3
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the quarterly period ended June 30, 2002
-------------------------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the transition period from to
------------------- ------------------------
Commission file number 1-14161
KEYSPAN CORPORATION
--------------------
(Exact name of Registrant as specified in its charter)
New York 11-3431358
- ------------------------------------ -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One MetroTech Center, Brooklyn, New York 11201
175 East Old Country Road, Hicksville, New York 11801
----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(718) 403-1000 (Brooklyn)
(631) 755-6650 (Hicksville)
--- ----------------------------
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding at July 31, 2002
- --------------------------- -----------------------------
$.01 par value 141,407,660
KEYSPAN CORPORATION AND SUBSIDIARIES
INDEX
Part I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Consolidated Balance Sheet -
June 30, 2002 and December 31, 2001 3
Consolidated Statement of Income -
Three and Six Months Ended June 30, 2002 and 2001
5
Consolidated Statement of Cash Flows -
Six Months Ended June 30, 2002 and 2001 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 26
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 52
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 58
Item 4. Submission of Matters to a Vote of Security Holders 59
Item 6. Exhibits and Reports on Form 8-K 60
Signatures 61
CONSOLIDATED BALANCE SHEET
(Unaudited)
(In Thousands of Dollars)
- -------------------------------------------------------------------------------------------------------------------------------
June 30, 2002 December 31, 2001
-------------------------------- --------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 137,599 $ 159,252
Accounts receivable 1,236,016 1,344,898
Allowance for uncollectible accounts (88,432) (72,299)
Gas in storage, at average cost 239,403 334,999
Materials and supplies, at average cost 106,652 105,693
Other 220,320 125,944
-------------------------------- --------------------------------
1,851,558 1,998,487
-------------------------------- --------------------------------
Net Assets Held for Disposal 190,135 191,055
-------------------------------- --------------------------------
Equity Investments and Other 241,342 223,249
-------------------------------- --------------------------------
Property
Gas 5,877,621 5,704,857
Electric 1,840,067 1,629,768
Other 418,675 400,643
Accumulated depreciation (2,647,591) (2,533,466)
Gas exploration and production, at cost 2,348,391 2,200,851
Accumulated depletion (882,721) (796,722)
-------------------------------- --------------------------------
6,954,442 6,605,931
-------------------------------- --------------------------------
Deferred Charges
Regulatory assets 429,077 458,191
Goodwill, net of amortization 1,786,561 1,782,826
Other 496,415 529,867
-------------------------------- --------------------------------
2,712,053 2,770,884
-------------------------------- --------------------------------
Total Assets $ 11,949,530 $ 11,789,606
================================ ================================
See accompanying Notes to the Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEET
(Unaudited)
(In Thousands of Dollars)
- ----------------------------------------------------------------------------------------------------------------------------------
June 30, 2002 December 31, 2001
-------------------------------- ------------------------------
LIABILITIES AND CAPITALIZATION
Current Liabilities
Current redemption of long term debt $ 1,480 $ 993
Accounts payable and accrued expenses 1,006,073 1,091,430
Commercial paper 570,655 1,048,450
Dividends payable 64,273 63,442
Taxes accrued 11,068 50,281
Customer deposits 36,402 36,151
Interest accrued 85,169 93,962
-------------------------------- ------------------------------
1,775,120 2,384,709
-------------------------------- ------------------------------
Deferred Credits and Other Liabilities
Regulatory liabilities 68,790 39,442
Deferred income tax 811,349 598,072
Postretirement benefits and other reserves 708,320 694,680
Other 149,857 207,992
-------------------------------- ------------------------------
1,738,316 1,540,186
-------------------------------- ------------------------------
Capitalization
Common stock, $.01 par value, authorized 450,000,000
shares; outstanding 140,570,579 and 2,995,501 2,995,797
137,251,386 shares stated at
Retained earnings 498,751 452,206
Other comprehensive income (27,997) 4,483
Treasury stock purchased (509,988) (561,884)
-------------------------------- ------------------------------
Total common shareholders equity 2,956,267 2,890,602
Preferred stock 84,077 84,077
Long-term debt 5,192,217 4,697,649
-------------------------------- ------------------------------
Total Capitalization 8,232,561 7,672,328
-------------------------------- ------------------------------
Minority Interest in Subsidiary Companies 203,533 192,383
-------------------------------- ------------------------------
Total Liabilities and Capitalization $ 11,949,530 $ 11,789,606
================================ ==============================
See accompanying Notes to the Consolidated Financial Statements
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(In Thousands of Dollars, Except Per Share Amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues
Gas Distribution $ 521,822 $ 620,685 $ 1,744,791 $ 2,374,329
Electric Services 354,756 357,904 669,440 701,275
Energy Services 229,311 232,771 470,870 551,864
Gas Exploration 88,274 103,720 162,988 235,731
Energy Investments 21,942 24,222 39,575 51,191
------------------ -------------------- ------------------ ------------------
Total Revenues 1,216,105 1,339,302 3,087,664 3,914,390
------------------ -------------------- ------------------ ------------------
Operating Expenses
Purchased gas for resale 249,942 348,349 899,299 1,545,698
Fuel and purchased power 93,292 146,357 177,664 289,657
Operations and maintenance 548,094 533,803 1,041,660 1,037,686
Depreciation, depletion and amortization 127,463 121,578 253,460 252,742
Operating taxes 87,388 100,835 207,781 242,825
------------------ -------------------- ------------------ ------------------
Total Operating Expenses 1,106,179 1,250,922 2,579,864 3,368,608
------------------ -------------------- ------------------ ------------------
Operating Income 109,926 88,380 507,800 545,782
------------------ -------------------- ------------------ ------------------
Other Income and (Deductions)
Minority interest (6,138) (11,869) (10,569) (27,280)
Other income 8,484 8,713 21,102 28,826
------------------ -------------------- ------------------ ------------------
Total Other Income 2,346 (3,156) 10,533 1,546
------------------ -------------------- ------------------ ------------------
Income Before Interest Charges 112,272 85,224 518,333 547,328
and Income Taxes ------------------ -------------------- ------------------ ------------------
Interest Charges 70,054 91,927 142,661 185,230
------------------ -------------------- ------------------ ------------------
Income Taxes
Current 5,587 (24,825) (78,031) 88,574
Deferred 7,457 28,539 209,898 59,827
------------------ -------------------- ------------------ ------------------
Total Income Taxes 13,044 3,714 131,867 148,401
------------------ -------------------- ------------------ ------------------
Preferred stock dividend requirements 1,476 1,476 2,952 2,952
------------------ -------------------- ------------------ ------------------
Earnings (Loss) from Continuing Operations 27,698 (11,893) 240,853 210,745
------------------ -------------------- ------------------ ------------------
Discontinued Operations
Income from operations, net of tax - 3,892 - 4,553
Loss on Disposal, net of tax of $13,050 (19,662) - (19,662) -
------------------ -------------------- ------------------ ------------------
Loss from Discontinued Operations (19,662) 3,892 (19,662) 4,553
------------------ -------------------- ------------------ ------------------
Earnings (Loss) for Common Stock $ 8,036 $ (8,001) $ 221,191 $ 215,298
================== ==================== ================== ==================
Basic Earnings (Loss) Per Share from
Continuing Operations 0.20 (0.09) 1.71 1.54
Basic Earnings (Loss) Per Share from
Discontinued Operations (0.14) 0.03 (0.14) 0.03
------------------ -------------------- ------------------ ------------------
Basic Earnings (Loss) Per Share $ 0.06 $ (0.06) $ 1.57 $ 1.57
================== ==================== ================== ==================
Diluted Earnings (Loss) Per Share from
Continuing Operations 0.20 (0.09) 1.70 1.52
Diluted Earnings (Loss) Per Share from
Discontinued Operations (0.14) 0.03 (0.14) 0.03
================== ==================== ================== ==================
Diluted Earnings (Loss) Per Share $ 0.06 $ (0.06) $ 1.56 $ 1.55
================== ==================== ================== ==================
Average Common Shares Outstanding (000) 141,063 137,916 140,551 137,438
Average Common Shares Outstanding Diluted (000) 142,156 139,361 141,706 138,872
See accompanying Notes to the Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In Thousands of Dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
Six Months Six Months
Ended Ended
June 30, 2002 June 30, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Activities
Earnings from continuing operations $ 243,805 $ 213,697
Adjustments to reconcile net income to net cash
Depreciation, depletion and amortization 253,460 252,742
Deferred income tax 26,741* 59,827
Income from equity investments (7,409) (6,294)
Dividends from equity investments 120 -
Provision for loss on contracting business - 28,012
Changes in assets and liabilities
Accounts receivable 125,015 321,673
Materials and supplies, fuel oil and gas in storage 94,637 24,518
Accounts payable and accrued expenses (48,213) (425,263)
Interest accrued (8,793) 52,252
Other 4,394* 33,706
---------------------------- --------------------------------
Net Cash Provided by Operating Activities 683,757 554,870
---------------------------- --------------------------------
Investing Activities
Capital expenditures (595,503) (424,807)
Proceeds from sale of assets - 18,458
Other - (7,822)
---------------------------- --------------------------------
Net Cash Used in Investing Activities (595,503) (414,171)
---------------------------- --------------------------------
Financing Activities
Issuance of treasury stock 51,896 64,107
Issuance of long-term debt 507,754 708,000
Payment of long-term debt (54,590) (152,000)
Payment of commercial paper (477,795) (497,033)
Preferred stock dividends paid (2,952) (2,952)
Common stock dividends paid (124,684) (121,937)
Other (9,536) 5,102
---------------------------- --------------------------------
Net Cash (Used in) Provided By Financing Activities (109,907) 3,287
---------------------------- --------------------------------
Net (decrease) increase in Cash and Cash Equivalents $ (21,653) $ 143,986
============================ ================================
Cash and cash equivalents at beginning of period $ 159,252 $ 83,329
Net (decrease) increase in cash and cash equivalents (21,653) 143,986
---------------------------- --------------------------------
Cash and Cash Equivalents at End of Period $ 137,599 $ 227,315
============================ ================================
Cash equivalents are short-term marketable securities purchased with maturities
of three months or less that were carried at cost which approximates fair value.
