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
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the period from January 1, 2001 to December 31, 2001
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 incorporation or organization) (I.R.S. employer identification no.)
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. __
As of March 1, 2002, the aggregate market value of the common stock
held by non-affiliates (139,971,853 shares) of the registrant was
$4,571,480,718.98 based on the closing price, on such date, of $32.66 per
share.
As of March 1, 2002, there were 158,837,654 shares of common stock,
$.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement dated on or about March 22, 2002 is incorporated by
reference into Part III hereof.
KEYSPAN CORPORATION
INDEX TO FORM 10-K
Page
----
Part I
Item 1. Description of the Business................................................................................
Item 2. Properties.................................................................................................
Item 3. Legal Proceedings..........................................................................................
Item 4. Submission of Matters to a Vote of Security Holders........................................................
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................
Item 6. Selected Financial Data....................................................................................
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A Quantitative and Qualitative Disclosures About Market Risk ................................................
Item 8. Financial Statements and Supplementary Data ...............................................................
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure....................................................................
Part III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
2
PART I
Item 1. Description of the Business
Corporate 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, Boston Gas Company ("Boston
Gas"), Colonial Gas Company ("Colonial Gas") and Essex Gas Company ("Essex
Gas"), as well as EnergyNorth Natural Gas, Inc. ("EnergyNorth"), 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.
Under our holding company structure, we have no independent operations and
conduct substantially all of our operations through our subsidiaries. Our
subsidiaries operate in the following businesses: Gas Distribution, Electric
Services, Energy Services and Energy Investments.
The Gas Distribution segment consists of our six regulated gas distribution
subsidiaries, which operate in New York, Massachusetts and New Hampshire and
serve approximately 2.5 million customers.
The Electric Services segment consists of subsidiaries that operate the electric
transmission and distribution ("T&D") system owned by the Long Island Power
Authority ("LIPA"); provide energy conversion services for LIPA from our
generating facilities located on Long Island; and manage fuel supplies for LIPA
to fuel our approximately 4,000 megawatts of 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.
The Energy Services segment primarily provides energy-related services to
customers primarily located within the New York, New Jersey, Massachusetts, New
Hampshire, Rhode Island and Pennsylvania through various subsidiaries that
operate under the following principal four lines of business: (i) home energy
services; (ii) business solutions; (iii) commodity procurement; and (iv) fiber
optic services.
We are also engaged in Energy Investments which includes: (i) gas exploration
and production activities; (ii) domestic pipelines and gas storage facilities;
(iii) midstream natural gas processing activities in Canada; and (iv) natural
gas distribution and pipeline activities in the United Kingdom.
KeySpan's vision is to be the premier energy company in the Northeastern United
States. To help us achieve that goal, we acquired the operations of Eastern and
EnergyNorth in November 2000, 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 other
services and products by implementing innovative marketing techniques and
building upon our existing relationships; and capitalize on the above-average
growth opportunities for natural gas expansion in the Northeast by expanding our
infrastructure primarily on Long Island and in New England.
The key element of our business strategy is the continued focus and growth of
our Gas Distribution, Electric Services and Energy Services businesses. We are
also exploring the sale of some or all of our assets in the Energy Investments
segment. KeySpan's financial statements are prepared on the basis of reporting
its operations under the following four business segments: Gas Distribution,
Electric Services, Energy Services and Energy Investments. 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;
- - our ability to successfully reduce our cost structure;
- - implementation of new accounting standards;
- - inflationary trends and interest rates;
- - the ability of KeySpan to identify and make complementary acquisitions, as
well as the successful integration of such acquisitions;
- - available sources and cost of fuel;
- - federal and state regulatory initiatives that increase competition,
threaten cost and investment recovery, and impact the rate structures of
our regulated businesses;
4
- - the exercise by LIPA of its right to acquire our Long Island generation
operations and the possible deployment of the proceeds received in
connection therewith;
- - potential write-down of our investment in natural gas properties when
natural gas prices are depressed or if we have significant downward
revisions in our estimated proved gas reserves;
- - competition in general facing our unregulated Energy Services businesses,
including but not limited to competition from other mechanical, HVAC, and
engineering companies;
- - the degree to which we develop unregulated business ventures, as well as
federal and state regulatory policies affecting our ability to retain and
operate such business ventures;
- - other risks detailed from time to time in other reports and other documents
filed by KeySpan with the Securities and Exchange Commission ("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 (Investor Relations section).
Gas Distribution Overview
Our gas distribution activities are 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 2.5 million customers served within an aggregate service area
covering 4,273 square miles. In New York, The Brooklyn Union Gas Company doing
business as 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 doing business as 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 distributes natural gas in eastern
and central Massachusetts; Colonial Gas distributes natural gas in Cape Cod and
eastern Massachusetts; and Essex Gas distributes natural gas in eastern
Massachusetts. In New Hampshire, EnergyNorth distributes gas to customers
principally located in central New Hampshire. Our New England gas companies all
do business as KeySpan Energy Delivery New England ("KEDNE").
In New York there are two separate, but contiguous service territories served by
KEDNY and KEDLI, comprising approximately 1,417 square miles, and 1.66 million
customers. In
5
Massachusetts, Boston Gas, Colonial Gas and Essex Gas serve three contiguous
service territories consisting of 1,934 square miles and approximately 768,000
customers. In New Hampshire, EnergyNorth has a service territory that is
contiguous to Colonial's and is within 30 to 85 miles of the greater Boston
area. EnergyNorth provides service to approximately 75,000 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.
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 tariffed
schedules or contracts that anticipate no interruptions, whereas "interruptible"
service is offered to customers under schedules or contracts that anticipate and
permit interruption on short notice, generally in peak-load seasons or for
system reliability reasons. We have restructured our gas supply and capacity
contracts to reduce fixed costs and to minimize the risk of stranded costs. We
maintain sufficient gas supply and capacity contracts to serve our customers,
maintain system reliability and system operations, and to meet our obligation to
serve. Over the long term, we intend to minimize our costs by purchasing gas at
points within or in close proximity to our market area, which will only require
us to contract for firm short-haul rather than long-haul transportation
capacity.
Gas is available at any time of the year on an interruptible basis, if supply is
sufficient and the gas delivery system is operationally adequate. KeySpan
actively promotes a competitive retail gas market by making capacity available
to retail marketers that are unable to obtain their own capacity. KeySpan also
participates in interstate markets by releasing pipeline capacity or by bundling
gas supply and pipeline capacity for "off-system" sales. An "off-system"
customer consumes gas at facilities located outside of our 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 both long-and
short-term supply contracts, and on the spot market, under firm transportation
contracts. In addition, KeySpan contracts for firm capacity in natural gas
underground storage facilities and for winter 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 our distribution facilities). We share with our
firm gas customers net revenues (operating revenues less the cost of gas) from
off-system sales and capacity release transactions. 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.
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
6
fourth calendar quarters. KEDNY and KEDLI each operate under a 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 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".
