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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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
-------------------
(Exact name of Registrant as specified in its Charter)
New York 11-3431358
-------- ----------
(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
------------------------------------------------------
(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}
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 October 15, 2003
--------------------- -------------------------------
$.01 par value 159,060,100
KEYSPAN CORPORATION AND SUBSIDIARIES
INDEX
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Part I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Consolidated Balance Sheet -
September 30, 2003 and December 31, 2002 3
Consolidated Statement of Income -
Three and Nine months Ended September 30, 2003 and 2002 5
Consolidated Statement of Cash Flows -
Nine months Ended September 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 35
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 68
Item 4. Controls and Procedures 73
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 73
Item 6. Exhibits and Reports on Form 8-K 73
Signatures 75
2
CONSOLIDATED BALANCE SHEET
(Unaudited)
- -----------------------------------------------------------------------------------------
(In Thousands of Dollars) September 30, 2003 December 31, 2002
- -----------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and temporary cash investments $ 118,051 $ 170,617
Accounts receivable 1,000,534 1,122,022
Unbilled revenue 227,554 473,060
Allowance for uncollectible accounts (70,306) (63,029)
Gas in storage, at average cost 522,736 297,060
Material and supplies, at average cost 120,655 113,519
Other 88,370 93,980
---------------------------------------------
2,007,594 2,207,229
---------------------------------------------
Investments and Other 292,587 265,977
Property
Gas 6,397,706 6,124,281
Electric 2,155,736 1,974,352
Other 400,953 394,374
Accumulated depreciation (2,941,551) (2,740,516)
Gas exploration and production, at cost 2,788,884 2,438,998
Accumulated depletion (1,108,826) (973,889)
---------------------------------------------
7,692,902 7,217,600
---------------------------------------------
Deferred Charges
Regulatory assets 475,748 438,516
Goodwill, net of amortization 1,816,434 1,789,751
Other 714,783 695,233
---------------------------------------------
3,006,965 2,923,500
---------------------------------------------
Total Assets $ 13,000,048 $ 12,614,306
=============================================
- -----------------------------------------------------------------------------------------
See accompanying Notes to the Consolidated Financial Statements.
3
CONSOLIDATED BALANCE SHEET
(Unaudited)
- --------------------------------------------------------------------------------------------
(In Thousands of Dollars) September 30, 2003 December 31, 2002
- --------------------------------------------------------------------------------------------
LIABILITIES AND CAPITALIZATION
Current Liabilities
Current redemption of long-term debt $ 11,417 $ 11,413
Accounts payable and other liabilities 893,045 1,061,649
Commercial paper 644,400 915,697
Dividends payable 72,162 64,714
Taxes accrued 139,749 51,276
Customer deposits 39,529 38,387
Interest accrued 99,254 77,092
--------------------------------------------
1,899,556 2,220,228
--------------------------------------------
Deferred Credits and Other Liabilities
Regulatory liabilities 102,582 84,479
Deferred income tax 976,358 877,013
Postretirement benefits and other reserves 795,437 759,731
Other 164,202 189,912
--------------------------------------------
2,038,579 1,911,135
--------------------------------------------
Commitments and Contingencies (See Note 8) - -
Capitalization
Common stock 3,482,456 3,005,354
Retained earnings 557,121 522,835
Other comprehensive income (68,101) (108,423)
Treasury stock (398,190) (475,174)
--------------------------------------------
Total common shareholders' equity 3,573,286 2,944,592
Preferred stock 83,697 83,849
Long-term debt 4,927,423 5,224,081
--------------------------------------------
Total Capitalization 8,584,406 8,252,522
--------------------------------------------
Minority Interest in Subsidiary Companies 477,507 230,421
--------------------------------------------
Total Liabilities and Capitalization $ 13,000,048 $ 12,614,306
============================================
- --------------------------------------------------------------------------------------------
See accompanying Notes to the Consolidated Financial Statements.