*Includes a non-cash reduction to current taxes payable of $183.2 million
resulting from the finalization of certain tax issues associated with the
KeySpan/Long Island Lighting Company merger.
See accompanying Notes to the Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
KeySpan Corporation (referred to in the Notes to the Financial Statements 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
regulated 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, 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;
plumbing; heating, ventilation and air conditioning installation and services;
large energy-system ownership, installation and management; engineering and
consulting services; and fiber optic services. We also invest and participate in
the development of, natural gas pipelines, natural gas processing plants,
electric generation, and other energy-related projects, domestically and
internationally. (See Note 2 "Business Segments" for additional information on
each operating segment.)
1. BASIS OF PRESENTATION
In our opinion, the accompanying unaudited Consolidated Financial Statements
contain all adjustments necessary to present fairly our financial position as of
June 30, 2002, and the results of our operations for the three and six months
ended June 30, 2002 and June 30, 2001, as well as cash flows for the six months
ended June 30, 2002 and June 30, 2001. The accompanying financial statements
should be read in conjunction with the consolidated financial statements and
notes included in our Annual Report on Form 10-K for the year ended December 31,
2001, as amended, as well as our March 31, 2002 10Q. The December 31, 2001
financial statement information has been derived from the 2001 audited financial
statements. Income from interim periods may not be indicative of future results.
Basic earnings per share ("EPS") is calculated by dividing earnings available
for common stock by the weighted average number of shares of common stock
outstanding during the period. No dilution for any potentially dilutive
securities is included. Diluted EPS assumes the conversion of all potentially
dilutive securities and is calculated by dividing earnings available for common
stock, as adjusted, by the sum of the weighted average number of shares of
common stock outstanding plus all potentially dilutive securities.
We have approximately 2.1 million options outstanding at June 30,2002 that were
not included in the calculation of diluted EPS since the exercise price
associated with these options was greater than the average market price of our
common stock. Further, we have 84,077 shares of convertible preferred stock
outstanding that can be converted into 244,104 shares of common stock. These
shares were not in the calculation of diluted EPS for the three months ended
June 30, 2002 since to do so would have been anti-dilutive.
Under the requirements of Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share", our basic and diluted EPS are as follows:
(In Thousands of Dollars, Except Per Share)
- ------------------------------------------------------------- ------------------- --------------------------------------------------
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
- ------------------------------------------------------------- ------------------ ---------------- --------------- --------------
Earnings (loss) from Continuing Operations $ 27,698 $ (11,893) $ 240,853 $ 210,745
Interest savings on convertible preferred stock - 142 284 284
Houston Exploration dilution (options) (129) (310) (225) (859)
- ------------------------------------------------------------- ------------------ ---------------- --------------- --------------
Earnings (loss) for common stock - adjusted 27,569 (12,061) 240,912 210,170
- ------------------------------------------------------------- ------------------ ---------------- --------------- --------------
Weighted average shares outstanding (000) 141,063 137,916 140,551 137,438
Add dilutive securities:
Options 1,093 1,201 911 1,190
Convertible preferred stock - 244 244 244
- ------------------------------------------------------------- ------------------ ---------------- --------------- --------------
Total weighted average shares outstanding - assuming dilution 142,156 139,361 141,706 138,872
- ------------------------------------------------------------- ------------------ ---------------- --------------- --------------
Basic Earnings (Loss) Per Share from Continuing Operations $ 0.20 $ (0.09) $ 1.71 $ 1.54
- ------------------------------------------------------------- ------------------ ---------------- --------------- --------------
Diluted Earnings (Loss) Per Share from Continuing Operations $ 0.20 $ (0.09) $ 1.70 $ 1.52
- ------------------------------------------------------------- ------------------ ---------------- --------------- --------------
2. BUSINESS SEGMENTS
We have four reportable segments: Gas Distribution, Electric Services, Energy
Services and Energy Investments.
The Gas Distribution segment consists of our six regulated gas distribution
subsidiaries. KeySpan Energy Delivery New York ("KEDNY") provides gas
distribution services to customers in the New York City Boroughs of Brooklyn,
Queens and Staten Island. 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. The remaining gas
distribution subsidiaries, Boston Gas Company, Colonial Gas Company, Essex Gas
Company and EnergyNorth Natural Gas, Inc., collectively referred to as KeySpan
Energy Delivery New England ("KEDNE"), provide gas distribution service to
customers in Massachusetts and New Hampshire.
The Electric Services segment consists of subsidiaries that: operate the
electric transmission and distribution system owned by LIPA; own and provide
capacity to and produce energy for LIPA from our generating facilities located
on Long Island; and manage fuel supplies for LIPA to fuel our Long Island
generating facilities. These services are provided in accordance with long-term
service contracts having remaining terms that range from six to twelve years.
The Electric Services segment also includes subsidiaries that own, lease and
operate the 2,200 megawatt Ravenswood electric generation facility ("Ravenswood
facility"), located in Queens, New York. We sell all of the energy, capacity and
ancillary services related to the Ravenswood facility to the New York
Independent System Operator ("NYISO") energy markets. Further, we recently
placed two 79 megawatt generating facilities into service, (one in June 2002 and
the other in July 2002) located on Long Island. Currently, our primary electric
generation customers are LIPA and the NYISO energy markets. The capacity of and
energy from these facilities are dedicated to LIPA under 25 year contracts.
The Energy Services segment includes companies that provide energy-related
services to customers located within the New York City metropolitan area
including New Jersey and Connecticut, as well as, Rhode Island, Pennsylvania,
Massachusetts and New Hampshire, through the following three lines of business:
(i) Home Energy Services, which provides residential customers with service and
maintenance of energy systems and appliances, as well as the retail marketing of
natural gas and electricity to residential and small commercial customers; (ii)
Business Solutions, which provides mechanical contracting, engineering and
consulting services to commercial and industrial customers, including
installation of plumbing, heating, ventilation and air conditioning equipment;
and (iii) Fiber Optic Services, which provides various services to carriers of
voice and data transmission on Long Island and in New York City.
The Energy Investments segment consists of our gas exploration and production
investments, as well as certain other domestic and international energy-related
investments. Our gas exploration and production subsidiaries are engaged in gas
and oil exploration and production and the development and acquisition of
domestic natural gas and oil properties. These investments consist of our 67%
equity interest in The Houston Exploration Company ("Houston Exploration" -
NYSE: THX), an independent natural gas and oil exploration company, as well as
KeySpan Exploration and Production, LLC, our wholly owned subsidiary engaged in
a joint venture with Houston Exploration.
Subsidiaries in this segment also hold a 20% equity interest in the Iroquois Gas
Transmission System LP, a pipeline that transports Canadian gas supply to
markets in the Northeastern United States; a 50% interest in the Premier
Transmission Pipeline and a 24.5% interest in Phoenix Natural Gas, both in
Northern Ireland; and investments in certain midstream natural gas assets in
Western Canada through KeySpan Canada. With the exception of KeySpan Canada,
which is consolidated in our financial statements, these subsidiaries are
accounted for under the equity method. Accordingly, equity income from these
investments is reflected in Other Income and (Deductions) in the Consolidated
Statement of Income.
