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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
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
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(Exact name of Registrant as specified in its Charter)
New York 11-3431358
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
One MetroTech Center, Brooklyn, New York 11201
175 East Old Country Road, Hicksville, New York 11801
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(Address of principal executive offices) (Zip Code)
(718) 403-1000 (Brooklyn)
(631) 755-6650 (Hicksville)
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(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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).[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 July 31, 2003
- --------------------- ----------------------------
$.01 par value 158,492,590
KEYSPAN CORPORATION AND SUBSIDIARIES
INDEX
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Part I. FINANCIAL INFORMATION Page No.
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Item 1. Financial Statements
Consolidated Balance Sheet -
June 30, 2003 and December 31, 2002 3
Consolidated Statement of Income -
Three and Six Months Ended June 30, 2003 and 2002 5
Consolidated Statement of Cash Flows -
Six Months Ended June 30, 2003 and 2002 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 33
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 62
Item 4. Controls and Procedures 67
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 66
Item 4. Submission of Matters to a Vote of Security Holders 66
Item 6. Exhibits and Reports on Form 8-K 69
Signatures 71
2
CONSOLIDATED BALANCE SHEET
(Unaudited)
(In Thousands of Dollars) June 30, 2003 December 31, 2002
- --------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and temporary cash investments $ 195,668 $ 170,617
Accounts receivable 1,307,457 1,122,022
Unbilled revenue 252,292 473,060
Allowance for uncollectible accounts (81,933) (63,029)
Gas in storage, at average cost 281,850 297,060
Material and supplies, at average cost 110,498 113,519
Other 99,124 93,980
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2,164,956 2,207,229
----------------------------------------------
Investments and Other 280,581 265,977
Property
Gas 6,287,988 6,124,281
Electric 2,073,464 1,974,352
Other 396,014 394,374
Accumulated depreciation (2,869,820) (2,740,516)
Gas exploration and production, at cost 2,705,912 2,438,998
Accumulated depletion (1,060,124) (973,889)
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7,533,434 7,217,600
----------------------------------------------
Deferred Charges
Regulatory assets 434,147 438,516
Goodwill, net of amortization 1,790,033 1,789,751
Other 696,992 695,233
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2,921,172 2,923,500
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Total Assets $ 12,900,143 $ 12,614,306
==============================================
See accompanying Notes to the Consolidated Financial Statements.
3
CONSOLIDATED BALANCE SHEET
(Unaudited)
(In Thousands of Dollars) June 30, 2003 December 31, 2002
- -----------------------------------------------------------------------------------------------------------
LIABILITIES AND CAPITALIZATION
Current Liabilities
Current redemption of long-term debt $ 111,416 $ 11,413
Accounts payable and other liabilities 967,751 1,061,649
Commercial paper 431,000 915,697
Dividends payable 71,779 64,714
Taxes accrued 168,381 51,276
Customer deposits 39,047 38,387
Interest accrued 59,227 77,092
---------------------------------------------
1,848,601 2,220,228
---------------------------------------------
Deferred Credits and Other Liabilities
Regulatory liabilities 76,129 84,479
Deferred income tax 903,961 877,013
Postretirement benefits and other reserves 822,088 759,731
Other 201,080 189,912
---------------------------------------------
2,003,258 1,911,135
---------------------------------------------
Commitments and Contingencies (See Note 8) - -
Capitalization
Common stock 3,481,361 3,005,354
Retained earnings 616,740 522,835
Other comprehensive income (91,848) (108,423)
Treasury stock (417,733) (475,174)
---------------------------------------------
Total common shareholders' equity 3,588,520 2,944,592
Preferred stock 83,697 83,849
Long-term debt 4,905,609 5,224,081
---------------------------------------------
Total Capitalization 8,577,826 8,252,522
---------------------------------------------
Minority Interest in Subsidiary Companies 470,458 230,421
---------------------------------------------
Total Liabilities and Capitalization $ 12,900,143 $ 12,614,306
=============================================
See accompanying Notes to the Consolidated Financial Statements.
4
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
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Three Months Ended June 30, Six Months Ended June 30,
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(In Thousands of Dollars, Except Per Share Amounts) 2003 2002 2003 2002
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Revenues
Gas Distribution $ 732,036 $ 521,822 $ 2,564,737 $ 1,744,791
Electric Services 370,591 354,756 704,985 669,440
Energy Services 154,022 229,311 346,393 470,870
Gas Exploration and Production 122,875 90,563 250,722 167,489
Energy Investments 28,628 21,748 53,840 39,187
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Total Revenues 1,408,152 1,218,200 3,920,677 3,091,777
----------------------------------------------------------------------------
Operating Expenses
Purchased gas for resale 424,300 249,942 1,620,465 899,299
Fuel and purchased power 102,476 93,292 199,998 177,664
Operations and maintenance 509,636 552,706 1,007,825 1,050,784
Depreciation, depletion and amortization 142,290 127,463 287,261 253,460
Operating taxes 95,251 84,062 219,964 197,966
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Total Operating Expenses 1,273,953 1,107,465 3,335,513 2,579,173
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Income from Equity Investments 4,030 3,240 9,759 7,409
Operating Income 138,229 113,975 594,923 520,013
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Other Income and (Deductions)
Interest charges (79,198) (70,054) (148,137) (142,661)
Loss on sale of subsidiary stock (30,345) - (11,325) -
Cost of debt redemption (5,900) - (24,094) -
Minority interest (13,000) (6,138) (30,358) (10,569)
Other (246) 7,761 14,455 18,704
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Total Other Income and (Deductions) (128,689) (68,431) (199,459) (134,526)
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Earnings Before Income Taxes 9,540 45,544 395,464 385,487
Income Taxes
Current 4,017 5,298 133,592 (62,453)
Deferred 11,461 11,072 24,719 204,135
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Total Income Taxes 15,478 16,370 158,311 141,682
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Earnings (Loss) from Continuing Operations (5,938) 29,174 237,153 243,805
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Discontinued Operations
Income from Operations, net of tax - - - -
Loss on Disposal , net of tax of $13,050 - (19,662) - (19,662)
----------------------------------------------------------------------------
Loss from Discontinued Operations - (19,662) - (19,662)
----------------------------------------------------------------------------
Cummulative Effect of Change in Accounting Principle - - 174 -
----------------------------------------------------------------------------
Net Income (Loss) (5,938) 9,512 237,327 224,143
Preferred stock dividend requirements 1,461 1,476 2,922 2,952
----------------------------------------------------------------------------
Earnings (Loss) for Common Stock $ (7,399) $ 8,036 $ 234,405 $ 221,191
============================================================================
Basic Earnings Per Share From:
Continuing Operations, less preferred dividends (0.05) 0.20 1.49 1.71
Discontinued Operations - (0.14) - (0.14)
Change in Accounting Principle - - - -
----------------------------------------------------------------------------
Basic Earnings (Loss) Per Share $ (0.05) $ 0.06 $ 1.49 $ 1.57
============================================================================
Diluted Earnings Per Share From:
Continuing Operations, less preferred dividends (0.05) 0.20 1.48 1.70
Discontinued Operations - (0.14) - (0.14)
Change in Accounting Principle - - - -
----------------------------------------------------------------------------
Diluted Earnings (Loss) Per Share $ (0.05) $ 0.06 $ 1.48 $ 1.56
============================================================================
Average Common Shares Outstanding (000) 157,943 141,063 157,414 140,551
Average Common Shares Outstanding - Diluted (000) 158,757 142,156 158,464 141,706
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to the Consolidated Financial Statements.
