Back to GetFilings.com
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
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 (IRS Employer
incorporation or organization 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)
(631) 755-6650 (Hicksville)
(Registrant's telephone number, including area code)
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. /X/
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 October 31, 2002
--------------------- -------------------------------
$.01 par value 142,026,375
KEYSPAN CORPORATION AND SUBSIDIARIES
Table of Contents
Page
----
PART I FINANCIAL INFORMATION
---------------------
Item 1 Financial Statements
Consolidated Balance Sheet:
September 30, 2002 and December 31, 2001
3
Consolidated Statement of Income:
Three and Nine Months Ended
September 30, 2002 and 2001 5
Consolidated Statement of Cash Flows:
Nine Months Ended September 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 28
Item 3 Quantitative and Qualitative Disclosures
About Market Risk 56
PART II OTHER INFORMATION
- ------- -----------------
Item 1 Legal Proceedings 63
Item 4 Controls and Procedures 63
Item 6 Exhibits and Reports on Form 8-K 63
Signatures 65
Certifications 66
CONSOLIDATED BALANCE SHEET
(Unaudited)
(In Thousands)
- -----------------------------------------------------------------------------------------------------------------------------
September 30, 2002 December 31, 2001
--------------------------- ---------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 53,925 $ 159,252
Accounts receivable 1,100,805 1,344,898
Allowance for uncollectible accounts (67,775) (72,299)
Gas in storage, at average cost 327,246 334,999
Materials and supplies, at average cost 107,507 105,693
Other 187,050 125,944
--------------------------- ---------------------------
1,708,758 1,998,487
--------------------------- ---------------------------
Net Assets Held for Disposal - 191,055
--------------------------- ---------------------------
Equity Investments and Other 237,624 223,249
--------------------------- ---------------------------
Property
Gas 5,977,669 5,704,857
Electric 1,904,995 1,629,768
Other 390,526 400,643
Accumulated depreciation (2,671,817) (2,533,466)
Gas exploration and production, at cost 2,378,828 2,200,851
Accumulated depletion (927,666) (796,722)
--------------------------- ---------------------------
7,052,535 6,605,931
--------------------------- ---------------------------
Deferred Charges
Regulatory assets 430,284 458,191
Goodwill, net of amortization 1,785,029 1,782,826
Other 667,243 529,867
--------------------------- ---------------------------
2,882,556 2,770,884
--------------------------- ---------------------------
Total Assets $ 11,881,473 $ 11,789,606
=========================== ===========================
See accompanying Notes to the Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEET
(Unaudited)
(In Thousands)
- ----------------------------------------------------------------------- ---- --------------------------- --- -----------------------
September 30, 2002 December 31, 2001
--------------------------- -----------------------
LIABILITIES AND CAPITALIZATION
Current Liabilities
Current redemption of long-term debt $ 1,431 $ 993
Accounts payable and accrued expenses 851,433 1,091,430
Commercial paper 529,228 1,048,450
Dividends payable 64,297 63,442
Taxes accrued 42,650 50,281
Customer deposits 36,500 36,151
Interest accrued 114,535 93,962
--------------------------- -----------------------
1,640,074 2,384,709
--------------------------- -----------------------
Deferred Credits and Other Liabilities
Regulatory liabilities 68,311 39,442
Deferred income tax 843,956 598,072
Postretirement benefits and other reserves 715,817 694,680
Other 163,268 207,992
--------------------------- -----------------------
1,791,352 1,540,186
--------------------------- -----------------------
Capitalization
Common stock, $.01 par value, authorized
450,000,000 shares; outstanding 141,865,724 2,995,666 2,995,797
and 137,251,386 shares stated at
Retained earnings 439,181 452,206
Other comprehensive income (42,507) 4,483
Treasury stock purchased (494,576) (561,884)
--------------------------- -----------------------
Total common shareholders equity 2,897,764 2,890,602
Preferred stock 83,849 84,077
Long-term debt 5,260,109 4,697,649
--------------------------- -----------------------
Total Capitalization 8,241,722 7,672,328
--------------------------- -----------------------
Minority Interest in Subsidiary Companies 208,325 192,383
--------------------------- -----------------------
Total Liabilities and Capitalization $ 11,881,473 $ 11,789,606
=========================== =======================
See accompanying Notes to the Consolidated Financial Statements
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(In Thousands, Except Per Share Amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, 2002 September 30, 2001 September 30, 2002 September 30, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues
Gas Distribution $ 337,785 $ 346,703 $ 2,082,577 $ 2,721,032
Electric Services 414,868 387,881 1,084,309 1,089,156
Energy Services 217,104 263,047 687,975 814,911
Gas Exploration 86,464 82,362 249,452 318,093
Energy Investments 23,599 22,436 62,784 73,627
------------------- ------------------ --------------------- ----------------------
Total Revenues 1,079,820 1,102,429 4,167,097 5,016,819
------------------- ------------------ --------------------- ----------------------
Operating Expenses
Purchased gas for resale 138,607 148,893 1,037,907 1,694,591
Fuel and purchased power 139,538 164,555 317,253 454,212
Operations and maintenance 485,157 507,113 1,531,394 1,544,799
Depreciation, depletion and amortization 127,301 135,937 380,758 388,679
Operating taxes 96,298 94,909 304,076 337,734
------------------- ------------------ --------------------- ----------------------
Total Operating Expenses 986,901 1,051,407 3,571,388 4,420,015
------------------- ------------------ --------------------- ----------------------
Operating Income 92,919 51,022 595,709 596,804
------------------- ------------------ --------------------- ----------------------
Other Income and (Deductions)
Minority interest (5,353) (7,694) (15,920) (34,970)
Other (1,293) 6,464 24,821 35,286
------------------- ------------------ --------------------- ----------------------
Total Other Income (6,646) (1,230) 8,901 316
------------------- ------------------ --------------------- ----------------------
Earnings Before Interest Charges
and Income Taxes 86,273 49,792 604,610 597,120
------------------- ------------------ --------------------- ----------------------
Interest Charges 79,937 78,735 222,594 263,967
------------------- ------------------ --------------------- ----------------------
Income Taxes
Current (31,903) (31,088) (110,403) 53,088
Deferred 33,275 39,572 243,652 103,796
------------------- ------------------ --------------------- ----------------------
Total Income Taxes 1,372 8,484 133,249 156,884
------------------- ------------------ --------------------- ----------------------
Earnings (Loss) from Continuing Operations 4,964 (37,427) 248,767 176,269
