to the
increase in normalized firm sales, as discussed above, and the benefits derived
from colder weather in 1999 as compared to 1998. Firm gas transportation volumes
increased in 1999, as a result of natural gas deregulation initiatives. At
December 31, 1999, approximately 5,000 residential, commercial and industrial
customers, with annual requirements of approximately 5,400 MDTH, or 7.7% of the
Company's annual firm gas system requirements, purchased their gas supply from
sources other than the Company. The Company's net margins are not affected by
customers opting to purchase their gas supply from sources other than the
Company, since distribution rates charged to transportation customers are
essentially the same as those charged to sales customers. (See Item 7A.
Quantitative and Qualitative Disclosures About Market Risk for a discussion of
competitive issues facing the Company.)
Transportation volumes related to electric generation, reflect the
transportation of gas to the Parent's electric generating facilities located on
Long Island. The Company began reporting these sales since its inception in May
1998. Net revenues from these volumes are marginal.
Other sales volumes include on-system interruptible volumes, off-system sales
volumes (sales made to customers outside of the Company's service territory) and
related transportation.
17
<PAGE>
OPERATING EXPENSES
Comparative operations and maintenance expense decreased in 1999 by $11.8
million, or 8.9%. During the year, the Company realized significant reductions
in operations and maintenance expense reflecting, primarily, the benefits
derived from cost reduction measures and operating efficiencies employed during
the past few years. Such measures included, but were not limited to, the early
retirement program completed in 1998. The Company intends to continue its
on-going cost containment initiatives and anticipates further reductions in
operations and maintenance expenses in 2000. In addition, the Company
discontinued providing non-safety related appliance repair services on July 1,
1999, further reducing operating expenses. Another Parent subsidiary is
currently providing these services.
The increase in depreciation and amortization expense reflects continued
property additions and amortization of previously deferred merger related
expenses. As provided for in the Stipulation Agreement, which in effect approved
the KeySpan Acquisition, the Company, for ratemaking purposes, deferred certain
merger related costs at the time of the merger. These costs are being amortized
over a ten year period. (See Gas Distribution - Rate Matters for further details
on the Stipulation Agreement.) Further, operating taxes which include state and
local taxes on property have increased as the applicable property base and tax
rates generally have increased.
NET INCOME
Net Income increased in 1999 by $4.4 million, or 11.8% due primarily to the net
result of the aforementioned items and lower interest expense.
LIQUIDITY, CAPITAL EXPENDITURES AND FINANCING, AND DIVIDENDS
LIQUIDITY
The increase in cash flow from operations in 1999 as compared to the Transition
Period, primarily reflects the significant positive cash flows that are realized
from revenues generated during a heating season. Approximately 75% of total
annual gas revenues are realized during the heating season (November 1 to April
30) as a result of the large proportion of heating sales compared to total gas
sales. Results from gas-heating season operations for the months of January
through March are not reflected in the Transition Period, as previously
explained. Further, cash flow from operations in 1999 reflects the utilization,
in 1999, of a $19.7 million NOL which reduced current income tax payments.
The Company does not maintain a cash balance. All cash generated from billings
to customers for gas service is maintained by the Parent's corporate and
administrative subsidiary. Further, all
18
<PAGE>
payments to third parties for Company payables, including labor, are made by the
Parent's corporate and administrative subsidiary on behalf of the Company. (See
Note 7 to the Financial Statements, "Related Party Transactions".) The Company
records as a note receivable from or note payable to the Parent's corporate and
administrative subsidiary the difference between the cash received from
customers compared to third party payments. At December 31, 1999, the Company
had a note payable of $258.1 million to the Parent's corporate and
administrative subsidiary. In addition, at December 31, 1999 the Company had a
current intercompany accounts receivable balance of $43.4 million from the
Parent's corporate and administrative subsidiary, approximating interest
payments on the Company's allocated share of the promissory notes for the twelve
months ended December 31, 1999. (See Note 5 to the Financial Statements
"Long-Term Debt" for additional information on the promissory notes.)
CAPITAL EXPENDITURES AND FINANCING
Capital Expenditures
Capital expenditures were $102.0 million in 1999 and were primarily for the
renewal and replacement of mains and services and for the expansion of the gas
distribution system on Long Island. Capital expenditures for 2000 are estimated
to be at the same level as 1999. The amount of capital expenditures is reviewed
on an ongoing basis and can be affected by timing, scope and changes in
investment opportunities.
Financing
In December 1999, the Company and the Parent jointly filed a shelf registration
statement with the Securities and Exchange Commission in anticipation of
issuing, from time to time, up to $600 million of Medium Term Notes. These notes
will be issued by the Company and unconditionally guaranteed by the Parent. On
February 1, 2000, the Company issued $400 million 7.875 % Notes due February 1,
2010, the net proceeds of which were used to replace $397 million of the
Company's portion of the promissory notes due LIPA which had previously matured
in June 1999. (See Note 5 to the Financial Statements, "Long-Term Debt" for a
further discussion of this financing and the associated repayment of a portion
of the promissory notes.)
DIVIDENDS
Pursuant to NYPSC's orders dated February 5, 1998 and April 14, 1998 approving
the KeySpan Acquisition, the Company's ability to pay dividends to the Parent is
conditioned upon the Company maintaining a capital structure with debt not
exceeding 58% of total capitalization. In addition, the level of dividends paid
may not be increased from current levels if a 40 basis point penalty is incurred
under the customer service performance program. At the end of the Company's rate
year, November 30, 1999, the ratio of debt to total capitalization was
approximately 47%.
19
<PAGE>
GAS DISTRIBUTION - RATE MATTERS
By orders dated February 5, 1998 and April 14, 1998 the NYPSC approved a
Stipulation Agreement ("Stipulation") among Brooklyn Union, LILCO, the Staff of
the Department of Public Service and six other parties that in effect approved
the KeySpan Acquisition and established gas rates for the Company. Under the
Stipulation, $1 billion of efficiency savings, excluding gas costs, attributable
to operating synergies that are expected to be realized over the 10 year period
following the combination, were allocated to the Company's ratepayers (as well
as ratepayers of the Parent's other gas utility subsidiary, Brooklyn Union) net
of transaction costs.
The Stipulation required the Company to reduce base rates to its customers by
$12.2 million annually effective February 5, 1998 and by an additional $6.3
million annually effective May 29, 1998. The Company is subject to an earnings
sharing provision pursuant to which it is required to credit to firm customers
60% of any utility earnings in any rate year up to 100 basis points above a
return on equity of 11.10% and 50% of any utility earnings in excess of a return
on equity of 12.10%. The Company did not earn above its threshold return level
in its rate year ended November 30, 1999. At the conclusion of the Company's
rate plan on November 30, 2000, the Company or the NYPSC on its own motion, may
initiate a proceeding to revise the rates and charges of the Company.
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 cost of its
manufactured gas plant ("MGP") related environmental cleanup activities will be
approximately $76.7 million and has recorded a related liability for such
amount. Further, as of December 31, 1999, the Company has expended a total of
$5.3 million. (See Note 6 to the Financial Statements, "Contractual Obligations,
Contingencies and Fair Values.")
YEAR 2000 ISSUES
The Company experienced no significant Year 2000 related abnormalities
associated with the roll over to the year 2000. All systems needed to deliver
gas to customers, as well as those systems needed to manage daily business
functions performed without significant malfunction. Nevertheless, the Company
continues to monitor systems for any unexpected Year 2000 related abnormalities.
The Company has spent a total of approximately $4.2 million to address the Year
2000 issue. While the Year 2000 Project is virtually complete, some minor
expenses will be incurred for the continued review of systems to monitor for
Year 2000 abnormalities. The largest portion of the Year 2000 costs was
attributable to the assessment, modification, and testing of corporate
information technology ("IT") supported computer software and in-house written
applications. The Company's
20
<PAGE>
implementation of the Year 2000 Project did not directly result in delaying any
IT projects. The Company's cash flow from operations and cash on-hand have been
sufficient to fund the Year 2000 Project expenditures.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to various risk exposures and uncertainties associated
with its 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. Set forth
below is a description of this exposure and an explanation as to how the Company
has sought to reduce this risk.
The energy industry continues to undergo fundamental changes, which may have a
significant impact on the future financial performance of utilities, as
regulatory authorities, elected officials and customers seek lower energy prices
and broader choices.
Over the past few years, the NYPSC has been formulating a policy framework to
guide the transition of New York State's gas distribution industry in the
deregulated gas industry environment. Since 1996, customers in the small-volume
market have been given the option to purchase their gas supplies from sources
other than the Company. Large-volume customers had this option for a number of
years prior to 1996. In addition to transporting gas that customers purchase
from marketers, the Company has been providing billing, meter reading and other
services for aggregate rates that match the distribution charge reflected in
otherwise applicable sales rates to supply these customers.
In November 1998, the NYPSC issued a policy statement setting forth its vision
for furthering competition in the natural gas industry. Under this vision,
regulated natural gas utilities or local distribution companies ("LDCs") would
plan to exit the business of purchasing gas for and selling gas to customers
(the merchant function) over the next three to seven years. LDCs would remain
the operators of the gas system (the distribution function) and the provider of
last resort of natural gas supplies during that period and until alternatives
are developed. The NYPSC's goal is to encourage more competition at the local
level by separating the merchant function from the distribution function.
As required by the NYPSC's policy statement, the Company filed a joint
restructuring proposal (with the Parent's other gas utility subsidiary, Brooklyn
Union) with the NYPSC in October 1999. The filing offers a comprehensive
restructuring plan designed to (i) provide a significant impetus toward exiting
the gas supply business and (ii) present the NYPSC with an opportunity to
realize its vision of a competitive unbundled gas supply market for all
customers within the transitional time frame of three to seven years. Under the
proposal the Company would continue to be the provider of last
21
<PAGE>
resort during the transition period. The restructuring plan seeks to "jump
start" the migration of the mass customer market (especially the residential and
the small commercial and industrial markets) from bundled utility sales service
to unbundled transportation service, accelerates the elimination of regulatory
cost burdens from the gas supply market, provides protections for low income
customers, and sets forth a plan to minimize potential strandable costs.
Currently, the Company has contracts for the purchase of upstream interstate
transportation, storage and supply with annual fixed demand charges of
approximately $104 million. These contracts have terms that range from one to
fourteen years and the associated demand charges through the term of the
contracts are approximately $652 million. The Company has estimated its
strandable costs as the costs under these contracts in excess of market value.
The Company has assumed that, if it were necessary to assign the contracts to
third parties, the Company could recover the market value of the underlying
assets. Therefore, the difference between the contract costs and the market
value is the potential "strandable" costs. The Company estimates that, if it
would continue to recover demand charges for the next five years, then the
estimated potential strandable costs for contracts that will not expire by 2005
and would not be needed to provide service to firm transportation customers will
be, on a present value basis, approximately $36 million.
In its proposal, the Company has set forth a plan to recover potential
strandable costs during the transition period. The plan includes the creation of
a price differential between gas utility bundled service and unbundled services
available in the marketplace. The increased revenue generated from this price
differential would be retained by the Company for future application to recover
costs associated with the transition to competition, including strandable costs.