Gas sales and revenues for 2001 by class of customer are set forth below:
Sales Revenues Revenues
Customer (MDTH) (thousands of $) (% of Total)
- -------------------------------------------------- -------------------- ------------------------ ---------------------
Firm
Residential Heating 152,725 1,944,414 53.81
Residential Non-Heating 12,412 255,623 7.07
Temperature-Controlled heating 28,694 191,504 5.30
Commercial / Industrial 67,642 733,560 20.30
-------------------- ------------------------ ---------------------
Total Firm 261,473 3,125,101 86.48
-------------------- ------------------------ ---------------------
Firm Transportation 101,000 87,089 2.41
Transportation - Electric Generation 64,578 7,496 .21
-------------------- ------------------------ ---------------------
Total Firm Transportation 165,578 94,585 2.62
-------------------- ------------------------ ---------------------
Total Firm Gas Sales and Transportation 427,051 3,219,686 89.10
Interruptible 7,235 47,082 1.30
Off-System Sales 40,058 138,415 3.83
Transportation 59,507 154,905 4.29
-------------------- ------------------------ ---------------------
Total Gas Sales and Transportation 533,851 3,560,088 98.52
Other Retail Services - 53,463 1.48
-------------------- ------------------------ ---------------------
Total Sales and Revenues 533,851 3,613,551 100.00
==================== ======================== =====================
Further information and statistics regarding our Gas Distribution segment see
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations, "Gas Distribution."
7
New York Gas Distribution System - KEDNY and KEDLI
Supply and Storage
KEDNY and KEDLI have contracts for the purchase of firm long-term transportation
and underground storage services. Gas supplies are purchased under long and
short-term contracts, as well as on the spot market. Gas supplies are
transported by interstate pipelines from domestic and Canadian supply basins.
Peaking supplies are available to meet system requirements during winter
periods.
Peak-Day Capability. The design criteria for the New York gas system assumes an
average temperature of 0(0)F for peak-day demand. Under such criteria, we
estimate that the requirements to supply our firm gas customers would amount to
approximately 1,993 MDTH of gas for a peak-day during the 2001/02 winter season
and that the gas available to us on such a peak-day amounts to approximately
2,036 MDTH. For the 2002/03 winter season, we estimate the peak-day requirements
will amount to 1,996 MDTH and that the gas supplies available on such a peak-day
amount to approximately 2,046 MDTH . The 2001/02 winter peak-day throughput to
our New York customers was 1,411 MDTH, which occurred on December 31, 2001 at an
average temperature of 26 F, representing 69% of our per day capability
at that time. We plan to have sufficient gas available to meet the requirements
of firm gas customers for both the 2001/02 and 2002/03 winter seasons. Our New
York firm gas peak-day capability is summarized in the following table:
Source MDTH per % of Total
day
- --------------------- --- -------------------- ---- -------------------
Pipeline........... 752 37
Underground Storage 779 38
Peaking Supplies... 505 25
--- --
Total 2,036 100
- --------------------- --- ==================== ---- ===================
Pipelines. Our New York based gas distribution utilities purchase natural gas
for sale to their New York gas customers under contracts with suppliers with
natural gas located in domestic and Canadian supply basins and arrange for its
transportation to our facilities under firm long-term contracts with interstate
pipeline companies. For the 2001/02 winter, approximately 76% of our New York
natural gas supply was available from domestic sources and 24% from Canadian
sources. We have available under firm contract 752 MDTH per day of year-round
and seasonal pipeline transportation capacity to our facilities in the New York
City metropolitan area. Major providers of interstate pipeline capacity and
related services to us include: Transcontinental Gas Pipe Line Corporation
("Transco"), Texas Eastern Transmission Corporation ("Tetco"), Iroquois Gas
Transmission System ("Iroquois"), Tennessee Gas Pipeline Company ("Tennessee"),
Dominion Transmission Incorporated ("Dominion"), and Texas Gas Transmission
Company.
Underground Storage. In order to meet higher winter demand in our New York
service territories, we also have long-term contracts with Transco, Tetco,
Tennessee, Dominion, Equitrans, Inc., and Honeoye Storage Corporation
("Honeoye"), for underground storage capacity of 59,058 MDTH for the winter
season and 779 MDTH per day of maximum deliverability.
8
Peaking Supplies. In addition to the pipeline and underground storage supply, we
supplement our winter supply portfolio with peaking supplies that are available
on the coldest days of the year to economically meet the increased requirements
of our heating customers. Our peaking supplies include gas provided by: (i) two
liquefied natural gas ("LNG") plants; and (ii) peaking supply contracts with
four cogeneration facilities/independent power producers located in our
franchise areas, as well as with the New York Power Authority ("NYPA"). For the
2001/02 winter season, we had the capability to provide a maximum peak-day
supply of 505 MDTH on excessively cold days. The LNG plants have a storage
capacity of approximately 2,053 MDTH and peak-day throughput capacity of 394.5
MDTH, or 19% of peak-day supply. We also have contract rights with Trigen
Services Corporation, Brooklyn Navy Cogeneration Partners, LP, Nissequogue Cogen
Partners, TBG 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.
Gas Supply Management.
In April 1, 2000, through a subsidiary, we entered into a two-year agreement
with Coral Energy, LLC, ("Coral") in which Coral was contracted to assist with
the New York gas distribution energy supply management services and our
energy-management services undertaken on behalf of LIPA. The agreement was
scheduled to expire on March 31, 2002, and both parties have agreed to a one
year extension through March 31, 2003.
Gas Costs. Fluctuations in utility gas costs have little impact on the operating
results of KEDNY and KEDLI, 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.
Deregulation. Regulatory actions, economic factors and changes in customers and
their preferences continue to reshape our gas operations. A number of
multi-family, commercial and industrial customers and residential customers
currently purchase their gas supplies from natural gas marketers and then
contract with us for local transportation, balancing and other unbundled
services. In addition, our New York gas distribution companies release firm
capacity on our interstate pipeline transportation contracts to natural gas
marketers to ensure the marketers' gas supply is delivered on a firm basis and
in a reliable manner to their customers. Since 1996, when New York State
regulators implemented policies designed to encourage customers to purchase
their gas from suppliers other than the traditional gas utilities, approximately
136,000 gas customers have opted to purchase their gas from marketers instead of
KEDNY or KEDLI. This trend has slowed somewhat in recent months as policies
towards additional deregulation are being reevaluated by utility regulators
nationwide.
New England Gas Distribution Systems
Supply and Storage
KEDNE has contracts for the purchase of firm long-term transportation and
underground storage services. Gas supplies are purchased under long and
short-term contracts, as well as on the spot market. Gas supplies are
transported by interstate pipelines from domestic and Canadian supply basins.
Peaking supplies are available to meet system requirements during winter
periods.
9
Peak-Day Capability. The design criteria for our New England gas systems assumes
an average temperature of -6(0)F for peak-day demand. Under such criteria, KEDNE
estimates that the requirements to supply their firm gas customers would amount
to approximately 1,245 MDTH of gas for a peak-day during the 2001/2002 winter
season and that the gas available to KEDNE on such a peak-day would amount to
approximately 1,317 MDTH. For the 2002/2003 winter season, KEDNE estimates that
the peak-day requirements will amount to 1,294 MDTH and that the gas supplies
available on such a peak-day will amount to approximately 1,317 MDTH.