------------------- ------------------ --------------------- ----------------------
Discontinued Operations
Income from operations, net of tax - 2,253 (3,356) 6,806
Loss on Disposal, net of tax of $13,050 - - (16,306) -
------------------- ------------------ --------------------- ----------------------
Earnings (Loss) from Discontinued Operations - 2,253 (19,662) 6,806
------------------- ------------------ --------------------- ----------------------
Net Income 4,964 (35,174) 229,105 183,075
Preferred stock dividend requirements 1,335 1,473 4,287 4,425
------------------- ------------------ --------------------- ----------------------
Earnings (Loss) Available for Common Stockholders $ 3,629 $ (36,647) $ 224,818 $ 178,650
=================== ================== ===================== ======================
Basic Earnings (Loss) Per Share:
Continuing Operations, less Preferred
Stock Requirements 0.03 (0.28) 1.74 1.25
Discontinued Operations 0.00 0.02 (0.14) 0.05
------------------- ------------------ --------------------- ----------------------
Basic Earnings (Loss) Per Share $ 0.03 $ (0.26) $ 1.60 $ 1.30
=================== ================== ===================== ======================
Diluted Earnings (Loss) Per Share:
Continuing Operations, less Preferred
Stock Requirements 0.02 (0.28) 1.72 1.23
Discontinued Operations 0.00 0.02 (0.14) 0.05
------------------- ------------------ --------------------- ----------------------
Diluted Earnings (Loss) Per Share $ 0.02 $ (0.26) $ 1.58 $ 1.28
=================== ================== ===================== ======================
Average Shares Outstanding (000)
Basic 141,686 138,693 140,929 137,856
Diluted 142,359 139,508 141,760 138,921
See accompanying Notes to the Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Nine Months Nine Months
Ended Ended
September 30, 2002 September 30, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Activities
Earnings from continuing operations $ 248,767 $ 176,269
Adjustments to reconcile earnings from continuing
operations to net cash provided by (used in) operating
activities
Depreciation, depletion and amortization 380,758 388,679
Deferred income tax 60,495* 103,796
Income from equity investments (9,713) (9,249)
Dividends from equity investments 1,777 2,901
Gain from class action settlement - (33,510)
Provision for loss on contracting business - 63,682
Changes in assets and liabilities
Accounts receivable 239,569 630,820
Materials and supplies, fuel oil and gas in storage 5,939 (110,107)
Accounts payable and accrued expenses (147,188) (634,596)
Interest accrued 20,573 85,580
Other (16,139)* 13,202
-------------------------- -------------------------------
Net Cash Provided by Operating Activities 784,838 677,467
-------------------------- -------------------------------
Investing Activities
Capital expenditures (835,980) (668,494)
Proceeds from sale of assets 173,935 18,458
Other - (356)
-------------------------- -------------------------------
Net Cash Used in Investing Activities (662,045) (650,392)
-------------------------- -------------------------------
Financing Activities
Issuance of treasury stock 67,308 82,025
Issuance of long-term debt 515,774 721,474
Payment of long-term debt (99,845) (168,937)
Payment of commercial paper (519,222) (410,307)
Preferred stock dividends paid (4,287) (4,425)
Common stock dividends paid (187,857) (184,052)
Other 9 1,496
-------------------------- -------------------------------
Net Cash (Used in) Provided By Financing Activities (228,120) 37,274
-------------------------- -------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (105,327) 64,349
Cash and Cash Equivalents at Beginning of Period 159,252 83,329
-------------------------- -------------------------------
Cash and Cash Equivalents at End of Period $ 53,925 $ 147,678
========================== ===============================
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"). KeySpan
operates six regulated utilities that distribute natural gas to approximately
2.5 million customers in New York City, Long Island, Massachusetts and New
Hampshire, making KeySpan 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
September 30, 2002, and the results of operations for the three and nine months
ended September 30, 2002 and September 30, 2001, as well as cash flows for the
nine months ended September 30, 2002 and September 30, 2001. The accompanying
financial statements should be read in conjunction with the consolidated
financial statements and notes included in KeySpan's Annual Report on Form 10-K
for the year ended December 31, 2001, as amended, as well as KeySpan's Quarterly
Reports on Form 10-Q for the quarters ended June 30, 2002 and March 31, 2002.
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 common stock options outstanding at September
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 90,770 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 and
nine months ended September 30, 2002 and September 30, 2001, since to do so
would have been anti-dilutive.
Under the requirements of Statement of Financial Accounting Standards ("SFAS")
128, "Earnings Per Share", our basic and diluted EPS are as follows:
(In Thousands, Except Per Share)
- --------------------------------------------------------------- ---------------- ----------------- ---------------- ----------------
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
- --------------------------------------------------------------- ---------------- ----------------- ---------------- ----------------
Earnings (Loss) from Continuing Operations $ 4 ,964 $ (37,427) $ 248,767 $ 176,269
Preferred stock dividends (1,335) (1,473) (4,287) (4,425)
Houston Exploration dilution (options) (96) (200) (321) (1,040)
- --------------------------------------------------------------- ---------------- ----------------- ---------------- ----------------
Earnings (Loss) from Continuing Operations
available to common stockholders - adjusted 3,533 (39,100) 244,159 170,804
- --------------------------------------------------------------- ---------------- ----------------- ---------------- ----------------
Weighted average shares outstanding (000) 141,686 138,693 140,929 137,856
Add dilutive securities:
Options 673 815 831 1,065
- --------------------------------------------------------------- ---------------- ----------------- ---------------- ----------------
Total weighted average shares outstanding - assuming dilution 142,359 139,508 141,760 138,921
- --------------------------------------------------------------- ---------------- ----------------- ---------------- ----------------
Basic Earnings (Loss) Per Share from Continuing Operations $ 0.03 $ (0.28) $ 1.74 $ 1.25
- --------------------------------------------------------------- ---------------- ----------------- ---------------- ----------------
Diluted Earnings (Loss) Per Share from Continuing Operations $ 0.02 $ (0.28) $ 1.72 $ 1.23
- --------------------------------------------------------------- ---------------- ----------------- ---------------- ----------------
2. BUSINESS SEGMENTS
We have four reportable segments: Gas Distribution, Electric Services, Energy
Services and Energy Investments.