In addition, the Company recommends retention of certain customer refunds that
otherwise would have been refunded to customers during the transition period.
The plan also recommends certain financial incentives and mechanisms to mitigate
potential strandable costs. The Company believes that implementation of this
plan, or some variation designed to achieve the same objectives, will allow the
Company to fully recover its strandable costs.
The Company believes that its proposal strikes a balance among competing
stakeholder interests in order to most effectively make available the benefits
of the unbundled gas supply market to all customers. The Company currently is
not able to determine the outcome of this proceeding and what effect, if any, it
may have on its operations.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
================================================================================
December 31, 1999 December 31, 1998
================================================================================
ASSETS
CURRENT ASSETS
Customer accounts receivable $ 122,889 $ 108,631
Accounts receivable, intercompany 43,405 32,637
Other accounts receivable 117,738 40,890
Allowance for uncollectible accounts (5,310) (5,586)
Gas in storage, at average cost 72,741 70,957
Materials and supplies, at average cost 5,507 7,095
Other 1,445 1,562
----- -----
358,415 256,186
------- --------
PROPERTY
Gas 1,393,533 1,305,716
Accumulated depreciation (245,956) (232,703)
--------- ---------
1,147,577 1,073,013
---------- ---------
DEFERRED CHARGES
Regulatory assets 179,742 155,805
Deferred income tax 52,065 100,229
Other 373 1,614
--- -----
232,180 257,648
-------- -------
TOTAL ASSETS $ 1,738,172 $ 1,586,847
============ ===========
The Notes to the Financial Statements are an integral part of these statements.
23
<PAGE>
BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
================================================================================
December 31, 1999 December 31, 1998
================================================================================
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
Current maturities of long-term debt $ 397,000 $ 397,000
Accounts payable and accrued expenses 142,481 100,715
Taxes accrued 5,005 3,930
Customer deposits 3,845 4,139
----- -----
548,331 505,784
------- --------
INTERCOMPANY ACCOUNTS PAYABLE, LONG-TERM 258,079 180,968
----------- -----------
DEFERRED CREDITS AND OTHER LIABILITIES
Regulatory liabilities 20,888 23,332
Operating reserves and other 81,896 86,175
------ ------
102,784 109,507
-------- --------
CAPITALIZATION
Premium on capital stock 657,862 659,113
Retained earnings (4,788) (45,784)
------- --------
Total common shareholders' equity 653,074 613,329
Long-term debt 175,904 177,259
------- -------
Total Capitalization 828,978 790,588
--------- --------
TOTAL LIABILITIES AND CAPITALIZATION $ 1,738,172 $ 1,586,847
=========== ===========
The Notes to the Financial Statements are an integral part of these statements.
24
<PAGE>
<TABLE>
STATEMENT OF INCOME
================================================================================
(IN THOUSANDS OF DOLLARS)
<CAPTION>
Nine Months Fiscal Year
YEAR ENDED Ended Ended
DECEMBER 31, 1999 December 31, 1998 March 31, 1998
- -------------------------------------------------------------- ---------------------- --------------------- ------------------
<S> <C> <C> <C>
REVENUES
Gas Distribution $ 637,088 $ 356,634 $ 645,659
----------- ---------------- ---------------
OPERATING EXPENSES
Purchased gas 284,924 150,622 299,469
Operations and maintenance 120,628 109,081 107,221
Depreciation and amortization 32,801 18,260 38,584
Operating taxes 83,633 53,817 77,734
----------- ---------------- ---------------
Total Operating Expenses 521,986 331,780 523,008
----------- ---------------- ---------------
OPERATING INCOME 115,102 24,854 122,651
----------- ---------------- ---------------
OTHER INCOME AND (DEDUCTIONS)
Transaction related expenses (net of $7,517 income tax) - (2,128) -
Other 159 72 (3,526)
----------- ---------------- ---------------
Total Other Income (Deductions) 159 (2,056) (3,526)
----------- ---------------- ---------------
INCOME BEFORE INTEREST CHARGES AND INCOME TAXES 115,261 22,798 119,125
----------- ---------------- ---------------
INTEREST CHARGES 50,488 41,058 52,409
----------- ---------------- ---------------
INCOME TAXES
Current (25,146) (4,408) 9,498
Deferred 48,402 (1,961) 16,660
----------- ---------------- ---------------
Total Income Taxes 23,256 (6,369) 26,158
----------- ---------------- ---------------
NET INCOME (LOSS) 41,517 (11,891) 40,558
Preferred stock dividend requirements - 1,056 6,743
---------- --------------- ---------------
EARNINGS (LOSS) FOR COMMON STOCK $ 41,517 $ (12,947) $ 33,815
=========== ================ ===============
</TABLE>
<TABLE>
STATEMENT OF RETAINED EARNINGS
(IN THOUSANDS OF DOLLARS)
================================================================================
<CAPTION>
Nine Months Fiscal Year
YEAR ENDED Ended Ended
DECEMBER 31, 1999 December 31, 1998 March 31, 1998
- ---------------------------------------------------------------- -------------------- --------------------- ------------------
<S> <C> <C> <C>
Balance at beginning of period $ (45,784) $ - $ 120,275*
Net income for period 41,517 - 40,558
Net loss for period May 29, 1998 - December 31,1998 - (44,728) -
Deductions
Cash dividends declared on common and preferred stock - 1,056 35,202
Other 521 - -
----- ----- -----
Balance at end of period $ (4,788) $ (45,784) $ 125,631*
================ ================= ==============
</TABLE>
*Represents allocated equity of the former Long Island Lighting Company's gas
operation. See Note 1b. "Summary of Significant Accounting Policies" for further
details regarding Retained Earnings.
The Notes to the Financial Statements are an integral part of these statements.
25
<PAGE>
STATEMENT OF CAPITALIZATION
(IN THOUSANDS OF DOLLARS)
================================================================================
DECEMBER 31, December 31,
1999 1998
--------------- -------------
COMMON SHAREHOLDERS' EQUITY
Common stock - $0.01 par value, 100 shares
outstanding $ - $ -
Premium of capital stock 657,862 659,113
Retained earnings (4,788) (45,784)
------- --------
TOTAL COMMON SHAREHOLDERS' EQUITY 653,074 613,329
--------- --------
ALLOCATED PROMISSORY NOTES
Debentures
7.30% Series due July 15, 1999 397,000 397,000
8.20% Series due March 15, 2023 175,904 177,259
------- -------
572,904 574,259
Less: Current Maturities 397,000 397,000
------------ -----------
Total Allocated Promissory Notes 175,904 177,259
------- -------
TOTAL CAPITALIZATION $ 828,978 $ 790,588
============ ===========
The Notes to the Financial Statements are an integral part of these statements.
26
<PAGE>
<TABLE>
STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
================================================================================
<CAPTION>
Nine Months Fiscal Year
YEAR ENDED Ended Ended
DECEMBER 31, December 31, March 31,
1999 1998 1998
- ---------------------------------------------------------------- ------------------- ------------------ ------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income (Loss) $ 41,517 $ (11,891) $ 40,558
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES
Depreciation and amortization 32,801 18,260 38,584
Deferred income tax 48,402 (1,961) 16,660
CHANGES IN ASSETS AND LIABILITIES
Accounts receivable and accrued revenues (102,150) (13,253) 1,371
Materials and supplies, fuel oil and gas in storage (196) (53,810) (2,873)
Accounts payable and accrued expenses 42,841 (18,983) (1,974)
Special deposits 335 19,704 (12,165)
Other (38,654) 3,443 427
-------------- -------------- -------------
Net Cash Provided by (Used in) Operating Activities 24,896 (58,491) 80,588
-------------- -------------- -------------
INVESTING ACTIVITIES
Capital expenditures (102,007) (59,683) (78,897)
Transaction related adjustments - 30,620 -
------- ------ -------
Net Cash (Used in) Investing Activities (102,007) (29,063) (78,897)
-------------- -------------- -------------
FINANCING ACTIVITIES
Intercompany accounts payable - long-term 77,111 86,885 -
Issuance of common stock - - 2,505
Issuance of long-term debt - - 13,140
Repayment of long-term debt - - (9,868)
Repayment of preferred stock - - (154)
Dividends paid - (1,056) (35,202)
-------------- -------------- -------------
Net Cash Provided by (Used in) Financing Activities 77,111 85,829 (29,579)
-------------- -------------- -------------
Net (Decrease) Increase in Cash and Cash Equivalents $ - $ (1,725) $ (27,888)
============== ============== =============
Cash and cash equivalents at beginning of period - 1,725 29,613
Net (Decrease) Increase in cash and cash equivalents - (1,725) (27,888)
-------------- -------------- -------------
Cash and Cash Equivalents at End of Period $ - $ - $ 1,725
============== ============== =============
</TABLE>
The amount of interest and federal income tax paid during the above periods
approximates the amounts in the respective Statement of Income. Cash equivalents
are short-term marketable securities purchased with maturities of three months
or less that were carried at cost which approximates fair value.
The Notes to the Financial Statements are an integral part of these statements.
27
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION
KeySpan Gas East Corporation, d/b/a Brooklyn Union of Long Island (the
"Company") is a wholly owned subsidiary of KeySpan Corporation d/b/a KeySpan
Energy (the "Parent"), the successor to Long Island Lighting Company ("LILCO"),
as a result of a transaction with the Long Island Power Authority ("LIPA") (the
"LIPA Transaction") and following the acquisition (the "KeySpan Acquisition") of
KeySpan Energy Corporation ("KSE"). The Company was formed on May 7, 1998 and on
May 28, 1998 acquired substantially all of the assets related to the gas
distribution business of LILCO immediately prior to the LIPA Transaction. (See
Note 8, "Sale of LILCO Assets, Acquisition of KeySpan Energy Corporation and
Transfer of Assets and Liabilities to the Parent".) The Company provides gas
distribution services to customers in the Long Island counties of Nassau and
Suffolk and the Rockaway peninsula of Queens county and owns substantially all
of the gas distribution assets formerly owned by LILCO.
B. BASIS OF PRESENTATION
As noted, the Company commenced operations on May 28, 1998. Prior thereto, the
gas distribution operations of LILCO were included as part of its gas and
electric operations. At the time of the LIPA transaction, the Company ceased
being an integrated part of LILCO's operations, and became a wholly-owned
subsidiary of the Parent. Assets and liabilities were transferred to the Company
at approximately equal amounts, and consequently, the accompanying December 31,
1998 Statement of Retained Earnings reflects no opening balance. In September
1998, the Company changed its fiscal year end from March 31 to December 31.
Therefore, financial statements presented herein include the year ended December
31, 1999, the nine month period April 1, 1998 through December 31, 1998 (the
"Transition Period"), and the fiscal year ended March 31, 1998.
Prior to the LIPA Transaction, certain of LILCO's income statement accounts were
recorded in its books and records as directly related to its gas operations.
These items included: revenues, purchased gas costs, certain operations and
maintenance ("O&M") expenses, depreciation of gas utility plant, revenue taxes,
certain other income and deductions, and federal income taxes.