During 2001, the highest daily throughput to our New England customers was 947
MDTH, which occurred on February 11, 2001 at an average temperature of
17 F, representing 72% of KEDNE's capability at that time. KEDNE has
sufficient gas available to meet the requirements of their firm gas customers
for the 2001/2002 winter gas season and anticipate that they will have
sufficient quantities for the 2002/2003 winter season. The firm gas peak day
capability of KEDNE is summarized in the following table:
Source MDTH per % of Total
day
- ------------------------------ --- ------------------- --- --------------------
Pipeline................... 436 33
Underground Storage........ 270 21
Peaking Supplies........... 611 46
--- --
Total 1,317 100
- ------------------------------ --- =================== --- ====================
Pipelines. Our New England based gas distribution utilities purchase natural gas
for sale to their gas customers under contracts with suppliers with natural gas
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 2001/2002 winter season, approximately 77% of KEDNE's
natural gas supply was available from domestic sources and 23% from Canadian
sources.
Underground Storage. KEDNE has available under firm contract 706 MDTH per day of
year-round and seasonal 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, KEDNE has long-term contracts with
Tetco, Tennessee, Dominion, National Fuel Gas Supply Corporation and Honeoye for
underground storage capacity of 23,205 MDTH and 270 MDTH per day of maximum
deliverability.
Peaking Supplies. The KEDNE gas supply portfolio is supplemented with peaking
supplies that are available on the coldest days of the year in order to
economically meet the increased requirements of our heating customers. Peaking
supplies include gas provided by both LNG and propane air plants located within
the distribution system, as well as two leased facilities outside of our
distribution systems located in Providence, Rhode Island and Everett, MA. For
the 2001/2002 winter season, KEDNE had the capability to provide a peak-day
supply of 611 MDTH on excessively cold days or 46% of peak-day supply.
10
Gas Supply Management. Since November 1, 1999, the Massachusetts based gas
distribution subsidiaries have been operating under 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 gas distribution companies (Boston, Colonial and Essex) at market
prices and manages upstream capacity, underground storage and term supply
contracts. The Massachusetts Department of Telecommunications and Energy ("DTE")
approved this contract in October 1999. The annual fee paid by El Paso to manage
the Massachusetts 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 the KEDNE companies, since their current gas rate structures include
gas adjustment clauses whereby variations between actual gas costs and gas cost
recoveries are deferred and subsequently refunded to or collected from
customers. The KEDNE companies do not have a weather normalization adjustment
clause and as a result, fluctuations from normal weather may have a positive or
negative impact on their results.
For additional information concerning the gas distribution segment, see the
discussion in"Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Gas Distribution" contained herein.
Electric Services Overview
We are the largest investor owned electric generator in New York State. Our
subsidiaries own and operate five large generating plants and 8 smaller
facilities which are comprised of 53 generating units in Nassau and Suffolk
Counties on Long Island and the Rockaway Peninsula in Queens. In addition, we
own, lease and operate a major generating facility in Queens County in New York
City, the Ravenswood facility which is comprised of 3 large steam-generating
units and 17 gas turbine generators.
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 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."
Generating Facility Operations
Ravenswood facility. On June 18, 1999, we acquired the 2,200 megawatt Ravenswood
facility located in New York City from Consolidated Edison Company of New York,
Inc. ("Consolidated Edison") for approximately $597 million. In order to reduce
our initial cash requirements to finance this acquisition, we entered into an
arrangement with an unaffiliated special purpose financing entity through which
we lease the Ravenswood facility. Under the arrangement, the special purpose
financing entity acquired a portion of the facility directly from Consolidated
Edison and leased it to our wholly owned subsidiary. We have guaranteed all
payment and performance obligations of our subsidiary under the lease. The lease
relates to approximately $425 million of the acquisition cost
11
of the facility, which is the amount of debt that would have been recorded on
our Consolidated Balance Sheet had the special purpose financing entity not been
utilized and conventional debt financing been employed. Further, we would have
recorded an asset in the same amount. Monthly lease payments are for interest
only. 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. We believe that the fair market value of the
Ravenswood facility, including the leased facilities, is well in excess of its
acquisition cost.
The Ravenswood facility sells capacity, energy and ancillary services into the
New York Independent System Operator ("NYISO") energy market at market-based
rates, subject to mitigation. The plant has the ability to provide approximately
25% of New York City's capacity and is a strategic asset that is available to
serve residents and businesses in New York City. We are also in the process of
constructing an expansion to our Ravenswood facility by adding a 250-megawatt
state-of-the-art gas- fired co-generation unit at the site. On September 5,
2001, we received approval for the expansion from New York State's Siting Board
on Electric Generation and the Environment ("Siting Board") and construction is
underway. We anticipate that the new unit will be operational in late 2003/early
2004.
The pricing for both energy sales and ancillary services to the NYISO energy
market is still evolving and the Federal Energy Regulatory Commission ("FERC")
has adopted several price mitigation measures which are subject to rehearing and
possible judicial review. See "Item 7A. Quantitative and Qualitative Disclosures
About Market Risk" for a further discussion of these matters.
Long Island Generation. Forty of our 73 generating units 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,
we increased installed capacity in our generating facilities by 80 megawatts,
and we instituted a program to reduce nitrogen oxides for improved environmental
performance. Reliability improvement investments at our Ravenswood facility
reduced the forced outage rate for that facility from 35% in 1999 to just 5% in
2000 and 2001. Decreasing the amount of time our generating units are offline
for repair allows us to increase sales.
The following table indicates the 2001 summer capacity of our steam generation
facilities and gas turbine ("GT") units as reported to the NYISO:
Location of Units Description Fuel Units MW
- -------------------------- --------------------------- --------------------- --------------------- ------------------
Long Island City Steam Turbine Dual* 3 1,755
Northport, L.I. Steam Turbine Dual* 3 1,150
Northport, L.I. Steam Turbine Oil 1 370
Port Jefferson, L.I. Steam Turbine Dual* 2 385
Glenwood, L.I. Steam Turbine Gas 2 229
Island Park, L.I. Steam Turbine Dual* 2 389
Far Rockaway, L.I. Steam Turbine Dual 1 110
Long Island City GT Units Dual* 17 455
Throughout L.I. GT Units Dual* 12 311
Throughout L.I. GT Units Oil 30 1,093
Total 73 6,247
========================== =========================== ===================== ===================== ==================
*Dual - Oil or natural gas
In addition to the 250 MW expansion of the Ravenswood facility, we have plans
for the development of three new generation projects on Long Island, New York.
We plan to construct another 250 MW combined cycle plant in Melville, Long
Island. In January 2002, we filed an application for approval with the Siting
Board for this project. This facility is expected to become operational in late
2004/early 2005. Additionally, we are constructing two peaking facilities, one
at Glenwood Landing and the other at Port Jefferson. Each facility will produce
approximately 79 MW of electricity which is enough power to supply 80,000
customers. We have entered into a long term power purchase agreement with LIPA
with respect to the Glenwood Landing facility and expect to enter into a similar
power purchase agreement with respect to the Port Jefferson facility. We
anticipate that these units will be operational by this summer to meet the peak
electric load season.