The Gas Distribution segment consists of 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.
All of the energy, capacity and ancillary services related to the Ravenswood
facility is sold to the New York Independent System Operator ("NYISO") energy
markets. Further, two 79 megawatt generating facilities located on Long Island
were placed in service in June and July 2002. 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, plumbing, 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.
KeySpan subsidiaries 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. The segments are strategic
business units that are managed separately because of their different operating
and regulatory environments. Operating results of the segments are evaluated by
management on an earnings before interest and taxes ("EBIT") basis. At September
30, 2002, the total assets of each reportable segment have not changed
materially from December 31, 2001. To reflect a complete picture of the 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, an inland 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
September 30, 2002
Unaffiliated Revenue 337,785 414,868 217,104 86,464 23,599 - 1,079,820
Intersegment Revenue - 25 - - 194 (219) -
Earnings Before Interest
and Taxes (38,878) 113,278 (4,455) 21,275 10,935 (15,882) 86,273
Three Months Ended
September 30, 2001
Unaffiliated Revenue 346,703 387,881 263,047 82,362 22,436 - 1,102,429
Intersegment Revenue - 25 - - - (25) -
Earnings Before Interest
and Taxes (31,009) 96,519 (69,594) 26,787 2,418 24,671 49,792
- ------------------------------------------------------------------------------------------------------------------------------------
Eliminating items include intercompany interest income and expense, the
elimination of certain intercompany accounts, as well as activities of our
corporate and administrative areas. Included in the three months ended September
30, 2001 is the favorable court decision regarding the class action settlement
recorded by our corporate holding company that increased EBIT by $22.0 million.
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 $414.9 million and $387.9 million for the three
months ended September 30, 2002 and 2001 represent approximately 38% and 35% 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
- ------------------------------------------------------------------------------------------------------------------------------------
Nine months Ended
September 30, 2002
Unaffiliated Revenue 2,082,577 1,084,309 687,975 249,452 62,784 - 4,167,097
Intersegment Revenue - 75 - - 582 (657) -
Earnings Before Interest
and Taxes 320,016 243,651 (23,901) 60,542 17,089 (12,787) 604,610
Nine months Ended
September 30, 2001
Unaffiliated Revenue 2,721,032 1,089,156 814,911 318,093 73,627 - 5,016,819
Intersegment Revenue - 75 - - - (75) -
Earnings Before Interest
and Taxes 318,596 229,825 (133,013) 136,260 18,819 26,633 597,120
- ------------------------------------------------------------------------------------------------------------------------------------
Eliminating items include intercompany interest income and expense, the
elimination of certain intercompany accounts, as well as activities of our
corporate and administrative areas. Included in the nine months ended September
30, 2001, is the favorable court decision regarding the class action settlement
recorded by our corporate holding company that increased EBIT by $22.0 million.
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 $ 1.1 billion for the nine months ended
September 30, 2002 and 2001 represent approximately 26% and 22% of our
consolidated revenues, respectively.
3. COMPREHENSIVE INCOME
The table below indicates the components of comprehensive income.
(In Thousands)
- --------------------------------------------------------- ------------------ ----------------- ------------------ -----------------
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
- --------------------------------------------------------- ------------------ ----------------- ------------------ -----------------
Earnings (loss) available for common stockholders $ 3,629 $ (36,647) $ 224,818 $ 178,650
- --------------------------------------------------------- ------------------ ----------------- ------------------ -----------------
Other comprehensive income (loss), net of tax
Reclassification adjustment for gains
realized in net income (7,529) (13,584) (17,814) (11,683)
Foreign currency translation adjustments (2,313) (179) 6,804 (8,307)
Unrealized losses on marketable securities (4,027) (2,672) (8,263) (5,032)
Accrued unfunded pension obligation - - (1,132) -
Unrealized (losses) gains on derivative financial
instruments (641) 39,004 (26,585) 54,936
- --------------------------------------------------------- ------------------ ----------------- ------------------ -----------------
Other comprehensive income (loss) (14,510) 22,569 (46,990) 29,914
- --------------------------------------------------------- ------------------ ----------------- ------------------ -----------------
Comprehensive income (loss) $ (10,881) $ (14,078) $ 177,828 $ 208,564
- --------------------------------------------------------- ------------------ ----------------- ------------------ -----------------
Related tax expense (benefit)
Reclassification adjustment for gains
realized in net income (4,054) (7,315) (9,592) (6,291)
Foreign currency translation adjustments (1,245) (97) 3,663 (4,473)
Unrealized losses on marketable securities (2,168) (1,439) (4,449) (2,709)
Accrued unfunded pension obligation - - (610) -
Unrealized (losses) gains on derivative financial
instruments (346) 21,003 (14,316) 29,581
- --------------------------------------------------------- ------------------ ----------------- ------------------ -----------------
Total tax expense (benefit) $ (7,813) $ 12,152 $ (25,304) $ 16,108
- --------------------------------------------------------- ------------------ ----------------- ------------------ -----------------
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 the Ravenswood facility was purchased 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 $146.9 million, which amount has been accrued as a
reasonable estimate of probable cost for known sites. Expenditures incurred to
date with respect to these MGP-related sites total $44.4 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. A
regulatory asset of $122.4 million for the New York/Long Island MGP sites is
reflected at September 30, 2002.