5
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
- --------------------------------------------------------------------------------------------------
Six Months Ended June 30,
(In Thousands of Dollars) 2003 2002
-----------------------------------
Operating Activities
Net income $ 237,327 $ 224,143
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Depreciation, depletion and amortization 287,261 253,460
Deferred income tax 24,719 20,978
Income from equity investments (9,759) (7,409)
Dividends from equity investments - 120
Amortization of interest rate swap (4,930) -
Loss on disposal of subsidiary investments 15,048 19,662
Changes in assets and liabilities
Accounts receivable 54,237 125,015
Materials and supplies, fuel oil and gas in storage 18,231 94,637
Accounts payable and other liabilities 7,292 (48,213)
Interest accrued (17,865) (8,793)
Other (46,184) (5,443)
-----------------------------------
Net Cash Provided by Operating Activities 565,377 668,157
-----------------------------------
Investing Activities
Construction expenditures (434,052) (579,903)
Proceeds from sale of subsidiary investments 198,553 -
-----------------------------------
Net Cash Used in Investing Activities (235,499) (579,903)
-----------------------------------
Financing Activities
Treasury stock issued 57,441 51,896
Equity issuance 473,573 -
Issuance of long-term debt 599,684 507,754
Payment of long-term debt (377,174) (54,590)
Payment of commercial paper (484,697) (477,795)
Redemption of promissory notes (447,005) -
Preferred stock dividends paid (2,922) (2,952)
Common stock dividends paid (133,435) (124,684)
Other 9,708 (9,536)
-----------------------------------
Net Cash Used in Financing Activities (304,827) (109,907)
-----------------------------------
Net Increase in Cash and Cash Equivalents $ 25,051 $ (21,653)
Cash and Cash Equivalents at Beginning of Period 170,617 159,252
-----------------------------------
Cash and Cash Equivalents at End of Period $ 195,668 $ 137,599
===================================
Cash equivalents are short-term marketable securities purchased with maturities
of three months or less that were carried at cost which approximates fair value.
See accompanying Notes to the Consolidated Financial Statements.
6
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 and are the largest investor owned electric generation
operator in New York State. 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"). KeySpan's other subsidiaries are involved in gas and
oil exploration and production; gas storage; liquefied natural gas storage;
wholesale and retail gas and electric marketing; appliance service; plumbing;
heating, ventilation and air conditioning and other mechanical 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, 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 KeySpan's financial position
as of June 30, 2003, and the results of operations for the three and six months
ended June 30, 2003 and June 30, 2002, as well as cash flows for the six months
ended June 30, 2003 and June 30, 2002. 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, 2002, as well as KeySpan's March 31, 2003 quarterly report on Form.
The December 31, 2002 financial statement information has been derived from the
2002 audited financial statements. Income from interim periods may not be
indicative of future results. Certain reclassifications were made to conform
prior period financial statements to current period financial statement
presentation.
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 million common stock options outstanding at June 30,
2003, 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 88,486 shares of convertible
preferred stock outstanding that can be converted into 228,406 shares of common
stock. These shares were not included in the calculation of diluted EPS for the
three months ended June 30, 2003 since to do so would have been anti-dilutive.
7
Under the requirements of Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share" our basic and diluted EPS are as follows:
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
(In Thousands of Dollars, Except Per Share Amounts) 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) for common stock $ (7,399) $ 8,036 $ 234,405 $ 221,191
Interest savings on convertible preferred stock - - 265 284
Houston Exploration dilution (57) (129) (144) (225)
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) for common stock - adjusted $ (7,456) $ 7,907 $ 234,526 $ 221,250
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding (000) 157,943 141,063 157,414 140,551
Add dilutive securities:
Options 814 1,093 822 911
Convertible preferred stock - - 228 244
- -----------------------------------------------------------------------------------------------------------------------------------
Total weighted average shares outstanding - assuming dilution 158,757 142,156 158,464 141,706
- -----------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss )per share $ (0.05) $ 0.06 $ 1.49 $ 1.57
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share $ (0.05) $ 0.06 $ 1.48 $ 1.56
- -----------------------------------------------------------------------------------------------------------------------------------
2. BUSINESS SEGMENTS
We have four reportable segments: Gas Distribution, Electric Services, Energy
Services and Energy Investments.
The Gas Distribution segment consists of six 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 four to twelve years.
Also, in the summer of 2002, we placed two 79.9 megawatt generating facilities
into service; the capacity of and energy from these facilities are dedicated to
LIPA under 25 year contracts. 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.
8
The Energy Services segment includes companies that provide energy-related
services to customers primarily located in 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
electricity to residential and small commercial customers; (ii) Business
Solutions, which provides plumbing, heating, ventilation, air conditioning and
mechanical services, as well as operation and maintenance, design, engineering
and consulting services to commercial and industrial customers; and (iii) Fiber
Optic Services, which provides various services to carriers of voice and data
transmission on Long Island and in New York City.
KeySpan Services, Inc. and its wholly-owned subsidiary Paulus, Sokolowski, and
Sartor, LLC., have entered into an agreement to acquire Bard, Rao + Athanas
Consulting Engineers, Inc. (BR+A), a Boston, Massachusetts company engaged in
the business of providing engineering services relating to heating, ventilation,
and air conditioning systems. The purchase price is expected to be approximately
$35 million, plus up to $14.7 million in contingent consideration depending on
the financial performance of BR+A over the five-year period after the closing of
the acquisition. We have received all necessary regulatory approvals and it is
anticipated that the closing of this transaction will occur in the third quarter
of 2003. On May 1, 2003, KeySpan's gas and electric marketing subsidiary,
KeySpan Energy Services Inc., assigned the majority of its retail natural gas
customers, consisting mostly of residential and small commercial customers, to
ECONnergy Energy Co., Inc. ("ECONnergy"). KeySpan Energy Services will continue
to provide retail natural gas marketing to a small number of customers in New
Jersey and will continue its electric marketing activities.
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 56%
equity interest in The Houston Exploration Company ("Houston Exploration"), 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. On February 26, 2003, we reduced our ownership
interest in Houston Exploration from 66% to 56% following the repurchase, by
Houston Exploration, of three million shares of common stock owned by KeySpan.
We realized net proceeds of $79 million in connection with this repurchase.
KeySpan follows an accounting policy of income statement recognition for Parent
company gains or losses from common stock transactions initiated by its
subsidiaries. As a result, KeySpan realized a gain of $19 million on this
transaction. Income taxes were not provided, since this transaction was
structured as a return of capital.
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. These subsidiaries are accounted for under the equity method.
9
We also have investments in certain midstream natural gas assets in Western
Canada through KeySpan Canada. These assets include 14 processing plants and
associated gathering systems that can process approximately 1.5 BCFe of natural
gas daily and provide associated natural gas liquids fractionation. On May 30,
2003, we sold a portion of our interest in KeySpan Canada through the
establishment of an open-ended income fund trust (the "Fund") organized under
the laws of Alberta, Canada. The Fund acquired a 39.09% ownership interest in
KeySpan Canada through an indirect subsidiary, and then issued 17 million trust
units to the public through an initial public offering. Each trust unit
represents a beneficial interest in the Fund and is registered on the Toronto
Stock Exchange under the symbol KEY.UN. Additionally, we sold our 20% interest
in Taylor NGL LP that owns and operates two extraction plants also in Canada to
AltaGas Services, Inc. Net proceeds of $119.4 million from the two sales, plus
proceeds of $45.7 million drawn under a new credit facility made available to
KeySpan Canada, were used to pay down existing KeySpan Canada credit facilities
of $160.4 million. A pre-tax loss of $30.3 million was recognized on the
transactions and is included in Other Income and (Deductions) in the
Consolidated Statement of Income. These transactions produced a tax expense of
$3.8 million as a result of certain United States partnership tax rules and we,
therefore, recorded an after-tax loss of $34.1 million. This investment is now
expected to provide an annual cash dividend of approximately $20 million.