LIPA Agreements P
ower Supply Agreement. The PSA provides for the sale to LIPA of all of the
capacity and, to the extent LIPA requests, energy conversion services 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 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 2001, we earned approximately $3.8 million in incentives
under the PSA.
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 for an
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additional 15 years 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 we continue to operate the ramped-down capacity,
the PSA requires us to use reasonable efforts to market the capacity and energy
from the ramped-down capacity and to share any profits with LIPA. 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 pursuant to the
Generation Purchase Rights Agreement discussed in greater detail below.
We also have 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 voluntarily entered into 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 marginally affect the market value of the allowances.
Management Services Agreement. Under the MSA, we perform 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, we are reimbursed our 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 our
performance. The incentives provide for us 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 and we are
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, we are
eligible for incentives for performance above certain threshold target levels
and subject to disincentives for performance below
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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 2001, we earned $7.4 million in
non-cost performance incentives.
The MSA currently has an eight year term and expires on May 28, 2006. However,
we have reached an agreement in principle with LIPA to, among other things,
extend the MSA for an additional thirty months, until November 28, 2008. For a
further description of the agreement in principle, see the discussion on
"Generation Purchase Rights Agreement" below.
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, we earn 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 that 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, we earned an
aggregate of $5 million in incentives under the EMA.
Generation Purchase Rights Agreement. Under a Generation Purchase Rights
Agreement ("GPRA"), LIPA has the right to purchase, at fair market value, all of
our currently existing Long Island based generating assets during the twelve
month period ending on May 28, 2002. On March 11, 2002, we entered into an
agreement in principle with LIPA, to among other thing, extend the GPRA for
three years. The agreement in principle establishes a new option window
commencing November 2004 and closing May 2005. Under the agreement, LIPA retains
the right to exercise the option to purchase our Long Island generation assets
under the terms of the original GPRA. In return for providing LIPA an extension
of the GPRA, we have been provided with a corresponding extension of 30 months
on the term of the MSA, as previously discussed.
The GPRA extension is the result of a new initiative established by LIPA to work
with KeySpan and others to review Long Island's long-term energy needs. We will
work with LIPA to jointly analyze new energy supply options including
re-powering existing plants, renewable energy technologies, distributed
generation, conservation initiatives and retail competition.
15
The extension allows both LIPA and us to explore alternatives to the GPRA
including re-powering existing facilities, the sale of some, but not all of our
currently existing Long Island generation plants to LIPA, or the sale of some of
these plants to other private operators.
Other Rights. 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. In addition, LIPA has acquired a parcel at the site of the former
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.
We own the common plant (such as administrative office buildings and computer
systems) formerly owned by LILCO and recover 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 May 28, 1998 transaction which resulted in the formation of KeySpan
(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. We have entered into agreements with LIPA to provide
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. We have 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 in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Electric Services" contained herein.
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Energy Services Overview
Our Energy Services segment provides services to customers located primarily
within the New York, New Jersey, 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; (ii) business solutions, which provides
engineering, consulting and construction services, related to the design,
construction, installation, operation, maintenance and management of heating,
cooling and power production equipment and 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 wholesale gas and electric purchasing and management services for home
energy services, retail gas and electricity business; 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.
The Energy Services segment has more than 3,000 employees, 100,000 natural gas
and electric commodity customers, 200,000 service contracts and is the number
one oil to gas conversion contractor in New York.
KeySpan's Energy Services subsidiaries compete with local, regional and national
mechanical contracting, HVAC, plumbing, engineering, wholesale fiber optics
carriers, and independent 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 experience and customer service.
With our strong market presence in the Northeast centered on our Gas
Distribution and Electric Services operations and the long-term trend towards
further deregulation, we believe that we are well positioned to provide our
customers with an expanded array of energy products and services through our
unregulated energy service companies.
During 2001, we undertook a complete evaluation of our Energy Services
operations, operating controls and the organizational structure of our
subsidiaries, as a result of circumstances surrounding certain charges and
losses incurred in 2001 relating to the general contracting activities of the
Roy Kay companies. We are currently engaged in litigation concerning the Roy Kay
companies. For further information, See Note 11 to the Consolidated Financial
Statements, "Roy Kay Operations" and Note 8 "Contractual Obligations and
Contingencies - Legal Matters for a further discussion.
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As a result of our evaluation of the Energy Services business, we decided that
our contracting subsidiaries would no longer engage in new general contracting
activities. We also installed new senior management personnel who, among other
things, will be reviewing and focusing on our overall strategy of these
businesses.
In its order approving the acquisition by KeySpan of Eastern and EnergyNorth,
the SEC reserved jurisdiction on its determination of whether the Energy
Services companies are retainable under existing SEC precedent. We are working
with the SEC in providing them with additional and supplemental information to
assist them in their evaluation of these subsidiaries as to whether their
operations are functionally related to our core utility operations as required
by PUHCA. We are hopeful that the SEC will approve of KeySpan's continued
operations in the Energy Services business, as other companies that have
registered as holding companies under PUHCA have been permitted to retain their
energy-service operations.
For additional information concerning the Energy Services segment, see the
discussion in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Energy Services" contained herein.
Energy Investments Overview
We are also engaged in Energy Investments which include: (i) gas exploration and
production activities; (ii) domestic pipelines and gas storage facilities; (iii)
midstream natural gas processing activities in Canada; (iv) natural gas
distribution and pipeline activities in the United Kingdom; and (v) certain
other domestic energy-related investments, such as providing meter reading
equipment and services to municipal utilities, the transportation by truck of
liquid natural gas, new fuel cell technologies and certain internet related
activities.
Gas Exploration & Production
KeySpan is engaged in the exploration and production of domestic natural gas and
oil through our 67% equity interest in The Houston Exploration Company ("Houston
Exploration") and through our wholly owned subsidiary, KeySpan Exploration and
Production, LLC ("KeySpan Exploration"). Houston Exploration was organized by
KEDNY 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, 2002, its aggregate market capitalization was approximately $943,597,720
(based upon the closing price on the New York Stock Exchange on that date of
$30.95). At March 1, 2002, Houston Exploration had approximately 30,487,810
shares of common stock, $.01 par value, outstanding.
KeySpan Exploration is engaged in a joint venture with Houston Exploration to
explore for natural gas and oil. Houston Exploration contributed all of its then
undeveloped offshore leases to the joint venture for a 55% working interest and
KeySpan Exploration, acquired a 45% working interest in all prospects to be
drilled by the joint venture. Effective 2001, the joint venture was modified to
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reflect that KeySpan Exploration would only participate in the development of
wells that had previously been drilled and not participate in future prospects.
KeySpan Exploration expended approximately $17.2 million and has agreed to
commit approximately $15 million for 2002 for the continued development of
prospects successfully drilled by the joint venture.
