Back to GetFilings.com
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, 2000 to December 31, 2000
Commission File Number 1-14161
KEYSPAN CORPORATION
(Exact name of registrant as specified in its charter)
NEW YORK 11-3431358
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
One MetroTech Center, Brooklyn, New York 11201
175 East Old Country Road, Hicksville, New York 11801
(Address of principal executive offices) (Zip code)
(718) 403-1000 (Brooklyn)
(516) 755-6650 (Hicksville)
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $.01 par value New York Stock Exchange
Pacific Stock Exchange
Series AA Preferred Stock, $25 par value New York Stock Exchange
Pacific Stock Exchange
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
As of March 1, 2001, the aggregate market value of the common stock
held by non-affiliates (133,745,586 shares) of the registrant was $5,165,254,531
based on the closing price, on such date, of $38.62 per share).
As of March 1, 2001, there were 137,014,409 shares of common stock,
$.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement dated March 23, 2001 is incorporated by
reference into Part III hereof.
KEYSPAN CORPORATION
INDEX TO FORM 10-K
Part I Page
Item 1. Business.........................................................................................................2
Item 2. Properties......................................................................................................33
Item 3. Legal Proceedings...............................................................................................33
Item 4. Submission of Matters to a Vote of Security Holders.............................................................33
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...........................................34
Item 6. Selected Financial Data.........................................................................................35
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.............................................................................................36
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .....................................................36
Item 8. Financial Statements and Supplementary Data ....................................................................36
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure......................................................................................36
Part III
Item 10. Directors and Executive Officers of the Registrant..............................................................36
Item 11. Executive Compensation..........................................................................................36
Item 12. Security Ownership of Certain Beneficial Owners and Management..................................................36
Item 13. Certain Relationships and Related Transactions..................................................................36
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................................37
-1-
PART I
Item 1. Business
Overview
KeySpan Corporation ("KeySpan"), a New York corporation, is a member of the
Standard and Poor's 500 Index and a registered holding company under the Public
Utility Holding Company Act of 1935, as amended ("PUHCA"). KeySpan was formed in
May 1998, as a result of the business combination of KeySpan Energy Corporation,
the parent of The Brooklyn Union Gas Company, and certain businesses of the Long
Island Lighting Company ("LILCO"). On November 8, 2000, we acquired Eastern
Enterprises ("Eastern"), a Massachusetts business trust, that primarily owns
three gas utilities operating in Massachusetts, as well as EnergyNorth, Inc.
("ENI"), the parent of a gas utility operating principally in central New
Hampshire. As used herein, "KeySpan," "we," "us" and "our" refers to KeySpan,
its six principal gas distribution subsidiaries, and its other regulated and
unregulated subsidiaries, individually and in the aggregate.
Our core business is gas distribution, conducted by our six regulated gas
distribution subsidiaries which operate in three states in the Northeast, New
York, Massachusetts and New Hampshire. We are the fifth largest gas distribution
company in the United States and the largest in the Northeast, with
approximately 2.4 million customers. In New York, The Brooklyn Union Gas Company
d/b/a KeySpan Energy Delivery New York ("KEDNY") provides gas distribution
services to customers in the New York City Boroughs of Brooklyn, Queens and
Staten Island; and KeySpan Gas East Corporation d/b/a KeySpan Energy Delivery
Long Island ("KEDLI") provides gas distribution services to customers in the
Long Island Counties of Nassau and Suffolk and the Rockaway Peninsula of Queens
County. In Massachusetts, Boston Gas Company distributes natural gas in eastern
and central Massachusetts; Colonial Gas Company distributes natural gas in Cape
Cod and eastern Massachusetts; and Essex Gas Company distributes natural gas in
eastern Massachusetts. In New Hampshire, EnergyNorth Natural Gas, Inc.
distributes gas to customers principally located in central New Hampshire. Our
newly acquired New England gas companies are all doing business as KeySpan
Energy Delivery New England ("KEDNE").
KEDNY was formed in 1895 through the consolidation of several existing
companies, the oldest of which commenced operations in 1849, providing gas
distribution services throughout the New York City Boroughs of Brooklyn, Staten
Island and most of Queens, New York. LILCO, the original owner of KEDLI's gas
assets, was organized in 1910 to provide electric and gas services in the Long
Island Counties of Nassau and Suffolk and the Rockaway peninsula in the Borough
of Queens, all in New York. KEDLI, was formed on May 7, 1998 and on May 28,
1998, acquired substantially all of the LILCO gas assets and provides gas
distribution services in Nassau, Suffolk and the Rockaway peninsula in Queens.
Boston Gas Company has been wholly-owned by Eastern since 1929 and has been in
business for 177 years, making it the second oldest gas company in the United
States. Essex Gas Company has been in business for 146 years and was acquired by
Eastern in September 1998. Colonial Gas Company has been in business for 150
years and was acquired by Eastern in August 1999.
-2-
We are also a major, and growing, generator of electricity. We own and operate
five large generating plants and 42 smaller facilities in Nassau and Suffolk
Counties on Long Island and the Rockaway peninsula and Queens. In addition, we
own, lease and operate a major generating facility in Queens County in New York
City. Under contractual arrangements, we provide power, electric transmission
and distribution services, billing and other customer services for approximately
one million electric customers of the Long Island Power Authority ("LIPA").
Our other subsidiaries are involved in gas and oil exploration and production;
gas storage; wholesale and retail gas and electric marketing; appliance service;
heating, ventilation and air conditioning ("HVAC") installation and services;
large energy-system ownership, installation and management; engineering
services; fiber optic services; energy-related internet activities; fuel cells;
and marine transportation, including the barge hauling of fuel and other cargo.
We also invest in, and participate in the development of, pipelines and other
energy-related projects, domestically and internationally.
As a result of the acquisition of Eastern and ENI, we became a registered
holding company under PUHCA. Therefore, our corporate and financial activities
and those of our subsidiaries, including their ability to pay dividends to us,
are subject to regulation by the Securities and Exchange Commission ("SEC").
Under our holding company structure, we have no independent operations or source
of income of our own and conduct substantially all of our operations through our
subsidiaries and, as a result, we depend on the earnings and cash flow of, and
dividends or distributions from, our subsidiaries to provide the funds necessary
to meet our debt and contractual obligations. Furthermore, a substantial portion
of our consolidated assets, earnings and cash flow is derived from the
operations of our regulated utility subsidiaries, whose legal authority to pay
dividends or make other distributions to us is subject to regulation by state
regulatory authorities.
For additional information concerning regulation by the SEC under PUHCA see the
discussion under the heading "Securities and Exchange Commission Regulation"
contained in Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" contained herein.
KeySpan reports its operations in six business segments: Gas Distribution,
Electric Services, Energy Services, Gas Exploration and Production, Energy
Investments and Other.
The Gas Distribution segment consists of our six gas distribution subsidiaries
described earlier, which operate in New York, Massachusetts and New Hampshire
and serve approximately 2.4 million customers.
The Electric Services segment consists of subsidiaries that operate the electric
transmission and distribution ("T&D") system owned by LIPA; provide energy
conversion services for LIPA from our generating facilities located on Long
Island; and manage fuel supplies for LIPA to fuel our Long Island generating
facilities. The electric services segment also includes subsidiaries that own,
lease and operate the 2,200 megawatt Ravenswood electric generation facility
(the "Ravenswood facility"), located in Queens County in New York City.
-3-
The Gas Exploration and Production segment is engaged in natural gas and oil
exploration and production, and the development and the acquisition of domestic
natural gas and oil properties primarily in the Gulf of Mexico and Southern
Texas. This segment consists of our approximate 70% equity interest in The
Houston Exploration Company ("Houston Exploration") and KeySpan Exploration and
Production, LLC ("KeySpan Exploration"), our wholly owned subsidiary engaged in
a joint venture with Houston Exploration.
The Energy Services segment primarily provides energy-related services to
customers located within the New York City metropolitan area, New Jersey,
Connecticut, Massachusetts, New Hampshire, Rhode Island and Pennsylvania through
various subsidiaries which operate under the following principal four lines of
business: (i) home energy services, which provides residential and small
commercial customers with service and maintenance of energy systems and
appliances, as well as the competitive retail supply of natural gas and
electricity to residential and small commercial customers; (ii) business
solutions, which provides engineering, consulting and construction services,
services related to the design, construction, installation, operation,
maintenance and management of heating, cooling and power production equipment
and systems, including ventilating, air conditioning, electrical power, motors,
pumps, lighting, water, wastewater, plumbing, piping, fire suppression systems,
for commercial and industrial customers, as well as the competitive retail
supply of natural gas and electricity to large commercial, institutional and
industrial customers . Certain subsidiaries within this line of business also
engage or may engage in the financing and ownership of cogeneration, small power
production, thermal energy, chilled water and related equipment and facilities;
(iii) commodity procurement, which provides management and procurement services
for fuel supply and management of energy sales, primarily for and from the
Ravenswood facility, as well as provides wholesale gas and electric purchasing
and management services for the home energy services and business solutions; and
(iv) fiber optic services, which provides fiber optic related construction,
leasing and exchange services.
Subsidiaries in the Energy Investments segment hold a 20% equity interest in the
Iroquois Gas Transmission System, LP ("Iroquois"), a pipeline that transports
Canadian gas supply to markets in the Northeastern United States; a 50% interest
in the Premier Transco Pipeline and a 24.5% interest in Phoenix Natural Gas
Limited, both in Northern Ireland; investments of natural gas processing plans
and related facilities in Western Canada, principally through KeySpan Canada,
formerly Gulf Midstream Services and hold minor investments in certain other
domestic pipeline projects.
The Other segment represents primarily unallocated administrative and general
expenses, interest income earned on temporary cash investments, and preferred
stock dividends. Further, this segment includes our marine transportation
subsidiary, Midland Enterprises, that was acquired as part of the Eastern
acquisition. We are required by the SEC to sell this subsidiary by November 8,
2003 as its operations were determined not to be functionally related to our
core utility operations as required by PUHCA. These operations do not contribute
significantly to our consolidated results of operations or cash flows.
In 1998, KeySpan 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 and have been prepared on the basis
-4-
that LILCO was deemed the acquiring company in the 1998 KeySpan transaction.