The accounting policies of the segments are the same as those used for the
preparation of the Consolidated Financial Statements. Our segments are strategic
business units that are managed separately because of their different operating
and regulatory environments. Operating results of our segments are evaluated by
management on an earnings before interest and taxes ("EBIT") basis. At June 30,
2002, the total assets of each reportable segment have not changed materially
from December 31, 2001. To reflect a complete picture of our electric
operations, we reclassified, for all periods presented, KeySpan Energy Supply
from the Energy Services segment to the Electric Services segment. This
subsidiary provides management and procurement services for fuel supply and
management of energy sales, primarily for and from the Ravenswood facility. Due
to the July 2002 sale of Midland Enterprises LLC, our marine barge business,
this subsidiary is reported as discontinued operations in 2002 and 2001. The
reportable segment information, excluding Midland, is as follows:
( In Thousands of Dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
Energy Investments
-------------------------------
Gas Electric Energy Gas Exploration Other
Distribution Services Services and Production Investments Eliminations Consolidated
- ------------------------- --------------- ------------ ------------ ------------------ ------------- --------------- ---------------
Three Months Ended
June 30, 2002
Unaffiliated Revenue 521,822 354,756 229,311 88,274 21,942 - 1,216,105
Intersegment Revenue - 25 - - - (25) -
Earnings Before Interest
and Taxes 29,243 64,719 (10,252) 23,595 1,266 3,701 112,272
Three Months Ended
June 30, 2001
Unaffiliated Revenue 620,685 357,904 232,771 103,720 24,222 - 1,339,302
Intersegment Revenue - 25 - - - (25) -
Earnings Before Interest
and Taxes 18,924 67,725 (57,040) 43,957 7,148 4,510 85,224
- ------------------------- --------------- ------------ ------------ ------------------ ------------- --------------- ---------------
Eliminating items include intercompany interest income and expense, the
elimination of certain intercompany accounts, as well as activities of our
corporate and administrative areas.
Because of the nature of our Electric Services business, electric revenues are
derived from two large customers - the NYISO and LIPA. Electric Services
revenues from these customers of $354.8 million and $357.9 million for the three
months ended June 30, 2002 and 2001 represent approximately 29% and 27% of our
consolidated revenues, respectively.
(In Thousands of Dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
Energy Investments
----------------------------
Gas Electric Energy Gas Exploration Other
Distribution Services Services and Production Investments Eliminations Consolidated
- ------------------------- ---------------- ------------ ----------- --------------- ------------- ----------------- ----------------
Six Months Ended
June 30, 2002
Unaffiliated Revenue 1,744,791 669,440 470,870 162,988 39,575 - 3,087,664
Intersegment Revenue - 49 - - - (49) -
Earnings Before Interest
and Taxes 358,899 130,364 (19,449) 39,267 6,159 3,093 518,333
Six Months Ended
June 30, 2001
Unaffiliated Revenue 2,374,329 701,275 551,864 235,731 51,191 - 3,914,390
Intersegment Revenue - 50 - - - (50) -
Earnings Before Interest
and Taxes 349,605 133,306 (63,419) 109,473 16,401 1,962 547,328
- ------------------------- ---------------- ------------ ---------- ---------------- ------------- ----------------- ----------------
Eliminating items include intercompany interest income and expense, the
elimination of certain intercompany accounts, as well as activities of our
corporate and administrative areas.
Because of the nature of our Electric Services business, electric revenues are
derived from two large customers - the NYISO and LIPA. Electric Services
revenues from these customers of $669.4 million and $701.3 million for the six
months ended June 30, 2002 and 2001 represent approximately 22% and 18% of our
consolidated revenues, respectively.
3. COMPREHENSIVE INCOME
The table below indicates the components of comprehensive income.
(In Thousands of Dollars)
- ------------------------------------------------------ ----------------------------------------------------------- -----------------
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
- ------------------------------------------------------ ------------------ ---------------- ----------------- --------------------
Earnings (Loss) for Common Stock $ 8,036 $ (8,001) $ 221,191 $ 215,298
- ------------------------------------------------------ ------------------ ---------------- ----------------- --------------------
Other comprehensive income (loss), net of tax
Reclassification adjustment for gains
realized in net income (2,998) (212) (10,285) (3,454)
Foreign currency translation adjustments 10,829 1,554 9,116 (8,128)
Unrealized losses on marketable securities (3,195) (4,765) (4,236) (2,148)
Accrued unfunded pension obligation - - (1,132) -
Unrealized (losses) gains on derivative financial
instruments (2,159) 20,124 (25,944) 21,075
- ------------------------------------------------------ ------------------ ---------------- ----------------- --------------------
Other comprehensive income (loss) 2,477 16,701 (32,481) 7,345
- ------------------------------------------------------ ------------------ ---------------- ----------------- --------------------
Comprehensive income $ 10,513 $ 8,700 $ 188,710 $ 222,643
- ------------------------------------------------------ ------------------ ---------------- ----------------- --------------------
Related tax expense (benefit)
Reclassification adjustment for gains
realized in net income (1,614) (114) (5,538) (1,860)
Foreign currency translation adjustments 5,831 837 4,908 (4,376)
Unrealized losses on marketable securities (1,721) (2,566) (2,281) (1,157)
Accrued unfunded pension obligation - - (610) -
Unrealized (losses) gains on derivative financial
instruments (1,163) 10,836 (13,970) 11,348
- -------------------------------------------------------- ----------------- ----------------- ----------------- --------------------
Total tax expense (benefit) $ 1,333 $ 8,993 $ (17,491) $ 3,955
- -------------------------------------------------------- ----------------- ----------------- ----------------- --------------------
4. ENVIRONMENTAL MATTERS
New York Sites. We have identified 28 manufactured gas plant ("MGP") sites and
related facilities in New York State that were historically owned or operated by
KeySpan subsidiaries or such companies' predecessors. Twenty seven of these
former sites, some of which are no longer owned by us, were associated with our
regulated gas businesses, and have been identified to both the Department of
Environmental Conservation ("DEC") for inclusion on appropriate site inventories
and listing with the New York Public Service Commission ("NYPSC"). The remaining
former MGP site was acquired when we purchased the Ravenswood facility from
Consolidated Edison Company of New York Inc. ("Consolidated Edison"). Fourteen
sites are currently the subjects of Administrative Orders on Consent ("ACOs") or
Voluntary Clean-Up Agreements ("VCAs") with the DEC.
We presently estimate the remaining environmental cleanup costs related to our
New York MGP sites will be $150.3 million, which amount has been accrued by us
as a reasonable estimate of probable cost for known sites. Expenditures incurred
to date by us with respect to these MGP-related sites total $41.0 million.
The KEDNY and KEDLI rate plans generally provide for the recovery of MGP related
investigation and remediation costs in rates charged to gas distribution
customers. Under prior rate orders, KEDNY has offset certain refunds due
customers against its estimated environmental cleanup costs for MGP sites. At
June 30, 2002, we have reflected a regulatory asset of $123.9 million for our
New York/Long Island MGP sites.
We are also responsible for environmental obligations associated with the
Ravenswood electric generating facility. The extent of our liability does not
include liabilities arising from the disposal of waste at off-site locations
prior to the acquisition and any monetary fines arising from Consolidated
Edison's pre-closing conduct. Based on information currently available for
environmental contingencies related to the Ravenswood facility acquisition, we
have accrued a $5.0 million liability.
New England Sites. Within the Commonwealth of Massachusetts and the State of New
Hampshire, we are aware of 76 former MGP sites and related facilities within the
existing or former service territories of KEDNE or their predecessor companies.
Boston Gas Company, Colonial Gas Company and Essex Gas Company may have or share
responsibility under applicable environmental laws for the remediation of 66 MPG
sites and related facilities, and EnergyNorth Natural Gas may have or share
responsibility under applicable environmental laws for the remediation of 10 MGP
sites and related facilities.
We presently estimate the remaining cost of New England MGP-related
environmental cleanup activities will be $51.7 million, which amount has been
accrued by us as a reasonable estimate of probable cost for known sites.
Expenditures incurred since November 8, 2000 with respect to these MGP-related
activities total $11.5 million.
The Massachusetts Department of Telecommunications and Energy and the New
Hampshire Public Utilities Commission have issued rate orders that provide for
the recovery of site investigation and remediation costs in rates charged to gas
distribution customers. Accordingly, at June 30, 2002, we have reflected a
regulatory asset of $60.0 million for the KEDNE MGP sites. Colonial Gas Company
and Essex Gas Company are not subject to the provisions of Statement of
Financial Accounting Standards ("SFAS") 71 "Accounting for the Effects of
Certain Types of Regulation" and therefore have recorded no regulatory asset.
However, rate plans in effect for these subsidiaries provide for the recovery of
investigation and remediation costs.
