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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
[ ] 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
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(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 July 14, 2004
--------------------- ----------------------------
$.01 par value 160,176,033
KEYSPAN CORPORATION AND SUBSIDIARIES
INDEX
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Part I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Consolidated Balance Sheet -
June 30, 2004 and December 31, 2003 3
Consolidated Statement of Income - Three and
Six Months Ended June 30, 2004 and 2003 5
Consolidated Statement of Cash Flows -
Six Months Ended June 30, 2004 and 2003 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 33
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 62
Item 4. Controls and Procedures 65
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 65
Item 4. Submission of Matters to a Vote of Security Holders 65
Item 5. Other Events 66
Item 6. Exhibits and Reports on Form 8-K 67
Signatures 69
2
CONSOLIDATED BALANCE SHEET
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------
(In Thousands of Dollars) June 30, 2004 December 31, 2003
- -----------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and temporary cash investments $ 818,127 $ 205,751
Accounts receivable 977,499 1,029,459
Unbilled revenue 272,890 505,633
Allowance for uncollectible accounts (82,219) (79,184)
Gas in storage and prepaid gas 371,781 488,521
Material and supplies at average cost 117,884 121,415
Other 44,783 115,304
----------------------------- ----------------------------
2,520,745 2,386,899
----------------------------- ----------------------------
Investments and Other 499,157 248,565
Property
Gas 6,688,175 6,522,251
Electric 2,323,247 2,636,537
Other 434,329 425,576
Accumulated depreciation (2,649,641) (2,610,876)
Gas exploration and production, at cost 181,927 3,088,242
Accumulated depletion (102,588) (1,167,427)
----------------------------- ----------------------------
6,875,449 8,894,303
----------------------------- ----------------------------
Deferred Charges
Regulatory assets 544,393 578,383
Goodwill and other intangible assets 1,811,243 1,809,712
Other 707,869 722,320
----------------------------- ----------------------------
3,063,505 3,110,415
----------------------------- ----------------------------
Total Assets $ 12,958,856 $ 14,640,182
============================= ============================
See accompanying Notes to the Consolidated Financial Statements.
3
CONSOLIDATED BALANCE SHEET
(Unaudited)
- --------------------------------------------------------------------------------------------------------------------
June 30, 2004 December 31, 2003
- --------------------------------------------------------------------------------------------------------------------
Current redemption of long-term debt $ 16,474 $ 1,471
Accounts payable and other liabilities 738,145 1,141,597
Commercial paper 40,000 481,900
Dividends payable 72,054 72,289
Taxes accrued 90,460 46,580
Customer deposits 41,251 40,370
Interest accrued 62,328 64,609
------------------------------ ----------------------------
1,060,712 1,848,816
------------------------------ ----------------------------
Regulatory liabilities:
Miscellaneous liabilities 104,824 104,034
Removal cost recovered 473,720 450,034
Deferred income tax 1,092,322 1,278,341
Postretirement benefits and other reserves 915,603 961,962
Other 113,738 121,790
------------------------------ ----------------------------
2,700,207 2,916,161
------------------------------ ----------------------------
- -
Common stock 3,490,056 3,487,645
Retained earnings 854,559 621,430
Accumulated other comprehensive loss (64,370) (59,932)
Treasury stock (363,861) (378,487)
------------------------------ ----------------------------
Total common shareholders' equity 3,916,384 3,670,656
Preferred stock 83,342 83,568
Long-term debt 5,182,652 5,611,432
------------------------------ ----------------------------
9,182,378 9,365,656
------------------------------ ----------------------------
15,559 509,549
------------------------------ ----------------------------
$ 12,958,856 $ 14,640,182
============================== ============================
See accompanying Notes to the Consolidated Financial Statements.
4
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
- -----------------------------------------------------------------------------------------------------------------------------------
(In Thousands of Dollars, Except Per Share Amounts) 2004 2003 2004 2003
-------------------------------------------------------------------------------
Revenues
Gas Distribution $ 676,363 $ 732,036 $ 2,604,142 $ 2,564,737
Electric Services 433,763 392,345 792,899 790,045
Energy Services 129,877 132,268 258,936 261,333
Energy Investments 125,768 151,503 305,367 304,562
-------------------------------------------------------------------------------
Total Revenues 1,365,771 1,408,152 3,961,344 3,920,677
-------------------------------------------------------------------------------
Operating Expenses
Purchased gas for resale 363,130 424,300 1,589,703 1,620,465
Fuel and purchased power 130,347 102,476 231,959 199,998
Operations and maintenance 477,511 509,636 969,977 1,007,825
Depreciation, depletion and amortization 189,403 142,290 361,088 287,261
Operating taxes 90,484 95,251 212,763 219,964
-------------------------------------------------------------------------------
Total Operating Expenses 1,250,875 1,273,953 3,365,490 3,335,513
-------------------------------------------------------------------------------
Income from Equity Investments 8,416 4,030 14,132 9,759
-------------------------------------------------------------------------------
Operating Income 123,312 138,229 609,986 594,923
-------------------------------------------------------------------------------
Other Income and (Deductions)
Interest charges (88,475) (79,198) (172,540) (148,137)
Gain (loss) on subsidiary stock transactions 172,894 (30,345) 172,894 (11,325)
Cost of debt redemption - (5,900) - (24,094)
Minority interest (16,661) (13,000) (36,954) (30,358)
Other 19,382 (246) 22,143 14,455
-------------------------------------------------------------------------------
Total Other Income and (Deductions) 87,140 (128,689) (14,457) (199,459)
-------------------------------------------------------------------------------
Income Taxes
Current 8,364 4,017 163,503 133,592
Deferred 71,351 11,461 53,592 24,719
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Total Income Taxes 79,715 15,478 217,095 158,311
-------------------------------------------------------------------------------
Earnings (Loss) Before Change in Accounting Principle 130,737 (5,938) 378,434 237,153
Cummulative Change in Accounting Principle - - - 174
--------------------------------------------------------------------------------
Net Income (Loss) 130,737 (5,938) 378,434 237,327
Preferred stock dividend requirements 1,459 1,461 2,920 2,922
-------------------------------------------------------------------------------
Earnings (Loss) for Common Stock $ 129,278 $ (7,399) $ 375,514 $ 234,405
===============================================================================
Basic Earnings (Loss) Per Share:
Before Change in Accounting Principle 0.81 (0.05) 2.35 1.49
Change in Accounting Principle - - - -
-------------------------------------------------------------------------------
Basic Earnings (Loss) Per Share $ 0.81 $ (0.05) $ 2.35 $ 1.49
===============================================================================
Diluted Earnings (Loss) Per Share:
Before Change in Accounting Principle 0.80 (0.05) 2.33 1.48
Change in Accounting Principle - - - -
-------------------------------------------------------------------------------
Diluted Earnings (Loss) Per Share $ 0.80 $ (0.05) $ 2.33 $ 1.48
===============================================================================
Average Common Shares Outstanding (000) 160,167 157,943 160,030 157,414
Average Common Shares Outstanding - Diluted (000) 161,433 158,757 161,256 158,464
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to the Consolidated Financial Statements.