Additional information about KeySpan's industry segments is contained in Note 2
to the Consolidated Financial Statements, "Business Segments" included herein
and incorporated by reference thereto.
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 that 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 our future outlook, anticipated capital expenditures, future
cash flows and borrowings, pursuit of potential future acquisition opportunities
and sources of funding, are forward-looking statements. Such forward-looking
statements reflect numerous assumptions and involve a number of risks and
uncertainties and actual results may differ materially from those discussed in
such statements. Among the factors that could cause actual results to differ
materially are: general economic conditions, especially in the Northeast United
States; 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 KeySpan to successfully reduce its
cost structure; the successful integration of KeySpan's subsidiaries, including
Eastern, ENI and their subsidiaries; the degree to which KeySpan develops
unregulated business ventures, as well as federal and state regulatory policies
affecting KeySpan's ability to retain and operate such business ventures; the
ability of KeySpan to identify and make complementary acquisitions, as well as
the successful integration of such acquisitions; inflationary trends and
interest rates; and other risks detailed from time to time in other reports and
other documents filed by KeySpan with the SEC. For any of these statements,
KeySpan 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
"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.
KeySpan's principal executive offices are located at One MetroTech Center,
Brooklyn, New York 11201 and 175 East Old Country Road, Hicksville, New York
11801 and its telephone numbers are (718) 403-1000 (Brooklyn) and (516) 755-6650
(Hicksville). Financial and other information is also available through the
World Wide Web at http://www.keyspanenergy.com.
Business Strategy
KeySpan's vision is to be the premier energy company in the Northeastern United
States. To help us achieve that goal, we have acquired the operations of Eastern
and ENI, establishing KeySpan as the largest gas distribution company in the
Northeast and the fifth largest in the United States. The increased size and
scope of the company should enable us to provide enhanced cost-effective
customer service; offer our existing customers an array of other services and
products by implementing innovative marketing techniques and building upon our
existing relationships with
-5-
them; and capitalize on the above-average growth opportunities for natural gas
expansion in the Northeast by expanding our infrastructure on Long Island and in
New England.
A key element of KeySpan's business strategy is the continued focus and growth
of our core businesses of gas distribution, electric services and energy
services. In order provide the greatest shareholder value, we may consider the
sale of some or all of our non-core assets which include the businesses
conducted in our Gas Exploration and Production, Energy Investments and our
Other business segments. Any proceeds from such sales would, in all likelihood,
be used to retire a portion of our outstanding indebtedness.
Gas Distribution Services. KeySpan has achieved a high degree of penetration in
KEDNY's service territory, with approximately 79% of all one and two family
homes currently using natural gas for space heating. In contrast, less than 40%
of one and two family homes in KEDLI's service territory and less than 50% of
one and two family homes in KEDNE's service territories currently use natural
gas for space heating. During 2000, we continued the implementation of our
innovative marketing techniques focused on oil to gas space heating conversions
and the conversion of our existing non- heating natural gas customers to gas
heating. In our New York markets, this approach resulted in 24,000
installations, concentrated primarily in our Long Island service territory.
We also implemented the same marketing programs in our newly acquired New
England service territories, resulting in 19,000 new installations. Our strategy
is to continue these marketing efforts primarily on Long Island and in New
England. We believe that more than half of our gas sales growth will come from
our KEDNE service territories where there are more than 650,000 potential
customers, mostly homeowners who heat their homes with oil. Of these potential
customers, more than 100,000 already use gas for cooking or water heating and
another 160,000 are in close proximity to a gas main. Converting these customers
to gas heat will require minimal capital investment.
Additionally, we are also committed to expanding our gas distribution systems on
Long Island and in New England. During 2000, we installed more than 1,000,000
feet of new gas main in our KEDLI service territory, twice as much as in any
previous year. Expanding our gas distribution systems allows us to add new
customers, providing a broader customer base to expand our markets for
additional products and services.
Electric Services. Our electric services segment contributed significantly to
earnings in 2000, largely attributable to sales of capacity, energy, and
ancillary services from our Ravenswood facility. We are planning on expanding
the Ravenswood facility by adding a 250-megawatt, gas-fired co- generation unit
that is expected to come on line in 2003. We are also considering expanding
capacity on Long Island by building a combined-cycle generating unit.
Over the last year, we also focused our efforts on improving our plant
efficiencies to increase generating capacity. Through innovative technological
approaches, such as adding water spray to smaller units, we increased installed
capacity on Long Island and New York City by 37 megawatts, and we instituted a
program to reduce nitrogen oxides for improved environmental performance.
Reliability improvements at our Ravenswood facility reduced our forced outage
rate from 35% two years ago to just 5% in 2000. Decreasing the amount of time
our generating units are offline for
-6-
repairs allows us to increase sales and thus increase earnings. Our goal is to
continue improving our plants through new technologies that improve efficiencies
and reliability.
Energy Services. With our strong market presence in the Northeast centered on
our gas distribution services and by taking advantage of the increasing trend
towards deregulation and competition, KeySpan believes it is well positioned to
provide our customers with an expanded array of energy products and services
through our unregulated energy services companies. Our goal is to become one of
the top regional service providers in the Northeast.
During 2000, KeySpan expanded its energy services operations through the
acquisition of four additional companies located in the New York City
metropolitan area. The newly acquired companies specialize in
engineering-consulting, plumbing and mechanical contracting and HVAC
contracting. Additionally, Eastern and ENI each have unregulated energy services
operations in Massachusetts and New Hampshire, thereby expanding our energy
services operations further into the Northeast. The Energy Services segment now
has more than 3,000 employees and 100,000 contracts for the sale of gas and
electricity at retail on an unregulated basis.
Additionally, our fiber optic services continue to enhance our Energy Services
segment. Our 450 miles, or 57,000 fiber miles, of fiber optics located on Long
Island are strategically situated in one of the most attractive communication
markets in the United States. We construct fiber optic systems and facilities,
and own and lease fiber optic cable to local, long distance trans-Atlantic and
internet service providers. Our goal is to continue to expand this business by
broadening our customer base and creating strategic alliances with other
telecommunication companies. To this end, we entered into an agreement with FLAG
Atlantic 1, a British telecommunications joint venture, to establish a high
speed telecommunications link between London, Paris and New York.
Gas Exploration & Production. The shortages in energy supply and high gas prices
created the opportunity for significant net income and shareholder value from
this segment. Further, in March 2000, we converted approximately $80 million in
debt owed by Houston Exploration to us into additional common equity, increasing
our ownership from approximately 64% to 70%.
Energy Investments. Consistent with KeySpan's strategy to make investments in
certain select energy related businesses, focused primarily in the Northeast and
Canada, we purchased the remaining 50% interest in KeySpan Canada from Gulf
Canada Resources Limited. KeySpan also entered into a joint venture to construct
the Islander East Pipeline, which will bring 250 MDTH of gas capacity daily from
Nova Scotia, Canada to Long Island, New York and will also provide an additional
connection to gas supply for our New England marketplace. The Islander East
Pipeline is scheduled to become operational in 2003.
Other. As we previously discussed, we are required by the SEC to sell our marine
transportation subsidiary, Midland Enterprises, that was acquired as part of the
Eastern acquisition since its operations were determined not to be functionally
related to our core utility operations.
New Lines of Business. During 2000, we launched the myHomeKey.com portal.
MyHomeKey provides customers with the ability to electrically manage numerous
household tasks by linking them
-7-
with service providers, allowing on-line scheduling of home repairs and
maintenance, convenient shopping for home appliances, one-stop shopping for
utility services and access to energy saving equipment and systems, as well as
individualized community information.
In addition to using internet applications to enhance customer contact with
KeySpan, we are also using e-business solutions to operate more efficiently and
reduce our costs. In 2000, KeySpan entered into a supply chain venture called
Enporion. Enporion is an open, global supply chain e- marketplace for the energy
industry, linking suppliers and buyers through the internet. Through Enporion,
we have been able to simplify business purchasing processes, make operations
more effective and efficient, and reduce the purchase costs of materials and
supplies.
KeySpan is also engaged in alternative generation technologies such as
microturbines, reciprocating engines, fuel cells, photovoltaic, and wind power.
We believe that distributed generation methods such as these will be a growth
area in the next few years. In 2000, we successfully installed the first
microturbine unit on Long Island at the Atlantis Marine World Aquarium. The
unit, which runs on natural gas, produces up to 28 kilowatts of electricity for
the aquarium and uses its exhaust heat to provide hot water to the facility's
shark tank.
The Company
Gas Distribution
Overview
KeySpan sells, distributes and transports natural gas in six service territories
located in three states, New York, Massachusetts and New Hampshire. We are the
fifth largest gas distribution company in the United States and the largest in
the Northeast. In New York there are two separate, but contiguous service
territories served by KEDNY and KEDLI, comprising approximately 1,417 square
miles, and 1.6 million customers. In Massachusetts, Boston Gas Company, Colonial
Gas Company and Essex Gas Company, each doing business as KEDNE serve three
contiguous service territories consisting of 1,934 square miles and
approximately 758,000 customers. In New Hampshire, EnergyNorth Natural Gas, Inc.
d/b/a KEDNE has a service territory that is contiguous to Colonial Gas Company's
and is within 30 to 85 miles of the greater Boston area. EnergyNorth Natural Gas
services approximately 74,000 customers over a service area of approximately 922
square miles. Collectively, KeySpan owns and operates gas distribution,
transmission and storage systems that consist of approximately 21,000 miles of
gas mains and distribution pipelines and 576 miles of transmission pipelines, as
well as two major gas storage facilities. Our service areas cover 4,273 square
miles, and we serve approximately 2.4 million customers in the aggregate.
Gas is offered for sale to residential and small commercial customers on a
"firm" basis, and to most large 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.
-8-
KeySpan also participates in 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 of KeySpan's service
territories by connecting to our facilities or another transporter's facilities
at a point of delivery agreed to by us and the customer. KeySpan purchases
natural gas for sale to customers under long-term supply contracts and
short-term spot contracts. Such gas is transported under both firm and
interruptible transportation contracts. In addition, KeySpan has commitments for
the provision of gas storage capability and peaking supplies.