4
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
(In Thousands of Dollars, Except Per Share Amounts) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------
Revenues
Gas Distribution $ 405,777 $ 334,031 $ 2,970,514 $ 2,078,823
Electric Services 427,662 414,868 1,132,647 1,084,309
Energy Services 148,876 217,104 495,269 687,975
Gas Exploration and Production 123,052 88,600 373,774 256,089
Energy Investments 26,447 23,599 80,287 62,784
---------------------------------------------------------------------
Total Revenues 1,131,814 1,078,202 5,052,491 4,169,980
---------------------------------------------------------------------
Operating Expenses
Purchased gas for resale 173,116 134,853 1,793,581 1,034,153
Fuel and purchased power 132,649 144,259 332,647 326,327
Operations and maintenance 507,381 487,293 1,515,206 1,538,073
Depreciation, depletion and amortization 135,656 127,301 422,917 380,758
Operating taxes 91,790 89,103 311,754 282,663
---------------------------------------------------------------------
Total Operating Expenses 1,040,592 982,809 4,376,105 3,561,974
---------------------------------------------------------------------
Income from Equity Investments 2,727 2,299 12,486 9,713
Operating Income 93,949 97,692 688,872 617,719
---------------------------------------------------------------------
Other Income and (Deductions)
Interest charges (78,366) (79,937) (226,503) (222,594)
Loss on sale of subsidiary stock - - (11,325) -
Cost of debt redemption - - (24,094) -
Minority interest (19,894) (5,353) (50,252) (15,920)
Other 24,299 (3,549) 38,754 15,143
---------------------------------------------------------------------
Total Other Income and (Deductions) (73,961) (88,839) (273,420) (223,371)
---------------------------------------------------------------------
Earnings Before Income Taxes 19,988 8,853 415,452 394,348
Income Taxes
Current (39,317) (34,508) 94,275 (97,430)
Deferred 46,720 38,397 71,439 243,011
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Total Income Taxes 7,403 3,889 165,714 145,581
---------------------------------------------------------------------
Earnings from Continuing Operations 12,585 4,964 249,738 248,767
---------------------------------------------------------------------
Discontinued Operations
Income from Operations, net of tax - - - -
Loss on Disposal , net of tax of $13,050 - - - (19,662)
---------------------------------------------------------------------
Loss from Discontinued Operations - - - (19,662)
---------------------------------------------------------------------
Cummulative Effect of Change in Accounting Principle - - 174 -
---------------------------------------------------------------------
Net Income 12,585 4,964 249,912 229,105
Preferred stock dividend requirements 1,461 1,335 4,383 4,287
---------------------------------------------------------------------
Earnings for Common Stock $ 11,124 $ 3,629 $ 245,529 $ 224,818
=====================================================================
Basic Earnings Per Share From:
Continuing Operations, less preferred dividends $ 0.07 $ 0.03 $ 1.56 $ 1.74
Discontinued Operations - - - (0.14)
Change in Accounting Principle - - - -
---------------------------------------------------------------------
Basic Earnings Per Share $ 0.07 $ 0.03 $ 1.56 $ 1.60
=====================================================================
Diluted Earnings Per Share From:
Continuing Operations, less preferred dividends $ 0.07 $ 0.02 $ 1.55 $ 1.72
Discontinued Operations - - - (0.14)
Change in Accounting Principle - - - -
---------------------------------------------------------------------
Diluted Earnings Per Share $ 0.07 $ 0.02 $ 1.55 $ 1.58
=====================================================================
Average Common Shares Outstanding (000) 158,783 141,686 157,871 140,929
Average Common Shares Outstanding - Diluted (000) 159,539 142,359 158,670 141,760
- ------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to the Consolidated Financial Statements.