5
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
- -------------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30,
(In Thousands of Dollars) 2004 2003
- -------------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 378,434 $ 237,327
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Depreciation, depletion and amortization 361,088 287,261
Deferred income tax 53,592 24,719
Income from equity investments (14,132) (9,759)
Dividends from equity investments 104 -
Amortization of interest rate swap (4,895) (4,930)
(Gain) Loss on subsidiary stock transactions (172,894) 15,048
(Gain) on settlement of treasury lock (12,656) -
Amortization of prepayments 46,489 46,706
Minority interest 36,954 30,358
Changes in assets and liabilities
Accounts receivable 85,087 54,237
Materials and supplies, fuel oil and gas in storage 112,806 18,231
Accounts payable and other liabilities (112,166) 7,292
Interest accrued (2,281) (17,865)
Captive insurance reserve 43,214 -
Property tax prepayments - (47,478)
Other (12,411) (63,130)
-----------------------------------------------
Net Cash Provided by Operating Activities 786,333 578,017
-----------------------------------------------
Investing Activities
Construction expenditures (413,247) (434,052)
Cost of removal (14,606) (12,640)
Proceeds from sale of property 13,138 -
Net proceeds from sale/leaseback transaction 383,716 -
Net proceeds from subsidiary stock transactions 512,065 198,553
-----------------------------------------------
Net Cash Provided by (Used In) Investing Activities 481,066 (248,139)
-----------------------------------------------
Financing Activities
Treasury stock issued 14,626 57,441
Equity issuance - 473,573
Issuance of long-term debt 49,142 599,684
Payment of long-term debt (153,884) (377,174)
Payment of commercial paper (441,900) (484,697)
Redemption of promissory notes - (447,005)
Gain on settlement of treasury lock 12,656 -
Preferred stock dividends paid (2,920) (2,922)
Common stock dividends paid (142,622) (133,435)
Other 9,879 9,708
-----------------------------------------------
Net Cash (Used in) Financing Activities (655,023) (304,827)
-----------------------------------------------
Net Increase in Cash and Cash Equivalents $ 612,376 $ 25,051
Cash and Cash Equivalents at Beginning of Period 205,751 170,617
-----------------------------------------------
Cash and Cash Equivalents at End of Period $ 818,127 $ 195,668
===============================================
Cash equivalents are short-term marketable securities purchased with maturities
of six 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 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; underground gas storage; liquefied natural gas storage; retail
electric marketing; appliance service; plumbing; heating, ventilation and air
conditioning and other mechanical services; large energy-system ownership,
installation and management; and engineering and consulting services. We also
invest and participate in the development of natural gas pipelines, electric
generation and other energy-related projects. (See Note 2 "Business Segments"
for additional information on each operating segment.)
1. BASIS OF PRESENTATION
In our opinion, the accompanying unaudited Consolidated Financial Statements
contain all adjustments necessary to present fairly KeySpan's financial position
as of June 30, 2004, and the results of operations for the three and six months
ended June 30, 2004 and June 30, 2003, as well as cash flows for the six months
ended June 30, 2004 and June 30, 2003. 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, 2003. The December 31, 2003 financial statement information has
been derived from the 2003 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 the current period
financial statement presentation.
Consolidated earnings are seasonal in nature primarily due to the significant
contribution to earnings of the gas distribution operations. As a result, we
expect to earn most of our annual earnings in the first and fourth quarters of
the fiscal year.
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 3.6 million common stock options outstanding at June 30,
2004 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.
7
Under the requirements of Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share" our basic and diluted EPS are as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
(In Thousands of Dollars, Except Per Share Amounts) 2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) for common stock $ 129,278 $ (7,399) $ 375,514 $ 234,405
Interest savings on convertible preferred stock 129 - 514 265
Houston Exploration dilution (76) (57) (158) (144)
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) for common stock - adjusted $ 129,331 $ (7,456) $ 375,870 $ 234,526
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding (000) 160,167 157,943 160,030 157,414
Add dilutive securities:
Options 1,045 814 1,005 822
Convertible preferred stock 221 - 221 228
- ------------------------------------------------------------------------------------------------------------------------------------
Total weighted average shares outstanding - assuming dilution 161,433 158,757 161,256 158,464
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss )per share $ 0.81 $ (0.05) $ 2.35 $ 1.49
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share $ 0.80 $ (0.05) $ 2.33 $ 1.48
- ------------------------------------------------------------------------------------------------------------------------------------
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 six to eleven years and
power purchase agreements having remaining terms of 23 years. The Electric
Services segment also includes subsidiaries that own or lease and operate the
2,450 megawatt ("MW") Ravenswood electric generation facility ("Ravenswood
facility"), located in Queens, New York, which includes the recently completed
250 MW combined-cycle electric generating unit located at the Ravenswood site
("Ravenswood Expansion"). 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. The Electric Services segment also conducts
retail marketing of electricity to commercial customers.