KeySpan New England LLC Sites. We are aware of three non-utility sites
associated with the historic operations of KeySpan New England, LLC, a successor
company to Eastern Enterprises for which we may have or share environmental
remediation responsibility or ongoing maintenance: the former Philadelphia Coke
site located in Pennsylvania; the former Connecticut Coke site located in New
Haven, Connecticut; and the former Everett Coal Tar Processing Facility (the
"Everett Facility") located in Massachusetts. Honeywell International, Inc. and
Beazer East, Inc. (both former owners and operators of the Everett Facility)
together with KeySpan have entered into an ACO with the Massachusetts Department
of Environmental Protection for the investigation and development of a remedial
response plan for the site.
We presently estimate the remaining cost of our environmental cleanup activities
for the three non-utility sites will be approximately $41.8 million, which
amount has been accrued by us a reasonable estimate of probable costs for known
sites. Expenditures incurred since November 8, 2000 with respect to these sites
total $1.5 million. Additionally, see Note 10 "Legal Matters" for further
information on New England environmental matters.
We believe that in the aggregate, the accrued liability for investigation and
remediation of the New York and New England sites and related facilities
identified above are reasonable estimates of likely cost within a range of
reasonable, foreseeable costs. We may be required to investigate and, if
necessary, remediate each of these, or other currently unknown former sites and
related facility sites, the cost of which is not presently determinable but may
be material to our financial position, results of operations or liquidity.
Remediation costs for each site may be materially higher than noted, depending
upon remediation experience, selected end use for each site, and actual
environmental conditions encountered.
See our Annual Report on Form 10-K for the year ended December 31, 2001 Note 8
to those Consolidated Financial Statements "Contractual Obligations and
Contingencies" for further information on environmental matters.
5. LONG-TERM DEBT
At December 31, 2001, we had an existing $1 billion shelf registration statement
on file with the Securities and Exchange Commission ("SEC"), with $500 million
available for issuance. In February 2002, we updated our shelf registration for
the issuance of an additional $1.2 billion of securities, thereby giving us the
ability to issue up to $1.7 billion of debt, equity or various forms of
preferred stock. At December 31, 2001, we had authority under PUHCA to issue up
to $1 billion of this amount.
On April 30, 2002, we issued $460 million of MEDS Equity Units at 8.75%
consisting of a three-year forward purchase contract for our common stock and a
six-year note. The purchase contract commits us, three years from the date of
issuance of the MEDS Equity Units, to issue and the investors to purchase, a
number of shares of our common stock based on a formula tied to the market price
of our common stock at that time. The 8.75% coupon is composed of interest
payments on the six-year note of 4.9% and premium payments on the three-year
equity forward contract of 3.85%. These instruments have been recorded as
long-term debt on our Consolidated Balance Sheet. Further, upon issuance of the
MEDS Equity Units, we recorded a direct charge to Retained Earnings of $49.1
million, which represents the present value of the forward contract's premium
payments.
The issuance of the MEDS equity units utilized $920 million of our financing
authority under both the shelf registration and our PUHCA financing authority.
Both the $460 million six-year note and the $460 million forward equity contract
are considered current issuances under these arrangements. Therefore, we have
$780 million available for issuance under the shelf registration and $80 million
available under PUHCA authorization. We have filed an application with the SEC
under PUHCA to increase our financing authority by $700 million, thereby
matching our shelf availability. We anticipate action by the SEC on this
application this year.
These securities are currently not considered convertible instruments for
purposes of applying SFAS 128 "Earnings Per Share" calculations, unless or until
such time as the market value of our common stock reaches a threshold
appreciation price which will be higher than our current per share market value.
Interest payments will, however, reduce net income and earnings per share.
The Emerging Issues Task Force of the Financial Accounting Standards Board is
considering proposals related to accounting for certain securities and financial
instruments, including securities such as the Equity Units. The current
proposals being considered include the method of accounting discussed above.
Alternatively, other proposals being considered could result in the common
shares issuable pursuant to the purchase contract to be deemed outstanding and
included in the calculation of diluted earnings per share, and could result in
periodic "marking to market" of the purchase contracts, causing periodic charges
or credits to income. If this latter approach were adopted, our diluted earnings
per share could increase and decrease from quarter to quarter to reflect the
lesser and greater number of shares issuable upon satisfaction of the contract.
In May 2002, Colonial Gas Company repaid $15 million of its 6.81% Series A First
Mortgage Medium -Term Notes. These Notes would have matured on May 19, 2027, but
the holder of the Notes elected to exercise a put option to redeem the Notes
early.
6. DERIVATIVE FINANCIAL INSTRUMENTS
Commodity Contracts and Electric Derivative Instruments: From time to time we
have utilized derivative financial instruments, such as futures, options and
swaps, for the purpose of hedging exposure to commodity price risk and to hedge
the cash flow variability associated with a portion of our peak electric energy
sales. Our hedging objectives and strategies have remained substantially
unchanged from year-end.
Houston Exploration has utilized collars, as well as over- the- counter ("OTC")
swaps to hedge the cash flow variability associated with forecasted sales of a
portion of its natural gas production. As of June 30, 2002, Houston Exploration
has hedged approximately 64% of its estimated 2002 yearly production and
approximately 40% of its estimated 2003 yearly production. Further, Houston
Exploration may enter into additional derivative positions for 2003 and 2004.
Houston Exploration used standard New York Mercantile Exchange ("NYMEX") futures
prices and published volatility in its Black-Scholes calculation to value its
outstanding derivatives. The maximum length of time over which Houston
Exploration has hedged such cash flow variability is through December 2003. The
estimated amount of gains or losses associated with such derivative instruments
that are reported in accumulated other comprehensive income and that are
expected to be reclassified into earnings over the next twelve months is $3.8
million. The measured amount of hedge ineffectiveness was immaterial.
We have also employed standard NYMEX gas futures contracts, as well as oil swap
derivative contracts, to fix the purchase price for a portion of the fuel used
at the Ravenswood facility. The maximum length of time over which we have hedged
such cash flow variability is through February 2004. We used standard NYMEX
futures prices to value the gas futures contracts and industry published oil
indices for number 6 grade fuel oil to value the oil swap contracts. The
estimated amount of gains or losses associated with such derivative instruments
that are reported in accumulated other comprehensive income and that are
expected to be reclassified into earnings over the next twelve months is $1.7
million. The measured amount of hedge ineffectiveness was immaterial.
Our gas and electric marketing subsidiary, as well as our gas distribution
operations, have fixed rate gas sales contracts and utilized standard NYMEX
futures contracts to lock-in a price for future natural gas purchases. We used
standard NYMEX futures prices to value the outstanding contracts. The maximum
length of time over which we have hedged such cash flow variability is through
February 2003. The estimated amount of gains or losses associated with such
derivative instruments that are reported in accumulated other comprehensive
income and that are expected to be reclassified into earnings over the next
twelve months is $0.8 million. The measured amount of hedge ineffectiveness was
immaterial.
We have also engaged in the use of derivative swap instruments to hedge the cash
flow variability associated with a portion of our forecasted 2002 summer and
winter peak electric energy sales from the Ravenswood facility. We currently
have hedge positions for approximately 50% of our estimated 2002 summer peak
electric sales from the Ravenswood facility. We used NYISO-location zone
published indices and standard NYMEX prices to value these outstanding
derivatives. The maximum length of time over which we have hedged such cash flow
variability is through December 2002. The estimated amount of gains or losses
associated with such derivative instruments that are reported in accumulated
other comprehensive income and that are expected to be reclassified into
earnings over the next twelve months is $1.6 million. The measured amount of
hedge ineffectiveness was immaterial.
KeySpan Canada has also employed electric swap contracts to lock-in the purchase
price on the purchase of electricity needed to operate its gas processing
plants. These contracts are not exchange- traded and we used local published
indices to value these outstanding swap agreements. The maximum length of time
over which we have hedged such cash flow variability is through December 2003.
The estimated amount of gains or losses associated with such derivative
instruments that are reported in accumulated other comprehensive income and that
are expected to be reclassified into earnings over the next twelve months is a
loss of $2.2 million. The measured amount of hedge ineffectiveness was
immaterial.
The following tables set forth selected financial data associated with these
derivative financial instruments noted above that were outstanding at June 30,
2002.