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 101 lease blocks, representing 496,995
gross (412,335 net) acres, in federal and state waters in the Gulf of Mexico, of
which 38 have current operations. Houston Exploration operates 24 of these
blocks, accounting for approximately 75% of our offshore production. Over the
past five years, we have drilled 29 successful exploratory wells and 22
successful development wells in the Gulf of Mexico, representing a historical
success rate of 70%. During 2001, Houston Exploration drilled 7 successful
exploratory wells and 6 successful development wells on its Gulf of Mexico
properties. The joint venture participated in 3 of the successful wells, all 2
exploratory wells and 1 of the development wells.
Onshore Properties. We also own onshore natural gas and oil properties
representing interests in 1,481 gross (1041 net) wells, approximately 86% of
which Houston Exploration is the operator of record, and 198,781 gross (126,448
net) acres. Over the past five years, we have drilled or participated in the
drilling of 191 successful development wells and 7 successful exploratory wells
onshore, representing a historical success rate of 84%, through our interest in
Houston Exploration. During 2001, Houston Exploration participated in the
drilling of 60 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 and 12 development wells that were
not successful.
On December 31, 2001, Houston Exploration acquired 159 producing wells located
in South Texas, representing 85 BCF of total proved reserves from Conoco, Inc.
for $69 million.
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
19
activities and drilling commitments see "Note 17 to the Consolidated Financial
Statements, Supplemental Gas and Oil Disclosures," included herein.
Domestic Pipelines and Gas Storage Facilities
We also own an approximate 20% interest in Iroquois, 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.
We are also participating in the Islander East Pipeline Company LLC ("Islander
East"), an interstate pipeline joint venture with Duke Energy Corporation. The
joint venture plans to construct, own and operate a 50 mile natural gas pipeline
that will transport 260 MDTH of gas from Nova Scotia, Canada to growing markets
in Connecticut, New York City and Long Island, New York. The project received a
positive preliminary determination from the FERC to construct the pipeline.
Increasing gas transmission capacity is necessary to meet the increased demand
for natural gas in the Northeast which coincides with the growth strategy of our
Gas Distribution business. Islander East is projected to be in service by 2003.
We also have 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.
Additionally, we own 34% of a partnership that has a 50% interest in the Steuben
facility storage which provides up to 6.2 billion cubic feet of storage service
to New Jersey and Massachusetts.
Our investments in domestic pipelines and gas storage facilities are
complimentary to our Gas Distribution and Electric Services businesses in that
they provide energy infrastructure to support the growth of these businesses. To
the extent that opportunities become available for expanding our investments in
these types of Energy Investments, KeySpan will continue to consider such
investments as strategic.
Midstream Natural Gas Processing Activities in Canada
We also own 100% of KeySpan Canada, a company with natural gas processing plants
and gathering facilities located in Western Canada. In October 2000, we
purchased the remaining 50% interest in KeySpan Canada from our former partner,
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 an approximate 75% interest in the Paddle River
processing plant in Western Canada and an interest in the Younger NGL Extraction
plant in British Columbia, Canada. We also consider our Canadian operations to
be non-core assets and are also evaluating strategies to divest or monetize
these assets.
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Natural Gas Distribution and Pipeline Activities in the United Kingdom
We own 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. KeySpan also considers these assets as non-core
assets and is currently evaluating the possible divestiture of these assets.
Marine Transportation Activities - Discontinued Operations
Our marine transportation subsidiary, Midland Enterprises, Inc. ("Midland") that
was acquired as part of the Eastern acquisition is being divested and its
operations are being discontinued. We were required by the SEC to divest 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. On
January 24, 2002, we announced that we had entered into a definitive agreement
with Ingram Industries for the sale of Midland for approximately $230 million.
Ingram Industries will also assume debt of approximately $135 million. The sale
is subject to certain regulatory approvals and is expected to close during the
second quarter of 2002. See Note 10 "Discontinued Operations," for further
information on the sale of our marine transportation business.
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.
Environmental Matters Overview
KeySpan's ordinary business operations subject it to regulation in accordance
with various federal, state and local laws, rules and regulations dealing with
the environment, including air, water, and hazardous substances. These
requirements govern both our normal, ongoing operations and the remediation of
impacted 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 8 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 are also pursuing claims against insurance carriers
and potentially responsible parties which seek the recovery of certain
environmental costs associated with the investigation and remediation of
contaminated properties. We believe that all investigator and remediation costs
prudently incurred at facilities
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associated with utility operations, not recoverable through insurance or some
other means, will be recoverable from our customers.
Air. The Federal Clean Air Act ("CAA") provides for the regulation of a variety
of air emissions from new and existing electric generating plants. We have
submitted timely applications for permits in accordance with the requirements of
Title V of the 1990 amendments to the CAA. Final permits have been issued for
all of our electric generating facilities, except for the Far Rockaway facility.
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 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 systems at our steam electric generating stations have
enabled us to achieve the emission reductions required under Phase I and II of
the OTC memorandum in a cost-effective manner. With respect to Phase III of the
OTC memorandum, we are required to be in compliance with such reduction
requirements by May 1, 2003 and we fully expect to achieve such emission
reductions on time and in a cost-effective manner. Our expenditures to address
emission reduction requirements through the year 2003 are expected to be between
$10 million and $15 million.
Water. The Federal Clean Water Act provides for effluent limitations, to be
implemented by a permit system, to regulate the discharge of pollutants into
United States waters. 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, if any, cannot be
determined.
Land. The Federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980 and certain similar state laws (collectively "Superfund")
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, after disposal, may become
subject to Superfund. From time to time, we have received notices under
Superfund concerning possible claims with respect to sites where hazardous
substances generated by KeySpan and other potentially responsible parties were
allegedly disposed. The cost of these claims is not presently determinable but,
if actually imposed on us, may be material to our financial condition, results
of operations or cash flows.
KeySpan has identified certain manufactured gas plant ("MGP") sites which were
historically owned or operated by its subsidiaries (or such companies
predecessors). Operations at these sites between the mid 1800s to mid 1900s may
have resulted in the release of hazardous substances. For a
22
discussion on our MGP sites and further information concerning environmental
matters, see Note 8 to the Consolidated Financial Statements, "Contractual
Obligations and Contingencies - Environmental Matters."
Competition, Regulation and Rate Matters
Competition
Over the last several years the natural gas and electric sectors of the
regulated energy industry have undergone significant change as market forces
moved towards replacing or supplementing rate regulation through the
introduction of competition. A significant number of natural gas and electric
utilities 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 engaged in two such
combinations, the KeySpan/LILCO transaction in1998 and our November 2000
acquisition of Eastern and EnergyNorth. For further information regarding the
gas and electric industry, see "Item 7A. Quantitative and Qualitative Disclosure
about Market Risk."
Additionally, our non-utility subsidiaries engaged in the Energy Services
business compete with other mechanical, HVAC, and engineering companies, and in
New Jersey are faced with competition from the regulated utilities that are
still able to offer appliance repair and protection services.
Regulation
Public utility holding companies, like KeySpan, 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. Our utility
subsidiaries are subject to extensive federal and state regulation by state
utility commissions, FERC and the SEC. Our gas and electric public utility
companies are 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. The FERC regulates interstate
natural gas transportation and electric transmission, and has jurisdiction over
certain wholesale natural gas sales and wholesale electric sales.