KeySpan sells gas to firm gas customers at its cost for such gas, plus a charge
designed to recover the costs of distribution (including a return of and a
return on capital invested in its distribution facilities). We share with our
firm gas customers net revenues (operating revenues less the cost of gas) from
off-system sales. Further, net revenues from tariff gas balancing services and
certain on- system sales are refunded, for the most part, to firm customers
subject to certain sharing provisions. The majority of interruptible profits
earned by the KEDNE companies are also refunded to firm gas customers.
Our gas 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. KEDNY and KEDLI operate under a utility tariff that 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) during a heating season due to variations from normal
weather. However, the utility tariffs for our four KEDNE gas distribution
companies do not contain such a weather normalization adjustment and, therefore,
fluctuations in seasonal weather conditions between years may have a significant
effect on results of operations and cash flows for these four subsidiaries. For
additional discussion, see Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, "Regulation and Rate Matters".
-9-
Gas sales and revenues for 2000 by class of customer are set forth below:
Sales Revenues Revenues
Customer (MDTH) (thousands of $) (% of Total)
- ----------------------------------------------------------- ---------------- ---------------------- --------------
Firm
Residential Heating........................................ 127,467 1,352,215 52.91
Residential Non-Heating.................................... 11,214 226,592 8.87
Temperature-Controlled heating............................. 33,490 224,792 8.80
Commercial/Industrial...................................... 43,829 389,620 15.24
------------ ---------------------- -----------------
Total Firm................................................. 216,000 2,193,219 85.82
------------ ---------------------- -----------------
Firm Transportation........................................ 40,655 34,709 1.36
Transportation - Electric Generation....................... 49,854 10,253 .40
------------ ---------------------- -----------------
Total Firm Transportation.................................. 90,509 44,962 1.76
------------ ---------------------- -----------------
Total Firm Gas Sales and Transportation.................. 306,509 2,238,181 87.58
Interruptible.............................................. 8,016 46,849 1.83
Off-System Sales........................................... 32,640 122,967 4.81
Transportation............................................. 50,750 121,996 4.77
------------ ---------------------- -----------------
Total Gas Sales and Transportation....................... 397,915 2,529,993 98.99
Other Retail Services...................................... - 25,792 1.01
------------ ---------------------- -----------------
Total Sales and Revenues................................. 397,915 2,555,785 100.00
============ ====================== =================
Further information and statistics regarding our Gas Distribution segment is
contained in Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations, "Gas Distribution."
Supply and Storage
KeySpan has contracts for the purchase of firm long-term transportation and
storage services. Our 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 our 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 us for local transportation, balancing and
other unbundled services. This trend is likely to continue as state regulators
in all of our service territories have implemented policies designed to
encourage customers to purchase their gas from suppliers other than the
traditional gas utilities, such as marketers.
New York Gas Distribution Systems
Peak-Day Capability. The design criteria for KeySpan's New York gas systems
assumes an average temperature of 0(0)F for peak-day demand. Under such
criteria, KEDNY and KEDLI estimated that
-10-
their requirements to supply firm gas customers would be approximately 1,940
MDTH of gas for a peak-day during the 2000/2001 winter season and that gas
available to KEDNY and KEDLI on such a peak-day would amount to approximately
1,999 MDTH. For the 2001/2002 winter season, KEDNY and KEDLI estimate that their
peak-day requirements will amount to 1,982 MDTH and that the gas supplies
available to KEDNY and KEDLI on such a peak-day will amount to approximately
1,999 MDTH.
For the 2000/2001 winter season, the highest daily throughput to our customers
was 1,597 MDTH, which occurred on December 25, 2000 at an average temperature of
17(degree)F, representing 80% of our capability at that time. KEDNY and KEDLI
had sufficient gas available to meet the requirements of their firm gas
customers for the 2000/2001 winter gas season and anticipate they will have
sufficient quantities for the 2001/2002 winter season. KEDNY and KEDLI's firm
gas peak-day capability is summarized in the following table:
MDTH
Source per day % of Total
- ----------------------------- ----------------------- -----------------
Pipeline.................. 716 36
Underground Storage....... 779 39
Peaking Supplies.......... 504 25
----------------------- -----------------
Total..................... 1,999 100
======================= =================
Pipelines and Storage. KEDNY and KEDLI purchase natural gas for sale to their
customers under contracts with suppliers located in domestic and Canadian supply
basins and arranged for transportation to their facilities under firm long-term
contracts with interstate pipeline companies. During the 2000/2001 winter
season, approximately 76% of KEDNY's and KEDLI's natural gas supply was
available from domestic sources and 24% from Canadian sources. KEDNY and KEDLI
had available under firm contract 716 MDTH per day of year-round and seasonal
pipeline transportation capacity to their facilities in the New York City
metropolitan area. Major providers of interstate pipeline capacity and related
services to KEDNY and KEDLI include: Transcontinental Gas Pipe Line Corporation
("Transco"), Texas Eastern Transmission Corporation ("TETCO"), Iroquois,
Tennessee Gas Pipeline Company ("Tennessee"), CNG Transmission Corporation
("CNG") and Texas Gas Transmission Company ("Texas").
Additionally, KEDNY and KEDLI have long-term contracts with Transco, TETCO,
Tennessee, CNG, Equitrans, Inc., Hattiesburg First Reserve and Honeoye Storage
Corporation for underground storage capacity of 58,954 MDTH, with 779 MDTH per
day, maximum deliverability.
Peaking Supplies. In our New York service territories, in addition to pipeline
and storage supply, KEDNY and KEDLI supplement their winter supply with peaking
supplies which are available on the coldest days of the year to enable them to
economically meet the increased requirements of their heating customers. KEDNY
and KEDLI's peaking supplies include gas provided by two of KeySpan's liquefied
natural gas ("LNG") plants. These LNG plants have an aggregate storage capacity
of approximately 2,053 MDTH and peak-day throughput capacity of 394 MDTH, or 20%
of peak-day supply. Additionally, KEDNY and KEDLI have peaking supply contracts
with four
-11-
cogeneration facilities/independent power producers located in their franchise
areas: 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 110 MDTH and total available peaking
supplies during the winter season of 3,349 MDTH. For the 2000/2001 winter
season, KEDNY and KEDLI had the capability to provide a maximum peak-day supply
of 504 MDTH on excessively cold days.
Gas Supply Management. Commencing April 1, 2000, we entered into a two-year
agreement with Coral Resources, L.P. ("Coral"), in which Coral assists our
wholly owned subsidiary, KeySpan Energy Trading Services LLC, in providing
energy supply management services for KEDNY and KEDLI. This agreement expires on
March 31, 2002. Additionally, KeySpan Energy Trading Services LLC also provides
energy-management services undertaken on behalf of LIPA.
New England Gas Distribution Systems
Peak-Day Capability. The design criteria for KeySpan's New England gas systems
assumes an average temperature of -6(0)F for peak-day demand. Under such
criteria, the KEDNE companies estimated that the requirements to supply their
firm gas customers would amount to approximately 1,217 MDTH of gas for a
peak-day during the 2000/2001 winter season and that the gas available to the
KEDNE companies on such a peak-day would amount to approximately 1,321 MDTH. For
the 2001/2002 winter season, the KEDNE companies estimate that their peak-day
requirements will amount to 1,240 MDTH and that the gas supplies available to
them on such a peak-day will amount to approximately 1,321 MDTH.
For the 2000/2001 winter season, the highest daily throughput to our New England
customers was 980 MDTH, which also occurred on December 25, 2000 at an average
temperature of 19(degree)F, representing 74% of the KEDNE companies' capability
at that time. The KEDNE companies had sufficient gas available to meet the
requirements of their firm gas customers for the 2000/2001 winter gas season and
anticipate that they will have sufficient quantities for the 2001/2002 winter
season. The firm gas peak day capability of the KEDNE companies is summarized in
the following table:
MDTH
Source per day % of Total
- --------------------------------------- ------------------- --------------
Pipeline and Underground Storage.... 708 54
Peaking Supplies.................... 613 46
------------------- -------------
Total............................... 1,321 100
=================== =============
Pipelines and Storage. The KEDNE companies also purchase natural gas for sale to
their customers under contracts with suppliers located in domestic and Canadian
supply basins and arrange for transportation to their facilities under firm
long-term contracts with interstate pipeline companies. During the 2000/2001
winter season, approximately 77% of the KEDNE companies' natural gas supply was
available from domestic sources and 23% from Canadian sources. The KEDNE
companies have available under firm contract 708 MDTH per day of year-round and
seasonal
-12-
transportation and underground storage capacity to their facilities in New
England. Major providers of interstate pipeline capacity and related services to
the KEDNE companies include: TETCO, Iroquois, Maritimes and Northeast Pipeline,
Tennessee, Algonquin Gas Transmission Company and Portland Natural Gas
Transmission System. Moreover, the KEDNE companies have long-term contracts with
TETCO, Tennessee, Dominion, National Fuel Gas Supply Corporation and Honeoye
Storage Corporation for underground storage capacity of 23,742 MDTH.
In our New England service territory, in addition to pipeline and storage
supply, the KEDNE companies supplement their winter supply with peaking supplies
that are available on the coldest days of the year to enable them to
economically meet the increased requirements of their heating customers. Peaking
supplies include gas provided by both LNG and propane air plants located
throughout the distribution systems of the KEDNE companies, as well as two
leased facilities outside of their distribution systems located in Providence,
Rhode Island and Everett, MA. For the 2000/2001 winter season, the KEDNE
companies had the capability to provide a peak-day supply of 613 MDTH on
excessively cold days or 46% of peak-day supply.
Gas Supply Management. Effective November 1, 1999, the Massachusetts based gas
distribution subsidiaries entered into a three-year portfolio management
contract with El Paso Energy Marketing, Inc. ("El Paso"). El Paso provides the
majority of the city gate supply requirements to the three Massachusetts
companies at market prices and manages upstream capacity, underground storage
and term supply contracts. The Massachusetts Department of Telecommunications
and Energy ("DTE") approved the contract in October 1999. The annual fee paid by
El Paso to manage the KEDNE companies' portfolio is, for the most part, returned
to firm customers.
Gas Costs. Fluctuations in utility gas costs have little impact on the operating
results of KEDNY, KEDLI and KEDNE companies, since the current gas rate
structure of each of these companies includes a gas adjustment clause whereby
variations between actual gas costs and gas cost recoveries are deferred and
subsequently refunded to or collected from customers.