5
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
- ------------------------------------------------------------------------------------------
Nine Months Ended September 30,
(In Thousands of Dollars) 2003 2002
- ------------------------------------------------------------------------------------------
Operating Activities
Net income $ 249,912 $ 229,105
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Depreciation, depletion and amortization 422,917 380,758
Deferred income tax 71,439 60,495
Income from equity investments (12,486) (9,713)
Dividends from equity investments 1,021 1,777
Amortization of interest rate swap (7,396) -
Loss on disposal of subsidiary investments 11,325 -
Gain on sale of property (13,974) -
Minority interest in income of subsidiaries 50,252 15,920
Changes in assets and liabilities
Accounts receivable 384,836 239,569
Materials and supplies, fuel oil and gas in storage (239,847) 18,297
Accounts payable and other liabilities (110,866) (170,526)
Interest accrued 22,161 20,573
Pension/OPEB funding (125,385) (40,294)
Other 33,154 9,360
-----------------------------------
Net Cash Provided by Operating Activities 737,063 755,321
-----------------------------------
Investing Activities
Construction expenditures (720,217) (815,155)
Other investment (50,500) -
Proceeds from sale of property 13,974 -
Proceeds from sale of subsidiary investments 198,553 173,935
-----------------------------------
Net Cash Used in Investing Activities (558,190) (641,220)
-----------------------------------
Financing Activities
Treasury stock issued 76,984 67,308
Equity issuance 473,573 -
Issuance of long-term debt 710,475 515,774
Payment of long-term debt (564,506) (91,152)
Payment of commercial paper (271,297) (519,222)
Redemption of promissory notes (447,005) -
Redemption of preferred stock (14,293) -
Preferred stock dividends paid (4,383) (4,287)
Common stock dividends paid (203,795) (187,857)
Other 12,808 9
-----------------------------------
Net Cash Used in Financing Activities (231,439) (219,427)
-----------------------------------
Net Increase in Cash and Cash Equivalents $ (52,566) $ (105,326)
Cash and Cash Equivalents at Beginning of Period 170,617 159,252
-----------------------------------
Cash and Cash Equivalents at End of Period $ 118,051 $ 53,926
===================================
- ------------------------------------------------------------------------------------------
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 September 30, 2003, and the results of operations for the three and nine
months ended September 30, 2003 and September 30, 2002, as well as cash flows
for the nine months ended September 30, 2003 and September 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
and June 30, 2003 Quarterly Reports on Form 10-Q. 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 September
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 and nine months ended September 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 September 30, Nine Months Ended September 30,
(In Thousands of Dollars, Except Per Share Amounts) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------
Earnings for common stock $ 11,124 $ 3,629 $ 245,529 $ 224,818
Houston Exploration dilution (74) (96) (212) (321)
- ------------------------------------------------------------------------------------------------------------------------------
Earnings for common stock - adjusted $ 11,050 $ 3,533 $ 245,317 $ 224,497
- ------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding (000) 158,783 141,686 157,871 140,929
Add dilutive securities:
Options 756 673 799 831
- ------------------------------------------------------------------------------------------------------------------------------
Total weighted average shares outstanding - assuming dilution 159,539 142,359 158,670 141,760
- ------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.07 $ 0.03 $ 1.56 $ 1.60
- ------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.07 $ 0.02 $ 1.55 $ 1.58
- ------------------------------------------------------------------------------------------------------------------------------
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 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.
During the third quarter of 2003, KeySpan Services, Inc. and its wholly-owned
subsidiary Paulus, Sokolowski, and Sartor, LLC. acquired Bard, Rao + Athanas
Consulting Engineers, LLC. ("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 was 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 following the closing of the
acquisition. We have recorded goodwill of $26 million and intangible assets of
$2 million associated with this transaction. The intangible assets, which relate
primarily to a portion of the backlog purchased, as well as to non-compete
agreements entered into with all of the former owners of BR+A, will be amortized
over two and three years, respectively. We are currently in the process of
evaluating the fair market value of the assets acquired and may adjust the
recorded goodwill and intangible assets in the fourth quarter of 2003. In May
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 plans to
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, which is reflected in Other Income and (Deductions) in the
Consolidated Statement of Income. Income taxes were not provided, since this
transaction was structured as a return of capital.
9
On October 15, 2003, Houston Exploration acquired the entire Gulf of Mexico
shallow-water asset base of Transworld Exploration and Production, Inc for $149
million. The properties, which are 75% natural gas, have proven reserves of 92
billion cubic feet of natural gas equivalent. Current production is from 11
fields and is producing approximately 35 million cubic feet of natural gas
equivalent per day. Houston Exploration funded the transaction from its bank
revolver and with cash on hand at the time of closing. Consistent with past
acquisitions, Houston Exploration has derivative hedge positions in place for a
portion of the 2004 production.
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.
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. In May 2003,
we sold a portion of our interest in KeySpan Canada through the establishment of
an open-ended income fund trust ("KeySpan Facilities Income Fund" or 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.
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. Except as noted above, at September 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:
10
- ----------------------------------------------------------------------------------------------------------------------------------
Energy Investments
-----------------------------
Gas Electric Energy Gas Exploration Other
(InThousands of Dollars) Distribution Services Services and Production Investments Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Sept. 30, 2003
Unaffiliated revenue 405,777 427,662 148,876 123,052 26,447 - 1,131,814
Intersegment revenue - 25 1,926 - 1,252 (3,203) -
Operating Income (Loss) (39,108) 100,254 (13,627) 50,995 8,009 (12,574) 93,949
Three Months Ended Sept. 30, 2002
Unaffiliated revenue 334,031 414,868 217,104 88,600 23,599 - 1,078,202
Intersegment revenue - 25 - - 194 (219) -
Operating Income (Loss) (39,565) 106,611 (4,834) 26,354 10,526 (1,400) 97,692
- ----------------------------------------------------------------------------------------------------------------------------------
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 September 30, 2003 and
2002 represent approximately 38% of our consolidated revenues for both periods.