Certain income and expense accounts common to both LILCO's gas and electric
operations prior to the LIPA Transaction have been allocated/determined based on
the following basis, which is consistent with the methodology utilized by the
State of New York Public Service Commission ("NYPSC") to establish rates.
28
<PAGE>
Common O&M expenses, operating taxes (excluding revenue taxes) and miscellaneous
income and deductions were allocated based upon methodologies employing: number
of active meters; revenues; utility plant; and labor associated with gas
operations, as a percentage of total operations.
Interest income, interest expense and preferred stock dividend requirements were
allocated based upon gas utility plant as a percentage of total utility plant,
(including certain electric related regulatory assets), adjusted for appropriate
deferred federal income taxes.
Depreciation on common plant was allocated based upon an annual study of the
utilization of common facilities by the gas and electric operations of LILCO.
The Company believes that the basis of allocation described above is reasonable.
Reported results of operations and the financial position of LILCO's gas
operations may have been different if such operations were conducted as a
separate subsidiary of LILCO, rather than as part of a combined integrated gas
and electric company.
Certain common assets which were previously part of LILCO's operations prior to
May 28, 1998 have been transferred to other affiliates of the Company (e.g.
common plant, inventory, etc.). Income and expenses related to these assets
prior to May 28, 1998 have been allocated in the accompanying financial
statements. After May 28, 1998, the Company has been charged by affiliated
companies for the use of these assets, resulting in an operating expense of
$14.4 million for the twelve months ended December 31, 1999 and $9.2 million for
the nine months ended December 31, 1998.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
C. ACCOUNTING FOR THE EFFECTS OF RATE REGULATION
The Company's accounting records are maintained in accordance with the Uniform
System of Accounts prescribed by the NYPSC. The Company's financial statements
reflect the ratemaking policies and actions of these regulators in conformity
with generally accepted accounting principles for rate-regulated enterprises.
The Company is subject to the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 71, "Accounting for the Effects of Certain Types of
Regulation". This statement recognizes the ability of regulators, through the
ratemaking process, to create future economic benefits and
29
<PAGE>
obligations affecting rate-regulated companies. Accordingly, the Company records
these future economic benefits and obligations as regulatory assets and
regulatory liabilities, respectively.
The following table presents the Company's net regulatory assets at December 31,
1999 and December 31, 1998.
(IN THOUSANDS OF DOLLARS)
================================================================================
December 31, 1999 December 31, 1998
----------------- -----------------
Regulatory Assets
Property taxes $ 40,348 $ 14,108
Environmental costs 77,416 82,294
Postretirement benefits other than pensions 48,553 48,614
Costs associated with the KeySpan Acquisition 13,425 10,789
------ ------
Total Regulatory Assets $ 179,742 $ 155,805
Regulatory Liability 20,888 23,332
------ ------
Total Net Regulatory Assets $ 158,854 $ 132,473
================================================= ========= ============
The regulatory assets above are not included in the Company's rate base.
However, the Company records carrying charges on the property tax and costs
associated with the KeySpan Acquisition deferrals. The Company also records
carrying charges on its regulatory liability. The remaining regulatory assets
represent, primarily, costs for which expenditures have not yet been made, and
therefore, carrying charges are not recorded. The Company anticipates recovering
these costs in its gas rates concurrently with future cash expenditures. If
recovery is not concurrent with the cash expenditures, the Company will record
the appropriate level of carrying charges. The Company estimates that full
recovery of its regulatory assets will not exceed 15 years.
Rate regulation is undergoing significant change as regulators and customers
seek lower prices for utility service and greater competition among energy
service providers. In the event that regulation significantly changes the
opportunity for the Company to recover its costs in the future, all or a portion
of the Company's regulated operations may no longer meet the criteria for the
application of SFAS No. 71. In that event, a write-down of all or a portion of
the Company's existing regulatory assets and liabilities could result. If the
Company had been unable to continue to apply the provisions of SFAS No. 71 at
December 31, 1999, the Company would have applied the provisions of SFAS No. 101
"Regulated Enterprises - Accounting for the Discontinuation of Application of
FASB Statement No. 71". The Company estimates that the write-off of its net
regulatory asset could result in an after-tax charge to net income of $103.3
million, which would be classified as an extraordinary item. In management's
opinion, the Company will be subject to SFAS No. 71 for the foreseeable future.
30
<PAGE>
D. REVENUES
Utility gas customers are billed monthly and bi-monthly on a cycle basis.
Revenues include unbilled amounts related to the estimated gas usage that
occurred from the most recent meter reading to the end of each month.
The cost of gas used is recovered when billed to firm customers through the
operation of the gas adjustment clause ("GAC") included in the Company's utility
tariff. The GAC provision requires an annual reconciliation of recoverable gas
costs and GAC revenues. Any difference is deferred pending recovery from or
refund to firm customers during a subsequent twelve-month period. Further, net
revenues from tariff gas balancing services, off-system sales and certain
on-system interruptible sales are refunded to firm customers subject to certain
sharing provisions.
The Company's utility tariff contains a weather normalization adjustment that
largely offsets shortfalls or excesses of firm net revenues (revenues less gas
costs and revenue taxes) during a heating season due to variations from normal
weather.
E. UTILITY PROPERTY - DEPRECIATION AND MAINTENANCE
Property is stated at original cost of construction, which includes allocations
of overheads, including taxes, and an allowance for funds used during
construction. Mass properties associated with gas operations, such as meters,
are accounted for on an average unit cost basis by year of installation.
Depreciation is provided on a straight-line basis in amounts equivalent to
composite rates on average depreciable property. The cost of property retired,
plus the cost of removal less salvage, is charged to accumulated depreciation.
The cost of repair and minor replacement and renewal of property is charged to
maintenance expense. The composite rates on average depreciable property were as
follows:
Period Rate
--------- ----
Year Ended December 31, 1999 2.06%
Nine Months Ended December 31, 1998 1.53%
Fiscal Year Ended March 31, 1998 2.06%
F. INCOME TAX
In accordance with SFAS No. 109, "Accounting for Income Taxes" the Company
provides deferred income taxes on all differences between tax and book bases of
assets and liabilities at the current tax rate.
31
<PAGE>
G. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board ("FASB") issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of SFAS No. 133." SFAS No. 137 defers the effective date of
SFAS No. 133 to fiscal years beginning after July 15, 2000. The Company will
therefore, adopt SFAS No. 133 in the first quarter of fiscal year 2001. SFAS No.
133 establishes accounting and reporting standards for derivative instruments
and for hedging activities. It requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. As of December 31, 1999, the Company
did not have any derivative financial instruments.
NOTE 2. INCOME TAX
The Company will file a consolidated federal income tax return for calendar year
1999 with the Parent. A tax sharing agreement between the Parent and its
subsidiaries provides for the allocation of a realized tax liability or benefit
based upon separate return contributions of each subsidiary to the consolidated
taxable income or loss in the consolidated income tax return.
In 1998, the Company incurred a tax net operating loss ("NOL") for federal
income tax purposes of $56.4 million for the period May 29, 1998 through
December 31, 1998, which can be carried forward for twenty years or until 2017.
In accordance with SFAS No. 109 - "Accounting For Income Taxes," the Company
believed that it was more likely than not that the tax benefit of this loss
would be realized. Therefore, in 1998 a deferred tax asset and a related tax
benefit for the tax effect of the NOL carryforward of $19.7 million were
recorded.
The Company estimates that the benefit associated with the NOL carryforward from
1998 of $19.7 million will be realized in the Parent's consolidated 1999 federal
income tax return. Accordingly, the NOL benefit has been applied in 1999 as a
reduction to the Company's current federal income tax provision.
32
<PAGE>
Income tax expense (benefit) is reflected as follows in the Statement of Income:
<TABLE>
(IN THOUSANDS OF DOLLARS)
- ----------------------------------------------------------------------------------------------------
<CAPTION>
Nine Months
Year Ended Ended Fiscal Year Ended
December 31,1999 December 31, 1998 March 31, 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current income tax $ (25,146) $ (4,408) $ 9,498
Deferred income tax 48,402 (1,961) 16,660
- -------- ---------- ------ ------- ------
23,256 (6,369) 26,158
------ ------- ------
Current - transaction related (1) - 235,722 -
Deferred - transaction related (2) - (243,239) -
- ---------------------------------- ------ --------- ------
- (7,517) -
------ ------- ------
Total income tax (benefit) $ 23,256 $ (13,886) $ 26,158
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) Primarily represents income taxes associated with the sale of assets (the
"Transferred Assets") to the Company by LIPA, which taxes were paid by the
Company, partially offset by tax benefits recognized upon funding of
postretirement benefits.
(2) Primarily represents the deferred federal income taxes necessary to
account for the difference between the carryover basis of the assets sold
to the Company for financial reporting purposes and the new increased tax
basis.
The components of deferred tax assets and (liabilities) reflected in the Balance
Sheet are as follows:
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
December 31, 1999 December 31, 1998
- --------------------------------------------------------------------------------
Benefits of tax loss carryforwards - $ 19,700
Property related differences 91,571 122,284
Property taxes (24,410) (15,020)
Other items - net (15,096) (26,735)
------- -------
Net deferred tax asset $ 52,065 $ 100,229
--------------- ------------------
33
<PAGE>
The following is a reconciliation between reported income tax and tax computed
at the statutory rate of 35%:
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
- ----------------------------------------------------------------------------------------------------------------
Nine Months Fiscal Year
Year Ended Ended Ended
December 31, December 31, March 31,
1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed at the statutory rate $ 22,671 $ (9,022)$ 23,350
Adjustments related to:
Net benefit from LIPA Transaction (1) - (5,677) -
Tax credits - - (263)
Excess of book over tax depreciation - - 3,313
Other items - net 585 813 (242)
- ------------------------------------------------ ------------------- -------------------- -------------------
Total income tax (benefit) $ 23,256 $ (13,886)$ 26,158
=================== ==================== ===================
Effective income tax rate 36% N/A 39%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1)Includes tax benefits relating to (a) the deferred federal income taxes
necessary to account for the difference between the carryover basis of the
Transferred Assets for financial reporting purposes and the new increased
tax basis and (b) certain credits for financial reporting purposes,
including tax benefits recognized on the funding of postretirement
benefits, partially offset by income taxes associated with the sale of the
Transferred Assets to the Company by LIPA which taxes were paid by the
Company.
NOTE 3. POSTRETIREMENT BENEFITS
PENSION PLANS: Company employees are members of a defined benefit pension plan
covering substantially all former LILCO employees. Benefits are based on years
of service and compensation. Pension costs are allocated to the Company; related
pension obligations and assets are not allocated separately to the Company.
Pension expense charged to the Company for the year ended December 31, 1999 was
$1.4 million. Pension expense charged to the Company for the nine months ended
December 31, 1998 and for the fiscal year ended March 31, 1998 was $11.7 million
and $6.0 million respectively. Pension expense for the nine months ended
December 31, 1998 includes approximately $8.7 million for a Parent company early
retirement program.