For additional information concerning the gas distribution segment, see the
discussion on "Gas Distribution" in Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations" contained herein.
Electric Services
Overview
KeySpan's Electric Services segment primarily consist of (i) the ownership and
operation of gas and oil fired generating facilities located on Long Island and
New York and the delivery of the power generated from these facilities to LIPA
and the New York Independent System Operator ("NYISO"); (ii) the management and
operation of LIPA's transmission and distribution system; and (iii) the
management of LIPA's fuel and electric energy purchases and off-system sales.
As more fully described below, we (i) provide to LIPA all operation, maintenance
and construction services relating to the Long Island electric T&D system
through a management services agreement (the "MSA"); (ii) supply LIPA with
energy conversion and ancillary services through a power supply
-13-
agreement (the "PSA") to allow LIPA to provide electricity to its customers on
Long Island; and (iii) manage all aspects of the fuel supply for the Long Island
generating facilities, as well as all aspects of the capacity and energy owned
by or under contract to LIPA through an energy management agreement (the "EMA").
Each of the MSA, PSA and EMA became effective on May 28, 1998 and are
collectively referred to herein as the "LIPA Agreements."
On June 18, 1999, KeySpan completed its acquisition of the then rated 2,168
megawatt Ravenswood facility located in New York City from Consolidated Edison
Company of New York, Inc. ("Consolidated Edison") for approximately $597
million. As a means of financing this acquisition, we entered into a lease
agreement with a special purpose, unaffiliated financing entity that acquired a
portion of the Ravenswood facility directly from Consolidated Edison and leased
it to a wholly owned KeySpan subsidiary under a ten-year lease. We have
guaranteed all payment and performance obligations of this subsidiary under the
lease. Another subsidiary provides all operating, maintenance and construction
services for the Ravenswood facility. The lease program was established in order
to reduce our cash requirements by $425 million. The lease qualifies as an
operating lease for financial reporting purposes while preserving our ownership
of the facility for federal and state income tax purposes. The balance of the
funds needed to acquire the Ravenswood facility were provided from cash on hand.
The Ravenswood facility has contributed significantly to earnings in 2000,
selling capacity, energy and ancillary services into the NYISO at market-based
rates, subject to mitigation. The plant, which provides approximately 25% of the
in-city capacity available to serve residents and businesses during a period of
economic growth, underscores the value of electric generation assets for our
company. We are in the process of expanding the Ravenswood facility by adding a
250-megawatt state-of-the- art gas-fired co-generation unit at the site which is
expected to come on line by 2003.
We currently sell the energy, capacity and ancillary services produced by the
Ravenswood facility by bidding into an auction process conducted by the NYISO.
See Note 8 to the Consolidated Financial Statements "New York State Independent
System Operator Matters" for further information.
Generating Facility Operations
KeySpan owns and operates an aggregate of 73 electric generation units
throughout Long Island and Queens, 40 of which can be powered either by natural
gas or oil. In recent years, we have reconfigured several of our facilities to
enable them to burn either natural gas or oil, thus enabling us to switch
periodically between fuel alternatives based upon cost and seasonal
environmental requirements. Through other innovative technological approaches
such as adding water spray to smaller units, we increased installed capacity in
our generating facilities by 37 megawatts, and we instituted a program to reduce
nitrogen oxides for improved environmental performance. Reliability improvements
at our Ravenswood facility reduced the forced outage rate for that facility from
35% two years ago to just 5% in 2000. Decreasing the amount of time our
generating units are offline for repair allows us to increase sales and thus
increase earnings.
-14-
The following table indicates the 2000 summer capacity of our steam generation
facilities and internal combustion ("IC") units as reported to the NYISO:
Location of Units Description Fuel Units MW
- ------------------------------- -------------------------------- ------------------------ ------------------------ --------------
Long Island City Steam Turbine Dual* 3 1,736
Northport, L.I. Steam Turbine Dual* 3 1,166
Northport, L.I. Steam Turbine Oil 1 382
Port Jefferson, L.I. Steam Turbine Dual* 2 386
Glenwood, L.I. Steam Turbine Gas 2 231
Island Park, L.I. Steam Turbine Dual* 2 388
Far Rockaway, L.I. Steam Turbine Dual* 1 106
Long Island City IC Units Dual* 17 464
Throughout L.I. IC Units Dual* 12 290
Throughout L.I. IC Units Oil 30 1,088
- ------------------------------------------------------------------------------------------------------------------------------------
Total 73 6,237
=============================== ================================ ======================== ======================== ==============
*Dual - Oil or natural gas.
LIPA Agreements
Power Supply Agreement. The PSA provides for the sale to LIPA of all of the
capacity and, to the extent LIPA requests, energy from the Long Island
generating facilities. Capacity refers to the ability to generate energy and,
pursuant to NYISO requirements, must be maintained at specified levels
(including reserves) regardless of the source and amount of energy consumption.
By contrast, energy conversion services refers to the electricity actually
generated for consumption by consumers. Such sales of capacity and energy
conversion services from the Long Island generating facilities are made at rates
regulated by the Federal Energy Regulatory Commission ("FERC"). These rates may
be modified in the future in accordance with the terms of the PSA for (i) agreed
upon labor and expense indices applied to the base year; (ii) a return of and on
the capital invested in the Long Island generating facilities; and (iii)
reasonably incurred expenses that are outside of our control.
The PSA provides incentives and penalties for us to maintain the output
capability of the Long Island generating facilities, as measured by annual
industry-standard tests of operating capability, and plant availability and
efficiency. These combined incentives and penalties may total as much as $4
million annually. In 2000, KeySpan earned approximately $3 million in incentives
under the PSA.
The PSA provides LIPA with all of the capacity from the Long Island generating
facilities. However, LIPA has no obligation to purchase energy conversion
services from the Long Island generating facilities and is able to purchase
energy on a least-cost basis from all available sources consistent with existing
transmission interconnection limitations of the transmission and distribution
system. Under the terms of the PSA, LIPA is obligated to pay for capacity at
rates which reflect a large percentage of the overall fixed cost of maintaining
and operating the Long Island generating facilities. A variable maintenance
charge is imposed for each unit of energy actually generated by the Long Island
generating facilities. The PSA expires on May 28, 2013 and is renewable on
similar terms. However, the PSA provides LIPA the option of electing to reduce
or "ramp-down" the capacity it purchases from us in accordance with agreed-upon
schedules. In years 7 through 10 of the PSA, if LIPA elects to ramp-down, we are
entitled to receive payment for 100% of the present value of the capacity
charges otherwise payable over the remaining term of the PSA. If LIPA ramps-
down the generation capacity in years 11 through 15 of the PSA, the capacity
charges otherwise payable by LIPA will be reduced in accordance with a formula
established in the PSA. If LIPA exercises its ramp-down option, KeySpan may use
any capacity released by LIPA to bid on new LIPA capacity requirements or to bid
on LIPA's capacity requirements to replace other ramped-down capacity. If
KeySpan continues to operate the ramped-down capacity, the PSA requires it to
use reasonable efforts to market the capacity and energy from the ramped-down
capacity and to share any profits with LIPA. Any capacity and energy sold by us
from ramped-down capacity must be transported over the T&D system, and we will
be required to pay LIPA's standard transmission (and, if applicable,
distribution) rates for the service. The PSA will be terminated in the event
that LIPA exercises its right to purchase, at fair market value, all of the Long
Island generating facilities. This purchase option commences on May 28, 2001 and
continues for one year. LIPA has initiated a process to review whether to
exercise its right to purchase the Long Island generating facilities and has
begun soliciting proposals for the management, operation and maintenance of the
Long Island generating facilities in the event it exercises its option.
KeySpan has an inventory of sulfur dioxide ("SO2") and nitrogen oxide ("NOx")
emission allowances that may be sold to third party purchasers. The amount of
allowances varies from year to year relative to the level of emissions from the
Long Island generating facilities which is greatly dependent on the mix of
natural gas and fuel oil used for generation and the amount of purchased power
that is imported onto Long Island. In accordance with the PSA, 33% of emission
allowance sales revenues attributable to the Long Island generating facilities
is retained by KeySpan and the other 67% is credited to LIPA. LIPA also has a
right of first refusal on any potential emission allowance sales of the Long
Island generating facilities. Additionally, KeySpan is bound by a memorandum of
understanding with the New York State Department of Environmental Conservation
("DEC"), which memorandum prohibits the sale of SO2 allowances into certain
states and requires the purchaser to be bound by the same restriction, which may
affect the market value of the allowances.
Management Services Agreement. Under the MSA, KeySpan performs day-to-day
operation and maintenance services and capital improvements for LIPA's
transmission and distribution system including, among other functions,
transmission and distribution facility operations, customer service, billing and
collection, meter reading, planning, engineering, and construction, all in
accordance with policies and procedures adopted by LIPA. KeySpan furnishes such
services as an independent contractor and does not have any ownership or
leasehold interest in the transmission and distribution system.
In exchange for providing these services, KeySpan is reimbursed its budgeted
costs and entitled to earn an annual management fee of $10 million and may also
earn certain incentives, or be responsible for certain penalties, based upon its
performance. The incentives provide for KeySpan to retain 100% of the first $5
million of cost reductions and 50% of any additional cost reductions up to 15%
of the total cost budget. Thereafter, all savings accrue to LIPA. KeySpan is
also required to absorb any total cost budget overruns up to a maximum of $15
million in any contract year.
In addition to the foregoing cost-based incentives and penalties, KeySpan is
eligible for incentives for performance above certain threshold target levels
and subject to disincentives for performance
-15-
below certain other threshold levels, with an intermediate band of performance
in which neither incentives nor disincentives will apply, for system
reliability, worker safety, and customer satisfaction. In 2000, KeySpan earned
$7.4 million in non-cost performance incentives.
The MSA continues in effect until May 28, 2006. Beginning in 2004, LIPA will
commence a competitive process to solicit a new management services agreement.
Generally, KeySpan will be eligible to submit a bid for any new management
services agreement.