We are also responsible for environmental obligations associated with the
Ravenswood electric generating facility. The extent of our obligations does not
include liabilities arising from the disposal of waste at off-site locations
prior to the acquisition of the Ravenswood facility, or from Consolidated
Edison's pre-closing conduct. Based on information currently available, a
liability of $3.9 million has been accrued. Expenditures incurred to date with
respect to these environmental obligations total $1.1 million.
New England Sites. Within the Commonwealth of Massachusetts and the State of New
Hampshire, we are aware of 75 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 65 MGP
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 $50.1 million, which amount has been
accrued as a reasonable estimate of probable cost for known sites. Expenditures
incurred since November 8, 2000 with respect to these MGP-related activities
total $13.3 million.
The Massachusetts Department of Telecommunications and Energy ("DTE") and the
New Hampshire Public Utilities Commission ("NHPUC") have issued rate orders that
provide for the recovery of site investigation and remediation costs in rates
charged to gas distribution customers. Accordingly, a regulatory asset of $59.6
million for the KEDNE MGP sites is reflected at September 30, 2002. 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 $41.2 million, which
amount has been accrued as a reasonable estimate of probable costs for known
sites. Expenditures incurred since November 8, 2000, with respect to these sites
total $2.0 million. 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 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 KeySpan's 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, KeySpan had an effective $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 the shelf
registration for the issuance of an additional $1.2 billion of securities,
thereby giving KeySpan 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 the 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 KeySpan's
financing authority under both the shelf registration and the 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
a financing amendment with the SEC under PUHCA to increase the financing
authority by $700 million, thereby matching the shelf availability. We
anticipate a decision by the SEC on this application by year-end.
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 ($42.36 per share) which is higher than the current per share
market value. Interest payments do, 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 basic and
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, as well as charges or credits to income.
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 Derivative Instruments: From time to time KeySpan has 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 peak electric energy sales. 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 October 31, 2002, Houston
Exploration has hedged approximately 65% of its estimated 2002 and 2003
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 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 $14.6 million.
KeySpan has also employed standard NYMEX gas futures contracts, as well as oil
swap derivative contracts, to hedge the cash flow variability of a portion of
forecasted purchases of natural gas and fuel oil that will be consumed at the
Ravenswood facility. Natural gas basis swaps are also utilized to hedge
forecasted purchases of natural gas transportation. The maximum length of time
over which we have hedged cash flow variability associated with: (i) forecasted
purchases of natural gas is October 2003; (ii) forecasted purchases of fuel oil
is through April 2004; and (iii) forecasted purchases of natural gas
transportation is through December 2003. 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
associated with all 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 $4.1 million.
Our retail gas and electric marketing subsidiary, our domestic gas distribution
operations and KeSpan Canada employed NYMEX natural gas futures contracts and
natural gas swaps to lock-in a price for expected future natural gas purchases.
As applicable, we used standard NYMEX futures prices and relevant natural gas
indices to value the outstanding contracts. The maximum length of time over
which we have hedged such cash flow variability is through October 2003. The
estimated amount of gains 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 $2.5 million.
We have also engaged in the use of cash-settled swap instruments to hedge the
cash flow variability associated with a portion of 2002 peak electric energy
sales from the Ravenswood facility. All hedge positions for the summer of 2002
have been settled. We currently have a number of remaining derivatives that are
employed to hedge cash flow variability through December 2002. We used
NYISO-location zone published indices to value these outstanding derivatives.
The estimated amount of gains 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 $2.4 million.
KeySpan Canada also has employed electricity swap contracts to lock-in the
purchase price of electricity needed to operate its gas processing plants. These
contracts are not exchange- traded and local published indices were used 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 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 following tables set forth selected financial data associated with these
derivative financial instruments noted above that were outstanding at September
30, 2002.
- -------------------------------- ------------ ------------- ------------ ------------- --------------- -------------- --------------
Year of Volumes Fixed Current Fair Value
Type of Contract Maturity mmcf Floor $ Ceiling $ Price $ Price $ ($000)
- -------------------------------- ------------ ------------- ------------ ------------- --------------- -------------- --------------
Gas
Collars 2002 14,720 3.56 5.14 - 3.69 - 4.32 (1,141)
2003 32,350 3.34 4.97 - 3.90 - 4.40 (2,498)
Swaps / Futures-Short
Natural Gas 2002 3,191 - - 3.01 3.69 - 4.32 (2,662)
2003 15,208 - - 3.19 3.90 - 4.40 (12,394)
Swaps / Futures - Long
Natural Gas 2002 2,990 - - 2.68 - 4.24 3.90 - 4.32 1,227
2003 8,210 - - 3.10 - 4.35 3.90 - 4.40 2,359
- -------------------------------- ------------ ------------- ------------ ------------- --------------- -------------- --------------
76,669 (15,109)
- -------------------------------- ------------ ------------- ------------ ------------- --------------- -------------- --------------
- ------------------------------- ----------------- ----------------- ----------------------- --------------------- ------------------
Type of Contract Year of Volumes Fair Value
Maturity Barrels Fixed Price $ Current Price $ ($000)
- ------------------------------- ----------------- ----------------- ----------------------- --------------------- ------------------
Oil
Swaps - Long Fuel Oil 2002 146,994 19.75 - 26.40 28.65 - 29.00 1,024
2003 307,822 20.10 - 26.72 23.01 - 28.96 1,613
2004 5,404 20.50 - 23.70 22.84 - 23.33 7
- ------------------------------- ----------------- ----------------- ----------------------- --------------------- ------------------
460,220 2,644
- ------------------------------- ----------------- ----------------- ----------------------- --------------------- ------------------
- -------------------------- ------------- ----------------- ----------------------- -------------- --------------- ------------------
Type of Contract Year of Current Estimated Fair Value
Maturity MWh Fixed Profit /Price $ Price $ Profit $ ($000)
- -------------------------- ------------- ----------------- ----------------------- -------------- --------------- ------------------
Electricity
Tolling Arrangements 2002 102,400 26.00 - 1.61 - 3.85 2,383
Swaps - Long 2002 17,664 56.07 - 57.33 30.87 - (429)
2003 70,080 56.07 - 57.33 29.61 - (1,791)
- -------------------------- ------------- ----------------- ----------------------- -------------- --------------- ------------------
190,144 163
- -------------------------- ------------- ----------------- ----------------------- -------------- --------------- ------------------
NYMEX futures are also used to economically hedge the cash flow variability
associated with the purchase of fuel for a portion of our fleet vehicles.