34
<PAGE>
The calculation of net periodic pension cost for the plan follows:
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
Year Ended Nine Months Ended Fiscal Year Ended
December 31, 1999 December 31, 1998 March 31, 1998
- ------------------------------------------ ------------------------- ------------------------ ------------------------
<S> <C> <C> <C>
Service cost, benefits earned
during the period $ 21,770 $ 15,608 $ 21,114
Interest cost on projected
benefit obligation 63,837 41,341 56,379
Return on plan assets (216,208) (45,792) (196,300)
Special termination charge (1) - 57,500 -
Net amortization and deferral 137,227 380 147,713
------- --- -------
Total pension cost $ 6,626 $ 69,037 $ 28,906
- ------------------------------------------ ------------------ ------------------------ ------------------------
</TABLE>
(1) Parent company early retirement plan completed in December 1998.
35
<PAGE>
The following table sets forth the pension plans' funded status at December 31,
1999 and December 31, 1998. Plan assets principally are common stock and fixed
income securities. Company employees account for approximately 15% of the
employees participating in the plan.
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
December 31, 1999 December 31, 1998
- ------------------------------------------------ ------------------------ -------------------------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of period $ (998,473) $ (825,159)
Service cost (21,770) (15,608)
Interest cost (63,837) (41,341)
Amendments (33,739) -
Actuarial gain (loss) 129,600 (101,202)
Special termination benefits (1) - (57,500)
Benefits paid 66,324 42,337
------ ------
Benefit obligation at end of period (921,895) (998,473)
- ------------------------------------------------ ------------------- -------------------------
Change in plan assets:
Fair value of plan assets at beginning of period 936,329 919,100
Actual return on plan assets 216,208 45,792
Employer contribution 17,375 13,500
Benefits paid (66,324) (42,063)
------- -------
Fair value of plan assets at end of period 1,103,588 936,329
- ------------------------------------------------ ------------------- -------------------------
Funded status 181,693 (62,144)
Unrecognized net (gain) from past experience
different from that assumed and from
changes in assumptions (325,977) (58,701)
Unrecognized prior service cost 82,274 54,234
Unrecognized transition obligation 3,163 4,138
----- -----
Net accrued pension cost $(58,847) $ (62,473)
- ------------------------------------------------ ------------------- -------------------------
</TABLE>
(1) Parent company early retirement plan completed in December 1998.
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Fiscal Year Ended
December 31, 1999 December 31, 1998 March 31, 1998
- ------------------------------------------ --------------------- --------------------- ----------------------
<S> <C> <C> <C>
Assumptions:
Obligation discount 7.50% 6.50% 7.00%
Asset return 8.50% 8.50% 8.50%
Average annual increase in compensation 5.00% 5.00% 4.50%
- ------------------------------------------ --------------------- --------------------- ----------------------
</TABLE>
36
<PAGE>
INFORMATION ON THE LILCO SUPPLEMENTAL PLAN
The Supplemental Plan in effect prior to May 28, 1998 provided supplemental
death and retirement benefits for LILCO officers and other key executives
without contribution from such employees. The Supplemental Plan was a
non-qualified plan under the Internal Revenue Code of 1986, as amended (the
"Code"). For the fiscal year ended March 31, 1998, a charge of $31 million was
recorded relating to certain benefits earned by former officers of LILCO
relating to the termination of their annuity benefits earned through the
supplemental retirement plan and other executive retirement benefits. This
charge, which was not recovered from ratepayers, resulted from the application
of certain provisions in the employment contracts of LILCO officers. The
Company's share of this charge was approximately $6 million and is reflected in
other income and deductions in the Statement of Income.
OTHER POSTRETIREMENT BENEFITS: Company employees are members of a
noncontributory defined benefit plan under which is provided certain health care
and life insurance benefits for all former LILCO retired employees. The Parent
and, prior to the KeySpan Acquisition, LILCO had been funding a portion of
future benefits over employees' active service lives through Voluntary Employee
Beneficiary Association ("VEBA") trusts. Contributions to VEBA trusts are tax
deductible, subject to limitations contained in the Code.
Other postretirement costs are allocated to the Company; related other
postretirement obligations and assets are not allocated separately to the
Company. Other postretirement expense charged to the Company for the year ended
December 31, 1999 was $2.3 million. Other postretirement expense charged to the
Company for the nine months ended December 31, 1998 and for the fiscal year
ended March 31, 1998 was $2.0 million and $6.7 million, respectively.
37
<PAGE>
Net periodic other postretirement benefit cost included the following
components:
<TABLE>
(IN THOUSANDS OF DOLLARS)
<CAPTION>
Nine Months
Year Ended Ended Fiscal Year Ended
December 31, 1999 December 31, 1998 March 31, 1998
- ------------------------------------------ ------------------------- ----------------------- ------------------------
<S> <C> <C> <C>
Service cost, benefits earned
during the period $ 12,317 $ 7,047 $ 12,204
Interest cost on accumulated post-
retirement benefit obligation 29,867 17,950 27,328
Return on plan assets (63,049) (14,305) (6,164)
Special termination charge (1) - 2,397 -
Net amortization and deferral 29,885 (14,934) (10,468)
------ ------- -------
Other postretirement (benefit) cost $ 9,020 $ (1,845) $ 22,900
- ------------------------------------------ ---------------- ----------------------- ------------------------
</TABLE>
(1) Parent company early retirement plan completed in December 1998.
38
<PAGE>
The following table sets forth the plan's funded status at December 31, 1999 and
December 31, 1998. Plan assets principally are common stock and fixed income
securities. Company employees account for approximately 15% of the employees
participating in the plan.
<TABLE>
(IN THOUSANDS OF DOLLARS)
<CAPTION>
December 31, 1999 December 31, 1998
- --------------------------------------------------- ------------------------ ------------------------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of period $ (491,055) $ (358,941)
Service cost (12,317) (7,047)
Interest cost (29,867) (17,950)
Plan participants' contributions 152 -
Amendments 7,256 -
Actuarial gain (loss) 84,437 (114,960)
Special termination benefits (1) - (2,397)
Benefits paid 21,275 10,240
------ ------
Benefit obligation at end of period (420,119) (491,055)
- --------------------------------------------------- ---------------- ------------------------
Change in plan assets:
Fair value of plan assets at beginning of period 372,470 108,165
Actual return on plan assets 63,049 14,305
Employer contribution 296 250,000
Plan participants' contribution 152 -
Benefits paid (21,275) -
------- ------
Fair value of plan assets at end of period 414,692 372,470
- --------------------------------------------------- ---------------- ------------------------
Funded status (5,427) (118,585)
Unrecognized net (gain) loss from past experience
different from that assumed and from changes in
assumptions (85,957) 27,557
Unrecognized prior service cost (7,113) 166
------ ---
Accrued benefit cost $ (98,497) $ (90,862)
- --------------------------------------------------- ---------------- ------------------------
</TABLE>
(1) Parent company early retirement plan completed in December 1998.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended Fiscal Year Ended
December 31, 1999 December 31, 1998 March 31, 1998
- --------------------------------------------- ---------------------- ------------------------ -----------------------
<S> <C> <C> <C>
Assumptions:
Obligation discount 7.50% 6.50% 7.00%
Asset return 8.50% 8.50% 8.50%
Average annual increase in compensation 5.00% 5.00% 4.50%
- --------------------------------------------- ---------------------- ------------------------ -----------------------
</TABLE>
39
<PAGE>
The measurement of plan liabilities also assumes a health care cost trend rate
of 6% annually. A 1% increase in the health care cost trend rate would have the
effect of increasing the accumulated postretirement benefit obligation as of
December 31, 1999 by $56.7 million and the net periodic health care expense by
$5.8 million. A 1% decrease in the health care cost trend rate would have the
effect of decreasing the accumulated postretirement benefit obligation as of
December 31, 1999 by $46.7 million and the net periodic health care expense by
$4.8 million.
In 1994, LILCO established VEBA trusts for union and non-union employees for the
funding of costs collected in rates for postretirement benefits. For the fiscal
year ended March 31, 1998, the trusts were funded with a contribution of $21
million. In May 1998, an additional $250 million was funded into the trusts.
NOTE 4. CAPITAL STOCK
COMMON STOCK: Currently the Company has 100 shares of authorized common stock.
On May 28, 1998, pursuant to the LIPA Transaction and upon the transfer of
assets to the Company, the Company's common equity was initially established.
The Company issued 100 shares of common stock at $0.01 per share to the Parent
and recorded $659.1 million as the Parent's investment on May 28, 1998. Since,
for accounting purposes, the Company commenced operations on May 29, 1998 it had
no retained earnings as of that date. Retained earnings, therefore, at December
31, 1998 reflect earnings for the period May 29, 1998 through December 31, 1998
only.
NOTE 5. LONG-TERM DEBT
PROMISSORY NOTES: In accordance with the LIPA Agreement, the Parent issued
promissory notes to LIPA which represented an amount equivalent to the sum of:
(i) the principal amount of 7.30% Series Debentures due July 15, 1999 and 8.20%
Series Debentures due March 15, 2023 outstanding at May 28, 1998, and (ii) an
allocation of certain of the Authority Financing Notes. The promissory notes
contain identical terms as the debt referred to in items (i) and (ii) above. The
Parent then allocated $574.3 million of these promissory notes to the Company,
which represented the 7.30% Series Debentures due July 15, 1999 and an allocated
portion of the 8.20% Series Debentures due March 15, 2023. The debt allocated to
the Company contains the same terms as the 7.30% Series and 8.20% Series
Debentures.
On June 15, 1999 the Parent, in accordance with the LIPA Agreement, extinguished
its obligation under the promissory note to LIPA relating to the 7.30% Series
Debenture due July 15, 1999. The Parent's obligation for these debentures of
$411.5 million consisted of the principal amount of $397 million and $14.5
million of interest accrued and unpaid. On February 1, 2000, the Company issued
$400 million of 7.875 % Medium Term Notes due February 1, 2010. The net proceeds
from the
40
<PAGE>
issuance of these notes were used to repay the Parent for its costs in
extinguishing the promissory notes as indicated. The carrying value of the
remaining promissory note at December 31, 1999 was $175.9 million.
In 1999, the Company transferred certain investments and related assets and
liabilities to the Parent. As part of this reorganization, $1.4 million of
promissory notes were transferred to the Parent. The investments and related
assets were immaterial.
DEBT MATURITY SCHEDULE: The Company does not have any long-term debt maturing in
the next five years.
NOTE 6. CONTRACTUAL OBLIGATIONS, CONTINGENCIES AND FAIR VALUES
LONG-TERM DEBT: In addition to the Company's allocated share of the promissory
notes due LIPA, the Company, as well as certain other affiliates of the Parent,
is jointly and severally obligated for each of the promissory notes due LIPA. At
December 31, 1999, the total remaining balance of these promissory notes
amounted to $602.4 million, of which $175.9 was allocated to the Company.
LEASE OBLIGATIONS: The Parent allocates applicable lease costs to its various
affiliates. Lease costs allocated to the Company amounted to $5.3 million in
1999 reflecting, primarily, lease costs for corporate facilities, land, computer
equipment, vehicles and power operated equipment. Lease costs for the nine
months ended December 31, 1998 were $4.5 million.