- -----------------------------------------------------------------------------------------------------------------------------------
Energy Investments
-------------------------------
Gas Electric Energy Gas Exploration Other
(InThousands of Dollars) Distribution Services Services and Production Investments Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended Sept. 30, 2003
Unaffiliated revenue 2,970,514 1,132,647 495,269 373,774 80,287 - 5,052,491
Intersegment revenue - 76 4,894 - 3,756 (8,726) -
Operating Income (Loss) 357,445 191,404 (32,647) 156,733 27,207 (11,270) 688,872
Nine Months Ended Sept. 30, 2002
Unaffiliated revenue 2,078,823 1,084,309 687,975 256,089 62,784 - 4,169,980
Intersegment revenue - 75 - - 582 (657) -
Operating Income (Loss) 321,551 227,613 (25,056) 75,633 15,081 2,897 617,719
- -----------------------------------------------------------------------------------------------------------------------------------
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 nine months ended September 30, 2003 and
2002 represent approximately 22% and 26% of our consolidated revenues,
respectively.
11
3. COMPREHENSIVE INCOME
The table below indicates the components of comprehensive income.
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
(In Thousands of Dollars) 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings for common stock $ 11,124 $ 3,629 $ 245,529 $ 224,818
- -----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax
Reclassification adjustments for loss (gains) realized in net income 8,431 (7,529) 19,602 (17,814)
Foreign currency translation adjustments 366 (2,313) 27,892 6,804
Unrealized gains (losses) on marketable securities 1,209 (4,027) 3,458 (8,263)
Accrued unfunded pension obligation - - - (1,132)
Premiums on derivative financial instruments - - (3,437) -
Unrealized gains (losses) on derivative financial instruments 13,740 (641) (7,193) (26,585)
- -----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax 23,746 (14,510) 40,322 (46,990)
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income (Loss) $ 34,870 $ (10,881) $ 285,851 $ 177,828
- -----------------------------------------------------------------------------------------------------------------------------------
Related tax (benefit) expense
Reclassification adjustments for loss (gains) realized in net income $ 4,540 $ (4,054) $ 10,555 $ (9,592)
Foreign currency translation adjustments 197 (1,245) 15,019 3,663
Unrealized gains (losses) on marketable securities 652 (2,168) 1,863 (4,449)
Accrued unfunded pension obligation - - - (610)
Premiums on derivative financial instruments - - (1,851) -
Unrealized gains (losses) on derivative financial instruments 7,398 (346) (3,873) (14,316)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Tax (Benefit) Expense $ 12,787 $ (7,813) $ 21,713 $ (25,304)
- -----------------------------------------------------------------------------------------------------------------------------------
4. CAPITAL AND PREFERRED STOCK
In September 2003, the Boston Gas Company redeemed all 562,700 shares of its
outstanding Variable Term Cumulative Preferred Stock, 6.42 % Series A at its par
value of $25 per share. The total payment was $14.3 million which included $0.2
million of accumulated dividends. This preferred stock series had been reflected
as Minority Interest on KeySpan's Consolidated Balance Sheet.
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
During the third quarter of 2003, KeySpan Canada, issued Cdn$125 million, or
approximately US$93 million, long-term secured notes in a private placement to
investors in Canada and the United States. The notes were issued in the
following three series: (i) Cdn$20 million 5.42% senior secured notes due 2008;
(ii) Cdn$52.5 million 5.79% senior secured notes due 2010; and (iii) Cdn$52.5
million 6.16% senior secured notes due 2013. The proceeds of the offering have
been used to re-pay KeySpan Canada's credit facility.
12
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 allowed KeySpan Canada to borrow
up to approximately $125 million. As a result of the above long-term debt
issuance, one tranch of the credit facility was discontinued. Therefore, at
September 30, 2003, KeySpan Canada's credit facility has the following two
tranches with the following maturities: (i) $37.5 million matures in 364 days;
and (ii) $37.5 million matures in two years.
In June 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 that ranges from eight to twenty five
basis points on the 364-day facility and ten to thirty basis points 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. 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%, plus a margin. Competitive bid loans are based on bid results requested by
KeySpan from the lenders. The margins on both facilities are ratings based and
range from zero basis points to 112.5 basis points. The margins are increased if
outstanding loans are in excess of 33% of the total facility. 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.