- ------------------------------------------------------------------------------------------------------------------------------------
Year of Volumes Fixed Price $ Current Price $ Fair Value
Type of Contract Maturity mmcf Floor $ Ceiling $ ($000)
- ----------------------------- ---------- ------------- ------------ ------------- ----------------- ----------------- --------------
Gas
Collars 2002 29,440 3.56 5.14 - 3.25 - 3.88 9,149
2003 25,550 3.34 4.97 - 3.72 - 4.24 1,937
Swaps -Short Natural Gas 2002 5,520 - - 3.01 3.25 - 3.88 (2,321)
2003 14,600 - - 3.19 3.72 - 4.24 (9,954)
Swaps - Long Natural Gas 2002 3,920 - - 2.44 - 3.91 3.25 - 3.95 947
2003 2,110 - - 3.10 - 4.00 3.72 - 4.04 1,017
- ----------------------------- ---------- ------------- ------------ ------------- ----------------- ----------------- --------------
81,140 775
- ----------------------------- ---------- ------------- ------------ ------------- ----------------- ----------------- --------------
- ------------------------------------------------------------------------------------------------------------------------------------
Type of Contract Year of Maturity Volumes Fair Value
Barrels Fixed Price $ Current Price $ ($000)
- --------------------------- -------------------- ----------------- --------------------- ------------------------- -----------------
Oil
Swaps - Long Fuel Oil 2002 163,474 19.75 - 24.49 24.58 - 24.93 486
2003 346,892 20.10 - 26.72 22.19 - 23.94 405
2004 3,894 23.50 - 23.70 23.23 - 23.32 7
- --------------------------- -------------------- ----------------- --------------------- ------------------------- -----------------
514,260 898
- --------------------------- -------------------- ----------------- --------------------- ------------------------- -----------------
- ------------------------------------------------------------------------------------------------------------------------------------
Type of Contract Year of Current Price Estimated Profit $ Fair Value
Maturity MWh Fixed Profit /Price $ $ ($000)
- ------------------------ --------------- ------------ ------------------------- --------------- ------------------- ----------------
Electricity
Tolling Arrangements 2002 732,800 26.00 - 56.50 - 4.07 - 49.07 1,635
Swaps - Long 2002 35,328 58.70 - 60.01 26.02 - (1,121)
2003 70,080 58.70 - 60.01 28.25 - (2,067)
- ------------------------ --------------- ------------ ------------------------- --------------- ------------------- ----------------
838,208 (1,553)
- ------------------------ --------------- ------------ ------------------------- --------------- ------------------- ----------------
Non-firm Gas Sales Derivative Instruments: Utility tariffs applicable to certain
large-volume customers permit gas to be sold at prices established monthly
within a specified range expressed as a percentage of prevailing alternate fuel
oil prices. We used natural gas swap contracts, with offsetting positions in oil
swap contracts of equivalent energy value, to hedge the cash-flow variability of
specified portions of gas purchases and sales. All positions that were
outstanding at December 31, 2001 settled during the first quarter of 2002. We
intend to enter into additional derivative instruments of this nature during
2002 if market conditions so warrant.
Firm Gas Sales Derivative Instruments - Regulated Utilities: We have also
utilized derivative financial instruments to reduce the cash flow variability
associated with the purchase price for a portion of our future natural gas
purchases. Our strategy is to minimize fluctuations in firm gas sales prices to
our regulated firm gas sales customers in our New York and New Hampshire service
territories. Since these derivative instruments are employed to support our gas
sales prices to regulated firm gas sales customers, the accounting for these
derivative instruments is subject to SFAS 71. Therefore, changes in the market
value of these derivatives have been recorded as a Regulatory Asset or
Regulatory Liability on the Consolidated Balance Sheet. Gains or losses on the
settlement of these contracts are initially deferred and then refunded to or
collected from our firm gas sales customers during the appropriate winter
heating season consistent with regulatory requirements.
The following tables set forth selected financial data associated with these
derivative financial instruments that were outstanding at June 30, 2002.
- ------------------------------------------------------------------------------------------------------------------------------------
Type of Contract Year of Maturity Volumes Fair Value
Mmcf Fixed Price $ Current Price $ ($000)
- -------------------------- -------------------- ----------------- ----------------------- ------------------------- ----------------
Gas
Call Options 2002 1,280 4.20 - 4.50 3.69 - 3.95 17
2003 1,960 4.20 - 4.50 3.88 - 4.04 253
- -------------------------- -------------------- ----------------- ----------------------- ------------------------- ----------------
3,240 270
- -------------------------- -------------------- ----------------- ----------------------- ------------------------- ----------------
Contract Review
On April 1, 2002 we implemented Implementation Issue C15 and C16 of Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" as amended and interpreted incorporating SFAS 137 and
138 and certain implementation issues (collectively "SFAS 133"). Issue C15
establishes new criteria that must be satisfied in order for option-type and
forward contracts in electricity to be exempted as normal purchases and sales,
while Issue C16 relates to contracts that combine a forward contract and a
purchased option contract. Based upon a review of our physical commodity
contracts, we determined that certain contracts for the physical purchase of
natural gas can no longer be exempted as normal purchases from the requirements
of SFAS 133. As a result, and effective April 1, 2002, such contracts are
required to be recorded on the Consolidated Balance Sheet at fair value and had
a calculated fair value at that date of $7.8 million. At June 30, 2002 the fair
value of these contracts was $5.0 million. Since these contracts are for the
purchase of natural gas sold to regulated firm gas sales customers, the
accounting for these contracts is subject to SFAS 71. Therefore, changes in the
market value of these contracts will be recorded as a Regulatory Asset or
Regulatory Liability on the Consolidated Balance Sheet.
Interest Rate Swaps: We also have interest rate swap agreements in which
approximately $1.3 billion of fixed rate debt has been synthetically modified to
floating rate debt. For the term of the agreements, we will receive the fixed
coupon rate associated with these bonds and pay the counter parties a variable
interest rate that is reset on a quarterly basis. These swaps are fair- value
hedges and qualify for "short-cut" hedge accounting treatment under SFAS 133.
Through the utilization of our interest rate swap agreements, we reduced
recorded interest expense by $22.7 million for the six months ended June 30,
2002. The fair values of these derivative instruments are provided to us by
third party appraisers and represent the present value of future cash-flows
based on a forward interest rate curve for the life of the derivative
instrument.
During the quarter ended June 30, 2002, the swap arrangement associated with a
$90 million Gas Facilities Revenue Bond was terminated by our counter party. At
that time we had an immaterial derivative asset recorded. As provided for under
the terms of the swap agreement, our counter party had the right to terminate
the swap arrangement at their discretion without a fee or penalty. Since neither
a fee nor penalty was imposed on the counter-party, the termination of this swap
arrangement had no earnings impact.
The table below summarizes selected financial data associated with these
derivative financial instruments that were outstanding at June 30, 2002.
- ------------------------------------------------------------------------------------------------------------------------------------
Average Variable Rate
Maturity Date of Notional Amount Fixed Rate Paid Fair Value
Bond Swaps ($000) Received Year to Date ($000)
- --------------------------- ---------------------- ----------------------- ---------------- ----------------------- ---------------
Medium Term Notes 2010 500,000 7.625% 4.290% 3,022
Medium Term Notes 2006 500,000 6.150% 3.320% 4,581
Medium Term Notes 2023 270,000 8.200% 3.620% (309)
- --------------------------- ---------------------- ----------------------- ---------------- ----------------------- ---------------
1,270,000 7,294
- --------------------------- ---------------------- ----------------------- ---------------- ----------------------- ---------------
Additionally, we also have an interest rate swap agreement that hedges the cash
flow variability associated with the forecasted issuance of a series of
commercial paper offerings. The maximum length of time over which we have hedged
such cash flow variability is through March 2003. The estimated amount of gains
or losses associated with such derivative instruments that are reported in
accumulated other comprehensive income and that are expected to be reclassified
into earnings over the next twelve months is a loss of $1.6 million. The
measured amount of hedge ineffectiveness was immaterial. We estimate that a 1%
increase in current interest rates would result in a $10.3 million increase to
interest expense.
Derivative contracts are primarily used to manage our exposure to market risk
arising from changes in commodity prices and interest rates. In the event of
nonperformance by a counter party to derivative contract, the desired impact may
not be achieved. The risk of a counter party nonperformance is generally
considered credit risk and is actively managed by assessing each counter party
credit profile and negotiating appropriate levels of collateral and credit
support. Currently the majority of our derivative contracts are with investment
grade companies. (See Item 3. Quantitative and Qualitative Disclosures About
Market Risk for a discussion on credit risk.)
7. WORKFORCE REDUCTION PROGRAMS
As a result of the Eastern acquisition, we implemented early retirement and
severance programs in an effort to reduce our workforce. In 2000, we recorded a
$22.7 million liability associated with these programs. This severance program
is targeted to reduce the workforce by 500 employees and will continue through
2002. In 2001, we reduced this liability by $4.1 million as a result of lower
than anticipated costs per employee. As of June 30, 2002, we had paid $12.3
million for these programs and had a remaining liability of $6.3 million.
8. RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, we adopted SFAS 141, "Business Combinations", and SFAS 142
"Goodwill and Other Intangible Assets". The key concepts from the two
interrelated Statements include mandatory use of the purchase method when
accounting for business combinations, discontinuance of goodwill amortization, a
revised framework for testing goodwill impairment at a "reporting unit" level,
and new criteria for the identification and potential amortization of other
intangible assets. Other changes to existing accounting standards involve the
amount of goodwill to be used in determining the gain or loss on the disposal of
assets, and a requirement to test goodwill for impairment at least annually. The
annual impairment test is to be performed within six months of adopting SFAS 142
with any resulting impairment reflected as either a change in accounting
principle, or a charge to operations in the financial statements. We have
completed our analysis for all of our reporting units and determined that no
consolidated impairment exists.
For the three and six months ended June 30, 2001 respectively, goodwill
amortization was recorded in each segment as follows: Gas Distribution $8.9 and
$17.8 million; Energy Services $2.1 and $4.2 million; and Energy Investments and
other $1.6 and $3.1 million. As required by SFAS 142, below is a reconciliation
of reported net income for the three and six months ended June 30, 2001 and
pro-forma net income, for the same period, adjusted for the discontinuance of
goodwill amortization.
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
- -------------------------------------------- --------------------- -------------------- --------------------- ---------------------
Earnings (loss) available for common stock $ 8,036 $ (8,001) $ 221,191 $ 215,298
Add back: goodwill amortization - 12,594 - 25,145
- -------------------------------------------- --------------------- -------------------- --------------------- ---------------------
Adjusted net income 8,036 4,593 221,191 240,443
- -------------------------------------------- --------------------- -------------------- --------------------- ---------------------
Basic earnings (loss) per share 0.06 (0.06) 1.57 1.57
Add back: goodwill amortization - 0.09 - 0.18
- -------------------------------------------- --------------------- -------------------- --------------------- ---------------------
Adjusted basic earnings per share $ 0.06 $ 0.03 $ 1.57 $ 1.75
- -------------------------------------------- --------------------- -------------------- --------------------- ---------------------
Diluted earnings (loss) per share 0.06 (0.06) 1.56 1.55
Add back: goodwill amortization - 0.09 - 0.18
- -------------------------------------------- --------------------- -------------------- --------------------- ---------------------
Adjusted diluted earnings per share $ 0.06 $ 0.03 $ 1.56 $ 1.73
- -------------------------------------------- --------------------- -------------------- --------------------- ---------------------
In July of 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". The Standard requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity will capitalize a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its then present value, and the capitalized
cost is depreciated over the useful life of the related asset. Upon settlement
of the liability, an entity either settles the obligation for its recorded
amount or incurs a gain or loss upon settlement. The standard is effective for
fiscal years beginning after June 15, 2002, with earlier application encouraged.
We are currently evaluating the impact, if any, that this Statement may have on
our results of operations and financial position.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets",
was effective January 1, 2002, and addresses accounting and reporting for the
impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" and APB Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business". SFAS
No. 144 retains the fundamental provisions of SFAS No. 121 and expands the
reporting of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and that will
be eliminated from the ongoing operations of the entity in a disposal
transaction. As of June 30, 2002, implementation of this Statement did not have
a significant effect on our results of operations and financial position.
9. DISCONTINUED OPERATIONS
On November 8, 2000, we acquired Midland Enterprises LLC ("Midland"), a marine
transportation subsidiary, as part of the Eastern acquisition. In its order
issued under PUCHA approving the acquisition, the SEC required us to sell this
subsidiary by November 8, 2003 because its operations were not functionally
related to our core utility operations. On July 2, 2002 we completed the sale of
Midland to Ingram Industries Inc.
Discontinued operations for the year ended December 31, 2001 included an
anticipated after-tax loss on disposal of $30.4 million. As a result of a change
in our tax structuring strategy related to the sale of Midland, during the
quarter ended June 30, 2002, we recorded an additional provision for city and
state taxes and made adjustments to the estimations used in the December 31,
2001 loss provision. These changes resulted in an additional after tax loss on
disposal of $19.7 million.
The following is selected financial information for Midland for the three and
six months ended June 30, 2002 and June 30, 2001:
(In Thousands of Dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues $ 60,260 $ 67,776 $ 116,149 $ 135,364
Pretax income (loss) (888) 6,368 (4,624) 7,857
Income tax (expense) benefit 235 (2,476) 1,268 (3,304)
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations (653) 3,892 (3,356) 4,553
- ------------------------------------------------------------------------------------------------------------------------------------
Loss on disposal (19,009) - (16,306) -
- ------------------------------------------------------------------------------------------------------------------------------------
Loss from discontinued operations $ (19,662) $ 3,892 $ (19,662) $ 4,553
- ------------------------------------------------------------------------------------------------------------------------------------
Assets and liabilities of the discontinued operations are as follows:
(In Thousands of Dollars)
--------------------------------------------------------------------------------------------------------------
June 30, 2002 December 31, 2001
--------------------------------------------------------------------------------------------------------------
Current assets $ 136,193 $ 139,522
Property, plant and equipment, net 308,707 316,626
Long-term assets 33,703 35,233
Current liabilities (49,750) (58,835)
Long-term liabilities (238,718) (241,491)
--------------------------------------------------------------------------------------------------------------
Net assets held for disposal $ 190,135 $ 191,055
--------------------------------------------------------------------------------------------------------------
10. LEGAL MATTERS
KeySpan has been cooperating in preliminary inquiries regarding trading in
KeySpan Corporation stock by individual officers of KeySpan prior to the July
17, 2001 announcement that KeySpan was taking a special charge in its Energy
Services business and otherwise reducing its 2001 earnings forecast. These
inquiries are being conducted by the U.S. Attorney's Office, Southern District
of New York, and the SEC.
As previously reported, as part of its continuing inquiry, on March 5, 2002, the
SEC issued a formal order of investigation, pursuant to which it will review the
trading activity of certain company insiders from May 1, 2001 to the present, as
well as KeySpan's compliance with its reporting rules and regulations, generally
during the period following the acquisition of the Roy Kay companies through the
July 17th announcement.
Furthermore, KeySpan and certain of its officers and directors are defendants in
a number of class action lawsuits filed in the United States District Court for
the Eastern District of New York after the July 17th announcement. These
lawsuits allege, among other things, violations of Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934, as amended ("Exchange Act"), in connection
with disclosures relating to or following the acquisition of the Roy Kay
companies by KeySpan Services, Inc., a KeySpan subsidiary. Finally, in October
2001, a shareholder's derivative action was commenced in the same court against
certain officers and directors of KeySpan, alleging, among other things,
breaches of fiduciary duty, violations of the New York Business Corporation Law
and violations of Section 20(a) of the Exchange Act. In addition, a second
derivative action has been commenced asserting similar allegations. Each of the
proceedings seek monetary damages in an unspecified amount. We are unable to
determine the outcome of these proceedings and what effect, if any, such outcome
will have on our financial condition, results of operations or cash flows.
On June 14, 2002, a complaint was filed by Donna Gay, et al. against KeySpan
Corporation in the United States District Court for the District of
Massachusetts. The complaint alleges liabilities stemming from alleged
environmental contaminants at the Oxbow Site in Everett, Massachusetts. On June
26, 2002, a complaint was filed by Beazer East, Inc. in the United States
District Court for the Eastern District of New York, seeking both contribution
from KeySpan for costs and declaratory relief as to the respective former and
future liabilities associated with responding to the actual or threatened
release of hazardous substances into the environment and the Everett site.
In June 2002, Hawkeye Electric, LLC et al. ("Hawkeye") commenced an action in
New York State Supreme Court, Suffolk County against KeySpan and certain of its
subsidiaries alleging, among other things, that KeySpan and its subsidiaries
breached certain contractual obligations to Hawkeye with respect to the
provision of certain gas, electric and telecommunications construction services
offered by Hawkeye. Hawkeye is seeking damages in excess of $90 million and
KeySpan has alleged a number of counterclaims seeking damages in excess of $4
million. At this time, we are unable to determine the outcome of this proceeding
and what effect, if any, such outcome will have on our financial position,
results of operation or cash flow.
11. KEYSPAN GAS EAST CORPORATION SUMMARY FINANCIAL INFORMATION
KEDLI, a wholly owned subsidiary of KeySpan, established a program for the
issuance, from time to time, of up to $600 million aggregate principal amount of
medium term notes, which are unconditionally guaranteed by us. On February 1,
2000, KEDLI issued $400 million of 7.875% medium term notes due 2010. In January
2001, KEDLI issued an additional $125 million of medium term notes at 6.9% due
January 15, 2008. The following condensed financial statements are required to
be disclosed by SEC regulations and are those of KEDLI and KeySpan as guarantor
of the medium term notes.