FIXED CHARGES UNDER FIRM CONTRACTS: The Company has entered into various
contracts for gas delivery, storage and supply services. The contracts have
remaining terms that cover from one to fourteen years. Certain of these
contracts require payment of annual demand charges in the aggregate amount of
approximately $104 million. The Company is liable for these payments regardless
of the level of service it requires from third parties. Such charges are,
currently, recovered from utility customers as gas costs. In response to a NYPSC
policy statement regarding gas industry restructuring, the Company estimated
that, if it were to continue to recover the demand charges for the next five
years, then the estimated strandable costs (contract costs above market value)
for contracts that will not expire by 2005 and would not be needed to provide
service to firm transportation customers will be, on a present value basis,
approximately $36 million. For purposes of this calculation, the Company has
assumed that, if it exited the merchant function and if it were necessary to
assign the contracts to third parties, the Company could recover the market
value of the underlying assets. Therefore, the difference between the contract
costs and the market value is the potential "strandable" costs.
41
<PAGE>
LEGAL MATTERS: From time to time, the Company is subject to various legal
proceedings arising out of the ordinary course of its business. The Company does
not consider any of such proceedings to be material to its business or likely to
result in a material adverse effect on its results of operations or financial
condition.
ENVIRONMENTAL MATTERS - MANUFACTURED GAS PLANT SITES: The Company has
identified, to date, nineteen manufactured gas plant ("MGP") sites which were
historically owned or operated by the Company or its predecessors. Operations at
these plants in the early 1900's may have resulted in the release of hazardous
substances. These former sites, some of which are no longer owned by the
Company, have been identified to both the DEC for inclusion on appropriate waste
site inventories and the NYPSC. The currently-known conditions of these 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 that
are discussed below.
In 1998 the DEC notified the Company that the Sag Harbor and Rockaway Park MGP
sites owned by the Company would require remediation under the State's Superfund
program. Accordingly, the Sag Harbor and Rockaway Park sites became the subject
of one Administrative Consent Order ("ACO"), between the Company and the DEC in
March 1999. Four other MGP sites, Bay Shore, Glen Cove, Halesite and Hempstead
are the subject of a second ACO, which the Company executed with the DEC in
September 1999. Field investigations and, in some cases, interim remedial
measures, are underway or scheduled to occur at each of these sites under the
supervision of the DEC and the New York State Department of Health.
The Company was also requested by the DEC to perform preliminary site
assessments at the Patchogue, Babylon, Far Rockaway, Garden City and Hempstead
(Clinton St.) MGP sites, each of which were formerly owned by LILCO, under a
third ACO entered into in September 1999. Initial studies based on existing
available documentation have been completed for each such site and the DEC has
requested that the Company collect additional samples at each of the subject
properties.
Thus, the eleven sites discussed above are currently the subject of ACOs between
the Company and the DEC. The final end uses for these sites and therefore,
acceptable remediation goals have not yet been determined. The Company is
required to prepare a feasibility study for the remediation of each such site,
based on cleanup levels derived from risk analyses associated with the proposed
or anticipated future use of the properties. The schedule for completing this
phase of the work under the ACOs for the identified sites discussed above
extends through 2001.
The Company has recently identified eight additional sites to the DEC,
Brooklyn/Kings County Lighting, Brooklyn (New Utrecht Avenue), Glenwood Landing,
Riverhead, Inwood, Saltaire,
42
<PAGE>
Southold and East Hampton. The Company has not been requested to conduct site
investigation activity by the DEC at these eight sites and is currently unable
to determine what, if any, additional costs will be incurred to remediate these
eight sites.
It is also possible, based on future investigation, that the Company may be
required to undertake investigation and potential remediation efforts at other
currently unknown former MGP sites. However, the Company is currently unable to
determine whether or to what extent such additional costs may be incurred.
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.
Accordingly, the Company presently estimates the cost of its MGP-related
environmental cleanup activities will be $76.7 million; which amount has been
accrued by the Company as its current best estimate of its aggregate
environmental liability for known sites. As previously indicated, the total
MGP-related costs may be substantially higher, depending upon remediation
experience, selected end use for each site, and actual environmental conditions
encountered.
The Company's NYPSC approved rate plan provides for the recovery of such
investigation and remediation costs. At December 31, 1999, the Company has
reflected a regulatory asset of $77.4 million. Expenditures incurred through
December 31, 1999 by the Company with respect to MGP-related activities total
$5.3 million.
Periodic discussions by the Company with insurance carriers and third parties
for reimbursement of some portion of MGP site investigation and remediation
costs continue. In December 1996, LILCO filed a complaint in the United States
District Court for the Southern District of New York against fourteen insurance
companies that issued general comprehensive liability policies to LILCO. In
January 1998, LILCO commenced a similar action against the same, and additional,
insurance companies in New York State Supreme Court, and the federal court
action subsequently was dismissed. The state court action is being conducted by
the Parent on behalf of the Company. The outcome of this proceeding cannot yet
be determined.
FAIR VALUE OF FINANCIAL INSTRUMENTS: Long-term debt allocated to the Company
consists of publicly traded Debentures, the fair value of which is estimated on
quoted market prices for the same or similar issues. The Debentures are included
in the promissory notes to LIPA. As previously indicated, there is no maturing
long-term debt within the next five years.
43
<PAGE>
The fair values and carrying amounts of the Company's long-term debt at December
31, 1999 and December 31, 1998 were as follows:
(IN THOUSANDS OF DOLLARS) Fair Value Carrying Amount
- ------------------------------ ----------------- -------------------
DECEMBER 31, 1999 $ 563,349 $ 572,904
December 31, 1998 $ 597,325 $ 574,259
- ------------------------------ ------------------- -------------------
NOTE 7. RELATED PARTY TRANSACTIONS
The Company engages in various transactions with affiliates of the Parent. In
addition, all cash collected from the Company's gas customers is collected and
held by the Parent's corporate and administrative subsidiary. Further, all
payments to third parties for Company payables, including labor, are made by the
Parent's corporate and administrative subsidiary on behalf of the Company. The
Company is also obligated to reimburse the Parent for the Company's allocated
share of principal and interest on the promissory notes due to LIPA. At December
31, 1999 and December 31, 1998 the Company had a current intercompany accounts
receivable balance of $43.4 million and $32.6 million from the Parent's
corporate and administrative subsidiary, approximating interest payments on the
Company's allocated share of long-term debt for the year ended December 31, 1999
and the nine months ended December 31, 1998.
The balance of intercompany accounts payable amounted to $258.1 million and
$181.0 million at December 31, 1999 and December 31, 1998, respectively. This
balance reflects, primarily, the Company's allocated pension and other
postretirement liability due to the Parent and natural gas purchases.
The Company incurs expenses related to services it provides to affiliates of the
Parent. These expenses are offset by intercompany billings to the various
affiliates of the Parent for which the Company provides such services. Billings
to various affiliates of the Parent amounted to $3.6 million and $2.0 million
for the year ended December 31, 1999 and the nine months ended December 31,
1998, respectively. These billings reduced operations expense in the
accompanying Income Statement.
44
<PAGE>
NOTE 8. SALE OF LILCO ASSETS, ACQUISITION OF KEYSPAN ENERGY CORPORATION AND
TRANSFER OF ASSETS AND LIABILITIES TO THE PARENT
On May 28, 1998, pursuant to the Agreement and Plan of Merger, dated as of June
26, 1997 as amended, by and among the Parent, LILCO, LIPA, and LIPA Acquisition
Corp. (the "Merger Agreement"), LIPA acquired all of the outstanding common
stock of LILCO for $2.4975 billion in cash and thereafter directly or indirectly
assumed certain liabilities including approximately $3.4 billion in debt. In
addition, LIPA reimbursed LILCO $339.1 million related to certain series of
preferred stock which were redeemed by LILCO prior to May 28, 1998. Immediately
prior to such acquisition, all of LILCO's assets employed in the conduct of its
gas distribution business and its non-nuclear electric generation business, and
all common assets used by LILCO in the operation and management of its electric
transmission and distribution ("T&D") business and its gas distribution business
and/or its non-nuclear electric generation business (the "Transferred Assets")
were sold to the Parent and transferred to wholly-owned subsidiaries of the
Parent at the Parent's direction.
Moreover, all of LILCO's outstanding long-term debt as of May 28, 1998, except
for its 1997 Series A Electric Facilities Revenue Bonds due December 1, 2027
which were assigned to the Parent, was assumed by LIPA. In accordance with the
LIPA Transaction, the Parent issued promissory notes to LIPA amounting to $1.048
billion which represented an amount equivalent to the sum of (i) the principal
amount of 7.30% Series Debentures due July 15, 1999 and 8.20% Series Debentures
due March 15, 2023 outstanding as of May 28, 1998, and (ii) an allocation of
certain of the Authority Financing Notes. The promissory notes contain identical
terms to the debt referred to in items (i) and (ii) above. (See Note 5,
"Long-Term Debt" for additional information.)
On May 28, 1998, immediately subsequent to the LIPA Transaction, KSE was merged
with and into a subsidiary of the Parent, pursuant to an Agreement and Plan of
Exchange and Merger, dated as of December 29, 1996, between LILCO and Brooklyn
Union. This agreement was amended and/or restated as of February 7, 1997, June
26, 1997, and September 29, 1997, to reflect certain technical changes and the
assignment by Brooklyn Union of all of its rights and obligations under the
agreement to KSE. On September 29, 1997, KSE became the parent company of
Brooklyn Union when Brooklyn Union reorganized into a holding company structure.
NOTE 9. TAX BENEFITS AND COSTS RELATED TO THE LIPA TRANSACTION AND SPECIAL
CHARGES
In 1998, the Company recognized tax benefits of $7.5 million primarily
reflecting (a) the deferred federal income taxes necessary to account for the
difference between the carryover basis of the Transferred Assets for financial
reporting purposes and the new increased tax basis and (b) certain credits for
financial reporting purposes, including tax benefits recognized on the funding
of postretirement benefits, partially offset by income taxes associated with the
sale of the Transferred
45
<PAGE>
Assets to the Company by LIPA, which taxes were paid by the Company. In
addition, the Company incurred an after-tax charge of $5.6 million for an early
retirement program initiated by the Parent in December 1998. (The before-tax,
early retirement charge of $8.7 million has been recorded as an operations
expense.)
NOTE 10. SUMMARY OF QUARTERLY INFORMATION (UNAUDITED)
The following is a table of financial data for each quarter of the Company's
year ended December 31, 1999.
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS)
Quarter Ended Quarter Ended Quarter Ended Quarter Ended
3/31/99 6/30/99 9/30/99 12/31/99
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $ 268,302 $ 99,971 $ 72,956 $ 195,859
Operating income (loss) $ 78,989 $ 9,844 $ (12,594 $ 38,863
Net income (loss) $ 42,930 $ (2,184) $ (15,163) $ 15,934
- -----------------------------------------------------------------------------------------------------
</TABLE>
The following is a table of financial data for each quarter of the Company's
nine month period ended December 31, 1998.