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
amounts associated with Houston Exploration's bank revolving credit facility.
13
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 has 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 have nearly 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.
Houston Exploration has utilized collars and purchased 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
September 30, 2003, Houston Exploration has hedged slightly less than 70% of its
estimated 2003 gas production and a similar amount of its 2004 gas production.
Houston Exploration used standard New York Mercantile Exchange ("NYMEX") futures
prices to value its swap positions, 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 $10.5
million, or $6.8 million after-tax.
14
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 for 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 for 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 forecasted purchases of
natural gas and fuel oil is through September 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 $0.2 million, or $0.1
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 2003. The estimated amount
of gains or 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 September 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, as well as forecasted sales of
Unforced Capacity ("UCAP") to the NYISO. The maximum length of time over which
we have hedged cash flow variability is through December 2004. We used NYMEX
day-ahead forward pricing, as well as published NYISO day-ahead award prices to
value these outstanding derivatives. 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 $1.3 million, or $0.8 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 $0.4 million, or $0.3 million after-tax.
15
The following tables set forth selected financial data associated with these
derivative financial instruments noted above that were outstanding at September
30, 2003.
- -----------------------------------------------------------------------------------------------------------------------------------
Year of Volumes Floor Ceiling Fixed Price Current Price Fair Value
Type of Contract Maturity (mmcf) ($) ($) ($) ($) ($000)
- -----------------------------------------------------------------------------------------------------------------------------------
Gas
Collars 2003 13,800 3.48 4.91 - 4.43 - 5.08 (4,085)
2004 64,100 3.50 - 4.50 4.75 - 7.00 - 4.70 - 5.26 (7,757)
Put Options - Short Natural Gas 2004 9,100 5.00 - - 5.11 - 5.26 4,228
Swaps/Futures - Short Natural Gas 2003 3,711 - - 3.19 4.43 - 5.08 (5,842)
2004 14,640 - - 4.96 4.76 - 5.26 1,152
Swaps/Futures - Long Natural Gas 2004 50 - - 5.11 - 5.14 4.71 - 4.72 (25)
2005 10 - - 4.95 4.46 (5)
- -----------------------------------------------------------------------------------------------------------------------------------
105,411 (12,334)
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Year of Volumes Fixed Price Current Price Fair Value
Type of Contract Maturity (Barrels) ($) ($) ($000)
- -----------------------------------------------------------------------------------------------------------------
Oil
Swaps - Long Fuel Oil 2003 55,367 20.60 - 30.07 28.54 - 29.80 204
2004 100,548 20.55 - 29.60 25.88 - 28.61 37
2005 28,000 24.65 - 27.25 25.25 - 25.59 (31)
- -----------------------------------------------------------------------------------------------------------------
183,915 210
- -----------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Year of Fixed Price Current Price Fair Value
Type of Contract Maturity Capacity MWh ($) ($) ($000)
- ------------------------------------------------------------------------------------------------------------------------------
Electricity
Swaps - Energy 2003 222,464 15.00 - 67.44 15.90 - 42.98 (613)
2004 340,800 14.00 - 26.50 17.15 - 41.96 (953)
Swaps - Capacity 2003 100 - 7.00 6.98 2
2004 200 - 7.00 6.98 4
- ------------------------------------------------------------------------------------------------------------------------------
300 563,264 (1,560)
- ------------------------------------------------------------------------------------------------------------------------------
16
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, "Accounting for Derivative Instruments and Hedging Activities." At
September 30, 2003, these instruments had a net fair market value of $1.3
million, which was recorded on the Consolidated Balance Sheet. Based on the
non-hedge designation of these instruments, the gain was recognized in the
Consolidated Statement of Income.
Firm Gas Sales Derivative Instruments - Regulated Utilities: We use derivative
financial instruments to reduce the cash flow variability associated with the
purchase price for a portion of future natural gas purchases associated with our
Gas Distribution operations. Our strategy is to minimize fluctuations in firm
gas sales prices to our regulated firm gas sales customers in our New York and
New Hampshire service territories. Since these derivative instruments are
employed to reduce the variability of the purchase price of natural gas to be
sold to regulated firm gas sales customers, the accounting for these derivative
instruments is subject to SFAS 71 "Accounting for the Effects of Certain Types
of Regulation". Therefore, changes in the market value of these derivatives have
been recorded as a Regulatory Asset or Regulatory Liability on the Consolidated
Balance Sheet. Gains or losses on the settlement of these contracts are
initially deferred and then refunded to or collected from our firm gas sales
customers consistent with regulatory requirements.