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 our segments are evaluated by
management on an operating income basis. At June 30, 2003, the total assets of
each reportable segment have not changed materially from those levels reported
at December 31, 2002. The reportable segment information is as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Energy Investments
-------------------------------
(InThousands of Dollars) Gas Electric Energy Gas Exploration Other
Distribution Services Services and Production Investments Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 2003
Unaffiliated revenue 732,036 370,591 154,022 122,875 28,628 - 1,408,152
Intersegment revenue - 26 1,542 - 1,252 (2,820) -
Operating Income 31,616 51,480 (9,872) 50,148 9,074 5,783 138,229
Three Months Ended June 30, 2002
Unaffiliated revenue 521,822 354,756 229,311 90,563 21,748 - 1,218,200
Intersegment revenue - 25 - - 194 (219) -
Operating Income 30,096 59,501 (10,867) 29,455 (147) 5,937 113,975
- ------------------------------------------------------------------------------------------------------------------------------------
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 for the three months ended June 30, 2003 and 2002
represent approximately 26% and 29% of our consolidated revenues, respectively.
10
- ------------------------------------------------------------------------------------------------------------------------------------
Energy Investments
------------------------------
(InThousands of Dollars) Gas Electric Energy Gas Exploration Other
Distribution Services Services and Production Investments Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 2003
Unaffiliated revenue 2,564,737 704,985 346,393 250,722 53,840 - 3,920,677
Intersegment revenue - 51 2,968 - 2,504 (5,523) -
Operating Income 396,553 91,150 (19,020) 105,738 19,198 1,304 594,923
Six Months Ended June 30, 2002
Unaffiliated revenue 1,744,791 669,440 470,870 167,489 39,187 - 3,091,777
Intersegment revenue - 49 - - 388 (437) -
Operating Income 361,118 120,991 (20,224) 49,280 4,555 4,293 520,013
- ------------------------------------------------------------------------------------------------------------------------------------
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 for the six months ended June 30, 2003 and 2002
represent approximately 18% and 22% of our consolidated revenues, respectively.
3. COMPREHENSIVE INCOME
The table below indicates the components of comprehensive income.
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
(In Thousands of Dollars) 2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) for common stock $ (7,399) $ 8,036 $ 234,405 $ 221,191
- ----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax
Reclassification adjustments for loss (gains) realized in
net income 8,817 (2,998) 11,171 (10,285)
Foreign currency translation adjustments 17,773 10,829 27,526 9,116
Unrealized gains (losses) on marketable securities 5,405 (3,195) 2,249 (4,236)
Accrued unfunded pension obligation - - - (1,132)
Premiums on derivative financial instruments (3,437) - (3,437) -
Unrealized losses on derivative financial instruments (6,184) (2,159) (20,933) (25,944)
- ----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax 22,374 2,477 16,576 (32,481)
- ----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 14,975 $ 10,513 $ 250,981 $ 188,710
- ----------------------------------------------------------------------------------------------------------------------------------
Related tax (benefit) expense
Reclassification adjustments for loss (gains) realized in net
income 4,748 $ (1,614) 6,015 $ (5,538)
Foreign currency translation adjustments 9,570 5,831 14,822 4,908
Unrealized gains (losses) on marketable securities 2,910 (1,721) 1,211 (2,281)
Accrued unfunded pension obligation - - - (610)
Premiums on derivative financial instruments (1,851) - (1,851)
Unrealized losses on derivative financial instruments (3,329) (1,163) (11,271) (13,970)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Tax (Benefit) Expense $ 12,048 $ 1,333 $ 8,926 $ (17,491)
- ----------------------------------------------------------------------------------------------------------------------------------
11
4. CAPITAL STOCK
On January 17, 2003, we issued 13.9 million shares of common stock in a public
offering that generated net proceeds of approximately $473 million. All shares
were offered by KeySpan pursuant to an effective shelf registration statement
filed with the Securities and Exchange Commission ("SEC").
5. LONG-TERM DEBT AND COMMERCIAL PAPER
On June 27, 2003, KeySpan renewed its $1.3 billion revolving credit facility,
which was syndicated among sixteen banks. The credit facility supports KeySpan's
commercial paper program, and consists of two separate credit facilities with
different maturities but substantially similar terms and conditions: a $450
million facility that extends for 364 days, and a $850 million facility that is
committed for three years. The fees for the facilities are subject to a
ratings-based grid, with an annual fee of 0.10% on the 364-day facility and
0.125% on the three-year facility. Both credit agreements allow for KeySpan to
borrow using several different types of loans; specifically, Eurodollar loans,
Adjustable Bank Rate (ABR) loans, or competitively bid loans. Eurodollar loans
are based on the Eurodollar rate plus a margin of 0.625% for loans up to 33% of
the total facility, and an additional 0.125% for loans over 33% of the total
facility. ABR loans are based on the highest of the Prime Rate, the base CD rate
plus 1%, or the Federal Funds Effective Rate plus 0.5%. Competitive bid loans
are based on bid results requested by KeySpan from the lenders. In addition, the
364-day facility has a one-year term out option, which would cost an additional
0.25% if utilized. We do not anticipate borrowing against this facility;
however, if the credit rating on our commercial paper program were to be
downgraded, it may be necessary to do so.
In June 2003, as part of the sale of a portion of KeySpan's ownership in KeySpan
Canada, two outstanding KeySpan Canada credit facilities were replaced with one
new facility with three tranches that combined allow KeySpan Canada to borrow up
to approximately $125 million. These facilities mature as follows: (i) $50
million matures in 180 days; (ii) $37.5 million matures in 364 days; and (iii)
$37.5 million matures in two years.
On June 10, 2003, Houston Exploration finalized a private placement issuance of
$175 million of 7.0%, senior subordinated notes due 2013. Interest payments will
begin on December 15, 2003, and will be paid semi-annually thereafter. The notes
will mature on June 15, 2013. Houston Exploration has the right to redeem the
notes as of June 15, 2008, at a price equal to the issue price plus a specified
redemption premium. Until June 15, 2006, Houston Exploration may also redeem up
to 35% of the notes at a redemption price of 107% with proceeds from an equity
offering. Houston Exploration incurred approximately $4.5 million of debt
issuance costs on this private placement.
Houston Exploration used a portion of the net proceeds from the issuance to
redeem all of its outstanding $100 million principal amount of 8.625% senior
subordinated notes due 2008 at a price of 104.313% of par plus interest accrued
to the redemption date. Debt redemption costs totaled approximately $5.9 million
and is reflected in Other Income and (Deductions) in the Consolidated Statement
of Income. The remaining net proceeds from the offering were used to reduce debt
12
amounts associated with Houston Exploration's revolving bank credit facility.