In addition, our non-utility subsidiaries are subject to a wide variety of
federal, state and local laws, rules and regulations with respect to their
business activities, including but not limit to those affecting public sector
projects, environmental and labor laws and regulations, state licensing
requirements, as well as state laws and regulations concerning the competitive
retail commodity supply.
State Utility Commissions Our regulated utility subsidiaries are subject to
regulation by the NYPSC, DTE and NHPUC. The NYPSC regulates KEDNY and KEDLI, and
indirectly KeySpan itself, through conditions, which were included in the NYPSC
order authorizing the 1998 KeySpan/LILCO transaction. Those
23
conditions address the manner in which KeySpan, its service company subsidiaries
and its unregulated subsidiaries may interact with KEDNY and KEDLI. The NYPSC
also regulates the safety, reliability and certain financial transactions of our
Long Island generating facilities and our Ravenswood generating facility under a
lightened regulatory standard. Our KEDNE subsidiaries are subject to regulation
by the DTE and NHPUC. Our Energy Services subsidiaries which engage in the
retail sale of gas and electricity are also subject to regulation by the NYPSC
and the New Jersey Board of Public Utilities. For further information regarding
the state regulatory commissions, see the discussion in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Regulation and Rate Matters."
Federal Energy Regulatory Commission
The 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. In 1998, LIPA, KeySpan and the
Staff of FERC stipulated to a five-year rate plan for the Long Island generating
facilities with agreed-upon yearly adjustments, which have 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. The
mitigation measures are administered by the NYISO. 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, as well as the mitigation
measures, if FERC concludes that it is in the public interest to do so.
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 Item 7A. Quantitative and Qualitative
Disclosures About Market Risk.
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 or 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.
Securities and Exchange Commission
As a result of the acquisition of Eastern and EnergyNorth, 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 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
24
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.
Foreign Regulation
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.
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.
Employee Matters
As of December 31, 2001, KeySpan and its wholly owned subsidiaries had
approximately 13,000 employees. Of that total, approximately 5,922 employees in
our regulated companies are covered under collective bargaining agreements.
KeySpan has not experienced any work stoppage during the past five years and
considers its relationship with employees, including those covered by collective
bargaining agreements, to be good.
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 65, 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
25
and Executive Vice President in 1984. He was elected Chief Operating Officer in
1986 and President in 1990. Mr. Catell continued to serve as President and Chief
Executive Officer of KEDNY from 1991 through 1996, when he was elected Chairman
and Chief Executive Officer. In 1997, Mr. Catell was elected Chairman, President
and Chief Executive Officer of KEDNY and its parent KeySpan Energy Corporation.
Robert J. Fani
Mr. Fani, age 48, was elected President of KeySpan Energy Services and Supply in
July 2001. Mr. Fani joined KEDNY in 1976, and held a variety of management
positions in distribution, engineering, planning, marketing, and business
development. He was elected as a KEDNY Vice President in 1992. In 1997, Mr. Fani
was promoted to Senior Vice President of Marketing and Sales. In 1998, he
assumed the position of Senior Vice President of Marketing and Sales for
KeySpan. In September 1999, he became SENIOR Vice President for Gas Operations
and in February 2000 was promoted to Executive Vice President of Strategic
Services until assuming his current position in July 2001.
Wallace P. Parker Jr.
Mr. Parker, age 52, was elected President of KeySpan Energy Delivery in July
2001. He joined KEDNY in 1971 and served in a wide variety of management
positions. 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 and in August 1998 was
promoted to SENIOR Vice President of Human Resources of KeySpan. He also served
as Executive Vice President of Gas Operations from February 2000 until his
promotion in July 2001.
John A. Caroselli
Mr. Caroselli, age 47, was elected Executive Vice President of Strategic
Services in October 2001 and is responsible for Brand Management, Strategic
Marketing, Strategic Planning, Strategic Performance, and E-business. Mr.
Caroselli came to KeySpan in 2001 from AXA Financial where he was Executive Vice
President of Corporate Development. Prior to that, he held senior officer
positions with Chase Manhattan, Chemical Bank and Manufacturers Hanover Trust.
He has extensive experience in brand management, marketing, communications,
human resources, facilities management, e-business and change management.
Gerald Luterman
Mr. Luterman, age 58 was elected Executive Vice President and Chief Financial
Officer in February 2002. He previously served as SENIOR Vice President and
Chief Financial Officer since joining KeySpan in 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
26
executive positions with American Express, including Executive Vice President
and Chief Financial Officer of the Consumer Card Division from 1991-1996. Mr.
Luterman serves on the Board of Directors of The Houston Exploration Company.
Chester R. Messer
Mr. Messer, age 60, was elected Executive Vice President of KeySpan and
President of KEDNE in November 2000, upon the acquisition of Eastern. He also
serves as President of each of our New England gas utilities, Boston Gas
Company, Colonial Gas Company, Essex Gas Company and EnergyNorth Natural Gas,
Inc. Mr. Messer joined Boston Gas Company in 1963 and rose through a succession
of positions until he was elected President in November 1988.
Anthony Nozzolillo
Mr. Nozzolillo, age 53, 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.
Lenore F. Puleo
Ms. Puleo, age 48, 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 January 2000. She joined KEDNY in 1974 and
held various 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.
Steven L. Zelkowitz
Mr. Zelkowitz, age 52, was elected to Executive Vice President and General
Counsel in July 2001, with responsibility for legal services, human resources,
regulatory affairs, enterprise-wide risk management and administration of the
internal auditing area. He joined KeySpan as SENIOR Vice President and Deputy
General Counsel in October 1998, and was elected SENIOR Vice President and
General Counsel in February 2000. Before joining KeySpan, 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.
Joseph A. Bodanza
Mr. Bodanza, age 54, was elected SENIOR Vice President of Finance Operations and
Regulatory Affairs in July 2001. He continues to serve as Chief Financial
Officer of KEDNE, a position he was
27
appointed to in November 2000, upon the acquisition of Eastern. 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.
David J. Manning
Mr. Manning, age 51, was elected SENIOR Vice President of KeySpan's Corporate
Affairs group 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. 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.
H. Neil Nichols
Mr. Nichols, age 64, was elected 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
segment. 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 PipeLines.
Cheryl T. Smith
Ms. Smith, age 50, 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 Management Information Services for Honeywell Federal Systems,
Inc.
Colin P. Watson
Mr. Watson, age 50, 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 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 of General Business Sales and Managing Director of
worldwide operations.
28
Elaine Weinstein
Ms. Weinstein, age 55, was named SENIOR Vice President of KeySpan's Human
Resources division in November 2000. She previously served as Vice President of
Staffing and 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.
Lawrence S. Dryer
Mr. Dryer, age 42, was named SENIOR Vice President and Chief Financial Officer
of KeySpan Services, Inc. effective March 1, 2002. He had been Acting Chief
Financial Officer since August 2001. He also serves as our Internal Auditor, a
position he has held since he was elected Vice President, Internal Audit in
September 1998. Prior to such positions, Mr. Dryer had been with LILCO from 1992
to 1998 as Director of Internal Audit. Prior to joining LILCO, Mr. Dryer was an
Audit Manager with Coopers & Lybrand.