Statement of Income
(In Thousands of Dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 2002 Three Months Ended June 30, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Guarantor KEDLI Eliminations Consolidated Guarantor KEDLI Eliminations Consolidated
Revenues $1,078,169 $ 137,936 $ 1,216,105 $ 1,182,782 $ 156,520 $1,339,302
Operating Expenses
Purchased Gas 187,369 62,573 249,942 273,680 74,669 348,349
Fuel and purchased power 93,292 - 93,292 146,357 - 146,357
Operations and maintenance 535,027 13,067 548,094 517,176 16,627 533,803
Intercompany expense (20,034) 20,034 - (21,216) 21,216 -
Depreciation and
amortization 112,124 15,339 127,463 108,156 13,422 121,578
Operating Taxes 68,080 19,308 87,388 81,214 19,621 100,835
----------- ------------ ------------- -------------- ------------- ---------- ------------ -------------
Total Operating
Expenses 975,858 130,321 1,106,179 1,105,367 145,555 1,250,922
----------- ------------ ------------- -------------- ------------- ---------- ------------ -------------
Operating Income 102,311 7,615 109,926 77,415 10,965 88,380
Other Income and
(Deductions) 6,023 2,192 (5,869) 2,346 (1,137) 3,588 (5,607) (3,156)
----------- ------------ ------------- -------------- ------------- ---------- ------------ -------------
Income Before Interest
Charges and Income Taxes 108,334 9,807 (5,869) 112,272 76,278 14,553 (5,607) 85,224
Interest Expense 60,023 15,900 (5,869) 70,054 81,896 15,638 (5,607) 91,927
Income Taxes 15,768 (2,724) 13,044 4,520 (806) 3,714
Preferred stock dividends 1,476 - - 1,476 1,476 - - 1,476
----------- ------------ ------------- -------------- ------------- ---------- ------------ -------------
Earnings (Loss) From
Continuing Operations $ 31,067 $ (3,369) $ - $ 27,698 $ (11,614) $ (279) $ - $ (11,893)
=========== ============ ============= ============== ============= ========== ============ =============
Statement of Income
(In Thousands of Dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 2002 Six Months Ended June 30, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Guarantor KEDLI Eliminations Consolidated Guarantor KEDLI Eliminations Consolidated
Revenues $ 2,630,780 $ 456,884 $ 3,087,664 $ 3,327,372 $ 587,018 $ 3,914,390
Operating Expenses
Purchased Gas 693,859 205,440 899,299 1,212,899 332,799 1,545,698
Fuel and purchased power 177,664 - 177,664 289,657 - 289,657
Operations and maintenance 1,016,593 25,067 1,041,660 1,005,915 31,771 1,037,686
Intercompany expense (38,242) 38,242 - (42,760) 42,760 -
Depreciation and
amortization 217,879 35,581 253,460 220,290 32,452 252,742
Operating Taxes 163,087 44,694 207,781 193,218 49,607 242,825
------------- ------------ --------------- ------------- ------------- ----------- ----------- -----------
Total Operating
Expenses 2,230,840 394,024 2,579,864 2,879,219 489,389 3,368,608
------------- ------------ --------------- ------------- ------------- ----------- ----------- -----------
Operating Income 399,940 107,860 507,800 448,153 97,629 545,782
Other Income and
(Deductions) 16,478 5,095 (11,040) 10,533 8,142 6,579 (13,175) 1,546
------------- ------------ --------------- ------------- ------------- ----------- ----------- -----------
Income Before Interest
Charges and Income Taxes 416,418 112,955 (11,040) 518,333 456,295 104,208 (13,175) 547,328
Interest Expense 122,599 31,102 (11,040) 142,661 165,527 32,878 (13,175) 185,230
Income Taxes 97,507 34,360 131,867 124,156 24,245 148,401
Preferred stock dividends 2,952 - - 2,952 2,952 - - 2,952
------------- ------------ --------------- ------------- ------------- ----------- ----------- -----------
Earnings (Loss) from
Continuing Operations $ 193,360 $ 47,493 $ - $ 240,853 $ 163,660 $ 47,085 $ - $ 210,745
============= ============ =============== ============= ============= =========== =========== ===========
Balance Sheet (In Thousands of Dollars)
- ---------------------------------------- -------------------------------------------------------------------------------------------
June 30, 2002 December 31, 2001
- ---------------------------------------- ----------------------------------------------------- -------------------------------------
ASSETS Guarantor KEDLI Eliminations Consolidated Guarantor KEDLI Eliminations Consolidated
Current Assets
Cash and temporary
cash investments $ 137,599 $ - $ - $ 137,599 $ 159,252 $ - $ - $ 159,252
Accounts Receivable, net 1,226,822 166,472 (245,710) 1,147,584 1,540,082 233,013 (500,496) 1,272,599
Other current assets 441,735 124,640 - 566,375 454,319 112,317 - 566,636
------------ -------------------------------------------------------------------------------------------
1,806,156 291,112 (245,710) 1,851,558 2,153,653 345,330 (500,496) 1,998,487
------------ -------------------------------------------------------------------------------------------
Assets Held for Disposal 190,135 - - 190,135 191,055 - - 191,055
Equity Investments 774,204 - (532,862) 241,342 756,111 - (532,862) 223,249
------------ -------------------------------------------------------------------------------------------
Property
Gas 4,187,083 1,690,538 - 5,877,621 4,074,894 1,629,963 - 5,704,857
Other 4,607,133 - - 4,607,133 4,231,262 - - 4,231,262
Accumulated depreciation
and depletion (3,219,722) (310,590) - (3,530,312) (3,035,788) (294,400) - (3,330,188)
------------ -------------------------------------------------------------------------------------------
5,574,494 1,379,948 - 6,954,442 5,270,368 1,335,563 - 6,605,931
------------ -------------------------------------------------------------------------------------------
Deferred Charges 2,528,605 183,448 - 2,712,053 2,571,029 199,855 - 2,770,884
--------------------------------------------------------------------------------------------------------
Total Assets $10,873,594 $1,854,508 $ (778,572) $11,949,530 $10,942,216 $1,880,748 $(1,033,358) $ 11,789,606
========================================================================================================
LIABILITIES
AND CAPITALIZATION
Current Liabilities
Accounts Payable
and accrued expenses $ 928,221 $ 77,852 $ - $ 1,006,073 $ 975,873 $ 115,557 $ - $ 1,091,430
Commercial Paper 570,655 - - 570,655 1,048,450 - - 1,048,450
Other current
liabilities 118,469 79,923 - 198,392 220,985 23,844 - 244,829
--------------------------------------------------------------------------------------------------------
1,617,345 157,775 - 1,775,120 2,245,308 139,401 - 2,384,709
--------------------------------------------------------------------------------------------------------
Intercompany
Accounts Payable - 69,806 (69,806) - - 324,592 (324,592) -
--------------------------------------------------------------------------------------------------------
Deferred Credits
and Other Liabilities
Deferred Income Tax 636,863 174,486 - 811,349 593,300 4,772 - 598,072
Other deferred credits
and liabilities 833,550 93,417 - 926,967 841,662 100,452 - 942,114
--------------------------------------------------- ----------------------------------------------------
1,470,413 267,903 - 1,738,316 1,434,962 105,224 - 1,540,186
--------------------------------------------------- ----------------------------------------------------
Capitalization
Common shareholders'
equity 2,831,009 658,120 (532,862) 2,956,267 2,812,837 610,627 (532,862) 2,890,602
Preferred stock 84,077 - - 84,077 84,077 - - 84,077
Long-term debt 4,667,217 700,904 (175,904) 5,192,217 4,172,649 700,904 (175,904) 4,697,649
--------------------------------------------------------------------------------------------------------
Total Capitalization 7,582,303 1,359,024 (708,766) 8,232,561 7,069,563 1,311,531 (708,766) 7,672,328
--------------------------------------------------------------------------------------------------------
Minority Interest
in Subsidiary Companies 203,533 - - 203,533 192,383 - - 192,383
--------------------------------------------------------------------------------------------------------
Total Liabilities
and Capitalization $10,873,594 $ 1,854,508 $(778,572) $11,949,530 $10,942,216 $ 1,880,748 $(1,033,358) $ 11,789,606
========================================================================================================
Statement of Cash Flows (In Thousands of Dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 2002 Six Months Ended June 30, 2001
- ------------------------------------------------------------------------------------ -----------------------------------------------
Guarantor KEDLI Consolidated Guarantor KEDLI Consolidated
- ------------------------------------------------ -------------- ------------------ --------------- ---------------- ----------------
Operating Activities
Net Cash Provided by
Operating Activities $ 395,573 $ 288,184 $ 683,757 $ 473,124 $ 81,746 $ 554,870
----------------- -------------- ------------------ --------------- ---------------- ----------------
Investing Activities
Capital expenditures (534,831) (60,672) (595,503) (396,786) (28,021) (424,807)
Sale of Assets - - - 18,458 - 18,458
Other - - - (7,822) - (7,822)
----------------- -------------- ------------------ --------------- ---------------- ----------------
Net Cash Used in
Investing Activities (534,831) (60,672) (595,503) (386,150) (28,021) (414,171)
----------------- -------------- ------------------ --------------- ---------------- ----------------
Financing Activities
Issuance of Treasury Stock 51,896 - 51,896 64,107 - 64,107
Issuance of long-term debt 507,754 - 507,754 583,000 125,000 708,000
Payment of long-term debt (54,590) - (54,590) (152,000) - (152,000)
Payment of commercial paper (477,795) - (477,795) (497,033) - (497,033)
Preferred stock dividends paid (2,952) - (2,952) (2,952) - (2,952)
Common stock dividends paid (124,684) - (124,684) (121,937) - (121,937)
Net intercompany accounts
payable 227,512 (227,512) - 178,725 (178,725) -
Other (9,536) - (9,536) 5,102 - 5,102
----------------- -------------- ------------------ --------------- ---------------- ----------------
Net Cash Provided by
(Used in) Financing
Activities $ 117,605 $ (227,512) $ (109,907) $ 57,012 $ (53,725) $ 3,287
----------------- -------------- ------------------ --------------- ---------------- ----------------
Net Increase in Cash and
Cash Equivalents $ (21,653) $ - $ (21,653) $ 143,986 $ - $ 143,986
================= ============== ================== =============== ================ ================
Cash and Cash Equivalents at
Beginning of Period $ 159,252 $ - $ 159,252 $ 83,329 - $ 83,329
----------------- -------------- ------------------ --------------- ---------------- ----------------
Cash and Cash Equivalents at
End of Period $ 137,599 $ - $ 137,599 $ 227,315 $ - $ 227,315
=================== ============== ================ =============== ================ ================
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Consolidated Review of Results
- ------------------------------
The following is a summary of transactions affecting comparative earnings and a
discussion of material changes in revenues and expenses during the three and six
months ended June 30, 2002, compared to the three and six months ended June 30,
2001. 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 included under Item 1. References to "KeySpan", "we", "us",
and "our" mean KeySpan Corporation, together with its consolidated subsidiaries.