The actual cash payment associated with the redemption of the senior
subordinated notes did not occur until July 11, 2003. The Consolidated Balance
Sheet at June 30, 2003, therefore reflects $100 million in cash and a
corresponding current liability.
In April 2003, we issued $300 million of medium-term and long-term debt. The
debt was issued in the following two series: (i) $150 million 4.65% Notes due
2013; and (ii) $150 million 5.875% Notes due 2033. The proceeds of this issuance
were used to pay down outstanding commercial paper.
In connection with the KeySpan/Long Island Lighting Company ("LILCO") business
combination in 1998, KeySpan and certain of its subsidiaries issued promissory
notes to LIPA to support certain debt obligations assumed by LIPA. At December
31, 2002, the remaining principal amount of promissory notes issued to LIPA was
approximately $600 million. To mitigate the dilutive effect of the equity
issuance previously mentioned in Note 4, in March 2003, we called approximately
$447 million aggregate principal amount of such promissory notes at the
applicable redemption prices plus accrued and unpaid interest through the dates
of redemption. Interest savings associated with this redemption are estimated to
be $15.6 million after-tax, or $0.09 per share, in 2003. We applied the
provisions of Statement of Financial Accounting Standards ("SFAS") 145
"Rescission of FASB Statement No. 4, 44 and 64, Amendment of FASB Statement No.
13, and Technical Corrections" and recorded an expense of $18.2 million,
reflecting redemption costs, as well as the write-off of previously deferred
debt issuance costs. This expense has been recorded in Other Income and
Deductions in the Consolidated Statement of Income.
KeySpan had authorization under PUHCA to issue up to $2.2 billion of securities
through December 31, 2003. Following the recent common stock offering previously
mentioned and shares of common stock expected to be issued for employee benefit
and dividend reinvestment plans, we generally exhausted our ability to issue new
securities under our current PUHCA authorization. However, the issuance of
securities in connection with the redemption of existing securities (including
the promissory notes discussed previously) is permitted under our PUHCA
authorization notwithstanding the foregoing limit. We have filed an application
with the SEC requesting authorization to, among other things, issue up to an
additional $3 billion of securities through December 31, 2006. It is anticipated
that this authorization will be obtained before the end of the year. This
request is intended to provide us with maximum flexibility to finance our future
capital requirements over the next three years.
6. HEDGING AND DERIVATIVE FINANCIAL INSTRUMENTS
Financially-Settled 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.
13
Houston Exploration has utilized collars and put options, 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,
2003, Houston Exploration has hedged approximately 67% of its estimated 2003 and
2004 gas production. To value its outstanding derivatives, Houston Exploration
used standard New York Mercantile Exchange ("NYMEX") futures prices, and, in
addition, used published volatility in its Black-Scholes calculation for
outstanding options. The maximum length of time over which Houston Exploration
has hedged such cash flow is through December 2004. The estimated amount of
losses associated with such derivative instruments that are reported in Other
Comprehensive Income and that are expected to be reclassified into earnings over
the next twelve months is $47.5 million, or $30.6 million after-tax.
With respect to price exposure associated with fuel purchases for the Ravenswood
facility, KeySpan employs standard NYMEX natural gas futures contracts and
over-the-counter financially settled natural gas basis swaps to hedge the cash
flow variability of a portion of forecasted purchases of natural gas. KeySpan
also employs the use of financially-settled oil swap contracts to hedge the cash
flow variability of a portion of forecasted purchases of fuel oil that will be
consumed at the Ravenswood facility. The maximum length of time over which we
have hedged cash flow variability associated with: (i) forecasted purchases of
natural gas is through September 2004; and (ii) forecasted purchases of fuel oil
is through April 2005. 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 Other Comprehensive Income
and that are expected to be reclassified into earnings over the next twelve
months is $1.5 million, or $1.0 million after-tax.
KeySpan Canada employs natural gas swaps to lock-in a price for expected future
natural gas purchases. As applicable, we used 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 2004. The estimated amount
of losses associated with such derivative instruments that are reported in Other
Comprehensive Income and that are expected to be reclassified into earnings over
the next twelve months is negligible at June 30, 2003.
We have also engaged in the use of cash-settled swap instruments to hedge the
cash flow variability associated with a portion of forecasted peak electric
energy sales from the Ravenswood facility. The maximum length of time over which
we have hedged cash flow variability is through December 2004. 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 Other Comprehensive Income and that are expected to be
reclassified into earnings over the next twelve months is $3.3 million, or $2.2
million after-tax.
KeySpan Canada also employs 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 Other
Comprehensive Income and that are expected to be reclassified into earnings over
the next twelve months is $0.7 million, or $0.5 million after-tax.
14
The following tables set forth selected financial data associated with these
derivative financial instruments noted above that were outstanding at June 30,
2003.
- ------------------------------------------------------------------------------------------------------------------------------------
Year of Volumes Floor Ceiling Fixed Price Current Price Fair Value
Type of Contract Maturity (mmcf) ($) ($) ($) ($) ($000)
- ------------------------------------------------------------------------------------------------------------------------------------
Gas
Collars 2003 27,600 3.48 - 3.49 4.91 - 4.95 - 5.29 - 5.82 (22,760)
2004 64,100 3.75 - 4.50 5.05 - 7.00 - 4.87 - 5.92 (16,920)
Put Options - Short Natural Gas 2004 9,100 5.00 - - 5.66 - 5.92 4,228
Swaps/Futures - Short Natural Gas 2003 7,483 - - 3.19 - 3.89 4.35 - 5.82 (17,161)
Swaps/Futures - Long Natural Gas 2003 410 - - 3.22 - 5.72 5.41 - 5.48 1,215
2004 50 - - 5.11 - 5.13 4.87 - 4.89 (10)
- ------------------------------------------------------------------------------------------------------------------------------------
108,743 (51,408)
- ------------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Year of Volumes Current Fair Value
Type of Contract Maturity (Barrels) Fixed Price ($) Price ($) ($000)
- ----------------------------------------------------------------------------------------------------------------------
Oil
Swaps - Short Fuel Oil 2003 30,000 29.70 28.50 - 30.52 (25)
Swaps - Long Fuel Oil 2003 66,195 20.60 - 30.88 29.15 - 31.99 253
2004 76,548 20.50 - 29.95 27.05 - 30.37 141
2005 9,000 24.65 - 26.28 26.60 - 26.85 17
- ----------------------------------------------------------------------------------------------------------------------
181,743 386
- ----------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Year of Fixed Margin/ Price Current Fair Value
Type of Contract Maturity MWh ($) Price ($) ($000)
- ---------------------------------------------------------------------------------------------------------------------------------
Electricity
Swaps - Energy 2003 584,928 22.40 - 67.53 14.67 - 46.59 2,477
2004 308,000 14.00 - 26.50 13.13 - 24.04 774
- ---------------------------------------------------------------------------------------------------------------------------------
892,928 3,251
- ---------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2003
Change in Fair Value of Derivative Instruments ($000)
- --------------------------------------------------------------------------------
Fair value of contracts at January 1, $ (32,628)
Net losses on contracts realized 17,186
(Decrease) in fair value of all open contracts (32,329)
- --------------------------------------------------------------------------------
Fair value of contracts outstanding at June 30, $ (47,771)
- --------------------------------------------------------------------------------
15
- ---------------------------------------------------------------------------------------------------------
(In Thousands of Dollars)
- ---------------------------------------------------------------------------------------------------------
Fair Value of Contracts
- ---------------------------------------------------------------------------------------------------------
Maturity Maturity Total
Sources of Fair Value In 12 Months 2004 - 2005 Fair Value
- ---------------------------------------------------------------------------------------------------------
Prices actively quoted $ (40,995) $ (2,292) $ (43,287)
Prices provided by external sources 427 2 429
Prices based on models and
other valuation methods (5,753) (2,765) (8,518)
Local published indicies 2,961 644 3,605
- ---------------------------------------------------------------------------------------------------------
$ (43,360) $ (4,411) $ (47,771)
- ---------------------------------------------------------------------------------------------------------
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 swap transactions for natural gas liquids. Such contracts are
executed by KeySpan Canada to: (i) 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 to counterparties.