Ronald S. Jendras
Mr. Jendras, age 54, 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 KEDNY's Rate and
Regulatory Affairs area, and in 1997, was named general manager of the
Accounting Division. Mr. Jendras has been Treasurer of KeySpan Foundation since
1998 as well as a member of its Board of Directors.
Richard A. Rapp, Jr.
Mr. Rapp, age 43, was elected Vice President and Deputy General Counsel in
February 2000 and in June 2000, he assumed the additional responsibility of
corporate Secretary. He joined LILCO in 1984 and has held various positions in
the Legal Department including several Assistant General Counsel positions.
Michael J. Taunton
Mr. Taunton, age 46, 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 held positions in Accounting,
Customer Service, Corporate Planning, Budgeting and Forecasting, Marketing and
Sales and Business Process Improvement.
29
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 gas and oil 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.
Item 3. Legal Proceedings
See Note 8 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, 2001.
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, 2002, there
were approximately 82,321 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:
2001 High Low Dividends Per Share
- -------------------- -----------------------------------------------------------
First Quarter $41.94 $34.20 $0.445
Second Quarter $41.10 $35.75 $0.445
Third Quarter $37.20 $29.10 $0.445
Fourth Quarter $35.35 $31.53 $0.445
2000 High Low Dividends Per Share
- -------------------- -----------------------------------------------------------
First Quarter $27.188 $20.188 $0.445
Second Quarter $32.688 $26.000 $0.445
Third Quarter $40.145 $30.938 $0.445
Fourth Quarter $43.625 $33.500 $0.445
Item 6. Selected Financial Data
(In Thousands of Dollars, Except Per Share Amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
Nine Months
Year Ended Year Ended Year Ended Ended Year Ended
December 31, 2001 December 31, 2000 December 31, 1999 December 31, 1998 March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Income Summary
Revenues
Gas Distribution $ 3,613,551 $ 2,555,785 $ 1,753,132 $ 856,172 $ 645,659
Electric Services 1,421,079 1,444,711 861,582 408,305 -
Electric Distribution - - - 330,011 2,478,435
Gas Exploration and Production 400,031 274,209 150,581 70,812 -
Energy Services and Other 1,198,454 805,997 189,318 63,181 -
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues 6,633,115 5,080,702 2,954,613 1,728,481 3,124,094
Operating expenses
Purchased gas for resale 2,171,113 1,408,680 744,432 331,690 299,469
Fuel and purchased power 538,532 460,841 17,252 91,762 658,338
Operation and maintenance 2,114,759 1,659,736 1,091,166 777,678 511,165
Depreciation, depletion and
amortization 559,138 330,922 253,440 254,859 183,129
Early retirement and
severance charges - 65,175 - 64,635 -
Operating taxes 448,924 421,936 366,154 257,124 466,326
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 800,649 733,412 482,169 (49,267) 1,005,667
Other income (deductions) 7,206 (12,086) 46,555 (36,727) (6,301)
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before interest
charges and income taxes 807,855 721,326 528,724 (85,994) 999,366
Interest charges 353,470 201,314 133,751 140,733 404,473
Income taxes (credits) 210,693 217,262 136,362 (59,794) 232,653
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 243,692 302,750 258,611 (166,933) 362,240
Preferred stock dividends 5,904 18,113 34,752 28,604 51,813
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from
Continuing Operations $ 237,788 $ 284,637 $ 223,859 $ (195,537) $ 310,427
- ----------------------------------------------------------------------------------------------------------------------------------
Discontinued Operations
Income from Operations, net of tax 10,918 (1,943) - - -
Loss on Disposal, net of tax (30,356) - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from
Discontinued Operations (19,438) (1,943) - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings for Common Stock $ 218,350 $ 282,694 $ 223,859 $ (195,537) $ 310,427
- ----------------------------------------------------------------------------------------------------------------------------------
Financial Summary
Basic earnings (loss) per share ($) 1.58 2.10 1.62 (1.34) 2.56
Cash dividends declared per share ($) 1.78 1.78 1.78 1.19 1.78
Book value per share, year-end ($) 21.33 20.65 20.26 20.90 21.88
Market value per share, year-end ($) 34.65 42.38 23.19 31.00 31.50
Shareholders 82,300 86,900 90,500 103,239 78,314
Capital expenditures ($) 1,059,759 925,257 725,670 676,563 297,230
Total assets ($) 11,789,606 11,307,465 6,730,691 6,895,102 11,900,725
Common equity ($) 2,890,602 2,815,816 2,712,325 3,022,908 2,662,447
Redeemable preferred stock ($) - - 363,000 363,000 562,600
Preferred stock ($) 84,077 84,205 84,339 447,973 -
Long term debt ($) 4,697,649 4,116,441 1,682,702 1,619,067 4,381,949
Total capitalization ($) 7,672,328 7,016,462 4,479,366 5,089,948 7,606,996
- ----------------------------------------------------------------------------------------------------------------------------------
Utility Operating Statistics
Firm gas and transportation
sales (MDTH) 427,051 306,509 275,771 87,179 58,304
Other sales (MDTH) 106,800 91,406 54,661 38,088 21,025
Total active gas meters 2,499,170 2,483,730 1,628,497 1,610,202 464,563
Gas heating customers 1,267,000 1,260,000 677,000 665,000 295,000
- ----------------------------------------------------------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
KeySpan Corporation (referred to in this Management's Discussion and Analysis of
Financial Condition and Results of Operations as "KeySpan", "we", "us", and
"our") is a registered holding company under the Public Utility Holding Company
Act of 1935, as amended ("PUHCA"). We operate six utilities that distribute
natural gas to approximately 2.5 million customers in New York City, Long
Island, Massachusetts and New Hampshire making us the fifth largest gas
distribution company in the United States and the largest in the Northeast. We
also own and operate electric generating plants in Nassau and Suffolk Counties
on Long Island and in Queens County in New York City. Under contractual
arrangements, of varying lengths and duration, 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 installation and
services; large energy-system ownership, installation and management;
engineering services; and fiber optic services. We also invest in, and
participate in the development of, pipelines and other energy-related projects,
domestically and internationally. (See Note 2 to the Consolidated Financial
Statements, "Business Segments" for additional information on each operating
segment.)
Consolidated Summary of Results
- -------------------------------
The following is a discussion of transactions affecting comparative earnings for
the years ended December 31, 2001, 2000 and 1999. As mentioned in Note 1 to the
Consolidated Financial Statements "Summary of Significant Accounting Policies",
on November 8, 2000 we acquired all of the common stock of Eastern Enterprises
("Eastern") and EnergyNorth Inc. ("ENI") in a transaction accounted for as a
purchase. As a result, consolidated comparisons in earnings, revenues and
expenses between reporting periods have been significantly affected by the
addition of these operations. Capitalized terms used in the following
discussion, but not otherwise defined, have the same meaning as when used in the
Notes to the Consolidated Financial Statements.