Energy Management Agreement. Pursuant to the EMA, KeySpan (i) procures and
manages fuel supplies for LIPA to fuel the Long Island generating facilities,
(ii) performs off-system capacity and energy purchases on a least-cost basis to
meet LIPA's needs, and (iii) makes off-system sales of output from the Long
Island generating facilities and other power supplies either owned or under
contract to LIPA. LIPA is entitled to two-thirds of the profit from any
off-system electricity sales arranged by us. The term for the service provided
in (i) above is fifteen years, and the term for the services provided in (ii)
and (iii) above is eight years.
In exchange for these services, KeySpan earns an annual fee of $1.5 million,
plus an allowance for certain costs incurred in performing services under the
EMA. The EMA further provides incentives for control of the cost of fuel and
electricity purchased on behalf of LIPA. Fuel and electricity purchase prices
are compared to regional price indices and we receive payment from LIPA, or are
obligated to make payment to LIPA, for fuel and/or purchased electricity costs
which are below or above, respectively, specified tolerance bands. The total
fuel purchase incentive or disincentive can be no greater than $5 million
annually and the electricity purchase incentive or disincentive can be no
greater than $2 million annually (subject to an overall cap including certain
non-cost performance incentives under the MSA). For the year ended December 31,
2000, KeySpan earned an aggregate of $5 million in incentives under the EMA.
Other Rights. As described above, under a "Generation Purchase Rights Agreement"
entered into as part of the LIPA Transaction, LIPA has the right to purchase, at
fair market value, all of our Long Island based generating assets during the
twelve month period beginning on May 28, 2001. Fair market value is to be
determined pursuant to an appraisal process conducted by independent investment
banking firms. During the fourth quarter of 2000, LIPA began an initial due
diligence review of the feasibility of purchasing these assets and has recently
solicited proposals from interested parties to operate the generating facilities
should they purchase them. At this point in time, we can not predict whether
LIPA will exercise its right to purchase the assets, nor can we estimate the
effect on our financial condition, results of operations and cash flows if LIPA
were to exercise such right.
Pursuant to other agreements between LIPA and us, certain future rights have
been granted to LIPA. Subject to certain conditions, these rights include the
right for 99 years to lease or purchase, at fair market value, parcels of land
and to acquire unlimited access to, as well as appropriate easements at, the
Long Island generating facilities for the purpose of constructing new electric
generating facilities to be owned by LIPA or its designee. Subject to this right
granted to LIPA, KeySpan has the right to sell or lease property on or adjoining
the Long Island generating facilities to third parties.
-16-
In addition, LIPA has the right to acquire a parcel at the Shoreham Nuclear
Power Station site suitable as the terminus for a potential transmission cable
under Long Island Sound or the potential site of a new gas-fired combined cycle
generating facility.
KeySpan owns the common plant (such as administrative office buildings and
computer systems) formerly owned by LILCO and recovers LIPA's allocable share of
the carrying costs of such plant through the MSA. KeySpan has agreed to provide
LIPA, for a period of 99 years, the right to enter into leases at fair market
value for common plant or sub-contract for common services which it may assign
to a subsequent manager of the transmission and distribution system. We have
also agreed: (i) for a period of 99 years not to compete with LIPA as a provider
of transmission or distribution service on Long Island; (ii) that LIPA will
share in synergy (i.e., efficiency) savings over a 10-year period attributed to
the 1998 KeySpan/LILCO transaction (estimated to be approximately $1 billion),
which savings are incorporated into the cost structure under the LIPA
Agreements; and (iii) not to commence any tax certiorari case (until termination
of the PSA) challenging certain property tax assessments relating to the Long
Island generating facilities.
Guarantees and Indemnities. KeySpan and LIPA have also entered into agreements
providing for the guarantee of certain obligations, indemnification against
certain liabilities and allocation of responsibility and liability for certain
pre-existing obligations and liabilities. In general, liabilities associated
with the LILCO assets transferred to KeySpan, have been assumed by KeySpan; and
liabilities associated with the assets acquired by LIPA, are borne by LIPA,
subject to certain specified exceptions. KeySpan has assumed all liabilities
arising from all manufactured gas plant ("MGP") operations of LILCO and its
predecessors, and LIPA has assumed certain liabilities relating to the Long
Island generating facilities and all liabilities traceable to the business and
operations conducted by LIPA after completion of the 1998 KeySpan/LILCO
transaction. An agreement also provides for an allocation of liabilities which
relate to the assets that were common to the operations of LILCO and/or shared
services and are not traceable directly to either the business or operations
conducted by LIPA or KeySpan.
For additional information concerning the Electric services segment, see the
discussion on "Electric Services" in Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained herein.
Gas Exploration & Production
KeySpan is engaged in the exploration and production of domestic natural gas and
oil, through our approximate 70% equity interest in Houston Exploration, as of
the date hereof, and through our wholly owned subsidiary, KeySpan Exploration.
Houston Exploration was organized by KeySpan in 1985 to conduct natural gas and
oil exploration and production activities. It completed an initial public
offering in 1996 and its shares are currently traded on the New York Stock
Exchange under the symbol "THX." At March 1, 2001, its aggregate market
capitalization was approximately $898.7 million (based upon the closing price on
the New York Stock Exchange on that date of $29.97). At March 1, 2001, Houston
Exploration had approximately 29,987,041 shares of common stock, $.01 par value,
outstanding. More detailed
-17-
information concerning the operations of Houston Exploration is contained in the
annual, quarterly and periodic reports filed by Houston Exploration with the
SEC.
KeySpan Exploration was organized in 1999, as a Delaware corporation,
principally to form a joint venture with Houston Exploration. Effective January
1, 1999, KeySpan Exploration and Houston Exploration entered into a joint
exploration agreement (the "Joint Venture") to explore for natural gas and oil
over a term of three years and expiring on December 31, 2001, subject to earlier
termination at the option of either party. Houston Exploration contributed all
of its then undeveloped offshore leases to the Joint Venture, and KeySpan
Exploration acquired a 45% working interest in all prospects to be drilled under
the Joint Venture. Houston Exploration retained a 55% interest in the leases,
and the revenues generated from this joint program are shared between KeySpan
Exploration and Houston Exploration on a 45% and 55% basis, respectively.
Effective December 31, 2000, KeySpan Exploration and Houston Exploration
mutually agreed that KeySpan Exploration will no longer participate in future
offshore exploration prospects. Under the terms of the Joint Venture agreement,
KeySpan Exploration will continue to maintain its working interest in all wells
previously drilled under the Joint Venture and will continue the development of
its current working interests in prospects on which discovery wells have been
drilled. In that regard, KeySpan Exploration has agreed to commit approximately
$17 million during 2001 for the development of prospects successfully drilled by
the Joint Venture during 1999 and 2000.
In February 2000, after completing a review of strategic alternatives for
Houston Exploration, we concluded that we would, at this time, retain our equity
interest in that company. However, as previously indicated, we consider our gas
and oil exploration and production activities to be non-core operations and a
future disposition of these assets, for appropriate consideration, is possible.
As previously mentioned, On March 31, 2000, under a pre-existing credit
arrangement, approximately $80 million in debt owed by Houston Exploration to us
was converted into additional common equity in Houston Exploration. Upon such
conversion, our common equity ownership interest increased from 64% to
approximately 70%.
Our gas exploration and production subsidiaries focus their operations offshore
in the Gulf of Mexico and onshore in South Texas, South Louisiana, the Arkoma
Basin, East Texas and West Virginia. The geographic focus of these operations
enables our subsidiaries to manage a comparatively large asset base with
relatively few employees and to add and operate production at relatively low
incremental costs. Our gas exploration and production subsidiaries seek to
balance their offshore and onshore activities so that the lower risk and more
stable production typically associated with onshore properties complement the
high potential exploratory projects in the Gulf of Mexico by balancing risk and
reducing volatility. Houston Exploration's business strategy is to seek to
continue to increase reserves, production and cash flow by pursuing internally
generated prospects, primarily in the Gulf of Mexico, by conducting development
and exploratory drilling on our offshore and onshore properties and by making
selective opportune acquisitions.
Offshore Properties. We hold interests in 106 lease blocks, representing 543,816
gross (442,548 net) acres, in federal and state waters in the Gulf of Mexico, of
which 32 have current operations. Houston Exploration operates 22 of these
blocks, accounting for approximately 80% of our offshore
-18-
production. Over the past five years, we have drilled 28 successful exploratory
wells and 17 successful development wells in the Gulf of Mexico, representing a
historical success rate of 69%. During 2000, Houston Exploration drilled 8
successful exploratory wells and 6 successful development wells on its Gulf of
Mexico properties. The Joint Venture participated in 10 of the successful wells,
all 8 exploratory wells and 2 of the development wells.
Onshore Properties. We also own onshore natural gas and oil properties
representing interests in 1,242 gross (844.1 net) wells, approximately 85% of
which Houston Exploration is the operator of record, and 175,320 gross (109,657
net) acres. Over the past five years, we have drilled or participated in the
drilling of 140 successful development wells and 7 successful exploratory wells
onshore, representing a historical success rate of 84%, through our interest in
Houston Exploration. During 2000, Houston Exploration participated in the
drilling of 44 successful development wells and 1 successful exploratory well on
its onshore properties. During the same period, Houston Exploration drilled or
participated in the drilling of 4 development wells that were not successful.
We did not acquire any onshore properties during 2000. Houston Exploration plans
to drill 4 onshore exploratory wells and 40 onshore development wells in 2001.
For additional information concerning the Gas Exploration and Production
segment, see the discussion on "Gas Exploration and Production" in Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and for information with respect to net proved reserves, production,
productive wells and acreage, undeveloped acreage, drilling activities, present
activities and drilling commitments see Note 17 to the Consolidated Financial
Statements, "Supplemental Gas and Oil Disclosures," included herein.