The following table sets forth selected financial data associated with these
derivative financial instruments that were outstanding at September 30, 2003.
- ----------------------------------------------------------------------------------------------------------------------------------
Year of Volumes Floor Ceiling Fixed Price Current Price Fair Value
Type of Contract Maturity mmcf ($) ($) ($) ($) ($000)
- ----------------------------------------------------------------------------------------------------------------------------------
Options 2003 2,650 4.00 - 5.00 5.15 - 6.00 - 4.90 - 5.13 (712)
2004 7,420 4.00 - 5.00 5.15 - 6.00 - 4.83 - 5.25 (411)
Swaps 2003 10,710 - - 5.00 - 6.23 4.90 - 5.13 (5,304)
2004 20,530 - - 4.42 - 6.23 4.83 - 5.25 (6,848)
- ----------------------------------------------------------------------------------------------------------------------------------
41,310 (13,275)
- ----------------------------------------------------------------------------------------------------------------------------------
Physically-Settled Commodity Derivative Instruments: Derivative Implementation
Group ("DIG") Issue C15 and C16 of SFAS 133, 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
17
that combine a forward contract and a purchased option contract. Based upon a
continuing review of our physical gas and electric commodity contracts, we
determined that certain contracts for the physical purchase of natural gas
associated with our regulated gas utilities are not exempt as normal purchases
from the requirements of SFAS 133. At September 30, 2003, the fair value of
these contracts was $2.8 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 interest rate
swap agreements 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 period ended September 30,
2003, we paid our counterparty an interest rate of 6.42%, and as a result, we
realized interest savings of $0.4 million. The fair market value of this
derivative was $1.4 million at September 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
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
18
purchased put options, KeySpan would have received 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.
In October 2003, we entered into heating-degree day call and put options to
mitigate the effect of fluctuations from normal weather on KEDNE's financial
position and cash flows for the 2003/2004 winter heating season - November 2003
through March 2004. With respect to sold call options, KeySpan will be required
to make a payment of $27,500 per heating degree day to its counterparties when
actual weather experienced during this time frame is above 4,440 heating degree
days, which equates to approximately 2% colder than normal weather, based on the
most recent 20-year average for normal weather. The maximum amount KeySpan may
be required to pay on its sold call options is $5.5 million. With respect to
purchased put options, KeySpan will receive a $27,500 per heating degree day
payment from its counterparties when actual weather is below 4,266 heating
degree days, or approximately 2% warmer than normal. The maximum amount KeySpan
may receive on its purchased put options is $11 million. The total premium cost
for these options was $0.4 million. We will account for these derivatives
pursuant to the requirements of EITF 99-2.
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 a 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, 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 September 30, 2003, the present value of our future asset retirement
obligation ("ARO") was approximately $65 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 $0.2 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,
19
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 September 30, 2003, KeySpan had costs recovered
in excess of costs incurred totaling $458 million.
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 original provisions of FIN 46 were to be applied for the
first interim or annual period beginning after June 15, 2003. However, in
October 2003, the FASB delayed implementation of FIN 46 until the fourth quarter
of 2003. We currently have an arrangement with a variable interest entity
through which we lease a portion of the Ravenswood facility. (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. The implementation of this Statement will not 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
20
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 did not have an impact on our results of operations, financial
condition or cash flows.
In July 2003, the Financial Accounting Standards Board ("FASB") concluded its
discussions on Emerging Issues Task Force ("EITF") 03-11 "Reporting Realized
Gains and Losses on Derivative Instruments That Are Subject to FASB Statement
No. 133 Accounting for Derivative Instruments and Hedging Activities and Not
Held for Trading Purposes as Defined in EITF Issue No. 02-3 Issues Involved in
Accounting for Derivative Contracts held for Trading Purposes and Contracts
Involved in Energy Trading and Risk Management Activities." The Task Force
reached a consensus that determining whether realized gains or losses on
physically settled derivative contracts not "held for trading purposes" should
be reported in the income statement on a gross or net basis is a matter of
judgment that depends on the relevant facts and circumstances. KeySpan reports
realized gains or losses on its derivative instruments that hedge the cash flow
variability associated with the forecasted sales of natural gas and electricity
in its reported revenues at time of their settlement. Realized gains or losses
on derivative instruments that hedge the cash flow variability associated with
the forecasted purchase of natural gas or fuel oil are reported in operating
expense. While we will continue to evaluate the provisions of EITF 03-11, we
believe that this EITF will not have a significant impact on our results of
operations, financial condition or cash flows.