8
The Energy Services segment includes companies that provide energy-related
services to customers primarily located within the Northeastern United States,
with concentrations in the New York City metropolitan area, including New
Jersey, as well as Rhode Island, Pennsylvania, Massachusetts and New Hampshire,
through the following lines of business: (i) Home Energy Services, which
provides residential and small commercial customers with service and maintenance
of energy systems and appliances; and (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.
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 include our 23.5%
interest in The Houston Exploration Company ("Houston Exploration") an
independent natural gas and oil exploration company, as well as our wholly-owned
subsidiaries KeySpan Exploration and Production, LLC ("KeySpan Exploration and
Production"), which is engaged in a joint venture with Houston Exploration, as
well as Seneca-Upshur Petroleum, Inc ("Seneca-Upshur").
On June 2, 2004, KeySpan exchanged 10.8 million shares of common stock of
Houston Exploration for 100% of the stock of Seneca-Upshur, previously a wholly
owned subsidiary of Houston Exploration. This transaction reduced our interest
in Houston Exploration from 55% to the current level of 23.5%. As part of this
transaction, Houston Exploration retired 4.6 million of its common shares and
issued 6.8 million new shares in a public offering. Based on Houston
Exploration's announced offering price of $48.00 per share, Seneca-Upshur's
shares were valued at the equivalent of $449 million, or $41.57 per share.
Seneca-Upshur's assets consist of West Virginia gas producing properties valued
at $60 million, and $389 million in cash. This transaction resulted in a gain to
KeySpan of $150.1 million. Effective June 1, Houston Exploration's earnings and
our ownership interest in Houston Exploration have been accounted for on the
equity basis of accounting. The deconsolidation of Houston Exploration required
the recognition of certain deferred taxes on our remaining investment resulting
in a net deferred tax expense of $44.1 million. Therefore, the net gain on the
share exchange less the deferred tax provision was $106 million, or $0.66 per
share.
Subsidiaries in this segment also hold a 20% equity interest in the Iroquois Gas
Transmission System LP, a pipeline that transports Canadian gas supply to
markets in the Northeastern United States and a 50% interest in the Premier
Transmission Pipeline in Northern Ireland. Further, KeySpan has a 17.4%
ownership interest in KeySpan Canada, a subsidiary with natural gas processing
plants and gathering facilities in Western Canada.
On April 1, 2004, KeySpan and KeySpan Facilities Income Fund (the "Fund"), which
previously owned a 39.09% interest in KeySpan Canada, consummated a transaction
whereby the Fund sold 15.617 million units of the Fund at a price of CDN$12.60
per unit for gross total proceeds of approximately CDN$196.8 million. The
proceeds of the offering were used by the Fund to acquire an additional 35.91%
interest in KeySpan Canada from KeySpan. We received net proceeds of
approximately CDN$186.3 million (or approximately US$135 million), after
9
commissions and expenses. The Fund's ownership in KeySpan Canada increased from
39.1% to 75%, and KeySpan's ownership of KeySpan Canada decreased to 25%.
KeySpan recorded a gain of $22.8 million ($10.1 million after-tax, or $0.06 per
share) on this transaction. Effective April 1, KeySpan Canada's earnings and our
ownership interest in KeySpan Canada have been accounted for on the equity basis
of accounting.
On July 2, 2004, the Fund issued an additional 10.7 million units, the proceeds
of which were used to fund the acquisition of the midstream assets of Chevron
Canada Midstream Inc. This transaction had the effect of further diluting
KeySpan's ownership of KeySpan Canada to 17.4%.
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. As a result of the Houston Exploration
stock transaction, the total assets associated with our gas exploration and
production operations, including cash from the transaction, were $640 million at
June 30, 2004, compared to $1.5 billion at December 31, 2003. Total assets
associated with KeySpan's other energy-related investments were approximately
$600 million at June 30, 2004 compared to $900 million at December 31, 2003, as
a result of the KeySpan Canada transaction.
In the first quarter of 2004 we reclassified the operating results of our
electric marketing subsidiary from the Energy Services segment to the Electric
Services segment. As a result we reclassified the financial results for all
periods of 2003. The reportable segment information is as follows:
- ----------------------------------------------------------------------------------------------------------------------------------
Energy Investments
--------------------------
Gas
Gas Electric Energy Exploration Other
(InThousands of Dollars) Distribution Services Services and Production Investments Eliminations Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 2004
Unaffiliated revenue 676,363 433,763 129,877 118,926 6,842 - 1,365,771
Intersegment revenue - - 4,147 - 1,278 (5,425) -
Operating income (Loss) 35,065 67,912 (4,906) 11,388 5,480 8,373 123,312
Three Months Ended June 30, 2003
Unaffiliated revenue 732,036 392,345 132,268 122,875 28,628 - 1,408,152
Intersegment revenue - 26 1,542 - 1,252 (2,820) -
Operating income (Loss) 31,616 52,100 (10,463) 50,148 9,074 5,754 138,229
- ----------------------------------------------------------------------------------------------------------------------------------
Eliminating items include intercompany interest income and expense, the
elimination of certain intercompany accounts, as well as activities of our
corporate and administrative areas.