These derivative financial instruments do not qualify for hedge accounting under
SFAS 133. At June 30, 2003, these instruments had a net fair market value of
$0.6 million, which was recorded on the Consolidated Balance Sheet. Based on the
non-hedge designation of these instruments, the gain was recognized in the
Consolidated Statement of Income.
Firm Gas Sales Derivative Instruments - Regulated Utilities: We use derivative
financial instruments to reduce the cash flow variability associated with the
purchase price for a portion of future natural gas purchases associated with our
Gas Distribution operations. 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 "Accounting for the Effects of Certain Types
of Regulation". 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 consistent with regulatory requirements.
The following table sets forth selected financial data associated with these
derivative financial instruments that were outstanding at June 30, 2003.
- ------------------------------------------------------------------------------------------------------------------------------------
Type of Contract Year of Volumes Fair Value
Maturity mmcf Floor $ Ceiling $ Fixed Price $ Current Price $ ($000)
- ------------------------------------------------------------------------------------------------------------------------------------
Options 2003 3,040 4.00 - 5.00 5.50 - 6.35 - - 72
2004 3,560 4.00 - 5.00 5.37 - 6.00 - - (87)
Swaps 2003 9,690 - - 5.09 - 6.23 5.36 - 5.90 46
2004 11,440 - - 4.42 - 6.23 4.52 - 5.83 99
- ------------------------------------------------------------------------------------------------------------------------------------
27,730 130
- ------------------------------------------------------------------------------------------------------------------------------------
16
Physically-Settled Commodity Derivative Instruments: 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, ("SFAS 133") establishes criteria that must be satisfied in
order for option-type and forward contracts in electricity to be exempted as
normal purchases and sales, and 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 continuing review of our physical commodity
contracts, we determined that certain contracts for the physical purchase of
natural gas are not exempt as normal purchases from the requirements of SFAS
133. At June 30, 2003, the fair value of these contracts was $1.5 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: In May 2003, we entered into an interest
rate swap agreement in which we swapped $250 million of 7.25 % fixed rate debt
to floating rate debt. Under the terms of the agreements, we will receive the
fixed coupon rate associated with these bonds and pay our swap counterparties a
variable interest rate based on LIBOR, that is reset on a semi-annual basis.
These swaps are designated as fair-value hedges and qualify for "short-cut"
hedge accounting treatment under SFAS 133. During the second quarter of 2003, we
paid our counterparty an interest rate of 6.43%, and as a result, we realized
interest savings of $0.3 million for the quarter. The fair market value of this
derivative was $1.9 million at June 30, 2003.
During 2002, we had interest rate swap agreements in which we swapped
approximately $1.3 billion of fixed rate debt to floating rate debt. Under the
terms of the agreements, we received the fixed coupon rate associated with these
bonds and paid the swap counterparties 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. In 2002, we
terminated two of these interest rate swap agreements with an aggregate notional
amount of $1.0 billion. The remaining swap, which had a notional amount of
$270.0 million, was terminated on February 25, 2003. We received $18.4 million
from our swap counterparties as a result of the latter termination, of which
$8.1 million represented accrued swap interest. The difference between the
termination settlement amount and the amount of accrued interest, $10.3 million,
was recorded to earnings in the first quarter of 2003. This swap was used to
hedge a portion of our outstanding promissory notes to LIPA. As discussed in
Note 5 "Long-Term Debt", we called a portion of these promissory notes during
the first quarter of 2003.
Additionally, we had an interest rate swap agreement that hedged the cash flow
variability associated with the forecasted issuance of a series of commercial
paper offerings. This hedge expired in March 2003.
Weather Derivatives: The utility tariffs associated with KEDNE's operations do
not contain weather normalization adjustments. As a result, fluctuations from
normal weather may have a significant positive or negative effect on the results
of these operations. To mitigate a substantial portion of the effect of
17
fluctuations from normal weather on our financial position and cash flows, we
sold heating degree-day call options and purchased heating-degree day put
options for the November 2002-March 2003 winter season. With respect to sold
call options, KeySpan was required to make a payment of $40,000 per heating
degree day to its counterparties when actual weather experienced during the
November 2002 - March 2003 time frame was above 4,470 heating degree days, which
equates to approximately 1% colder than normal weather. With respect to
purchased put options, KeySpan would receive a $20,000 per heating degree day
payment from its counterparties when actual weather was below 4,150 heating
degree days, or approximately 7% warmer than normal. Based on the terms of such
contracts, we account for such instruments pursuant to the requirements of EITF
99-2, "Accounting for Weather Derivatives." In this regard, such instruments
were accounted for using the "intrinsic value method" as set forth in such
guidance. During the first quarter of 2003, weather was 10% colder than normal
and, as a result, $11.9 million has been recorded as a reduction to revenues.
Derivative contracts are primarily used to manage exposure to market risk
arising from changes in commodity prices and interest rates. In the event of
non-performance by a counterparty to a derivative contract, the desired impact
may not be achieved. The risk of counterparty non-performance is generally
considered credit risk and is actively managed by assessing each counterparty
credit profile and negotiating appropriate levels of collateral and credit
support.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS 143,
"Accounting for Asset Retirement Obligations." SFAS 143 requires an entity to
record a liability and corresponding asset representing the present value of
legal obligations associated with the retirement of tangible, long-lived assets.
SFAS 143 was effective for fiscal years beginning after June 2002.
At June 30, 2003, the present value of our future asset retirement obligation
("ARO") was approximately $62 million, primarily related to our investment in
Houston Exploration. The cumulative effect of SFAS 143 and the change in
accounting principle was a benefit to net income of $0.6 million, or $0.2
million, after-tax. KeySpan's largest asset base is its gas transmission and
distribution system. A legal obligation exists due to certain safety
requirements at final abandonment. In addition, a legal obligation may be
construed to exist with respect to KeySpan's liquefied natural gas ("LNG")
storage tanks due to clean up responsibilities upon cessation of use. However,
mass assets such as storage, transmission and distribution assets are believed
to operate in perpetuity and, therefore, have indeterminate cash flow estimates.
Since that exposure is in perpetuity and cannot be measured, no liability will
be recorded pursuant to SFAS 143. KeySpan's ARO will be re-evaluated in future
periods until sufficient information exists to determine a reasonable estimate
of fair value.
KeySpan recovers certain asset retirement costs through rates charged to
customers as a portion of depreciation expense. When depreciable properties are
retired, the original cost plus cost of removal less salvage, is charged to
accumulated depreciation. As of June 30, 2003, KeySpan had costs recovered in
excess of costs incurred totaling $444.3 million.