Consolidated earnings from continuing operations for the three and six months
ended June 30, 2002 were $27.7 million, or $0.20 per share and $240.9 million,
or $1.71 per share, respectively. Consolidated results from continuing
operations for the three months ended June 30, 2001 reflected a loss of $11.9
million, or $0.09 per share. Consolidated earnings from continuing operations
for the six months ended June 30, 2001 were $210.7 million, or $1.54 per share.
Earnings available for common stock, which includes discontinued operations as
discussed below, were $8.0 million, or $0.06 per share and $221.2 million, or
$1.57 per share for the three and six months ended June 30, 2002, respectively.
Earnings available for common stock for the three months ended June 30, 2001
reflected a loss of $8.0 million, or $0.06 per share. For the six months ended
June 30, 2001 earnings available for common stock were $215.3 million, or $1.57
per share. Diluted earnings per share were $1.56 and $1.55 for the six months
ended June 30, 2002 and 2001, respectively. Basic and diluted earnings per share
were the same for the three months ended June 30, 2002 and 2001, respectively.
Average common shares outstanding for the six months ended June 30, 2002
increased by 2.3% compared to the same period last year 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 earnings per share for the six months ended June 30, 2002 by $0.04
compared to the corresponding period in 2001.
On January 24, 2002, we announced that we had entered into an agreement to sell
Midland Enterprises LLC ("Midland"), our marine barge business. In anticipation
of this divestiture, which closed on July 2, 2002, we have reported Midland's
operations as discontinued for 2002 and 2001. (See our Annual Report on Form 10K
for the year ended December 31, 2001 Item 7 "Management's Discussion and
Analysis of Financial Conditions and Results of Operations", as well as Note 10
to those Consolidated Financial Statements "Discontinued Operations".) In the
fourth quarter of 2001, we recorded an estimated loss on the sale of Midland as
well as an estimate for Midland's results of operations for the first six months
of 2002. During the three months ended June 30, 2002, we recorded an additional
after-tax loss of $19.7 million, primarily reflecting a provision for certain
city and state taxes that resulted from a change in our tax structuring
strategy. (See Note 9 to the Consolidated Financial Statements "Discontinued
Operations" for further disclosures on the sale of Midland.)
As discussed in more detail below, results from continuing operations for the
quarter and six months ended June 30, 2002 verses the comparable periods last
year were principally impacted by the following four factors: (i) losses
incurred in 2001 by one of our unregulated subsidiaries; (ii) the
discontinuation of goodwill amortization in 2002; (iii) a significant decrease
in interest expense; and (iv) a significant decrease in natural gas prices,
which reduced comparative earnings associated with the operations of our gas
exploration and production activities.
In 2001, we discontinued the general contracting activities related to the
former Roy Kay companies, with the exception of work to be completed on existing
contracts, based upon our view that the general contracting business was not a
core competency of these companies. Losses incurred by the former Roy Kay
companies for the three and six months ended June 30, 2001 were $30.1 million
after-tax, or $0.22 per share and $35.6 million after-tax, or $0.26 per share,
respectively. (See our Annual Report on Form 10K for the year ended December 31,
2001 Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 10 to those Consolidated Financial Statements
"Roy Kay Operations" for a more detailed discussion.) We are in the process of
completing the contracts entered into by the former Roy Kay companies and, for
the three and six months ended June 30, 2002, we incurred after-tax losses of
$1.5 million and $2.8 million, respectively, reflecting overhead, and
administrative and general expenses. These costs could not be accrued in 2001.
In January 2002, we adopted Statement of Accounting Standard ("SFAS") 142
"Goodwill and Other Intangible Assets". The key requirements of this Statement
include the discontinuance of goodwill amortization, a revised framework for
testing goodwill impairment and new criteria for the identification of
intangible assets. Consolidated goodwill amortization for the three and six
months ended June 30, 2001 was $12.6 million, or $0.09 per share, and $25.2
million, or $0.18 per share, respectively.
Interest expense decreased by $21.9 million ($14.2 after-tax), or $0.10 per
share and $42.6 million ($27.7 million after-tax) or $0.20 per share, for the
three and six months ended June 30, 2002, respectively. The weighted average
interest rate on outstanding commercial paper during the six months ended June
30, 2002 was approximately 2.08% compared to approximately 5.51% for the
corresponding period last year, a decrease of approximately 340 basis points.
Further, we have a number of interest rate swap agreements in which we have
effectively changed fixed rate debt to floating rate debt. Our use of these
derivative instruments has reduced interest expense by $22.7 million during the
six months ended June 30, 2002. (See Note 6 to the Consolidated Financial
Statements "Derivative Financial Instruments" for a description of these
instruments.)
For the three and six months ended June 30, 2002, net income from our gas
exploration and production operations decreased by $12.0 million, or $0.09 per
share and by $38.8 million, or $0.29 per share, respectively compared to the
corresponding periods last year. Our gas exploration and production subsidiaries
were adversely impacted by significantly lower realized gas prices during the
six months ended June 30, 2002 compared to the same period in 2001.
Income tax expense generally reflects the level of pre-tax income for all
periods reported. Income tax expense also reflects tax benefits of $6.4 million
and $11.9 million recognized in the three and six months ended June 30, 2002,
respectively, resulting from the favorable resolution of certain outstanding tax
issues related to the KeySpan / Long Island Lighting Company ("LILCO") merger
completed in May 1998. Further, during the first quarter of 2002, we recorded an
adjustment to deferred income taxes of $177.7 million reflecting a decrease in
the tax basis of the assets acquired at the time of the KeySpan / LILCO merger.
This adjustment was the result of a revised valuation study and the preparation
of an amended tax return. Concurrent with the deferred tax adjustment, we
reduced current income taxes payable by $183.2 million, resulting in a net $5.5
million income tax benefit.
Earnings before interest and taxes ("EBIT") increased by $27.1 million, or 32%,
for the second quarter of 2002 compared to the corresponding quarter last year,
but decreased by $29.0 million, or 5% for the six months ended June 30, 2002
compared to the same period last year. Comparative EBIT results were impacted by
the items mentioned above, namely (i) EBIT losses of $53.3 million and $61.2
million incurred by the Roy Kay companies for the three and six months ended
June 30, 2001, respectively; (ii) the discontinuation of goodwill amortization
in 2002 of $12.6 million and $25.2 million for the three and six months ended
June 30, 2001, respectively; and (iii) decreases in comparative EBIT results
associated with our gas exploration and production subsidiaries of $20.4 million
and $70.2 million for the three and six months ended June 30, 2002,
respectively. The remaining decrease in EBIT from core operati