Further, KeySpan Canada has a portfolio of financially-settled natural gas
collars and natural gas liquid swap transactions. Such contracts are executed by
KeySpan Canada to: (i) synthetically fix the price that is paid or received by
KeySpan Canada for certain physical transactions involving natural gas and
natural gas liquids and (ii) transfer the price exposure of such instruments to
other trading partners. These derivative financial instruments do not qualify
for hedge accounting under SFAS 133. At September 30, 2002, these instruments
had a favorable net mark-to-market value of $0.4 million, which was recorded on
the Consolidated Balance Sheet and recorded to earnings for the quarter and nine
months ended September 30, 2002.
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 use natural gas swap contracts, with offsetting positions in fuel
oil swap contracts of equivalent energy value, to hedge the cash-flow
variability of specified portions of gas purchases and sales. Currently, no
derivative transactions outstanding correspond to this particular price risk
strategy, although we intend to enter into derivative instruments of this nature
during the fourth quarter of 2002 if market conditions warrant.
Firm Gas Sales Derivative Instruments - Regulated Utilities: We also use
derivative financial instruments to reduce the cash flow variability associated
with the purchase price for a portion of 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 reduce the variability of the
purchase price of natural gas to be sold 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 table sets forth selected financial data associated with these
derivative financial instruments that were outstanding at September 30, 2002.
- ------------------------------- ----------------- ----------------- ----------------------- --------------------- ------------------
Type of Contract Year of Volumes Fair Value
Maturity Mmcf Fixed Price $ Current Price $ ($000)
- ------------------------------- ----------------- ----------------- ----------------------- --------------------- ------------------
Gas
Options 2002 7,980 3.85 - 4.50 4.23 1,549
2003 12,960 3.85 - 4.50 4.27 2,946
Swaps - Long 2002 300 4.11 4.24 42
2003 600 4.11 4.21 59
- ------------------------------- ----------------- ----------------- ----------------------- --------------------- ------------------
21,840 4,596
- ------------------------------- ----------------- ----------------- ----------------------- --------------------- ------------------
Other Commodity Derivative Instruments: On April 1, 2002 we implemented
Derivative Implementation Group (DIG) Issue C15 and C16 of Statement of
Financial Accounting Standard 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 the exemption (as normal purchases and normal sales)
of 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. At September 30,
2002, the fair value of these contracts was $2.0 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 have been recorded as a Regulatory Asset or
Regulatory Liability on the Consolidated Balance Sheet.
Interest Rate Derivative Instruments: At September 30, 2002, we had interest
rate swap agreements in which approximately $1.3 billion of fixed rate debt had
been synthetically modified to floating rate debt. Under the terms of the
agreements, we received the fixed coupon rate associated with these bonds and
paid the counter-parties a variable interest rate that was reset on a quarterly
basis. These swaps were designated as fair-value hedges and qualified for
"short-cut" hedge accounting treatment under SFAS 133. Through the utilization
of these agreements, we reduced recorded interest expense by $30.5 million for
the nine months ended September 30, 2002.
In early November 2002, we terminated two interest rate swap agreements with an
aggregate notional amount of $1.0 billion and received $81.0 million from our
swap counter-parties, of which $23.0 million represents accrued swap interest.
The difference between the termination settlement amount and the amount of
accrued swap interest, $58.0 million, will be amortized to earnings (as an
adjustment to interest expense) on a level yield basis over the remaining lives
of the originally hedged debt obligations. The remaining swap, which has a
notional amount of $270.0 million, will continue to be accounted for as a fair
value hedge.
The table below summarizes selected financial data associated with these
derivative financial instruments that were outstanding at September 30, 2002.
The fair values of these derivative instruments were provided to us by our swap
counter-parties and represent the present value of expected future cash-flows
associated with such transactions.
- -------------------------------------- ------------------- --------------------- ---------------- -------------------- -------------
Average Variable
Maturity Date of Notional Amount Fixed Rate Rate Paid Fair Value
Bond Swaps ($000) Received Year to Date ($000)
- -------------------------------------- ------------------- --------------------- ---------------- -------------------- -------------
Medium Term Notes 2010 500,000 7.625% 4.250% 55,077
Medium Term Notes 2006 500,000 6.150% 3.590% 37,145
Long Term Notes 2023 270,000 8.200% 3.770% 6,843
- -------------------------------------- ------------------- --------------------- ---------------- -------------------- -------------
1,270,000 99,065
- -------------------------------------- ------------------- --------------------- ---------------- -------------------- -------------
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.
Weather Derivatives: The utility tariffs associated with the New England gas
distribution operations do not contain a weather normalization adjustment. As a
result, fluctuations from normal weather may have a significant positive or
negative effect on the results of these operations. To mitigate the effect of
fluctuations from normal weather on our financial position and cash flows, we
entered into weather collars during the quarter ended September 30, 2002. These
derivatives will hedge approximately 60% of expected gas throughput of the New
England gas distribution companies during the November 2002 - March 2003 winter
season. The collars have been established with a ceiling that reflects 1% colder
than normal weather and a floor that reflects 7% warmer than normal weather.
KeySpan will be required to make payment to its counter-parties when actual
weather experienced during the November 2002 - March 2003 time frame is 1% or
more colder than normal, based on the 1975 - 1995 20 year average. In the event
that actual weather is 7% or more warmer than normal the counter-parties will be
required to make payment to KeySpan. These derivatives will be accounted for by
applying the "intrinsic value method" and are outside the scope of SFAS 133.
Derivative contracts are primarily used to manage exposure to market risk
arising from changes in commodity prices and interest rates. In the event of
nonperformance by a counter-party to a 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 KeySpan's derivative contracts are with
investment grade companies.