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 the Department of
Environmental Conservation ("DEC") for inclusion on appropriate site inventories
and for 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 $124.6 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 $67.2 million. The KEDNY and
KEDLI rate plans generally provide for the recovery of MGP related investigation
and remediation costs as costs are incurred. A regulatory asset of $142.6
21
million for the New York/Long Island MGP sites is reflected at September 30,
2003. In accordance with NYPSC policy, KeySpan records a reduction to regulatory
liabilities as costs are incurred for environmental clean-up activities. At
September 30, 2003, these previously deferred ratepayer benefits totaled $42.8
million. In October 2003, KEDNY and KEDLI filed a joint petition with the NYPSC
seeking rate treatment for additional environmental costs that may be incurred
in the future. 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 $3.5 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.
We may have or share responsibility under applicable environmental laws for the
remediation of 10 MGP sites and related facilities associated with the
historical operations of EnergyNorth Natural Gas, Inc. ("EnergyNorth").
EnergyNorth has received notice of its potential responsibility for
contamination at two former MGP sites and, together with other potentially
responsible parties, has received notice of potential responsibility for
contamination associated with four other sites.
We presently estimate the remaining cost of all the New England MGP-related
environmental cleanup activities will be $45.2 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 $18.8 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 $54.3
million for the KEDNE MGP sites is reflected at September 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.
22
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 $37.8 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 $5.1 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
continually evaluate our recorded liability for clean-up activities and as
circumstances arise we may revise our reserves accordingly. 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.
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, KeySpan's
Quarterly Reports on Form 10-Q for the periods ended March 31, 2003 and June 30,
2003 and KeySpan's Current Report on Form 8-K dated October 15, 2003, 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.
23
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. As previously disclosed, in March 2003, a
jury rendered a verdict against our subsidiary, KeySpan Generation LLC ("KeySpan
Generation"), and other defendants in the amount of $47 million in a proceeding
filed by a plaintiff claiming injury from asbestos exposure at generating
facilities formerly owned by the Long Island Lighting Company ("LILCO") and
others. In October 2003, KeySpan Generation agreed to pay $400,000 to resolve
this matter and a stipulation discontinuing this lawsuit has been filed with the
court.
24
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 is unable to determine the outcome of the other outstanding asbestos
proceedings, but does not believe that such outcomes, 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 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, which was modified in September 2003, (i) certain
obligations between the parties have been modified and clarified, (ii) certain
contracts were awarded to Hawkeye, (iii) certain credit and bonding support made
available by KeySpan to Hawkeye will be curtailed and ultimately terminated and
(iv) in addition to a short-term bridge loan of $21 million in June 2003,
KeySpan will provide a fully secured, interest bearing loan of up to $55 million
in the aggregate, to finance a power plant that has been constructed by a
Hawkeye affiliate. In October 2003, KeySpan and Hawkeye closed on the $55
million long-term loan and the $21 million short-term bridge loan was paid in
full.
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
September 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:
25
- ----------------------------------------------------------------------------------------------------------
Amount of Expiration
Nature of Guarantee (In Thousands of Dollars) Exposure Dates
- ----------------------------------------------------------------------------------------------------------
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) 73,842 2005
Letters of Credit (v) 64,822 2003
- ----------------------------------------------------------------------------------------------------------
Surety Bonds (vi) 11,540 Revolving
Third Party Line of Credit (vi) 25,000 2004
- ----------------------------------------------------------------------------------------------------------
$ 1,375,272
- ----------------------------------------------------------------------------------------------------------
The following is a description of KeySpan's outstanding guarantees of the
obligations of its subsidiaries:
(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.
(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 were still
outstanding as of September 30, 2003.
26
(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 of 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 of the
obligations of non-affiliates:
(vi) At September 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 has been terminated. Further, we are no longer required to provide
support for Hawkeye's surety bonds. (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 June
1999 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.
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.
27
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. 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. In accordance with a recent FASB announcement,
implementation of FIN 46 is now scheduled for the fourth quarter of 2003.