18
In January 2003, the FASB issued FASB Interpretation No. 46 "FIN 46",
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. We currently have an arrangement
with a variable interest entity through which we lease a portion of the
Ravenswood facility and we will apply the provisions of FIN 46 beginning July 1,
2003. (See Note 9 "Variable Interest Entity" for a detailed description of this
leasing arrangement).
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain instruments embedded in other contracts and for hedging
activities under Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This Statement: (i) clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a
derivative; (ii) clarifies when a derivative contains a financing component;
(iii) amends the definition of an underlying; and (iv) amends certain other
existing pronouncements. While we are still evaluating the provisions of this
Statement, we belive that implementation of this Statement is not expected to
have a significant impact on our results of operations, financial condition or
cash flows since our derivative instruments that meet the definition of a
derivative and qualify for hedge accounting treatment will continue to do so.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify certain financial instruments as a liability
(or an asset in some circumstances) when there is an obligation to redeem the
issuer's shares and either requires or may require satisfaction of the
obligation by transferring assets, or satisfy the obligation by issuing
additional equity shares subject to certain criteria. This Statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of the Statement and still existing
at the beginning of the interim period of adoption. The implementation of this
Statement is not expected to have a significant impact on our results of
operations, financial condition or cash flows.
19
8. FINANCIAL GUARANTEES AND CONTINGENCIES
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 KeySpan, were associated with
the 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 $135.3 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 $56.5 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
$123.1 million for the New York/Long Island MGP sites is reflected at June 30,
2003.
KeySpan is also responsible for environmental obligations associated with the
Ravenswood electric generating facility. Our obligations do not include those
arising from disposal of waste at off-site locations prior to our acquisition of
the Ravenswood facility, or any from Consolidated Edison's post-closing conduct
associated with its transmission facilities at the site. Based on information
currently available, a liability of $3.6 million has been accrued. Expenditures
incurred to date with respect to these environmental obligations total $1.4
million.
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.
Boston Gas Company, Colonial Gas Company and Essex Gas Company may have or share
responsibility under applicable environmental laws for the remediation of 66 MGP
sites and related facilities. A subsidiary of National Grid USA ("National
Grid"), formerly New England Electric System, has assumed responsibility for
remediating 11 of these sites, subject to a limited contribution from Boston Gas
Company, and has provided full indemnification to Boston Gas Company with
respect to eight other sites. At this time, there is substantial uncertainty as
to whether Boston Gas Company, Colonial Gas Company or Essex Gas Company have or
share responsibility for remediating any of these other sites. No notice of
responsibility has been issued to KeySpan for any of the sites from any
governmental authority.
20
We presently estimate the remaining cost of New England MGP-related
environmental cleanup activities will be $45.3 million, which amount has been
accrued as a reasonable estimate of probable cost for known sites. Expenditures
incurred since our acquisition of Eastern Enterprises on November 8, 2000 with
respect to these MGP-related activities total $17.6 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 $56.6
million for the KEDNE MGP sites is reflected at June 30, 2003. Colonial Gas
Company and Essex Gas Company are not subject to the provisions of 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 historical operations of KeySpan New England, LLC, the
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 Everett site, which includes the
former Coal Tar Processing Facility (the "Everett Coal Tar Facility"), Coke
Plant and a by-products facility located in Massachusetts. Honeywell
International, Inc. and Beazer East, Inc. (both former owners or operators of
the Everett Coal Tar 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 Everett Coal
Tar Facility.
We presently estimate the remaining cost of our environmental cleanup activities
for the three non-utility sites will be approximately $39.2 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 $4.6 million.
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, 2002
Note 7 to those Consolidated Financial Statements "Contractual Obligations and
Contingencies" for further information on environmental matters.
21
Legal Matters
From time to time we are subject to various legal proceedings arising out of the
ordinary course of our business. Except as described below, or in KeySpan's
Annual Report on Form 10-K for the year ended December 31, 2002, we do not
consider any of such proceedings to be material to our business or likely to
result in a material adverse effect on our results of operations, financial
condition or cash flows.
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.
On March 5, 2002 , the SEC, as part of its continuing inquiry, 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 by KeySpan Services, Inc., a KeySpan subsidiary, of
the Roy Kay companies through the July 17th announcement.
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
and the announcement of the agreement to acquire Eastern Enterprises and
EnergyNorth Inc. 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 March 18, 2003, the court granted our motion to dismiss
the class action complaint. The court's order dismissed certain class
allegations with prejudice, but provided the plaintiffs a final opportunity to
file an amended complaint concerning the remaining allegations. In April 2003,
the plaintiff filed an amended complaint and in July the court denied our motion
to dismiss this amended complaint. KeySpan intends to vigorously defend each of
these proceedings. However, we are unable to predict the outcome of these
proceedings or what effect, if any, such outcome will have on our financial
condition, results of operations or cash flows.
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 at generating facilities formerly owned by Long
Island Lighting Company and others. In March 2003, a jury rendered a verdict in
one such proceeding against our subsidiary, KeySpan Generation LLC ("KeySpan
Generation"), and other defendants in the amount of $47 million. KeySpan has
moved to set aside this verdict and, if necessary, will prosecute an appeal, on
the grounds that, among other things, the amount of the verdict is excessive and
unreasonable and the finding of liability against KeySpan Generation is not
supported by the evidence.
22
In connection with the May 1998 transaction with LIPA, costs incurred by KeySpan
for liabilities for asbestos exposure arising from the activities of the
generating facilities previously owned by LILCO, including the facility involved
in the case referred to above, are recoverable from LIPA through the Power
Supply Agreement between LIPA and KeySpan. KeySpan's cost recovery under the
Power Supply Agreement is reduced by any insurance recoveries received by
KeySpan Generation and by amounts received by KeySpan Generation from other
indemnification claims it is pursuing.
KeySpan is unable to determine the outcome of the appeals of the above
referenced action or the outcome of any of these other proceedings, but does not
believe, for the reasons set forth above, that such outcome, if adverse, will
have a material effect on its financial condition, results of operation or cash
flows. KeySpan believes that its cost recovery rights under the Power Supply
Agreement, its indemnification rights against third parties and its insurance
coverage (above applicable deductible limits) cover its exposure in this case
and for asbestos liabilities generally.
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 was seeking damages in excess of $90 million and
KeySpan alleged a number of counterclaims seeking damages in excess of $4
million. In June 2003, the parties entered into an agreement settling this
matter and a stipulation discontinuing the lawsuit, with prejudice, has been
filed with the court. The settlement will not have a material adverse effect on
the financial condition, results of operations or cash flows of KeySpan. Under
the terms of the settlement (i) certain obligations between the parties have
been modified and clarified, (ii) certain contracts were awarded to Hawkeye,
(iii) certain property will be sold to Hawkeye at fair market value, (iv)
certain credit and bonding support made available by KeySpan to Hawkeye will be
curtailed and ultimately terminated and (v) in addition to a short-term bridge
loan of $21 million due to be repaid in August 2003, KeySpan will subsequently
provide a fully secured, interest bearing loan of up to $50 million in the
aggregate, to finance a power plant currently being constructed by a Hawkeye
affiliate.