Because of the nature of our Electric Services business, electric revenues are
derived from two large customers - the NYISO and LIPA. Electric Services
revenues from these customers for the three months ended June 30, 2004 and 2003
represent approximately 15% of our consolidated revenues in both periods.
10
- ------------------------------------------------------------------------------------------------------------------------------------
Energy Investments
---------------------------
Gas
Gas Electric Energy Exploration Other
(In Thousands of Dollars) Distribution Services Services and Production Investments Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 2004
Unaffiliated revenue 2,604,142 792,899 258,936 271,345 34,022 - 3,961,344
Intersegment revenue - - 7,583 - 2,543 (10,126) -
Operating income (Loss) 414,717 115,111 (23,380) 73,496 18,402 11,640 609,986
Six Months Ended June 30, 2003
Unaffiliated revenue 2,564,737 790,045 261,333 250,722 53,840 - 3,920,677
Intersegment revenue - 51 2,968 - 2,504 (5,523) -
Operating income (Loss) 396,554 91,744 (19,585) 105,738 19,198 1,274 594,923
- ------------------------------------------------------------------------------------------------------------------------------------
Eliminating items include intercompany interest income and expense, the
elimination of certain intercompany accounts, as well as activities of our
corporate and administrative areas.
Because of the nature of our Electric Services business, electric revenues are
derived from two large customers - the NYISO and LIPA. Electric Services
revenues from these customers for the six months ended June 30, 2004 and 2003
represent approximately 10% of our consolidated revenues for both periods.
3. COMPREHENSIVE INCOME
The table below indicates the components of comprehensive income:
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
(In Thousands of Dollars) 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) for common stock $ 129,278 $ (7,399) $ 375,514 $ 234,405
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax
Reclassification adjustments for loss (gains) realized in net income 5,502 8,817 16,531 11,171
Foreign currency translation adjustments (15,167) 17,773 (17,063) 27,526
Unrealized gains (losses) on marketable securities 29 5,405 542 2,249
Premiums on derivative financial instruments - (3,437) 3,437 (3,437)
Deconsolidation of certain subsidiaries (6,711) - (6,711) -
Unrealized gain (losses) on derivative financial instruments 41,285 (6,184) (1,173) (20,933)
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax 24,938 22,374 (4,437) 16,576
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 154,216 $ 14,975 $ 371,077 $ 250,981
- ------------------------------------------------------------------------------------------------------------------------------------
Related tax (benefit) expense
Reclassification adjustments for loss (gains) realized in net income 2,963 4,748 8,902 6,015
Foreign currency translation adjustments (8,167) 9,570 (9,188) 14,822
Unrealized gains (losses) on marketable securities 16 2,910 290 1,211
Premiums on derivative financial instruments - (1,851) 1,851 (1,851)
Deconsolidation of certain subsidiaries 5,016 - 5,016 -
Unrealized gain (losses) on derivative financial instruments 22,231 (3,329) (631) (11,271)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Tax (Benefit) Expense $ 22,059 $ 12,048 $ 6,240 $ 8,926
- ------------------------------------------------------------------------------------------------------------------------------------
11
4. HEDGING AND DERIVATIVE FINANCIAL INSTRUMENTS
Financially-Settled Commodity Derivative Instruments - Hedging Activities: From
time to time, KeySpan subsidiaries have utilized derivative financial
instruments, such as futures, options and swaps, for the purpose of hedging the
cash flow variability associated with changes in commodity prices. KeySpan is
exposed to commodity price risk primarily with regard to its gas exploration and
production activities and its electric generating facilities at the Ravenswood
site. Derivative financial instruments are employed by Houston Exploration to
hedge cash flow variability associated with forecasted sales of natural gas. The
Ravenswood facility uses derivative financial instruments to hedge the cash flow
variability associated with the purchase of natural gas and oil that will be
consumed during the generation of electricity. The Ravenswood facility also
hedges the cash flow variability associated with a portion of on-peak electric
energy sales.
The majority of these derivative financial instruments are cash flow hedges that
qualify for hedge accounting under SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS 149 "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities," collectively
SFAS 133, and are not considered held for trading purposes as defined by current
accounting literature. Accordingly, we carry the fair market value of our
derivative instruments on the Consolidated Balance Sheet as either a current or
deferred asset or liability, as appropriate, and defer the effective portion of
unrealized gains or losses in accumulated other comprehensive income. Since
Houston Exploration is no longer a consolidated subsidiary, the fair market
value of their outstanding derivative instruments are not reflected on the June
30, 2004 Consolidated Balance Sheet. Gains and losses are reclassified from
accumulated other comprehensive income to the Consolidated Statement of Income
in the period the hedged transaction affects earnings. Gains and losses are
reflected as a component of either revenue or fuel and purchased power depending
on the hedged transaction. Hedge ineffectiveness results from changes during the
period in the price differentials between the index price of the derivative
contract and the index price at the point of sale for the cash flow that is
being hedged, and is recorded directly to earnings.
With respect to price exposure associated with fuel purchases for the Ravenswood
facility, KeySpan employs standard NYMEX natural gas futures contracts 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 April 2006. We use standard NYMEX futures
prices to value the gas futures contracts and market quoted forward prices to
value oil swap contracts. The fair market value of these derivative instruments
at June 30, 2004 was $0.4 million. A substantial portion of these derivative
instruments, which are reported in other comprehensive income, are expected to
be reclassified into earnings over the next twelve months.