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 September 30, 2002, we had paid $11.9
million for these programs and had a remaining liability of $6.7 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 was 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. During the
second quarter of 2002, we completed our analysis for all of the reporting units
and determined that no consolidated impairment exists. Consistent with the
requirements of SFAS 142, we will annually test our goodwill for impairment in
the fourth quarter, absent the occurrence of any event that would cause us to
perform a test in the interim.
For the three and nine months ended September 30, 2001 respectively, goodwill
amortization was recorded in each segment as follows: Gas Distribution $8.9 and
$26.6 million; Energy Services $1.8 and $5.8 million; and Energy Investments and
other $1.4 and $4.5 million. As required by SFAS 142, below is a reconciliation
of reported earnings available for common stockholders for the three and nine
months ended September 30, 2001 and pro-forma net income, for the same period,
adjusted for the discontinuance of goodwill amortization.
(In Thousands)
- ------------------------------------------------------- ----------------- ------------------ ----------------- ------------------
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
- ------------------------------------------------------- ----------------- ------------------ ----------------- ------------------
Earnings (loss) available for common stockholders $ 3,629 $ (36,647) $ 224,818 $ 178,650
Add back: goodwill amortization - 12,015 - 36,879
- ------------------------------------------------------- ----------------- ------------------ ----------------- ------------------
Adjusted net income 3,629 (24,632) 224,818 215,529
- ------------------------------------------------------- ----------------- ------------------ ----------------- ------------------
Basic earnings (loss) per share 0.03 (0.26) 1.60 1.30
Add back: goodwill amortization - 0.09 - 0.27
- ------------------------------------------------------- ----------------- ------------------ ----------------- ------------------
Adjusted basic earnings per share $ 0.03 $ (0.17) $ 1.60 $ 1.57
- ------------------------------------------------------- ----------------- ------------------ ----------------- ------------------
Diluted earnings (loss) per share 0.02 (0.26) 1.58 1.28
Add back: goodwill amortization - 0.09 - 0.27
- ------------------------------------------------------- ----------------- ------------------ ----------------- ------------------
Adjusted diluted earnings per share $ 0.02 $ (0.17) $ 1.58 $ 1.55
- ------------------------------------------------------- ----------------- ------------------ ----------------- ------------------
In July of 2001, the FASB issued SFAS 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 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 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
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 September 30, 2002, implementation of this Statement did not
have a significant effect on our results of operations and financial position.
In June of 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities". This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue No.94-3, "Liability recognition for Certain
Employee Termination benefits and Other Costs to Exit an Activity". This
Statement is effective for exit or disposal activities initiated after December
31, 2002 with early application encouraged.
9. DISCONTINUED OPERATIONS
On November 8, 2000, KeySpan acquired Midland Enterprises LLC ("Midland"), an
inland marine transportation subsidiary, as part of the Eastern acquisition. In
its order issued under PUHCA approving the acquisition, the SEC required KeySpan
to sell this subsidiary by November 8, 2003 because its operations were not
functionally related to KeySpan's core utility operations. On July 2, 2002, the
sale of Midland to Ingram Industries Inc. was completed and net proceeds of
$173.9 million were received from the sale.
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 the tax structuring strategy related to the sale of Midland, in the second
quarter of 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
nine months ended September 30, 2002 and September 30, 2001:
(In Thousands)
- --------------------------------------------- --- ----------------- --- ---------------- --- ----------------- --- ---------------
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
- --------------------------------------------- --- ----------------- --- ---------------- --- ----------------- --- ---------------
Revenues $ - $ 67,342 $ 116,149 $ 202,705
Pretax income (loss) - 3,868 (4,624) 11,727
Income tax (expense) benefit - (1,615) 1,268 (4,921)
- --------------------------------------------- --- ----------------- --- ---------------- --- ----------------- --- ---------------
Income (loss) from discontinued operations - 2,253 (3,356) 6,806
- --------------------------------------------- --- ----------------- --- ---------------- --- ----------------- --- ---------------
Loss on disposal - - (16,306) -
- --------------------------------------------- --- ----------------- --- ---------------- --- ----------------- --- ---------------
Loss from discontinued operations $ - $ 2,253 $ (19,662) $ 6,806
- --------------------------------------------- --- ----------------- --- ---------------- --- ----------------- --- ---------------
Assets and liabilities of the discontinued operations are as follows:
(In Thousands)
-------------------------------------------- -- ------------------------ --- -----------------------
September 30, 2002 December 31, 2001
----------------------------------------------------------------------------------------------------
Current assets $ - $ 139,522
Property, plant and equipment, net - 316,626
Long-term assets - 35,233
Current liabilities - (58,835)
Long-term liabilities - (241,491)
-------------------------------------------- -- ------------------------ --- -----------------------
Net assets held for disposal $ - $ 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. On November 1, 2002,
we filed a motion to dismiss the class action lawsuits. 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. At
the present time, KeySpan is unable to determine the outcome of these
proceedings, but does not believe that such outcome, if adverse, will have a
material effect on its financial condition or results of operation.
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.
KeySpan subsidiaries, along with several other parties, have been named as
defendants in numerous proceedings filed by plaintiffs claiming various degrees
of injury from asbestos exposure. Most of these proceedings have been commenced
in the New York State Supreme Court for New York County by contractor employees
allegedly as a result of exposure to asbestos in connection with the
construction and maintenance of our electric generating facilities. At the
present time, KeySpan is unable to determine the outcome of these proceedings,
but does not believe that such outcome, if adverse, will have a material effect
on its financial condition or results of operation.