Energy Services
As part of our business strategy, we will continue to develop and grow our
energy services activities through our non-regulated subsidiaries. The Energy
Services segment provides services to customers located within the New York City
metropolitan area, New Jersey, Connecticut, Massachusetts, New Hampshire, Rhode
Island and Pennsylvania through various subsidiaries which operate under the
following four principal lines of business: (i) home energy services, which
provides residential and small commercial customers with service and maintenance
of energy systems and appliances, as well as the competitive retail supply of
natural gas and electricity to residential and small commercial customers; (ii)
business solutions, which provides engineering, consulting and construction
services, services related to the design, construction, installation, operation,
maintenance and management of heating, cooling and power production equipment
and systems, including ventilating, air conditioning, electrical power, motors,
pumps, lighting, water, wastewater, plumbing, piping, fire suppression systems,
for commercial and industrial customers, as well as the competitive retail
supply of natural gas and electricity to large commercial, institutional and
industrial customers. Certain subsidiaries within this line of business also
engage or may engage in the financing and ownership of cogeneration, small power
production, thermal energy, chilled water and related equipment and facilities;
(iii) commodity procurement, which provides management and procurement services
for fuel supply and management of energy sales, primarily for and from the
-19-
Ravenswood facility, as well as provides wholesale gas and electric purchasing
and management services; and (iv) fiber optic services in which we construct
fiber optic systems and facilities and own and lease fiber optic cable to local,
long distance, and trans-Atlantic carriers, as well as internet service
providers.
Other energy services that we are engaged in include energy related internet
activities, microturbines and fuel cells.
Internet Activities. During 2000, we launched the myHomeKey.com portal. Through
our exclusive arrangement with myHomeKey.com, we created alliances with other
businesses to create a source for a wide array of home products and services, as
well as individualized community information. MyHomeKey provides customers with
the ability to electrically manage a myriad of household tasks by linking them
with quality service providers, allowing on-line scheduling of home repairs and
maintenance, convenient shopping for home appliances, one-stop shopping for
utility services and access to energy saving equipment and systems.
Alternative Generation Technologies. KeySpan is also engaged in alternative
generation technologies such as microturbines. In 2000, we successfully
installed the first microturbine unit on Long Island at the Atlantis Marine
World Aquarium. The unit, which runs on natural gas, produces up to 28 kilowatts
of electricity for the aquarium and uses its exhaust heat to provide hot water
to the facility's shark tank.
KeySpan expanded its energy services operations through the acquisition of four
additional companies located in the New York City metropolitan area. The newly
acquired companies specialize in engineering-consulting, plumbing and mechanical
contracting and HVAC contracting. Additionally, Eastern and ENI each had
unregulated energy services operations in Massachusetts and New Hampshire which
have expanded our energy services operations further into the Northeast. The
Energy Services segment now has more than 3,000 employees, 100,000 commodity
contracts and is the number one oil to gas conversion contractor in its service
territories.
KeySpan's energy services operations compete with the marketing and management
operations of both independent and major energy companies in addition to
electric utilities, independent power producers, local distribution companies
and various energy brokers. As a result of the continuing efforts to deregulate
both the natural gas and electric industries, the relative energy cost
differences among different forms of energy are expected to be reduced in the
future. Competition is based largely upon pricing, availability and reliability
of supply, technical and financial capabilities, regional presence and
experience. With our strong market presence in the Northeast centered on our gas
distribution services and by taking advantage of the increasing trend towards
deregulation, KeySpan believes it is well positioned to provide our customers
with an expanded array of energy products and services through our unregulated
energy service companies.
For additional information concerning the Energy Services segment, see the
discussion on "Energy Services" in Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations" contained herein.
-20-
Energy Investments
As one of our complementary non-core lines of business, KeySpan has investments
in certain energy related businesses, including natural gas pipelines, gas
storage facilities and midstream natural gas processing and gathering facilities
in the Northeast region of the United States, Canada and Northern Ireland.
Natural Gas Pipelines. KeySpan owns a 20% interest in Iroquois Gas Transmission
System, L.P., the partnership that owns a 375-mile pipeline that currently
transports 946 MDTH of Canadian gas supply daily from the New York-Canadian
border to markets in the Northeastern United States. KeySpan is also a shipper
on Iroquois and currently transports up to 137 MDTH of gas per day on the
pipeline.
KeySpan also is participating in two intra-regional pipeline projects, the Cross
Bay Pipeline and the Islander East Pipeline. The Cross Bay Pipeline Company,
LLC, is a joint venture among Duke Energy Corporation, The Williams Companies
and KeySpan to transport 125 MDTH of gas from two existing interstate pipelines
located in New Jersey to customers located in New York City and Long Island.
KeySpan has a 25% interest in this project. Additionally, in 2000, KeySpan
entered into another joint venture with Duke to construct the Islander East
Pipeline. KeySpan and Duke each hold a 50% interest in Islander East Pipeline
Company, LLC, which will bring 250 MDTH of gas from Nova Scotia, Canada to Long
Island, New York and will provide an additional connection to supplies in our
New England market. The Islander East Pipeline is scheduled to become
operational in 2003.
KeySpan also owns a 50% interest in Premier Transco Pipeline and a 24.5%
interest in Phoenix Natural Gas Limited both in Northern Ireland. Premier is an
84-mile pipeline to Northern Ireland from southwest Scotland that has planned
transportation capacity of approximately 300 MDTH of gas supply daily to markets
in Northern Ireland. Phoenix is a gas distribution system serving the City of
Belfast, Northern Ireland.
Gas Storage Facilities. KeySpan has equity investments in two gas storage
facilities in the State of New York. Honeoye Storage Corporation and Steuben Gas
Storage Company. We own a 52% interest in Honeoye, an underground gas storage
facility which provides up to 4.8 billion cubic feet of storage service to New
York and New England. We also own 34% of a partnership that has a 50% interest
in the Steuben facility which provides up to 6.2 billion cubic feet of storage
service to New Jersey and Massachusetts.
Natural Gas Processing and Gathering Facilities. KeySpan also owns 100% of
KeySpan Canada, a company with natural gas processing plants and gathering
facilities located in Western Canada. In October 2000, KeySpan purchased the
remaining 50% interest in KeySpan Canada from Gulf Canada Resources Limited. The
assets include interests in 14 processing plants and associated gathering
systems that can process approximately 1.5 BCFe of natural gas daily, and
associated natural gas liquids fractionation. Additionally, KeySpan owns a 37%
interest in the Paddle River processing plant in Western Canada and an interest
in the Younger NGL Extraction plant in British
-21-
Columbia, Canada. In 2000, KeySpan sold its interest in the Nipisi oil property
in Western Canada, and realized an after-tax gain of approximately $1.3 million
from the sale.
For additional information concerning the Energy Investments segment, see the
discussion on "Energy Investments" in Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained herein.
The Industry, Regulation and Rate Matters
The Industry
The natural gas and electric sectors of the regulated energy industry are
undergoing significant change as market forces are moving towards replacing or
supplementing rate regulation by introducing competition. Competition can
present utilities with greater opportunities to manage the cost of their natural
gas and electric supplies, as well as earn profits on energy sales and expand
their business activities, through unregulated affiliates.
A significant number of natural gas and electric utilities have reacted to the
changing structure of the energy industry by entering into business
combinations, with the goal of reducing common costs, gaining size to better
withstand competitive pressures and business cycles, and attaining synergies
from the combination of operations. We have engaged in two such combinations,
the KeySpan/LILCO transaction in 1998 and our recent acquisitions of Eastern and
ENI. For further information regarding the gas and electric industry, see Item
7A, Quantitative and Qualitative Disclosure About Market Risk.
Regulation and Rate Matters
Gas and electric public utility companies, and corporations which own gas and
electric public utility companies (i.e., public utility holding companies) may
be subject to either or both state and federal regulation. In general, state
public utility commissions, such as the NYPSC, DTE and NHPUC regulate the
provision of retail services, including the distribution and sale of natural gas
and electricity to consumers. FERC regulates interstate natural gas
transportation and electric transmission, and has jurisdiction over certain
wholesale natural gas sales and wholesale electric sales. Public utility holding
companies, especially those with operations in several states, are regulated by
the SEC under PUHCA and to some extent by state utility commissions through the
regulation of corporate, financial and affiliate activities of public utilities.
KeySpan and its subsidiaries are subject to regulation by the NYPSC, DTE, NHPUC,
FERC and the SEC. The NYPSC regulates KEDNY and KEDLI, and indirectly KeySpan
itself, through conditions which were attached to the NYPSC order authorizing
the 1998 KeySpan/LILCO transaction. The NYPSC also regulates the safety and
reliability of KeySpan's generating facilities on Long Island and at Ravenswood
under a lightened regulatory standard. Those conditions addressed the manner
-22-
in which KeySpan may interact with KEDNY and KEDLI. Similarly, we are now
subject to regulation by the DTE and NHPUC for our KEDNE subsidiaries.
For information regarding the NYPSC, DTE and SEC, see the discussion in Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, "Regulation and Rate Matters."
FERC regulates the sale of electricity at wholesale and the transmission of
electricity in interstate commerce as well as certain corporate and financial
activities of companies that are engaged in such activities. The Long Island
generating facilities and the Ravenswood facility are subject to FERC regulation
based on their wholesale energy transactions. LIPA, KeySpan and the Staff of
FERC stipulated a five-year rate plan for the Long Island generating facilities
with agreed-upon yearly adjustments, which has been approved by FERC. Our
Ravenswood facility's rates are based on a market-based rate application
approved by FERC. The rates that our Ravenswood facility may charge are subject
to mitigation measures due to market power concerns of FERC. FERC retains the
ability in future proceedings, either on its own motion or upon a complaint
filed with FERC, to modify the Ravenswood facility's rates, either upward or
downward, if FERC concludes that it is in the public interest to do so.
FERC also 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 KEDNY, KEDLI, KEDNE and certain related
intrastate gas transportation functions are not subject to FERC jurisdiction.
However, to the extent that KEDNY, KEDLI, KEDNE purchase or sell gas for resale
in interstate commerce, such transactions are subject to FERC jurisdiction and
have been authorized by the FERC.
Our interests in Iroquois, Honeoye and Steuben are also fully regulated by FERC
as natural gas companies.
KeySpan's electric operations in New York City are also subject to oversight by
the FERC approved NYISO. KeySpan currently bids and sells the energy capacity
and ancillary services from the Ravenswood facility through the energy market
operated by the NYISO. For information concerning the NYISO, see Note 8 to the
Consolidated Financial Statements, "New York Independent System Operator
Matters."
KeySpan's foreign operations in Northern Ireland, conducted through Premier and
Phoenix, are subject to licensing by the Northern Ireland Department of Economic
Development and regulation by the U.K. Department of Trade and Industry (with
respect to the subsea and on-land portions of the Premier pipeline) and the
Northern Ireland Director General, Office for the Regulation of Electricity and
Gas (with respect to the Northern Ireland portion of the Premier pipeline and
Phoenix's operations generally). The licenses establish mechanisms for the
establishment of rates for the conveyance and transportation of natural gas, and
generally may not be revoked except upon long- term notice. Charges for the
supply of gas by Phoenix are largely unregulated unless a determination is made
of an absence of competition.