12
We have also engaged in the use of cash-settled swap instruments to hedge the
cash flow variability associated with a portion of forecasted electric energy
sales from the Ravenswood facility. Our hedging strategy is to hedge
approximately 50% of forecasted on-peak summer season electric energy sales and
a portion of forecasted electric energy sales for the remainder of the year. The
maximum length of time over which we have hedged cash flow variability is
through December 2005. We use market quoted forward prices to value these
outstanding derivatives. The fair market value of these derivative instruments
at June 30, 2004 was $1.4 million. The estimated amount of gains associated with
such derivative instruments that are reported in other comprehensive income and
that are expected to be reclassified into earnings over the next twelve months
is $1.5 million, or approximately $1.0 million after-tax.
The table below summarizes the fair value of outstanding financially-settled
commodity derivative instruments that qualify for hedge accounting at June 30,
2004 and the related line item on the Consolidated Balance Sheet. As noted
earlier, derivative instruments employed by Houston Exploration are no longer
reflected on KeySpan's Consolidated Balance Sheet. Fair value is the amount at
which derivative instruments could be exchanged in a current transaction between
willing parties, other than in a forced liquidation sale.
- -----------------------------------------------------------------------------------------------------
(In Thousands of Dollars) June 30, 2004 December 31, 2003
- -----------------------------------------------------------------------------------------------------
Gas Contracts:
Other current assets $ 12 $ 3,458
Accounts payable and other liabilities - (35,592)
Other deferred liabilities (16) (4,734)
Oil Contracts:
Other current assets 382 -
Other deferred charges (20) 385
Electric Contracts:
Other current assets 1,501 -
Other deferred liabilities (123) 259
- ----------------------------------------------------------------------------------------------------
$ 1,736 $ (36,224)
- ----------------------------------------------------------------------------------------------------
Financially-Settled Commodity Derivative Instruments that Do Not Qualify for
Hedge Accounting: KeySpan subsidiaries also have employed a limited number of
financial derivatives that did not qualify for hedge accounting treatment under
SFAS 133. In 2003, we sold a "swaption" to hedge the cash flow variability
associated with 50 MW of forecasted 2004 summer electric energy sales from the
Ravenswood facility. The swaption is an option that gives the counterparty the
right, but not the obligation, to enter into a swap transaction with KeySpan in
the future at a given strike price. This swaption was converted into a swap at
the election of the counterparty in June 2004. The resulting premium payment
KeySpan received was recorded into income at the time the swaption was
exercised. The swap qualifies for hedge accounting treatment and its market
value at June 30, 2004 is reflected in the above table.
13
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 England service territories. The accounting for these derivative instruments
is subject to SFAS 71 "Accounting for the Effects of Certain Types of
Regulation." Therefore, changes in the fair 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. At June 30, 2004, these
derivatives had a net fair market value of $28 million and are reflected as a
regulatory liability on the Consolidated Balance Sheet.
Physically-Settled Commodity Derivative Instruments: SFAS 133 establishes
criteria that must be satisfied in order for option contracts, forward contracts
with optionality features, or contracts that combine a forward contract and a
purchase option contract to be exempted as normal purchases and sales. Based
upon a continuing review of our physical gas 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. 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. At June 30, 2004 these contracts had a net negative
fair market value of $3.5 million, and are reflected as a $3.9 million
regulatory asset and $0.4 million 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 received the fixed
coupon rate associated with these bonds and paid our swap counterparties a
variable interest rate based on LIBOR, that was reset on a semi-annual basis.
These swaps were designated as fair-value hedges and qualified for "short-cut"
hedge accounting treatment under SFAS 133. In the first quarter of 2004, we paid
our counterparty an average interest rate of 6.44%, and as a result, we realized
interest savings of $0.5 million.
On April 7, 2004 we terminated these swap agreements and received $1.2 million
from our swap counterparties, of which $0.7 million represented accrued swap
interest. The difference between the termination settlement amount and the
amount of accrued interest, $0.5 million, will be recorded as a reduction to
interest expense over the remaining life of the bonds.
KeySpan has a leveraged lease financing arrangement associated with the
Ravenswood Expansion. In May 2004, the facility was acquired by a lessor from
our subsidiary, KeySpan Ravenswood, LLC, and simultaneously leased back to that
subsidiary. In connection with this sale/leaseback transaction, KeySpan utilized
a $275 million treasury lock (at 4.2%) to hedge the 10-year US Treasury
component of the underlying notes issued by the lessor to purchase the facility.
The treasury lock was in effect for a five-week period during which time the
10-year US Treasury increased 70 basis points. KeySpan did not designate the
14
derivative instrument as a hedge for accounting purposes. The treasury lock
settled in May 2004 and KeySpan received cash proceeds of $12.6 million which
was recorded in other income and (deductions) in the Consolidated Statement of
Income. (See Note 6. "Financial Guarantees and Contingencies" for additional
information regarding the sale/leaseback transaction.)
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. 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 was required to make a payment of $27,500 per heating degree day to its
counterparties when actual weather experienced during this time frame was above
4,440 heating degree days, which equates to approximately 2% colder than normal
weather, based on the then most recent 20-year average for normal weather. The
maximum amount KeySpan was required to pay on its sold call options was $5.5
million. With respect to purchased put options, KeySpan would have received a
$27,500 per heating degree day payment from its counterparties when actual
weather was below 4,266 heating degree days, or approximately 2% warmer than
normal. The maximum amount KeySpan would have received on its purchased put
options was $11 million. The net premium cost for these options was $0.4
million. We account for these derivatives pursuant to the requirements of EITF
99-2, "Accounting for Weather Derivatives." In this regard, such instruments are
accounted for using the "intrinsic value method" as set forth in such guidance.
During the first quarter of 2004, weather, as measured in heating degree-days,
was 9.4% colder than normal and, as a result $4.1 million was recorded as a
reduction to revenues.
Derivative contracts are primarily used to manage exposure to market risk
arising from changes in commodity prices, interest rates and weather. 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. We believe that our credit risk related to the above mentioned
derivative financial instruments is no greater than the risk associated with the
primary contracts which they hedge and that the elimination of a portion of the
price risk reduces volatility in our reported results of operations, financial
position and cash flows and lowers overall business risk.