(IN THOUSANDS OF DOLLARS)
Quarter Ended Quarter Ended Quarter Ended
6/30/98 9/30/98 12/31/98
- --------------------------------------------------------------------------------
Operating revenues $ 104,772 $ 71,760 $ 180,102
Operating income $ 2,406 $ 265 $ 22,183
Net income (loss) $ (4,119) $ (10,787) $ 3,015
Earnings (loss) for common stock $ (5,175) $ (10,787) $ 3,015
- --------------------------------------------------------------------------------
46
<PAGE>
REPORT OF ARTHUR ANDERSEN LLP, INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder of KeySpan Gas East Corporation
d/b/a KeySpan Energy:
We have audited the accompanying Balance Sheet and Statement of Capitalization
of KeySpan Gas East Corporation (a New York corporation and a wholly owned
subsidiary of KeySpan Corporation) as of December 31, 1999 and December 31, 1998
and the related Statements of Income, Retained Earnings and Cash Flows for the
year ended December 31, 1999, the nine months ended December 31, 1998 and the
fiscal year ended March 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. These standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
As discussed in Note 1(B) to the accompanying financial statements, prior to May
28, 1998, the Company was part of the integrated gas and electric operations of
Long Island Lighting Company. Therefore, the accompanying Statement of Income
for the fiscal year ended March 31, 1998 and the period April 1, 1998 through
May 28, 1998 (which period is included in the accompanying Statement of Income
for the nine months ended December 31, 1998) are based upon allocations of
certain revenues and expenses relating to such integrated operations.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position and capitalization of KeySpan Gas
East Corporation as of December 31, 1999 and December 31, 1998 and the results
of its operations and its cash flows for the year ended December 31, 1999, the
nine months ended December 31, 1998 and the fiscal year ended March 31, 1998, in
conformity with accounting principles generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in Item 14 is the
responsibility of the Company's management and is presented for the purpose of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
January 27, 2000
New York, New York
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ----------------------------------------------------------------------------------------------------------------------
Additions
- ----------------------------------------------------------------------------------------------------------------------
Balance
Balance at Charged to at
Beginning Costs and Deduction End of
Description of Period Expenses (1) Period
- -------------------------------------------------------- ----------------- -------------- -------------- ------------
<S> <C> <C> <C> <C>
TWELVE MONTHS ENDED DECEMBER 31, 1999
Deducted from asset accounts:
Allowance for doubtful accounts $ 5,586 $ 4,413 $ 4,689 $ 5,310
NINE MONTHS ENDED DECEMBER 31, 1998
Deducted from asset accounts:
Allowance for doubtful accounts $ 7,726 $ 5,593 $ 7,733 $ 5,586
TWELVE MONTHS ENDED MARCH 31, 1998
Deducted from asset accounts:
Allowance for doubtful accounts $ 8,168 $ 4,852 $ 5,294 $ 7,726
- -------------------------------------------------------- ----------------- -------------- -------------- ------------
</TABLE>
(1) UNCOLLECTIBLE ACCOUNTS WRITTEN OFF, NET OF RECOVERIES.
47
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Not required
ITEM 11. EXECUTIVE COMPENSATION
Not required
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Not required
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not required
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
1. FINANCIAL STATEMENTS
The following financial statements of the Company and report of independent
accountants are filed as part of this Report:
Report of Independent Public Accountants
Statement of Income for the year ended December 31, 1999, the nine
months ended December 31, 1998, and the fiscal year ended
March 31, 1998.
Statement of Retained Earnings for the year ended December 31,
1999, the nine months ended December 31, 1998, and the fiscal
year ended March 31, 1998.
Balance Sheet at December 31, 1999 and December 31, 1998.
48
<PAGE>
Statement of Capitalization at December 31, 1999 and December 31,
1998.
Statement of Cash Flows for the year ended December 31, 1999, the
nine months ended December 31, 1998, and the fiscal year
ended March 31, 1998.
Notes to Financial Statements
2. FINANCIAL STATEMENTS SCHEDULES
Schedule of Valuation and Qualifying Accounts for the year ended December 31,
1999, the nine months ended December 31, 1998, and the fiscal year ended March
31, 1998.
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
3. EXHIBITS
Exhibits listed below which have been filed with the SEC pursuant to the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as
amended, and which were filed as noted below, are hereby incorporated by
reference and made a part of this report with the same effect as if filed
herewith.
*3.1 Certificate of Incorporation of the Company effective May 7,
1998, Amendment to Certificate of Incorporation of the Company
effective May 27,1998, Amendment to Certificate of
Incorporation of the Company effective October 26, 1998.
*3.2 ByLaws of the Company In Effect on May 7, 1998.
4.1 Indenture, dated December 1, 1999, between KeySpan Gas East
Corporation, the Registrants, KeySpan Corporation and the
Chase Manhattan Bank, as Trustee, with the respect to the
issuance of Medium-Term Notes, Series A, (filed as Exhibit 4-a
to Amendment No. 1 to Form S-3 Registration Statement No.
333-92003-01)
4.2 Form of Medium-Term Note issued in connection with the
issuance of 7 7/8% notes (filed as Exhibit 4, to KeySpan
Corporation's Form 8-K on February 1, 2000)
49
<PAGE>
*24.1 Powers of Attorney executed by Directors and Officers of the
Company
*24.2 Certified copy of Resolution of Board of Directors authorizing
signature pursuant to power of attorney
*27 Financial Data Schedule on Schedule U-T for the fiscal year
ended December 31, 1999
* Filed herewith
4. REPORTS ON FORM 8-K
None
50
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
KEYSPAN GAS EAST CORPORATION
d/b/a Brooklyn Union of Long Island
April 14, 2000 By: /s/ Anne C. Jordan
------------------
Anne C. Jordan
Vice President and Chief
Financial Officer
April 14, 2000 By: /s/ Paul R. Nick
----------------
Paul R. Nick
Controller and Chief
Accounting Officer
51
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on April 14, 2000.
/s/Anne C. Jordan Vice-President and Chief Financial Officer
-------------------
Anne C. Jordan (Principal financial officer)
/s/Paul R. Nick Controller and Chief Accounting Officer
-------------------
Paul R. Nick (Principal accounting officer)
* Director
-----------------------
Wallace P. Parker Jr.
* Director
-----------------------
George B. Jongeling
By: /s/Anne C. Jordan
---------------------
ATTORNEY-IN-FACT
* Such signature has been affixed pursuant to a Power of Attorney filed as an
exhibit hereto and incorporated herein by reference thereto.
CERTIFICATE OF INCORPORATION
OF
BL GAS, INC.
(Pursuant to Section three of the Transportation Corporations Law
of the State of New York)
I, the undersigned, being a natural person of at least eighteen (18) years
of age and acting for the purpose of forming a gas corporation pursuant to
section three of the Transportation Corporations Law of the State of New York
and under Section 402 of the Business Corporation Law of the State of New York,
hereby CERTIFY that:
FIRST: The name of the corporation shall be: BL Gas, Inc.
SECOND: The purpose of the corporation is to produce or otherwise acquire
and to supply for public use artificial or natural gas or a mixture of both
gases for light, heat or power and for lighting the streets and public and
private buildings of cities, villages and towns in the State of New York and to
engage in any lawful act or activity for which gas corporations may be organized
under the Transportation Corporations Law and the Business Corporation Law of
the State of New York , provided that it is not formed to engage in any act or
activity requiring the consent or approval of any state official, department,
board, agency or other body without such consent or approval first being
obtained.
THIRD: The office of the corporation shall be located in the County of
Nassau, State of New York.
FOURTH: The aggregate number of shares which the corporation shall have the
authority to issue shall be 100. Such shares shall consist of one class, herein
designated as common stock, of the par value of $.01 per share.
FIFTH: The Secretary of State of the State of New York is hereby designated
as agent of the corporation upon whom process against it may be served, and the
post office address to which the Secretary of State shall mail a copy of any
process against it served upon him is 175 East Old Country Road, Hicksville, New
York 11801. Attention: Secretary.
SIXTH: The corporation shall be a gas corporation and shall operate in
Nassau
<PAGE>
County, New York, Suffolk County, New York and Queen's County, New York.
SEVENTH: The duration of the corporation shall be perpetual.
EIGHTH: No director shall be personally liable to the corporation or any of
its shareholders for damages for any breach of duty in such capacity except for
liability if a judgment or other final adjudication adverse to him establishes
(A) that his act or omissions (I) were in bad faith, (ii) involved intentional
misconduct, or (iii) involved a knowing violation of the law, or (B) that he
personally gained in fact a financial profit or other advantage to which he was
not legally entitled, or (C) that his acts violated Section 719 of the Business
Corporation Law of the State of New York. This provision shall not eliminate or
limit the personal liability of any director for any act or omission prior to
the adoption of this provision. If the Business Corporation Law of the State of
New York is amended to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of a director
of the corporation shall be eliminated or limited to the fullest extent
permitted by the Business Corporation Law of the State of New York, as so
amended.
NINTH: The corporation may, to the fullest extent permitted by Sections 721
through 726 of the Business Corporation Law of the State of New York, indemnify
any and all directors and officers whom it shall have power to indemnify under
the said sections from and against any and all of the expenses, liabilities or
other matters referred to in or covered by such section, and the indemnification
provided for herein shall not be deemed exclusive of any other rights to which
the persons so indemnified may be entitled under any by-law, vote of
shareholders, or disinterested directors, agreement or otherwise, both as to
action in his official capacity and as to action in any other capacity as a
result of holding such office, and shall continue as to a person who has ceased
to be a director or officer and shall inure to the benefit of the heirs,
executors and administrators of such a person.
IN WITNESS WHEREOF, I have signed this Certificate and affirm that
the statements made herein are true under the penalties of perjury, this 6th day
of May, 1998.
/s/ Thomas D. Balliett
----------------------
Thomas D. Balliett, Esq.
Sole Incorporator
Kramer, Levin, Naftalis
& Frankel
919 Third Avenue
New York, New York 10022
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
BL GAS, INC.
Under Section 805 of the Business Corporation law
of the State of New York
BL Gas, Inc., a corporation organized and existing under the laws of the
State of New York (the "Corporation"), does hereby certify as follows:
FIRST: The name of the Corporation is BL Gas, Inc.
SECOND: The certificate of incorporation of the Corporation was filed by
the New York Department of State on May 7, 1998.
THIRD: The certificate of incorporation is hereby amended (I) to change the
name of the Corporation as authorized by the New York Business Corporation Law,
to wit:
Article I relating to the name of the Corporation is amended to read
in its entirety as follows:
"FIRST: The name of the corporation shall be: MarketSpan Gas Corporation."
FOURTH: The foregoing amendment to the certificate of incorporation has
been duly adopted by a Unanimous Written Consent of the Board of Directors of
the Corporation and by a Unanimous Written Consent of the shareholders of the
Corporation, in accordance with Section 803 of the New York Business Corporation
Law.
<PAGE>
IN WITNESS WHEREOF, the undersigned officers of the Corporation have
signed this Certificate of Amendment and each affirms that the statements made
herein are true under the penalties of perjury.
Dated: May 26, 1998
BL GAS, INC.
By: /s/Kathleen A. Marion
-------------------------
Name: Kathleen A. Marion
Title Vice President & Secretary
<PAGE>
VERIFICATION OF SIGNER OF CERTIFICATE OF AMENDMENT
FOR
BL GAS, INC.