Consolidated earnings from continuing operations for 2001 were $237.8 million,
or $1.72 per share compared to $284.6 million, or $2.12 per share for 2000 and
$223.9 million, or $1.62 per share for 1999. Average common shares outstanding
for 2001 increased by 3% compared to 2000 reflecting the re-issuance of shares
held in treasury pursuant to dividend reinvestment and employee benefit plans.
This increase in average common shares outstanding reduced 2001 earnings per
share by $0.05 compared to 2000.
On January 24, 2002, we announced that we have entered into an agreement to sell
Midland Enterprises Inc. ("Midland"), our marine barge business. In anticipation
of this divestiture, which we expect to close in the second quarter of 2002, we
have reported Midland's operations as discontinued for 2001 as well as for 2000.
For 2001, we reflected a loss of $19.4 million, or $0.14 per share, which
included both Midland's 2001 operating results as well as an estimate for our
loss on
the sale. At the time of our acquisition of Eastern, we were ordered by the
Securities and Exchange Commission ("SEC") to divest this subsidiary by November
8, 2003 since its operations are not functionally related to our core utility
operations. (See Note 10 to the Consolidated Financial Statements "Discontinued
Operations" for further information.) In 2000, Midland's results of operations
reflected a loss of $1.9 million, or $0.02 per share. There were no discontinued
operations in 1999, since we acquired Midland as part of the our acquisition of
Eastern on November 8, 2000.
Consolidated earnings available for common stock, which includes both results of
operations from continuing as well as discontinued operations, were $218.4
million or $1.58 per share in 2001, compared to $282.7 million or $2.10 per
share in 2000 and $223.9 million or $1.62 per share in 1999. Diluted earnings
per share were $1.56 in 2001 and $2.09 in 2000. Basic and diluted earnings per
share were the same in 1999.
During 2001, we recorded the effects of a number of events that significantly
affected results of operations as follows: (1) A non-cash impairment charge
recorded by our gas exploration and production subsidiaries to recognize the
effect of lower wellhead prices on their valuation of proved gas reserves. Our
share of this charge was $26.2 million after-tax ($40.7 million pre-tax) or
$0.19 per share. (See Note 1 to the Consolidated Financial Statements "Summary
of Significant Accounting Policies", Item F for further details.); (2) The
reversal of a previously recorded loss provision regarding certain pending rate
refund issues relating to the 1989 RICO class action settlement of $20.1 million
after-tax ($33.5 million pre-tax), or $0.15 per share. (See Note 12 to the
Consolidated Financial Statements "Class Action Settlement" for a further
discussion of this issue.); and (3) Losses incurred by the Roy Kay companies of
$95.0 million after-tax ($137.8 million pre- tax) or $0.69 per share reflecting
costs related to the discontinuance of the general contracting activities of
these companies, costs to complete work on certain loss construction projects,
and operating losses incurred. (See Note 11 to the Consolidated Financial
Statements, "Roy Kay Operations" and Note 8 "Contractual Obligations and
Contingencies " - legal matters, for a further discussion of these issues.)
In 2000, we recorded a $65.2 million pre-tax charge associated with early
retirement and severance programs that were implemented upon the acquisition of
Eastern and ENI. The after-tax effect of this charge on consolidated results
from continuing operations was $41.1 million, or $0.31 per share. There were no
significant items to note in 1999.
Interest expense increased by $152.2 million, or 75% in 2001, reflecting higher
levels of debt outstanding, primarily related to: (i) $1.65 billion of long-term
debt and $308.6 million of commercial paper issued to finance the acquisition of
Eastern and ENI; (ii) debt assumed in the Eastern and ENI acquisition; (iii)
$625 million of notes issued during the year, primarily used to repay short-
term debt; (iv) debt incurred by our Canadian subsidiary; as well as (v) higher
commercial paper borrowings during the year to satisfy seasonal working capital
needs. As part of the RICO class settlement adjustment noted above, we reversed
$11.5 million of previously recorded carrying charges during 2001; of which $9
million ($5.9 million after-tax) was recorded in 2000.
Earnings before interest and taxes ("EBIT") from continuing operations in 2001,
after adjusting for the matters noted above, were substanially higher than such
earnings for 2000. Our gas distribution operations benefitted from the addition
of the New England gas utilities for an entire year as compared to only two
months in the prior year's results, as well as an increase in net margins due to
continued gas sales growth, and cost saving synergies. Further, our gas
exploration and production activities benefitted from the combined effect of
higher realized gas prices, primarily during the first quarter of 2001, and
improved production volumes throughout the year. These benefits to EBIT from
continuing operations were almost entirely offset by higher interest expense. In
addition, during 2000 certain charges were incurred by our corporate and
administrative areas that were not incurred in 2001, which resulted in a
significant increase to comparative earnings. (See the discussion under the
heading "Review of Operating Segments" for an analyses of comparative EBIT for
each of our operating segments.)
The increase in earnings for 2000 over 1999, resulted from solid performance
across all of our business segments. Further, our average common shares
outstanding were approximately 3% lower for 2000 compared to 1999 due to a stock
repurchase program in 1999. The lower shares outstanding had a favorable affect
on earnings per share from continuing operations of $0.07. Our gas distribution
operations benefitted from gas sales growth, favorable gas prices compared to
oil prices for most of 2000 and earnings from the acquisition of the New England
gas distribution companies.
Earnings growth in 2000 was also due to the operation of our investment in the
Ravenswood electric generation facility, ("Ravenswood facility") located in
Queens, New York. The Ravenswood facility was acquired in June 1999 and
therefore, earnings for 2000 reflected a full year of operations, while 1999
reflected less than seven full months of operations. In addition, consolidated
earnings from continuing operations were further enhanced through improved
performance from our gas exploration and production operations which benefitted
from significantly higher realized gas prices and increased production volumes
in 2000. In addition, on March 31, 2000 we increased our ownership in Houston
Exploration from 64% to 70% at that time. Offsetting, to some extent, these
enhancements to earnings in 2000, were expenses incurred by our corporate and
administrative areas that were not allocated to our various business segments
and were not incurred in 1999, as well as an increase to interest expense
reflecting higher levels of debt outstanding due primarily to the acquisition of
Eastern and ENI as previously noted.
Income tax expense generally reflects the lower level of pre-tax income in 2001
compared to last year. For 2000, income tax expense reflects the higher level of
pre-tax income compared to 1999. Further, during the last quarter of 2000, the
basis for computing certain local income taxes was changed which increased
income tax expense in 2001 and 2000. (See Note 3 to the Consolidated Financial
Statements, "Income Taxes" for more information.) Preferred stock dividends have
decreased in all periods as a result of a redemption, at maturity, of 14.5
million shares of preferred stock in the second quarter of 2000.
Financial Outlook for 2002
Consistent with the guidance issued in December 2001, KeySpan's 2002 earnings
from core operations (defined for this purpose as all operations other than gas
exploration and production operations) are forecasted to be approximately $2.40
to $2.45 per share. KeySpan's 2002 earnings forecast for its gas exploration and
production operations is approximately $0.20-$0.30 per share, based on the most
recent guidance issued by Houston Exploratio