5. RECENT ACCOUNTING PRONOUNCEMENTS
In March 2004, the Financial Accounting Standards Board ("FASB") issued, as a
proposal, FASB Staff Position ("FSP") 106-b "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003." When issued in final, this guidance will supersede
FSP 106-1 issued in 2003 and will clarify the accounting and disclosure
requirements for employers with postretirement benefit plans that have been or
15
will be affected by the passage of the Medicare Prescription Drug Improvement
and Modernization Act of 2003 ("the Act"). The Act introduces two new features
to Medicare that an employer needs to consider in measuring its obligation and
net periodic postretirement benefit costs. The effective date for the new
requirements is the first interim or annual period beginning after June 15, 2004
or for KeySpan's purposes the third quarter of 2004.
KeySpan's retiree health benefit plan currently includes a prescription drug
benefit that is provided to retired employees. The implementation of the new
requirements is not expected to have a material impact on KeySpan's results of
operations and cash flows
6. FINANCIAL GUARANTEES AND CONTINGENCIES
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, then a 2,200-megawatt electric generating facility
located in Queens, New York, in part, through a variable interest entity from
Consolidated Edison Company of New York, Inc. ("Consolidated Edison") on June
18, 1999 for approximately $597 million. In order to reduce the initial cash
requirements, we entered into a lease arrangement ("Master Lease") with a
variable interest, unaffiliated financing entity that acquired a portion of the
facility, or six 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 units or the variable interest entity.
KeySpan has guaranteed all payment and performance obligations of our subsidiary
under the Master Lease. Monthly lease payments substantially equal the monthly
interest expense on such debt securities.
The initial term of the Master Lease expired on June 20, 2004 and was
automatically extended until June 20, 2009 pursuant to the terms of the Master
Lease. On all future semi-annual payment dates, 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; or (ii) terminate the Master Lease and dispose of the
facility. 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.
We have classified the Master Lease as $412.3 million of long-term debt on the
Consolidated Balance Sheet based on our current status as primary beneficiary.
Further, we have an asset on the Consolidated Balance Sheet for an amount
substantially equal to the fair market value of the leased assets at the
inception of the lease, less depreciation since that date, or approximately $383
million. Under the terms of our credit facility, the Master Lease has been
considered debt in the ratio of debt-to-total capitalization since the inception
of the lease. If our subsidiary that leases the Ravenswood facility were not
able to fulfill its payment obligations with respect to the Master Lease
payments, 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.
16
Sale/leaseback Transaction: KeySpan has a leveraged lease financing arrangement
associated with the Ravenswood Expansion. In May 2004, the unit was acquired by
a lessor from our subsidiary, KeySpan Ravenswood, LLC, and simultaneously leased
back to that subsidiary. All the obligations of KeySpan Ravenswood, LLC have
been unconditionally guaranteed by KeySpan. This lease transaction generated
cash proceeds of $385 million, which approximates the fair market value of the
facility, as determined by a third-party appraiser. The cash proceeds from this
transaction were initially used to redeem outstanding commercial paper. This
lease transaction qualifies as an operating lease under SFAS 98 "Accounting for
Leases: Sale/Leaseback Transactions Involving Real Estate; Sales-Type Leases of
Real Estate; Definition of the Lease Term; an Initial Direct Costs of Direct
Financing Leases, an amendment of FASB Statements No.13, 66, 91 and a rescission
of FASB Statement No. 26 and Technical Bulletin No. 79-11." The lease has an
initial term of 36 years and the yearly operating lease expense will be
approximately $17 million per year. Lease payments will fluctuate from year to
year, but are substantially paid over the first 16 years.
Asset Retirement Obligations: In 2003, KeySpan adopted SFAS 143, "Accounting for
Asset Retirement Obligations." SFAS 143 required us to record a liability and
corresponding asset representing the present value of legal obligations
associated with the retirement of tangible, long-lived assets that existed at
the inception of the obligation. At the time of implementation, KeySpan recorded
an asset retirement obligation related to its investment in Houston Exploration.
Since Houston Exploration's operations are no longer consolidated in KeySpan's
financial statements, this liability is no longer reflected on KeySpan's
Consolidated Balance Sheet.
KeySpan's largest asset base is its gas transmission and distribution system. A
legal obligation exists due to certain safety requirements at final abandonment.
In addition, a legal obligation may be construed to exist with respect to
KeySpan's liquefied natural gas ("LNG") storage tanks due to clean up
responsibilities upon cessation of use. However, mass assets such as storage,
transmission and distribution assets are believed to operate in perpetuity and,
therefore, have indeterminate cash flow estimates. Since that exposure is in
perpetuity and cannot be measured, no liability was 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 such obligation.
Environmental Matters
New York Sites: Within the State of New York we have identified 43 historical
manufactured gas plant ("MGP") sites and related facilities, which were owned or
operated by KeySpan subsidiaries or such companies' predecessors.
We have identified 28 of these sites as being associated with the historical
operations of KEDNY. One site has been fully remediated. The remaining 27 sites
will be investigated and, if necessary, remediated under the terms and
conditions of Administrative Orders on Consent ("ACO"), Voluntary Cleanup
Agreements ("VCA") or Brownfield Cleanup Agreements ("BCA"). Expenditures
incurred to date by us with respect to KEDNY MGP-related activities total $44.8
million.
17
We have identified 15 of these sites as being associated with the historical
operations of KEDLI. Expenditures incurred to date by us with respect to KEDLI
MGP-related activities total $35.3 million. One site has been fully investigated
and requires no further action. The remaining sites will be investigated and, if
necessary, remediated under the conditions of ACOs, VCAs or BCAs.