STATE OF NEW YORK )
) SS.:
COUNTY OF NEW YORK )
Kathleen A. Marion, being duly sworn, deposes and says that she is the
person who signed the foregoing certificate of amendment of the articles of
organization; that she signed the said articles in the capacity set opposite or
beneath her signature thereon; that she has read the said articles and knows the
contents thereof; and that the statements contained therein are true to her own
knowledge.
/s/ Kathleen A. Marion
----------------------
Kathleen A. Marion
Authorized Person
Subscribed and sworn to before me
on May 26, 1998
/s/
- -------------
Notary Public
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
MARKETSPAN GAS CORPORATION
Under Section 805 of the Business Corporation Law
of the State of New York
The undersigned, acting as an authorized person of MarketSpan Gas
Corporation (the "Corporation") hereinafter named, set forth the following
statements.
FIRST: The name of the Corporation is MarketSpan Gas Corporation.
SECOND: The Certificate of Incorporation of the Corporation was filed by
the New York Department of State on May 7, 1998. The first amendment to the
Certificate of Incorporation was filed by the New York Department of State on
May 27, 1998. It incorporated under the name of BL Gas, Inc.
THIRD: The Certificate of Incorporation is hereby amended to change the
name of the Corporation as authorized by the New York Business Corporation Law,
to wit:
Article I relating to the name of the Corporation is amended to read
in its entirety as follows:
"FIRST: The name of the corporation shall be KeySpan Gas East
Corporation."
FOURTH: The foregoing amendment to the certificate of incorporation has
been duly adopted by a Unanimous Written Consent of the Board of Directors of
the Corporation and by a Unanimous Written Consent of the shareholders of the
Corporation, in accordance with Section 803 of the New York Business Corporation
Law.
IN WITNESS WHEREOF, the undersigned officer of the Corporation has signed
this Certificate of Amendment and affirms that the statements made herein are
true and correct under the penalties of perjury.
Dated: October 19, 1998
MARKETSPAN GAS CORPORATION
By: /s/Robert D. Ekholm
-------------------
Robert D. Ekholm
Secretary
BY-LAWS
OF
BL GAS, INC.
(A NEW YORK CORPORATION)
ARTICLE I
SHAREHOLDERS
------------
Section 1. Place of Meetings. Meetings of shareholders shall be held at
------------------
such place, either within or without the State of New York, as shall be
designated from time to time by the Board of Directors.
Section 2. Annual Meetings. Annual meetings of shareholders shall be held
----------------
on such date during such month of each year and at such time as shall be
designated from time to time by the Board of Directors. At each annual meeting
the shareholders shall elect a Board of Directors and transact such other
business as may properly be brought before the meeting.
Section 3. Special Meetings. Special meetings of the shareholders may be
-----------------
called by the Board of Directors.
Section 4. Notice of Meetings. Written notice of each meeting of the
-------------------
shareholders stating the place, date and hour of the meeting shall be given by
or at the direction of the Board of Directors to each shareholder entitled to
vote at the meeting at least ten, but not more than fifty, days prior to the
meeting. Notice of any special meeting shall state in general terms the purpose
or purposes for which the meeting is called.
<PAGE>
Section 5. Quorum; Adjournments of Meetings. The holders of a majority of
------
the issued and outstanding shares of the capital stock of the corporation
entitled to vote at a meeting, present in person or represented by proxy, shall
constitute a quorum for the transaction of business at such meeting; but, if
there be less than a quorum for the transaction of business at such meeting;
but, if there be less than a quorum, the holders of a majority of the stock so
present or represented may adjourn the meeting to another time or place, from
time to time until a quorum shall be present, whereupon the meeting may be held,
as adjourned, without further notice, except as required by law, and any
business may be transacted thereat which might have been transacted at the
meeting as originally called.
Section 6. Voting. At any meeting of the shareholders every registered
------
owner of shares entitled to vote may vote in person or by proxy and, except as
otherwise provided by statute, in the Certificate of Incorporation or these
By-Laws, shall have one vote for each such share standing in his name on the
books of the corporation. Except as otherwise required by statute, the
Certificate of Incorporation or these By-Laws, all corporate action, other than
the election of directors, to be taken by vote of the shareholders shall be
authorized by a majority of the votes cast at such meeting by the holders or
shares entitled to vote thereon, a quorum being present.
Section 7. Inspectors of Election. The Board of Directors, or, if the Board
----------------------
shall not have made the appointment, the chairman presiding at any meeting of
shareholders, shall have the power to appoint one or more persons to act as
inspectors of election at the meeting or any
<PAGE>
adjournment thereof, but no candidate for the office of director shall be
appointed as an inspector at any meeting for the election of directors.
Section 8. Chairman of Meetings. The Chairman of the Board, or, in his
--------------------
absence, the President shall preside at all meetings of the shareholders. In the
absence of both the Chairman of the Board and the President, a majority of the
members of the Board of Directors present in person at such meeting may appoint
any other officer or director to act as Chairman of the meeting.
Section 9. Secretary of Meetings. The Secretary of the corporation shall
---------------------
act as secretary of all meetings of the shareholders. In the absence of the
Secretary, the chairman of the meeting shall appoint any other person to act as
secretary of the meeting.
ARTICLE II
BOARD OF DIRECTORS
------------------
Section 1. Number of Directors. The number of directors shall be not more
-------------------
than nine and not less than three, except that whenever all shares of the
corporation's stock are owned beneficially and of record by less than three
shareholders, the number of directors may be less than three but not less than
the number of shareholders. The number of initial directors shall be one, which
may be changed from time to time within the limits herein set forth by action of
the shareholders or of the Board of Directors.
<PAGE>
Section 2. Vacancies. Whenever any vacancy shall occur in the Board of
---------
Directors by reason of death, resignation, increase in the number of directors
or otherwise, it may be filled only by a majority of the directors then in
office, although less than a quorum, or by the sole remaining director, for the
balance of the term, or , if the Board has not filled such vacancy or if there
are no remaining directors, it may be filled by the shareholders.
Section 3. First Meeting. The first meeting of each newly elected Board of
-------------
Directors, of which no notice shall be necessary, shall be held immediately
following the annual meeting of shareholders or any adjournment thereof at the
place the annual meeting of shareholders was held at which such directors were
elected, or at such other place as a majority of the members of the newly
elected board who are then present shall determine, for the election or
appointment of officers for the ensuing year and the transaction of such other
business as may be brought before such meeting.
Section 4. Regular Meetings. Regular meetings of the Board of Directors,
-----------------
other than the first meeting, may be held without notice at such times and
places as the Board of Directors may from time to time determine.
Section 5. Special Meetings. Special meetings of the Board of Directors
-----------------
may be called by order of the Chairman of the Board, the President or any two
directors. Notice of the time and place of each special meeting shall be given
by or at the direction of the person or persons calling the meeting by mailing
the same at least three days before the meeting or by
<PAGE>
telephoning, telegraphing or delivering personally the same at least twenty-four
hours before the meeting to each director. Except as otherwise specified in the
notice thereof, or as required by statute, the Certificate of Incorporation or
these ByLaws, any and all business may be transacted at any special meeting.
Section 6. Organization. Every meeting of the Board of Directors shall be
------------
presided over by the Chairman of the Board, or, in his absence, the President.
In the absence of the Chairman of the Board and the President, a presiding
officer shall be chosen by a majority of the directors present. The Secretary of
the corporation shall act as secretary of the meeting, but, in his absence, the
presiding officer may appoint any person to act as secretary of the meeting.
Section 7. Quorum; Vote. A majority of the directors then in office (but
------
in no event less than one-third of the total number of directors) shall
constitute a quorum for the transaction of business, but less than a quorum may
adjourn any meeting to another time or place from time to time until a quorum
shall be present, whereupon the meeting may be held, as adjourned, without
further notice. Except as otherwise required by statute, the Certificate of
Incorporation or these By-Laws, all matters coming before any meeting of the
Board of Directors shall be decided by the vote of a majority of the directors
present at the meeting, a quorum being present.
Section 8. Action Without Meeting. Any action required or permitted to be
-----------------------
taken by the Board of Directors may be taken without a meeting if all members of
the Board of Directors consent in writing to the adoption of a resolution or
resolutions authorizing the action, which
<PAGE>
resolution or resolutions, and the written consents thereto by the members of
the Board of Directors, shall be filed with the minutes of the proceedings of
the Board of Directors. Any one or more members of the Board of Directors may
participate in a meeting of such Board by means of a conference telephone or
similar communications equipment allowing all persons participating in the
meeting to hear each other at the same time. Participation by such means shall
constitute presence in person at a meeting.
ARTICLE III
OFFICERS
--------
Section 1. General. The Board of Directors shall elect the officers of the
-------
corporation, which may include a President, Executive Vice Presidents, Senior
Vice Presidents, a Secretary and a Treasurer and such other or additional
officers (including, without limitation, a Chairman of the Board, one or more
Vice-Chairmen of the Board, Vice Presidents, Assistant Vice Presidents,
Assistant Secretaries and Assistant Treasurers) as the Board of Directors may
designate.
Section 2. Term of Office; Removal and Vacancy. Each officer shall hold
---------------
his office until the meeting of the Board of Directors following the next annual
meeting of shareholders and until his successor has been elected and qualified,
or until his earlier resignation or removal. Any officer or agent shall be
subject to removal with or without cause at any time by the Board of Directors.
Vacancies in any office, whether occurring by death, resignation, removal or
otherwise, may be filled by the Board of Directors.
<PAGE>
Section 3. Powers and Duties. Each of the officers of the corporation
------------------
shall, unless otherwise ordered by the Board of Directors, have such powers and
duties as generally pertain to their respective offices as well as such powers
and duties as from time to time may be conferred upon him by the Board of
Directors. Unless otherwise ordered by the Board of Directors after the adoption
of these By-Laws, the Chairman of the Board, or, when the office of Chairman of
the Board is vacant, the President, shall be the chief executive office of the
corporation.
Section 4. Power to Vote Stock. Unless otherwise ordered by the Board of
-------------------
Directors, the Chairman of the Board, the President, an Executive Vice President
and a Senior Vice President shall each have full power and authority on behalf
of the corporation to attend and to vote at any meeting of stockholders of any
corporation in which the corporation may hold stock, and may exercise on behalf
of the corporation any and all of the rights and powers incident to the
ownership of such stock at any such meeting and shall have power and authority
to execute and deliver proxies, waivers and consents on behalf of the
corporation in connection with the exercise by the corporation of the rights and
powers incident to the ownership of such stock. The Board of Directors, from
time to time, may confer like powers upon any other person or persons.
ARTICLE IV
CAPITAL STOCK
-------------
Section 1. Certificates of Stock. Certificates representing shares of stock
---------------------
of the corporation shall be in such form complying with the statute as the Board
of Directors may from time to time prescribe and shall be signed by the Chairman
of the Board or a Vice-Chairman of
<PAGE>
the Board or the President or a Vice-President and by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary.
Section 2. Transfer of Stock. Shares of capital stock of the corporation
-----------------
shall be transferable on the books of the corporation only by the holder of the
record thereof, in person or by duly authorized attorney, upon surrender and
cancellation of certificates for a like number of shares, with an assignment or
power of transfer endorsed thereon or delivered therewith, duly executed, and
with such proof of the authenticity of the signature and of authority to
transfer, and of payment of transfer taxes, as the corporation or its agents may
require.