23
Financial Guarantees
KeySpan has issued financial guarantees in the normal course of business,
primarily on behalf of its subsidiaries, to various third party creditors. At
June 30, 2003, the following amounts would have to be paid by KeySpan in the
event of non-payment by the primary obligor at the time payment is due:
- ----------------------------------------------------------------------------------------------------------------
Amount of Expiration
Nature of Guarantee (In Thousands of Dollars) Exposure Dates
- ----------------------------------------------------------------------------------------------------------------
Guarantees for Subsidiaries
Medium-Term Notes - KEDLI (i) $ 525,000 2008-2010
Master Lease - Ravenswood (ii) 425,000 2004
Surety Bonds (iii) 250,068 Revolving
Commodity Guarantees and Other (iv) 71,494 2005
Letters of Credit (v) 64,822 2003
- ----------------------------------------------------------------------------------------------------------------
Guarantees for Non-Affiliates
Surety Bonds (vi) 11,540 Revolving
Third Party Line of Credit (vi) 25,000 2004
- ----------------------------------------------------------------------------------------------------------------
$ 1,372,924
- ----------------------------------------------------------------------------------------------------------------
The following is a description of KeySpan's outstanding subsidiary guarantees:
(i) KeySpan has fully and unconditionally guaranteed $525 million to holders of
Medium-Term Notes issued by KEDLI. These notes are due to be repaid on
January 15, 2008 and February 1, 2010. KEDLI is required to comply with
certain financial covenants under the debt agreements. Currently, KEDLI is
in compliance with all covenants and management does not anticipate that
KEDLI will have any difficulty maintaining such compliance. The face value
of these notes is included in Long-Term Debt on the Consolidated Balance
Sheet.
(ii) KeySpan has guaranteed all payment and performance obligations of KeySpan
Ravenswood, LLC, the lessee under the $425 million Ravenswood master lease
(the "Master Lease") associated with the lease of the Ravenswood facility.
The initial term of the lease expires on June 20, 2004 and may be extended
until June 20, 2009. For further information, see Note 9 "Variable Interest
Entity."
(iii)KeySpan has agreed to indemnify the issuers of various surety and
performance bonds associated with certain construction projects currently
being performed by subsidiaries within the Energy Services segment. In the
event that the operating companies in the Energy Services segment fail to
perform their obligations under various contracts, the injured party may
demand that the surety make payments or provide services under the bond.
KeySpan would then be obligated to reimburse the surety for any expenses or
cash outlays it incurs.
24
(iv) KeySpan has guaranteed commodity-related payments for subsidiaries within
the Energy Services segment, as well as KeySpan Ravenswood, LLC. These
guarantees are provided to third parties to facilitate physical and
financial transactions involved in the purchase of natural gas, oil and
other petroleum products for electric production and marketing activities.
The guarantees cover actual purchases by these subsidiaries that are still
outstanding as of June 30, 2003.
(v) KeySpan has arranged for stand-by letters of credit to be issued to third
parties that have extended credit to certain subsidiaries. Certain vendors
require us to post letters of credit to guarantee subsidiary performance
under our contracts and to ensure payment to our subsidiary subcontractors
and vendors under those contracts. Certain of our vendors also require
letters of credit to ensure reimbursement for amounts disbursed on behalf
of our subsidiaries, such as to beneficiaries under our self-funded
insurance programs. Such letters of credit are generally issued by a bank
or similar financial institution. The letters of credit commit the issuer
to pay specified amounts to the holder of the letter of credit if the
holder demonstrates that we have failed to perform specified actions. If
this were to occur, KeySpan would be required to reimburse the issuer of
the letter of credit.
To date, KeySpan has not had a claim made against it for any of the above
guarantees and we have no reason to believe that our subsidiaries will
default on their current obligations. However, we cannot predict when or if
any defaults may take place or the impact such defaults may have on our
consolidated results of operations, financial condition or cash flows.
The following is a description of KeySpan's outstanding guarantees to
non-affiliates:
(vi) At June 30, 2003, KeySpan had agreed to support a line of credit up to $25
million on behalf of Hawkeye, a non-affiliated company. In addition,
KeySpan had also guaranteed certain performance bonds of Hawkeye. To date,
we have not had a claim made against either the guarantee associated with
the line of credit or the performance bonds. In June 2003, KeySpan and
Hawkeye settled an outstanding legal proceeding. In connection with the
settlement discussed previously, our obligation to guarantee the line of
credit is expected to be reduced to $13 million and will be eliminated by
the end of the first quarter of 2004. Further, we are no longer required to
provide support for Hawkeye's surety bonds. It is anticipated that any
currently outstanding support will be terminated by the end of August 2003.
(See Legal Matters above for a summary of the settlement.)
9. VARIABLE INTEREST ENTITY
KeySpan has an arrangement with a variable interest entity through which we
lease a portion of the Ravenswood facility. We acquired the Ravenswood facility,
in part, through the variable interest entity from Consolidated Edison in
June1999 for approximately $597 million. In order to reduce the initial cash
requirements, we entered into the Master Lease with a variable interest,
unaffiliated financing entity that acquired a portion of the facility, three
steam generating units, directly from Consolidated Edison and leased it to our
subsidiary. The variable interest unaffiliated financing entity acquired the
property for $425 million, financed with debt of $412.3 million (97% of
capitalization) and equity of $12.7 million (3% of capitalization). KeySpan has
no ownership interests in the steam units or in the variable interest entity.
25
KeySpan has guaranteed all payment and performance obligations of our subsidiary
under the Master Lease. The Master Lease represents $425 million of the
acquisition cost of the facility, which is the amount of debt that would have
been recorded on our Consolidated Balance Sheet had the variable interest entity
not been utilized and conventional debt financing been employed. Further, we
would have recorded an asset in the same amount. Monthly lease payments equal
the monthly interest expense on such debt securities. The Master Lease currently
qualifies as an operating lease for financial reporting purposes.
The initial term of the Master Lease expires on June 20, 2004 and may be
extended until June 20, 2009. In June 2004, we have the right to: (i) either
purchase the facility for the original acquisition cost of $425 million, plus
the present value of the lease payments that would otherwise have been paid
through June 2009; (ii) terminate the Master Lease and dispose of the facility;
or (iii) otherwise extend the Master Lease to 2009. If the Master Lease is
terminated in 2004, KeySpan has guaranteed an amount approximately equal to 83%
of the residual value of the original cost of the property, plus the present
value of the lease payments that would have otherwise been paid through June 20,
2009. In June 2009, when the Master Lease terminates, we may purchase the
facility in an amount equal to the original acquisition cost, subject to
adjustment, or surrender the facility to the lessor. If we elect not to purchase
the property, the Ravenswood facility will be sold by the lessor. We have
guaranteed to the lessor 84% of the residual value of the original cost of the
property.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51." FIN 46 requires KeySpan, based upon
its current status as the primary beneficiary, to consolidate this variable
interest entity for the first interim period ending after June 15, 2003. It also
requires that assets, liabilities and non-controlling interests of the variable
interest entity be consolidated at fair value, except to the extent that to do
so would result in a gain to KeySpan. KeySpan believes that the fair market
value of the Ravenswood facility exceeds the fair market value of the lease
obligation.
Prospectively, KeySpan will have a $425 million asset that will be amortized
over the economic life of the leased property. However, upon implementation,
there will be a cumulative catch-up adjustment for a change in accounting policy
as if the asset had been owned from inception, or June 20, 1999. Therefore, at
July 1, 2003, assuming a 35-year economic life, KeySpan will be deemed to have
owned and depreciated the asset from inception, or for approximately 4 years.