We presently estimate the remaining cost of our KEDNY and KEDLI MGP-related
environmental remediation activities will be $217.0 million, which amount has
been accrued by us as a reasonable estimate of probable cost for known sites.
Expenditures incurred to date by us with respect to these MGP-related activities
total $80.1 million.
With respect to remediation costs, the KEDNY and KEDLI rate plans generally
provide for the recovery from customers of investigation and remediation costs.
At June 30, 2004, we have reflected a regulatory asset of $237.7 million for our
KEDNY/KEDLI MGP sites. In accordance with New York State Public Service
Commission ("NYPSC") policy, KeySpan records a reduction to regulatory
liabilities as costs are incurred for environmental clean-up activities. At June
30, 2004, these previously deferred regulatory liabilities totaled $49.1
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.
We are also responsible for environmental obligations associated with the
Ravenswood facility, purchased from Consolidated Edison in 1999, including
remediation activities associated with its historical operations and those of
the MGP facilities that formerly operated at the site. We are not responsible
for liabilities arising from disposal of waste at off-site locations prior to
the acquisition closing and any monetary fines arising from Consolidated
Edison's pre-closing conduct. We presently estimate the remaining environmental
clean up activities for this site will be $3.2 million, which amount has been
accrued by us. Expenditures incurred to date total $1.8 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 of
these sites. 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 8 other
sites. In addition, Boston Gas Company, Colonial Gas Company, and Essex Gas
Company have each assumed responsibility for remediating 3 sites. At this time,
it is uncertain as to whether Boston Gas Company, Colonial Gas Company or Essex
Gas Company have or share responsibility for remediating any of the other sites.
No notice of responsibility has been issued to us for any of these sites from
any governmental environmental authority.
18
We presently estimate the remaining cost of these Massachusetts KEDNE
MGP-related environmental cleanup activities will be $22.8 million, which amount
has been accrued by us as a reasonable estimate of probable cost for known
sites. Expenditures incurred by KeySpan with respect to these MGP-related
activities total $15.8 million.
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. At four of these sites we have entered
into cost sharing agreements with other parties who share responsibility for
remediation of these sites. EnergyNorth also has entered into an agreement with
the United States Environmental Protection Agency ("EPA") for the contamination
from the Nashua site that was allegedly commingled with asbestos at the Nashua
River Asbestos Site, adjacent to the Nashua MGP site.
We presently estimate the remaining cost of EnergyNorth MGP-related
environmental cleanup activities will be $12.5 million, which amount has been
accrued by us as a reasonable estimate of probable cost for known sites.
Expenditures incurred by KeySpan, with respect to these MGP-related activities
total $8.5 million.
By rate orders, the Massachusetts Department of Telecommunications and Energy
("DTE") and the New Hampshire Public Utility Commission ("NHPUC") provide for
the recovery of site investigation and remediation costs and, accordingly, at
June 30, 2004, we have reflected a regulatory asset of $49.6 million for the
KEDNE MGP sites. Colonial Gas Company and Essex Gas Company are not subject to
the provisions of SFAS 71 and therefore have recorded no regulatory asset.
However, rate plans currently in effect for these subsidiaries provide for the
recovery of investigation and remediation costs.
KeySpan New England, LLC Sites: We are aware of three non-utility sites
associated with KeySpan New England, LLC for which we may have or share
environmental remediation or ongoing maintenance responsibility. These three
sites, located in Philadelphia, Pennsylvania, New Haven, Connecticut and
Everett, Massachusetts, were associated with historical operations involving the
production of coke and related industrial processes. Honeywell International,
Inc. and Beazer East, Inc. (both former owners and/or operators of certain
facilities at Everett (the "Everett Facility") together with KeySpan, have
entered into an ACO with the Massachusetts Department of Environmental
Protection for the investigation and development of a remedial response plan for
a portion of that site. KeySpan, Honeywell and Beazer East have entered into a
cost-sharing agreement under which each company has agreed to pay one-third of
the costs of compliance with the consent order, while preserving any claims it
may have against the other companies for, among other things, reallocation of
proportionate liability.
19
We presently estimate the remaining cost of our environmental cleanup activities
for the three non-utility sites will be approximately $24.1 million, which
amount has been accrued by us as a reasonable estimate of probable costs for
known sites. Expenditures incurred by KeySpan with respect to these sites total
$8.7 million.
We believe that in the aggregate, the accrued liability for these MGP sites and
related facilities identified above are reasonable estimates of the probable
cost for the investigation and remediation of these sites and facilities. As
circumstances warrant, we periodically re-evaluate the accrued liabilities
associated with MGP sites and related facilities. We may be required to
investigate and, if necessary, remediate each site previously noted, 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 cash flows. 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, 2003
Note 7 to those Consolidated Financial Statements "Contractual Obligations,
Financial Guarantees 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, 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.
As previously reported, KeySpan and certain of its current and former officers
and directors are defendants in a consolidated class action lawsuit filed in the
United States District Court for the Eastern District of New York. This lawsuit
alleges, 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.
In June 2004, the parties reached an agreement in principle to settle the
consolidated class action lawsuit. The proposed settlement provides for KeySpan
to make certain payments to plaintiffs, all of which is to be funded by the
insurance carrier providing liability coverage for KeySpan's directors and
officers. While KeySpan continues to deny any wrongdoing, we believe the
proposed settlement is in the best interest of KeySpan and its shareholders. The
settlement is subject to court approval and finalization of all necessary
documentation, the timing of which cannot be determined.