Section 3. Ownership of Stock. The corporation shall be entitled to treat
------------------
the holder of record of any share or shares of stock as the owner thereof in
fact and shall not be bound to recognize any equitable or other claim to or
interest in such shares on the part of any other person, whether or not it shall
have express or other notice thereof, except as otherwise expressly provided by
law.
ARTICLE V
MISCELLANEOUS
-------------
Section 1. Corporate Seal. The seal of the corporation shall be circular in
--------------
form and shall contain the name of the corporation and the year and State of
incorporation.
<PAGE>
Section 2. Fiscal Year. The Board of Directors shall have power to fix, and
-----------
from time to time to change, the fiscal year of the corporation.
ARTICLE VI
AMENDMENT
---------
The Board of Directors shall have the power to adopt, amend or repeal the
By-Laws of the corporation subject to the power of the shareholders to amend or
repeal the By-Laws made or altered by the Board of Directors.
ARTICLE VII
INDEMNIFICATION
---------------
Except to the extent expressly prohibited by the New York Business
Corporation Law, the corporation shall indemnify each person made or threatened
to be made a party to any action or proceeding, whether civil or criminal, and
whether by or in the right of the corporation or otherwise, by reason of the
fact that such person or such person's testator or intestate is or was a
director or officer of the corporation, or serves or served at the request of
the corporation any other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise in any capacity while he or she was
such a director or officer (hereinafter referred to as "Indemnified Person"),
against judgments, fines, penalties, amounts paid in settlement and reasonable
expenses, including attorneys' fees, incurred in connection with such action or
proceeding, or any appeal therein, provided that no such indemnification shall
be made if a judgment or other final adjudication adverse to such Indemnified
Person establishes that either
<PAGE>
(a) his or her acts were committed in bad faith, or were the result of active
and deliberate dishonesty, and were material to the cause of action so
adjudicated, or (b) that he or she personally gained in fact a financial profit
or other advantage to which he or she was not legally entitled.
The corporation shall advance or promptly reimburse upon request any
Indemnified Person for all expenses, including attorneys' fees, reasonably
incurred in defending any action or proceeding in advance of the final
disposition thereof upon receipt of an undertaking by or on behalf of such
Indemnified Person to repay such amount if such Indemnified Person is ultimately
found not to be entitled to indemnification or, where indemnification is
granted, to the extent the expenses so advanced or reimbursed exceed the amount
to which such Indemnified Person is entitled.
Nothing herein shall limit or affect any right of any Indemnified Person
otherwise than hereunder to indemnification or expenses, including attorney's
fees, under any statute, rule, regulation, certificate of incorporation, by-law,
insurance policy, contract or otherwise.
Anything in these by-laws to the contrary notwithstanding, no elimination
of this by-law, and no amendment of this by-law adversely affecting the right of
any Indemnified Person to indemnification or advancement of expenses hereunder
shall be effective until the 60th day following notice to such Indemnified
Person of such action, and no elimination of or amendment
<PAGE>
to this by-law shall thereafter deprive any Indemnified Person of his or her
rights hereunder arising out of alleged or actual occurrences, acts or failures
to act prior to such 60th day.
The corporation shall not, except by elimination or amendment of this
by-law in a manner consistent with the preceding paragraph, take any corporate
action or enter into any agreement which prohibits, or otherwise limits the
rights of any Indemnified Person to, indemnification in accordance with the
provisions of this by-law. The indemnification of any Indemnified Person
provided by this by-law shall be deemed to be a contract between the corporation
and each Indemnified Person and shall continue after such Indemnified Person has
ceased to be a director or officer of the Corporation and shall inure to the
benefit of such Indemnified Person's heirs, executors administrators and legal
representatives. If the corporation fails timely to make any payment pursuant to
the indemnification and advancement or reimbursement of expenses provisions of
this Article VII and an Indemnified Person commences an action or proceeding to
recover such payment, the corporation in addition shall advance or reimburse
such Indemnified Person for the legal fees and other expenses of such action or
proceeding.
The corporation is authorized to enter into agreements with any of its
directors or officers extending rights to indemnification and advancement of
expenses to such Indemnified Person to the fullest extent permitted by
applicable law, but the failure to enter into any such agreement shall not
affect or limit the right of such Indemnified Person pursuant to this by-law, it
being expressly recognized hereby that all directors or officers of the
corporation, by serving as such after the adoption hereof, are acting in
reliance hereon and that the corporation is estopped to
<PAGE>
contend otherwise. Persons who are not directors or officers of the corporation
shall be similarly indemnified and entitled to advancement or reimbursement of
expenses to the extent authorized at any time by the Board of Directors.
In case any provision in this by-law shall be determined at any time to be
unenforceable in any respect, the other provisions hall not in any way be
affected or impaired thereby, and the affected provision shall be given the
fullest possible enforcement in the circumstances, it being the intention of the
corporation to afford indemnification and advancement of expenses to its
directors or officers, acting in such capacities or in the other capacities
mentioned herein, to the fullest extent permitted by law whether arising from
alleged or actual occurrences, acts or failures to act occurring before or after
the adoption of this Article VII.
For purposes of this by-law, the corporation shall be deemed to have
requested an Indemnified Person to serve an employee benefit plan where the
performance by such Indemnified Person of his or her duties to the corporation
also imposes duties on, or otherwise involves services by, such Indemnified
Person to the plan or participants or beneficiaries of the plan, and excise
taxes assessed on an Indemnified Person with respect to an employee benefit plan
pursuant to applicable law shall be considered indemnifiable fines. For purposes
of this by- law, the term "corporation" shall include any legal successor to the
corporation, including any corporation which acquires all or substantially all
of the assets of the corporation in one or more transactions.
KEYSPAN GAS EAST CORPORATION
POWER OF ATTORNEY
WHEREAS, KeySpan Gas East Corporation, a New York corporation (the
"Company"), intends to file with the Securities and Exchange Commission under
the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K
as prescribed by said Commission pursuant to said Act and the rules and
regulations promulgated thereunder.
NOW, THEREFORE, in my capacity either as a director or officer, or
both as the case may be, of the Company, I do hereby appoint ANNE C. JORDAN and
PAUL R. NICK and each of them severally, as my attorneys-in-fact with power to
execute in my name and place, and in my capacity as a director, officer, or
both, as the case may be, of KeySpan Gas East Corporation, said Report, any
amendment to said Report and any other documents required in connection
therewith, and to file the same with the Securities and Exchange Commission.
IN WITNESS WHEREOF, I have executed this power of attorney this 13th
day of April, 2000.
/s/Wallace P. Parker, Jr.
------------------------
Wallace P. Parker, Jr.
Director
<PAGE>
KEYSPAN GAS EAST CORPORATION
POWER OF ATTORNEY
WHEREAS, KeySpan Gas East Corporation, a New York corporation (the
"Company"), intends to file with the Securities and Exchange Commission under
the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K
as prescribed by said Commission pursuant to said Act and the rules and
regulations promulgated thereunder.
NOW, THEREFORE, in my capacity either as a director or officer, or
both as the case may be, of the Company, I do hereby appoint ANNE C. JORDAN and
PAUL R. NICK and each of them severally, as my attorneys-in-fact with power to
execute in my name and place, and in my capacity as a director, officer, or
both, as the case may be, of KeySpan Gas East Corporation, said Report, any
amendment to said Report and any other documents required in connection
therewith, and to file the same with the Securities and Exchange Commission.
IN WITNESS WHEREOF, I have executed this power of attorney this 13th
day of April, 2000.
/s/George B. Jongeling
----------------------
George B. Jongeling
Director
Exhibit 24.2
WRITTEN CONSENT
OF THE BOARD OF DIRECTORS
OF
KEYSPAN GAS EAST CORPORATION
D/B/A BROOKLYN UNION OF LONG ISLAND
The undersigned, being all of the Directors of KeySpan Gas East
Corporation d/b/a Brooklyn Union of Long Island, a New York corporation (the
"Corporation"), acting by written consent without a meeting pursuant to Section
708(b) of the New York Business Corporation Law, hereby adopt the following:
RESOLVED, That the proper officers of the Corporation be, and hereby are,
and each of them with the full authority without the others hereby is,
authorized, empowered and directed, in the name and on behalf of the
Corporation, to execute the Corporation's Form 10-K for the year ended
December 31, 1999, and to execute any amendment to such Form 10-K, to
procure all necessary signatures thereon, and to file such Form 10-K and
any amendment when so executed (together with appropriate exhibits
thereto) with the Securities Exchange Commission;
RESOLVED, That the proper officers of the Corporation are, authorized,
empowered and directed in the name and on behalf of the Corporation to
execute and deliver any and all such documents, certificates, instruments,
agreements, or regulatory filing, including any amendments, modifications,
or supplements thereto, and to take all such further action as any such
officer or other such authorized person deems necessary, proper,
convenient, or desirable in order to carry out the foregoing resolutions
and to effectuate the purposes and intents thereof, the taking of any such
action to be conclusive evidence of the approval thereof by the directors
of the Corporation; and
RESOLVED, that the President and Chief Executive Officer, the Chief
Financial Officer, any Vice President, the Treasurer, the Controller, the
Chief Accounting Officer or the Secretary of the Corporation be and each
of them shall be considered a proper officer for each of the foregoing
resolutions; and
FURTHER RESOLVED, That all actions previously taken and all documents,
instruments, certificates and the like previously executed by directors or
officers of the Corporation or other authorized persons in connection with
the matters referred to in the foregoing resolutions be hereby approved,
ratified and confirmed in all respects.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Written Consent as
of this 13th day of April, 2000.
/s/Wallace P. Parker, Jr.
-------------------------
Wallace P. Parker, Jr., Director
/s/George B. Jongeling
----------------------
George B. Jongeling, Director
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the
Statement of Income, Balance Sheet and Statement of Cash Flows, and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,147,577
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 358,415
<TOTAL-DEFERRED-CHARGES> 232,180
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1,738,172
<COMMON> 0
<CAPITAL-SURPLUS-PAID-IN> 657,862
<RETAINED-EARNINGS> (4,788)
<TOTAL-COMMON-STOCKHOLDERS-EQ> 653,074
0
0
<LONG-TERM-DEBT-NET> 175,904
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 397,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 512,194
<TOT-CAPITALIZATION-AND-LIAB> 1,738,172
<GROSS-OPERATING-REVENUE> 637,088
<INCOME-TAX-EXPENSE> 23,256
<OTHER-OPERATING-EXPENSES> 521,986
<TOTAL-OPERATING-EXPENSES> 545,242
<OPERATING-INCOME-LOSS> 91,846
<OTHER-INCOME-NET> 159
<INCOME-BEFORE-INTEREST-EXPEN> 92,005
<TOTAL-INTEREST-EXPENSE> 50,488
<NET-INCOME> 41,517
0
<EARNINGS-AVAILABLE-FOR-COMM> 41,517
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 50,488
<CASH-FLOW-OPERATIONS> 24,896
<EPS-BASIC> 0
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