Therefore, it is anticipated that we will record a $29.1 million after-tax
charge, or $0.18 per share, change in accounting principle on the Consolidated
Statement of Income. Upon implementation of FIN 46, therefore, we anticipate
recording an asset of approximately $376 million and debt of $425 million. Based
upon expected average outstanding shares, we anticipate the incremental impact
of the additional depreciation expense for the remaining six months of 2003 to
be approximately $0.02 per share.
If our subsidiary that leases the Ravenswood facility is not able to fulfill its
payment obligation with respect to the Master Lease, then the maximum amount
KeySpan would be exposed to under its current guarantees would be $425 million
plus the present value of the remaining lease payments through June 20, 2009.
26
10. STOCK OPTIONS
Stock options have been issued to KeySpan officers, directors and certain other
management employees and consultants as approved by the Board of Directors.
These options generally vest over a three-to-five year period and have a
ten-year exercise period. Moreover, under a separate plan, Houston Exploration
has issued stock options to its directors and key Houston Exploration employees.
During 2002, we announced our intention to record stock options as a
compensation expense beginning with those options granted in 2003. In 2003,
KeySpan and Houston Exploration adopted the prospective method of transition in
accordance with SFAS 148 "Accounting for Stock-Based Compensation - Transition
and Disclosure." Accordingly, compensation expense has been recognized by
employing the fair value recognition provisions of SFAS 123 "Accounting for
Stock-Based Compensation" for grants awarded after January 1, 2003.
KeySpan and Houston Exploration continue to apply APB Opinion 25, "Accounting
for Stock Issued to Employees," and related Interpretations in accounting for
grants awarded prior to January 1, 2003. Accordingly, no compensation cost has
been recognized for these fixed stock option plans in the Consolidated Financial
Statements since the exercise prices and market values were equal on the grant
dates. Had compensation cost for these plans been determined based on the fair
value at the grant dates for awards under the plans consistent with SFAS 123,
our net income and earnings per share would have decreased to the pro-forma
amounts indicated below:
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
(In Thousands of Dollars, Except Per Share Amounts) 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings available for common stock: $ (7,399) $ 8,036 $ 234,405 $ 221,191
As reported
Add: recorded stock-based compensation expense, net of tax 1,132 66 1,990 66
Deduct: total stock-based compensation expense, net of tax (2,969) (1,887) (6,070) (3,774)
- -----------------------------------------------------------------------------------------------------------------------------------
Pro-forma earnings $ (9,236) $ 6,215 $ 230,325 $ 217,483
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic - as reported $ (0.05) $ 0.06 $ 1.49 $ 1.57
Basic - pro-forma $ (0.06) $ 0.04 $ 1.46 $ 1.55
Diluted - as reported $ (0.05) $ 0.06 $ 1.48 $ 1.56
Diluted - pro-forma $ (0.06) $ 0.04 $ 1.45 $ 1.53
- -----------------------------------------------------------------------------------------------------------------------------------
11. KEYSPAN GAS EAST CORPORATION SUMMARY FINANCIAL INFORMATION
KEDLI is a wholly owned subsidiary of KeySpan. KEDLI was formed on May 7, 1998
and on May 28, 1998, acquired substantially all of the assets related to the gas
distribution business of LILCO. KEDLI established a program for the issuance,
from time to time, of up to $600 million aggregate principal amount of
Medium-Term Notes, which are fully and unconditionally guaranteed by KeySpan
Corporation. 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 2008. The following condensed
financial statements are required to be disclosed by SEC regulations and set
forth those of KEDLI, KeySpan Corporation as guarantor of the Medium-Term Notes
and our other subsidiaries on a combined basis. The June 30, 2002 disclosures
have been revised to separately present our other subsidiaries.
27
- -----------------------------------------------------------------------------------------------------------------------------------
Statement of Income
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 2003
(In Thousands of Dollars) Guarantor KEDLI Other Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues $ 34 $ 177,340 $ 1,230,812 $ (34) $ 1,408,152
Operating Expenses
Purchased gas - 90,611 333,689 - 424,300
Fuel and purchased power - - 102,476 - 102,476
Operations and maintenance (5,424) 32,760 482,300 - 509,636
Intercompany expense 31 735 (735) (31) -
Depreciation and amortization (20) 18,064 124,246 - 142,290
Operating taxes (1,824) 16,954 80,121 - 95,251
------------------------------------------------------------------------------------------
Total Operating Expenses (7,237) 159,124 1,122,097 (31) 1,273,953
Income from Equity Investments 36 - 3,994 - 4,030
------------------------------------------------------------------------------------------
Operating Income (Loss) 7,307 18,216 112,709 (3) 138,229
Interest charges (53,403) (16,104) (56,720) 47,029 (79,198)
Other income and (deductions) 34,630 (1,809) (46,030) (36,282) (49,491)
------------------------------------------------------------------------------------------
Total Other Income and (Deductions) (18,773) (17,913) (102,750) 10,747 (128,689)
Income (Loss) Before Income Taxes (11,466) 303 9,959 10,744 9,540
Income Taxes (Benefit) (5,528) 1,221 19,785 - 15,478
------------------------------------------------------------------------------------------
Net Income (Loss) $ (5,938) $ (918) $ (9,826) $ 10,744 $ (5,938)
=========================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
Statement of Income
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 2002
(In Thousands of Dollars) Guarantor KEDLI Other Subsidiaries Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues $ 130 $ 137,937 $ 1,080,263 $ (130) $ 1,218,200
Operating Expenses
Purchased gas - 62,573 187,369 - 249,942
Fuel and purchased power - - 93,292 - 93,292
Operations and maintenance 1,522 13,066 538,118 - 552,706
Intercompany expense 83 20,033 (20,033) (83) -
Depreciation and amortization (3) 15,340 112,126 - 127,463
Operating taxes (569) 18,354 66,277 - 84,062
-------------------------------------------------------------------------------------
Total Operating Expenses 1,033 129,366 977,149 (83) 1,107,465
Income from Equity Investment 34 - 3,206 - 3,240
-------------------------------------------------------------------------------------
Operating Income (Loss) (869) 8,571 106,320 (47) 113,975
Interest charges (47,831) (15,900) (68,663) 62,340 (70,054)
Other income and (deductions) 52,613 2,193 14,610 (67,793) 1,623
-------------------------------------------------------------------------------------
Total Other Income and (Deductions) 4,782 (13,707) (54,053) (5,453) (68,431)
Income (Loss) Before Income Taxes 3,913 (5,136) 52,267 (5,500) 45,544
Income Taxes (Benefit) (5,599) (1,767) 23,736 - 16,370
-------------------------------------------------------------------------------------
Earnings from Continuing Operations $ 9,512 $ (3,369) $ 28,531 $ (5,500) $ 29,174
Discontinued Operations - - (19,662) - (19,662)
-------------------------------------------------------------------------------------
Net Income (Loss) $ 9,512 $ (3,369) $ 8,869 $ (5,500) $ 9,512
====================================================================================-
28
- ------------------------------------------------------------------------------------------------------------------------------------
Statement of Income
- -----------------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 2003
(In Thousands of Dollars) Guarantor KEDLI Other Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues $ 177 $ 655,685 $ 3,264,992 $ (177) $ 3,920,677
Operating Expenses
Purchased gas - 377,620 1,242,845 - 1,620,465
Fuel and purchased power - - 199,998 - 199,998
Operations and maintenance 1,835 70,980 935,010 - 1,007,825
Intercompany expense 65 1,917 (1,917) (65) -
Depreciation and amortization (40) 44,984 242,317 - 287,261
Operating taxes