-23-
KeySpan's assets in Canada are subject to regulation by Canadian federal and
provincial authorities. Such regulatory authorities license various aspects of
the facilities and pipeline systems as well as regulate safety, operational and
environmental matters and certain changes in such facilities' and pipelines'
capacities and operations.
Environmental Matters
Overview
KeySpan's ordinary business operations subject it to various federal, state and
local laws, rules and regulations dealing with the environment, including air,
water, and hazardous waste, and its business operations are regulated by various
federal, regional, state and local. These requirements govern both our normal,
ongoing operations and the remediation of contaminated properties historically
used in utility operations. Potential liability associated with our 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, or in Note 9 to the Consolidated Financial Statements
"Contractual Obligations and Contingencies - Environmental Matters", no material
proceedings relating to environmental matters have been commenced or, to our
knowledge, are contemplated by any federal, state or local agency against
KeySpan, and we are not a defendant in any material litigation with respect to
any matter relating to the protection of the environment. We believe that our
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 us. We believe that all prudently incurred costs not
recoverable through insurance or some other means with respect to environmental
requirements will be recoverable from our customers. We are also 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.
Air. Federal, state and local laws currently regulate a variety of air emissions
from new and existing electric generating plants, including SO2, NOx, opacity
and particulate matter and, in the future, may also regulate emissions of fine
particulate matter, hazardous air pollutants, and carbon dioxide. We have
submitted timely applications for permits in accordance with the requirements of
Title V of the 1990 amendments to the Federal Clean Air Act ("CAA"). Final
permits have been issued for all of our electric generating facilities. The
permits allow our electric generating plants to continue to operate without any
additional significant expenditures, except as described below.
Our generating facilities are located within a CAA severe ozone non-attainment
area, and are subject to the Phase I, II, and III NOx reduction requirements
established under the Ozone Transportation Commission ("OTC") memorandum of
understanding. Our investments in boiler combustion modifications and the use of
natural gas firing at our steam electric generating stations have enabled us to
achieve the NOx emission reductions required under Phase I and II in a
cost-effective manner. We are awaiting final development of state and federal
regulatory programs with respect to NOx reduction requirements for our existing
power plants. Our compliance strategy may be composed of fuel choice decisions,
acquisition of emission credits, and installation of emission control
-24-
equipment. The extent of development of new generation in the region will also
impact our compliance strategy. Although we are evaluating our alternatives,
final decisions cannot be made until pending regulatory requirements and new
generation decisions are clarified. Expenditures to address emission reduction
requirements through the year 2004 are expected to be between $10 million and
$15 million.
Water. We possess permits for our generating units which authorize discharges
from cooling water circulating systems and chemical treatment systems. These
permits are renewed from time to time, as required by regulation. Additional
capital expenditures associated with the renewal of the surface water discharge
permits for our power plants may be required by the DEC. Until our monitoring
obligations are completed and changes to the Environmental Protection Agency
regulations under Section 316 of the Clean Water Act are promulgated, the need
for and the cost of equipment upgrades cannot be determined.
On behalf of LIPA, we provide management and operations support for the
LIPA-Connecticut Light and Power Company electric transmission cable system
located under the Long Island Sound (the "Sound Cable"). The Connecticut
Department of Environmental Protection and the DEC separately have issued
Administrative Consent Orders ("ACOs") in connection with releases of insulating
fluid from the Sound Cable. The ACOs require the submission of a series of
reports and studies describing cable system condition, operation and repair
practices, alternatives for cable improvements or replacement, and environmental
impacts associated with prior leaks of fluid into the Long Island Sound.
Compliance activities associated with the ACOs are ongoing and are recoverable
from LIPA under the MSA.
In addition, we will be responsible for environmental obligations relating to
the Ravenswood facility operations other than liabilities arising from
pre-closing disposal of waste at off-site locations and any monetary fines
arising from Consolidated Edison's pre-closing conduct.
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 our business
operations, we generate materials which are subject to these laws. From time to
time, we have received notices under these laws concerning possible claims with
respect to sites at which hazardous substances generated by KeySpan and other
potentially responsible parties allegedly were disposed.
For further information concerning environmental matters and a discussion on our
MGP sites, see Note 9 to the Consolidated Financial Statements, "Contractual
Obligations and Contingencies - Environmental Matters."
Employee Matters
On December 31, 2000, KeySpan and its wholly owned subsidiaries had
approximately 13,000 employees. Of that total, approximately 6,5602 employees in
our regulated companies are covered under collective bargaining agreements.
KeySpan has not experienced any work stoppage during
-25-
the past five years and considers its relationship with employees, including
those covered by collective bargaining agreements, to be good.
Executive Officers of the Company
Certain information regarding executive officers of KeySpan and certain of its
subsidiaries is set forth below:
Robert B. Catell
Mr. Catell, age 64, has been a Director of KeySpan since its creation in May
1998. He was elected Chairman of the Board and Chief Executive Officer in July
1998. He served as its President and Chief Operating Officer from May 1998
through July 1998. Mr. Catell joined KEDNY in 1958 and became an officer in
1974. He was elected Vice President in 1977, Senior Vice President in 1981 and
Executive Vice President in 1984. He was elected Chief Operating Officer in 1986
and President in 1990. Mr. Catell served as President and Chief Executive
Officer from 1991 to 1996, when he was elected Chairman and Chief Executive
Officer. In 1997, Mr. Catell was elected Chairman, President and Chief Executive
Officer of the KEDNY and its parent KSE.
Joseph A. Bodanza
Mr. Bodanza, age 53, was elected Senior Vice President and Chief Financial
Officer of KEDNE in November 2000, upon the acquisition of Eastern and ENI. Mr.
Bodanza previously served as Senior Vice President of Finance and Management
Information Systems and Treasurer of Eastern's Gas Distribution Operations. Mr.
Bodanza joined Boston Gas in 1972 and held a variety of positions in the
financial and regulatory areas before becoming Treasurer in 1984. He was elected
Vice President and Treasurer in 1988.
Lawrence S. Dryer
Mr. Dryer, age 41, was elected Vice President of Internal Audit for KeySpan in
September 1998. Mr. Dryer had been with the LILCO since 1992 as Director of
Internal Audit and was responsible for providing independent appraisals and
recommendations to improve management controls and increase operational
efficiency. Prior to joining LILCO, Mr. Dryer was an Audit Manager with Coopers
& Lybrand.
Robert J. Fani
Mr. Fani, age 47, was elected Executive Vice President of Strategic Services in
February 2000. Mr. Fani joined KEDNY in 1976, and held a variety of management
positions in distribution, engineering, planning, marketing, and business
development. He was elected Vice President in 1992. In 1997, Mr. Fani was
promoted to Senior Vice President of Marketing and Sales for KEDNY. In 1998, he
assumed the position of Senior Vice President of Marketing and Sales for the
merged KeySpan/LILCO company. On September 1, 1999, he became Senior Vice
President for Gas Operations until assuming his current position in February
2000.
-26-
William K. Feraudo
Mr. Feraudo, age 51, was elected Executive Vice President of the KeySpan
Services Group in February 2000. KeySpan Services Group, is the group of
non-regulated companies that engage in our energy services business and focus on
gas and electric marketing, energy management, telecommunications and fuel
procurement. Since its founding in 1996, the KeySpan Services Group has grown to
more than 3,000 employees, serving customers in the Northeast. Mr. Feraudo began
his career at KEDNY in 1971 and rose through a succession of positions in
Information Systems, Engineering, Customer Operations, Sales, Marketing, and
Product Development before being named Senior Vice President in 1994. He served
as Senior Vice President of Energy Services for KeySpan prior to his promotion
to Executive Vice President.
Ronald S. Jendras
Mr. Jendras, age 53, was named Vice President, Controller and Chief Accounting
Officer of KeySpan in August 1998. He joined KEDNY in 1969 and held a variety of
positions in the Accounting Department before being named budget director in
1973. In 1983, Mr. Jendras was promoted to manager of KED's Rate and Regulatory
Affairs area, and in 1997, was named general manager of the Accounting Division.
Gerald Luterman
Mr Luterman, age 57, has served as Senior Vice President and Chief Financial
Officer since July 1999. He formerly served as Chief Financial Officer of
barnesandnoble.com and Senior Vice President and Chief Financial Officer of
Arrow Electronics, Inc., a distributor of electronic components and computer
products. Prior to that, from 1985 through 1996, he held executive positions
with American Express, including Executive Vice President and Chief Financial
Officer of the Consumer Card Division from 1991-1996.
David J. Manning
Mr. Manning, age 50, was elected Senior Vice President of KeySpan Corporate
Affairs division in April 1999. Before joining KeySpan, Mr. Manning had been
President of the Canadian Association of Petroleum Producers since 1995. From
1993 to 1995, he was Deputy Minister of Energy for the Province of Alberta,
Canada, the source of approximately 14 percent of the natural gas supply serving
United States markets. From 1988 to 1993, he was Senior International Trade
Counsel for the Government of Alberta, based in New York City. Previously he was
in the private practice of law in Canada.
Craig G. Matthews
Mr. Matthews, age 58, was elected as a Director and as Vice-Chairman effective
March 2001. He serves as Chief Operating Officer of KeySpan and KEDNY since
January 1999, and served as President of KeySpan until his recent promotion to
Vice Chairman. Mr. Matthews joined KEDNY in 1965 and held various management
positions in the corporate planning, financial, marketing, and
-27-
engineering areas. He has been an officer since 1977. He was elected Vice
President in 1981 and Senior Vice President in 1985. In 1991, Mr. Matthews was
named Executive Vice President with responsibilities for KEDNY's financial, gas
supply, information systems, and strategic planning functions, as well as
KEDNY's energy-related investments. In 1996, Mr. Matthews was promoted to
President and Chief Operating Officer. He also served as Executive Vice
President and Chief Financial Officer of KeySpan from May 1998 through August
1999.