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)
- ---------------------------------------------------------------------------------- -------------------------------------------------
Three Months Ended September 30, 2002 Three Months Ended September 30, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Guarantor KEDLI Eliminations Consolidated Guarantor KEDLI Eliminations Consolidated
Revenues $ 1,000,103 $ 79,717 $ - $ 1,079,820 $ 1,019,848 $ 82,581 $ - $ 1,102,429
Operating Expenses
Purchased Gas 102,658 35,949 - 138,607 117,511 31,382 - 148,893
Fuel and purchased power 139,538 - - 139,538 164,555 - - 164,555
Operations and maintenance 472,710 12,447 - 485,157 498,528 8,585 - 507,113
Intercompany expense (19,007) 19,007 - - (18,998) 18,998 - -
Depreciation and
amortization 115,351 11,950 - 127,301 125,504 10,433 - 135,937
Operating Taxes 78,764 17,534 - 96,298 76,556 18,353 - 94,909
------------ ------------ ------------- ------------- ------------- ----------- ------------- ------------
Total Operating Expenses 890,014 96,887 - 986,901 963,656 87,751 - 1,051,407
------------ ------------ ------------- ------------- ------------- ----------- ------------- ------------
Operating Income 110,089 (17,170) - 92,919 56,192 (5,170) - 51,022
Other Income and
(Deductions) (3,373) 1,769 (5,042) (6,646) 10 3,400 (4,640) (1,230)
------------ ------------ ------------- ------------- ------------- ----------- ------------- ------------
Income Before Interest
Charges and Income Taxes 106,716 (15,401) (5,042) 86,273 56,202 (1,770) (4,640) 49,792
Interest Expense 69,906 15,073 (5,042) 79,937 68,704 14,671 (4,640) 78,735
Income Taxes 12,945 (11,573) - 1,372 14,938 (6,454) - 8,484
------------ ------------ ------------- ------------- ------------- ----------- ------------- ------------
Earnings (Loss) From
Continuing Operations $ 23,865 $ (18,901) $ - $ 4,964 $ (27,440) $ (9,987) $ - $ (37,427)
============ ============ ============= ============= ============= =========== ============= ============
Statement of Income
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Nine months Ended September 30, 2002 Nine months Ended September 30, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Guarantor KEDLI Eliminations Consolidated Guarantor KEDLI Eliminations Consolidated
Revenues $ 3,630,496 $ 536,601 $ - $ 4,167,097 $ 4,365,604 $ 651,215 $ - $5,016,819
Operating Expenses
Purchased Gas 796,518 241,389 - 1,037,907 1,330,410 364,181 - 1,694,591
Fuel and purchased power 317,253 - - 317,253 454,212 - - 454,212
Operations and maintenance 1,493,880 37,514 - 1,531,394 1,504,442 40,357 - 1,544,799
Intercompany expense (57,250) 57,250 - - (64,198) 64,198 - -
Depreciation and
amortization 333,228 47,530 - 380,758 364,177 24,502 - 388,679
Operating Taxes 241,848 62,228 - 304,076 269,775 67,959 - 337,734
------------ ----------- ------------ -------------- ------------- ------------- ------------- -----------
Total Operating Expenses 3,125,477 445,911 - 3,571,388 3,858,818 561,197 - 4,420,015
------------ ----------- ------------ -------------- ------------- ------------- ------------- -----------
Operating Income 505,019 90,690 - 595,709 506,786 90,018 - 596,804
Other Income and
(Deductions) 18,122 6,860 (16,081) 8,901 5,711 9,979 (15,374) 316
------------ ----------- ------------ -------------- ------------- ------------- ------------- -----------
Income Before Interest
Charges and Income Taxes 523,141 97,550 (16,081) 604,610 512,497 99,997 (15,374) 597,120
Interest Expense 192,500 46,175 (16,081) 222,594 234,233 45,108 (15,374) 263,967
Income Taxes 110,466 22,783 - 133,249 139,094 17,790 - 156,884
------------ ----------- ------------ -------------- ------------- ------------- ------------- -----------
Earnings (Loss) from
Continuing Operations $ 220,175 $ 28,592 $ - $ 248,767 $ 139,170 $ 37,099 $ - $ 176,269
============ =========== ============ ============== ============= ============= ============= ===========
Balance Sheet (In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
September 30, 2002 December 31, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS Guarantor KEDLI Eliminations Consolidated Guarantor KEDLI Eliminations Consolidated
Current Assets
Cash and temporary cash
investments $ 53,925 $ - $ - $ 53,925 $ 159,252 $ - $ - $ 159,252
Accounts Receivable, net 1,198,151 131,409 (296,530) 1,033,030 1,540,082 233,013 (500,496) 1,272,599
Other current assets 495,270 126,533 - 621,803 454,319 112,317 - 566,636
--------------------------------------------------- --------------------------------------------------
1,747,346 257,942 (296,530) 1,708,758 2,153,653 345,330 (500,496) 1,998,487
--------------------------------------------------- --------------------------------------------------
Assets Held for Disposal - - - - 191,055 - - 191,055
Equity Investments 770,486 - (532,862) 237,624 756,111 - (532,862) 223,249
--------------------------------------------------- --------------------------------------------------
Property
Gas 4,250,404 1,727,265 - 5,977,669 4,074,894 1,629,963 - 5,704,857
Other 4,674,349 - - 4,674,349 4,231,262 - - 4,231,262
Accumulated depreciation
and depletion (3,285,338) (314,145) - (3,599,483) (3,035,788) (294,400) - (3,330,188)
--------------------------------------------------- --------------------------------------------------
5,639,415 1,413,120 - 7,052,535 5,270,368 1,335,563 - 6,605,931
--------------------------------------------------- --------------------------------------------------
Deferred Charges 2,693,952 188,604 - 2,882,556 2,571,029 199,855 - 2,770,884
--------------------------------------------------- --------------------------------------------------
Total Assets $ 10,851,199 $1,859,666 $ (829,392) $11,881,473 $10,942,216 $1,880,748 $(1,033,358) $11,789,606
=================================================== ==================================================
LIABILITIES
AND CAPITALIZATION
Current Liabilities
Accounts Payable
and accrued expenses $ 805,704 $ 45,729 $ - $ 851,433 975,873 $ 115,557 $ - $ 1,091,430
Commercial Paper 529,228 - - 529,228 1,048,450 - - 1,048,450
Other current
liabilities 182,690 76,723 - 259,413 220,985 23,844 - 244,829
-------------------------------------------------- --------------------------------------------------
1,517,622 122,452 - 1,640,074 2,245,308 139,401 - 2,384,709
-------------------------------------------------- --------------------------------------------------
Intercompany
Accounts Payable - 120,626 (120,626) - - 324,592 (324,592) -