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. At December 31,
2003, KeySpan will be deemed to have owned and depreciated the asset from
inception, or for approximately 4.5 years. Therefore, assuming a 35-year
economic life, it is anticipated that an after-tax charge of $34 million, or
$0.22 per share, will be recorded as a change in accounting principle on the
Consolidated Statement of Income. Upon implementation of FIN 46, therefore, we
anticipate recording an asset of approximately $362 million and debt of $412.3
million.
If the 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.
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.
28
During 2002, KeySpan announced its 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 Nine Months Ended
September 30, September 30,
(In Thousands of Dollars, Except Per Share Amounts) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings available for common stock: $ 11,124 $ 3,629 $ 245,529 $ 224,818
As reported
Add: recorded stock-based compensation expense, net of tax 868 78 3,132 144
Deduct: total stock-based compensation expense, net of tax (2,707) (1,887) (9,043) (5,661)
- ------------------------------------------------------------------------------------------------------------------------------------
Pro-forma earnings $ 9,285 $ 1,820 $ 239,618 $ 219,301
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic - as reported $ 0.07 $ 0.03 $ 1.56 $ 1.60
Basic - pro-forma $ 0.06 $ 0.01 $ 1.52 $ 1.56
Diluted - as reported $ 0.07 $ 0.02 $ 1.55 $ 1.58
Diluted - pro-forma $ 0.06 $ 0.01 $ 1.51 $ 1.55
- ------------------------------------------------------------------------------------------------------------------------------------
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 September 30, 2002
disclosures have been revised to separately present our other subsidiaries.
29
- ---------------------------------------------------------------------------------------------------------------------------------
Statement of Income
- ---------------------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, 2003
(In Thousands of Dollars) Guarantor KEDLI Other Subsidiaries Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues $ 185 $ 99,170 $ 1,032,644 $ (185) $ 1,131,814
Operating Expenses
Purchased gas - 37,038 136,078 - 173,116
Fuel and purchased power - - 132,649 - 132,649
Operations and maintenance 6,742 33,457 467,182 - 507,381
Intercompany expense 5,142 310 (310) (5,142) -
Depreciation and amortization (13) 13,519 122,150 - 135,656
Operating taxes 1,824 16,557 73,409 - 91,790
-------------------------------------------------------------------------------------------
Total Operating Expenses 13,695 100,881 931,158 (5,142) 1,040,592
Income from Equity Investments - - 2,727 - 2,727
-------------------------------------------------------------------------------------------
Operating Income (Loss) (13,510) (1,711) 104,213 4,957 93,949
Interest charges (54,233) (15,661) (54,205) 45,733 (78,366)
Other income and (deductions) 67,923 16,812 (11,939) (68,391) 4,405
-------------------------------------------------------------------------------------------
Total Other Income and (Deductions) 13,690 1,151 (66,144) (22,658) (73,961)
Income (Loss) Before Income Taxes 180 (560) 38,069 (17,701) 19,988
Income Taxes (Benefit) (12,574) 1,223 18,754 - 7,403
-------------------------------------------------------------------------------------------
Net Income (Loss) $ 12,754 $ (1,783) $ 19,315 $ (17,701) $ 12,585
===========================================================================================
- ---------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Statement of Income
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, 2002
(In Thousands of Dollars) Guarantor KEDLI Other Subsidiaries Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues $ 129 $ 79,717 $ 998,485 $ (129) $ 1,078,202
Operating Expenses
Purchased gas - 35,949 98,904 - 134,853
Fuel and purchased power - - 144,259 - 144,259
Operations and maintenance (226) 12,447 475,072 - 487,293
Intercompany expense 1,343 19,008 (20,127) (224) -
Depreciation and amortization (20) 11,949 115,372 - 127,301
Operating taxes (1) 17,534 71,570 89,103
-----------------------------------------------------------------------------------------
Total Operating Expenses 1,096 96,887 885,050 (224) 982,809
Income from Equity Investment 18 - 2,281 - 2,299
-----------------------------------------------------------------------------------------
Operating Income (Loss) (949) (17,170) 115,716 95 97,692
Interest charges (54,116) (15,073) (80,057) 69,309 (79,937)
Other income and (deductions) 55,417 1,765 12,079 (78,163) (8,902)
-----------------------------------------------------------------------------------------
Total Other Income and (Deductions) 1,301 (13,308) (67,978) (8,854) (88,839)
Income (Loss) Before Income Taxes 352 (30,478) 47,738 (8,759) 8,853
Income Taxes (Benefit) (4,612) (11,577) 20,078 - 3,88