Chester R. Messer
Mr. Messer, age 59, was elected Executive Vice President in November 2000, upon
the acquisition of Eastern and ENI. He also serves as President of each of the
KEDNE companies. Mr. Messer joined Boston Gas Company as a management trainee in
1963 and rose through a succession of positions and was elected President in
November 1988.
H. Neil Nichols
Mr. Nichols, age 63, was elected Senior Vice President of KeySpan's Corporate
Development & asset Management division in March 1999. He also serves as
President of KeySpan Energy Development Corporation (KEDC), a position to which
he was elected in March 1998. KEDC is a wholly owned subsidiary of KeySpan
responsible for our Energy Investments group that engages in energy-related
investment project development efforts, both domestically and internationally.
Since February 1999, Mr. Nichols also has responsibility for KeySpan Energy
Trading Services, LLC, which provides fuel procurement management and energy
trading services for KEDNY, KEDLI and LIPA. Mr. Nichols joined KeySpan in 1997
as a broad-based negotiator and business strategist with comprehensive finance
and treasury experience in domestic and international markets. Prior to joining
KeySpan, Mr. Nichols was an owner and president of Corrosion Interventions, Ltd.
in Toronto, Canada. He also served as Chief Financial Officer and Executive Vice
President with TransCanada.
Anthony Nozzolillo
Mr. Nozzolillo, age 52, was elected Executive Vice President of Electric
Operations in February 2000. He previously served as Senior Vice President of
KeySpan's Electric Business Unit from December 1998 to January 2000. He joined
LILCO in 1972 and held various positions, including Manager of Financial
Planning and Manager of Systems Planning. Mr. Nozzolillo served as LILCO's
Treasurer from 1992 to 1994 and as Senior Vice President of Finance and Chief
Financial Officer from 1994 to 1998. He served as Senior Vice President of
Finance of KeySpan from May 1998 to December 1998. He also serves as a Director
to the Long Island Museum of Science and Technology.
Wallace P. Parker Jr.
Mr. Parker, age 51, was elected Executive Vice President of Gas Operations in
February 2000. He previously served as KeySpan's Senior Vice President of Human
Resources from August 1998 to January 2000. He joined KEDNY in 1971 and served
in a wide variety of management positions.
-28-
In 1987 he was named Assistant Vice President for marketing and advertising and
was elected Vice President in 1990. In 1994 Mr. Parker was promoted to Senior
Vice President of Human Resources.
Lenore F. Puleo
Ms. Puleo, age 47, was elected Executive Vice President of Shared Services in
February 2000. She previously served as Senior Vice President of Customer
Relations for KEDNY from May 1994 to May 1998, and for KeySpan from May 1998 to
January 2000. She joined KEDNY in 1974 and worked in management positions in
KEDNY 's Accounting, Treasury, Corporate Planning, and Human Resources areas.
She was given responsibility for the Human Resources Department in 1987 and was
named a Vice President in 1990. Ms. Puleo was promoted to Senior Vice President
of KEDNY 's Customer Relations in 1994.
Richard A. Rapp, Jr.
Mr. Rapp, age 42, was elected Vice President and Deputy General Counsel in
February 2000 and in June 2000, he assumed the additional responsibility of
Secretary. He joined LILCO in 1984 and has held various positions in the Legal
Departments of LILCO, and since 1998, KeySpan, including Assistant General
Counsel. Mr. Rapp received a Bachelor of Science degree in Accounting from
Boston College's Carroll School of Management's Honors Program, and he holds a
Juris Doctor degree from Fordham University's School of Law.
Cheryl T. Smith
Ms. Smith, age 49, joined KeySpan in November 1998. She serves as Senior Vice
President and Chief Information Officer of KeySpan's Information technology
division. She came to KeySpan from Verizon (Bell Atlantic) where she served as
Vice President of Strategic Systems and Corporate Systems from 1995 through
1998. Prior to Bell Atlantic, she worked at Honeywell Federated Systems Inc. as
the Director of MIS for Honeywell Federal Systems, Inc. Ms. Smith brings to
KeySpan more than 25 years of information systems technology experience.
Michael J. Taunton
Mr. Taunton, age 45, has been KeySpan's Vice President and Treasurer since June
2000. Prior to that time, he served as Vice President of Investor Relations
since September 1998. He joined KEDNY in 1975 and has worked in various
management positions in Marketing and Sales, Corporate Planning, Corporate
Finance and Accounting. During the transition process of the KeySpan/LILCO
merger, he co-managed the day-to-day operations of the merger. Before that, Mr.
Taunton was General Manager of the Business Process Improvement teams that were
organized to improve the organization's strategic focus.
Colin P. Watson
Mr. Watson, age 49, was named Senior Vice President of KeySpan's Strategic
Marketing and E-Business division effective March 1, 2000. He previously served
as Vice President of Strategic
-29-
Marketing from May 1998 until his promotion to Senior Vice President. Mr Watson
joined KEDNY in 1997 as Vice President of Strategic Marketing. From 1973 to
1997, he held several positions at NYNEX, including Vice President and Managing
Director of worldwide operations.
Elaine Weinstein
Ms. Weinstein, age 46, was named Senior Vice President of KeySpan's Human
Resources division in November 2000. She previously served as Vice President of
Staffing Organizational Development since September 1998. Prior to that time,
Ms. Weinstein was General Manager of Employee Development since joining KeySpan
in 1995. Prior to 1995, Ms. Weinstein was Vice President of Training and
Organizational Development at Merrill Lynch.
Steven L. Zelkowitz
Mr. Zelkowitz, age 51, was elected Senior Vice President and General Counsel of
KeySpan in February 2000. He joined KeySpan as Senior Vice President and Deputy
General Counsel in October 1998. Before joining the Company, Mr. Zelkowitz
practiced law with Cullen and Dykman in Brooklyn, New York and had been a
partner since 1984. He served on the firm's Executive Committee and was head of
its Corporate/Energy Department. Mr. Zelkowitz specialized in energy and utility
law and represented investor-owned and municipal gas and electric utilities in
New York, New Jersey and Vermont.
-30-
Item 2. Properties
Information with respect to KeySpan'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 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, and in the
case of oil and gas properties, held under long-term mineral leases. In addition
to the information set forth therein with respect to properties utilized by each
business segment, KeySpan owns or leases a variety of office space used for its
administrative operations. In the case of leased office space, we anticipate no
significant difficulty in leasing alternative space at reasonable rates in the
event of the expiration, cancellation or termination of a lease relating to our
leased properties.
Item 3. Legal Proceedings
See Note 9 to the Consolidated Financial Statements, "Contractual Obligations
and Contingencies - Legal Matters."
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the security holders during the last
quarter of the 12 months ended December 31, 2000.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
KeySpan's common stock is listed and traded on the New York Stock Exchange and
the Pacific Stock Exchange under the symbol "KSE." As of March 1, 2001, there
were approximately 88,640 registered record holders of KeySpan's common stock.
The following table sets forth, for the quarters indicated, the high and low
sales prices and dividends declared per share for the periods indicated:
2000 High Low Dividends Per Share
- -------------------------- --------------- --------------------- -------------------------
First Quarter 27.188 20.188 $0.445
Second Quarter 32.688 26.000 $0.445
Fourth Quarter 43.625 33.500 $0.445
1999 High Low Dividends Per Share
- ------------------------- ---------------- --------------------- -------------------------
First Quarter 31.313 25.125 $0.445
Second Quarter 27.690 24.250 $0.445
Third Quarter 31.060 26.380 $0.445
Fourth Quarter 29.690 22.630 $0.445
Item 6. Selected Financial Data
(In Thousands of Dollars, Except Per Share Amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
Nine Months Twelve Months
Year Ended Year Ended Ended Year Ended Ended
December 31, 2000 December 31, 1999 December 31, 1998 March 31, 1998 March 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Income Summary
Revenues
Gas Distribution $ 2,555,785 $ 1,753,132 $ 856,172 $ 645,659 $ 672,705
Electric Services 1,444,711 861,582 408,305 - -
Electric Distribution - - 330,011 2,478,435 2,464,957
Gas Exploration and Production 274,209 150,581 70,812 - -
Energy Services and Other 846,785 189,318 63,181 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues 5,121,490 2,954,613 1,728,481 3,124,094 3,137,662
Operating expenses
Purchased gas 1,408,621 744,432 331,690 299,469 308,400
Fuel and purchased power 460,900 17,252 91,762 658,338 646,448
Operation and maintenance 1,695,507 1,091,166 777,678 511,165 489,868
Depreciation, depletion and
amortization 335,106 253,440 254,859 183,129 276,615
Early retirement and
severance charges 65,175 - 64,635 - -
General taxes 424,318 366,154 257,124 466,326 469,561
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 731,863 482,169 (49,267) 1,005,667 946,770
Other income (deductions) (11,430) 46,555 (36,727) (6,301) 22,191
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before interest
charges and income taxes 720,433 528,724 (85,994) 999,366 968,961
Interest charges 203,350 133,751 140,733 404,473 435,219
Income taxes (credits) 216,276 136,362 (59,794) 232,653 211,333
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 300,807 258,611 (166,933) 362,240 322,409
Preferred stock dividends 18,113 34,752 28,604 51,813 52,113
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) for common stock $ 282,694 $ 223,859 $ (195,537) $ 310,427 $ 270,296
- ------------------------------------------------------------------------------------------------------------------------------------
Financial Summary
Earnings (loss) per share ($) 2.10 1.62 (1.34) 2.56 2.24
Cash dividends declared per share ($) 1.78 1.78 1.19 1.78 1.78
Book value per share, year-end ($) 20.65 20.26 20.90 21.88 21.07
Market value per share, year-end ($) 42.38 23.19 31.00 31.50 24.00
Shareholders 86,900 90,500 103,239 78,314 77,691
Capital expenditures ($) 925,257 725,670 676,563 297,230 294,943
Total assets ($) 11,550,121 6,730,691 6,895,102 11,900,725 11,849,574
Common equity ($) 2,815,816 2,712,325 3,022,908 2,662,447 2,549,049
Redeemable preferred stock ($) - 363,000 - 562,600 638,500
Preferred stock ($) 84,205 84,339 447,973 - 63,598
Long term debt ($) 4,274,938 1,682,702 1,619,067 4,381,949 4,457,047
Total capitalizat