-------------------------------------------------- --------------------------------------------------
Deferred Credits
and Other Liabilities
Deferred Income Tax 664,859 179,097 - 843,956 593,300 4,772 - 598,072
Other deferred credits
and liabilities 850,028 97,368 - 947,396 841,662 100,452 - 942,114
-------------------------------------------------- --------------------------------------------------
1,514,887 276,465 - 1,791,352 1,434,962 105,224 - 1,540,186
-------------------------------------------------- --------------------------------------------------
Capitalization
Common shareholders'
equity 2,791,407 639,219 (532,862) 2,897,764 2,812,837 610,627 (532,862) 2,890,602
Preferred stock 83,849 - - 83,849 84,077 - - 84,077
Long-term debt 4,735,109 700,904 (175,904) 5,260,109 4,172,649 700,904 (175,904) 4,697,649
-------------------------------------------------- --------------------------------------------------
Total Capitalization 7,610,365 1,340,123 (708,766) 8,241,722 7,069,563 1,311,531 (708,766) 7,672,328
-------------------------------------------------- --------------------------------------------------
Minority Interest
in Subsidiary Companies 208,325 - - 208,325 192,383 - - 192,383
-------------------------------------------------- --------------------------------------------------
Total Liabilities
and Capitalization $10,851,199 $1,859,666 $ (829,392) $11,881,473 $10,942,216 $1,880,748 $(1,033,358) $ 11,789,606
================================================== ==================================================
Statement of Cash Flows (In Thousands)
- ------------------------------------------------------------------------------------ -----------------------------------------------
Nine Months Ended September 30, 2002 Nine Months Ended September 30, 2001
- ------------------------------------------------------------------------------------ -----------------------------------------------
Guarantor KEDLI Consolidated Guarantor KEDLI Consolidated
- ----------------------------------------------- ----------------- ------------------ ---------------- ---------------- -------------
Operating Activities
Net Cash Provided by
Operating Activities $ 492,665 $ 292,173 $ 784,838 $ 614,227 $ 63,240 $ 677,467
---------------- ----------------- ------------------ ---------------- ---------------- -------------
Investing Activities
Capital expenditures (734,136) (101,844) (835,980) (590,104) (78,390) (668,494)
Sale of Assets 173,935 - 173,935 18,458 - 18,458
Other - - - (356) - (356)
---------------- ----------------- ------------------ ---------------- ---------------- -------------
Net Cash Used in
Investing Activities (560,201) (101,844) (662,045) (572,002) (78,390) (650,392)
---------------- ----------------- ------------------ ---------------- ---------------- -------------
Financing Activities
Issuance of Treasury Stock 67,308 - 67,308 82,025 - 82,025
Issuance of long-term debt 515,774 - 515,774 596,474 125,000 721,474
Payment of long-term debt (99,845) - (99,845) (168,937) - (168,937)
Payment of commercial paper (519,222) - (519,222) (410,307) - (410,307)
Preferred stock dividends paid (4,287) - (4,287) (4,425) - (4,425)
Common stock dividends paid (187,857) - (187,857) (184,052) - (184,052)
Net intercompany accounts
payable 190,329 (190,329) - 109,850 (109,850) -
Other 9 - 9 1,496 - 1,496
---------------- ----------------- ------------------ ---------------- ---------------- -------------
Net Cash Provided by
(Used in) Financing
Activities $ (37,791) $ (190,329) $ (228,120) $ 22,124 $ 15,150 $ 37,274
---------------- ----------------- ------------------ ---------------- ---------------- -------------
Net Increase in Cash and
Cash Equivalents $ (105,327) $ - $ (105,327) $ 64,349 $ - $ 64,349
================ ================= ================== ================ ================ =============
Cash and Cash Equivalents at
Beginning of Period $ 159,252 $ - $ 159,252 $ 83,329 $ - $ 83,329
---------------- ----------------- ------------------ ---------------- ---------------- -------------
Cash and Cash Equivalents at
End of Period $ 53,925 $ - $ 53,925 $ 147,678 $ - $ 147,678
================ ================= ================== ================ ================ =============
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
nine months ended September 30, 2002, compared to the three and nine months
ended September 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 months ended
September 30, 2002 were $5.0 million compared to a loss of $37.4 million for the
same period last year. Consolidated earnings from continuing operations for the
nine months ended September 30, 2002 were $248.8 million compared to $176.3
million for the corresponding period last year. Earnings available for common
stock, which includes preferred stock dividends, as well as discontinued
operations as discussed below, were $3.6 million, or $0.03 per share for the
three months ended September 30, 2002 compared to a loss of $36.6 million, or
$0.26 per share for the same quarter last year. Earnings available for common
stock for the nine months ended September 30, 2002 were $224.8 million, or $1.60
per share compared to $178.7 million, or $1.30 per share for the same period
last year. Diluted earnings per share were $0.02 and $1.58 for the three and
nine months ended September 30, 2002, respectively. Diluted earnings per share
were $1.28 for the nine months ended September 30, 2001. Basic and diluted
earnings per share were the same for the three months ended September 30, 2001.
Average common shares outstanding for the nine months ended September 30, 2002
increased by 2.2% 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 nine months ended September 30, 2002, by
$0.03 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"), KeySpan's inland marine barge business. In
anticipation of this divestiture, which closed on July 2, 2002, Midland's
operations have been reported as discontinued for 2002 and 2001. (See KeySpan's
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, 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 was recorded. During the second quarter of
2002, an additional after-tax loss of $19.7 million was recorded, primarily
reflecting a provision for certain city and state taxes that resulted from a
change in the tax structuring strategy for this transaction. (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 operations for the quarter and
nine months ended September 30, 2002 compared to the comparable periods last
year were principally imp