Also, as previously reported two shareholder derivative actions were commenced
in the same court as the class action lawsuit against certain current and former
officers and directors of KeySpan, alleging, among other things, breaches of
fiduciary duty, violations of the New York Business Corporation Law and
20
violations of Section 20(a) of the Exchange Act. Each of these proceedings
sought monetary damages in an unspecified amount. In April 2004, the court
dismissed both derivative actions without prejudice following the withdrawal of
such actions by the plaintiffs.
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 ("LILCO") and others. 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 are recoverable from LIPA through the Power Supply Agreement
("PSA") between LIPA and KeySpan.
KeySpan is unable to determine the outcome of the outstanding asbestos
proceedings, but does not believe that such outcome, if adverse, will have a
material effect on its financial condition, results of operation or cash flows.
KeySpan believes that its cost recovery rights under the PSA, its
indemnification rights against third parties and its insurance coverage (above
applicable deductible limits) cover its exposure for asbestos liabilities
generally.
Financial Guarantees
KeySpan has issued financial guarantees in the normal course of business, on
behalf of its subsidiaries, to various third party creditors. At June 30, 2004,
the following amounts would have to be paid by KeySpan in the event of
non-payment by the primary obligor at the time payment is due:
- --------------------------------------------------------------------------------------------------------------------------
Amount of
Nature of Guarantee (In Thousands of Dollars) Exposure Expiration Dates
- --------------------------------------------------------------------------------------------------------------------------
Medium-Term Notes - KEDLI (i) $ 525,000 2008-2010
Industrial Development Revenue Bonds (ii) 128,000 2027
Ravenswood - Master Lease (iii) 425,000 2019
Ravenswood - Sale/leaseback (iv) 385,000 2040
Surety Bonds (v) 269,000 Revolving
Commodity Guarantees and Other (vi) 64,000 2005
Letters of Credit (vii) 74,000 2005
- --------------------------------------------------------------------------------------------------------------------------
$ 1,870,000
- --------------------------------------------------------------------------------------------------------------------------
The following is a description of KeySpan's outstanding subsidiary guarantees:
(i) KeySpan has fully and unconditionally guaranteed $525 million to holders of
Medium-Term Notes issued by KEDLI. These notes are due to be repaid on
January 15, 2008 and February 1, 2010. KEDLI is required to comply with
certain financial covenants under the debt agreements. Currently, KEDLI is
in compliance with all covenants and management does not anticipate that
KEDLI will have any difficulty maintaining such compliance. The face value
of these notes is included in long-term debt on the Consolidated Balance
Sheet.
21
(ii) KeySpan has fully and unconditionally guaranteed the payment obligations of
its subsidiaries with regard to $128 million of Industrial Development
Revenue Bonds issued through the Nassau County and Suffolk County
Industrial Development Authorities for the construction of two
electric-generation peaking plants on Long Island. The face value of these
notes are included in long-term debt on the Consolidated Balance Sheet.
(iii)KeySpan has guaranteed all payment and performance obligations of KeySpan
Ravenswood, LLC, the lessee under the Master Lease. The initial term of the
Master Lease expired on June 20, 2004 and was automatically extended until
June 20, 2009. The Master Lease is classified as $412.3 million long-term
debt on the Consolidated Balance Sheet.
(iv) KeySpan has guaranteed all payment and performance obligations of KeySpan
Ravenswood, LLC, the lessee under the sale/leaseback transaction associated
with the 250 MW Ravenswood Expansion site. The initial term of the lease is
for 36 years. As noted previously, this lease qualifies as an operating
lease and is therefore not reflected on the Consolidated Balance Sheet.
(v) 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 contract, 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.
(vi) KeySpan has guaranteed commodity-related payments for certain of its
subsidiaries. These guarantees are provided to third parties to facilitate
physical and financial transactions involved in the purchase of natural
gas, oil and other petroleum products for electric production and marketing
activities. The guarantees cover actual purchases by these subsidiaries
that are still outstanding as of June 30, 2004.
(vii)KeySpan has arranged for stand-by letters of credit to be issued to third
parties that have extended credit to certain subsidiaries. Certain vendors
require us to post letters of credit to guarantee subsidiary performance
under our contracts and to ensure payment to our subsidiary subcontractors
and vendors under those contracts. Certain of our vendors also require
letters of credit to ensure reimbursement for amounts they are disbursing
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.
22
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 any such defaults may have on our consolidated
results of operations, financial condition or cash flows.
Other Contingencies: We derive a substantial portion of our revenues in our
Electric Services segment from a series of agreements with LIPA pursuant to
which we manage LIPA's transmission and distribution system and supply the
majority of LIPA's customers' electricity needs. The agreements terminate at
various dates between December 31, 2008 and May 28, 2013, and at this time, we
can provide no assurance that any of the agreements will be renewed or extended,
or if they were to be renewed or extended, the terms and conditions thereof. In
addition, given the complexity of these agreements, disputes arise from time to
time between KeySpan and LIPA concerning the rights and obligations of each
party to make and receive payments as required pursuant to the terms of these
agreements. As a result, KeySpan is unable to determine what effect, if any, the
ultimate resolution of these disputes will have on its financial condition,
results of operations or cash flows.
7. 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.
(Beginning in 2004, KeySpan officers that serve on the Houston Exploration Board
of Directors do not receive Houston Exploration stock options.) In 2003, KeySpan
and Houston Exploration adopted the prospective method of transition of
accounting for stock option expense 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,
net income and earnings per share would have decreased to the pro-forma amounts
indicated below. The 2004 pro-forma impact of Houston Exploration's stock
options are reflected for the five month period ended May 31, 2004.
23
- ----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
(In Thousands of Dollars, Except Per Share Amounts) 2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings available for common stock: $ 129,278 $ (7,399) $ 375,514 $ 234,405
As reported
Add: recorded stock-based compensation expense, net of tax 1,390 1,132 2,794 1,990
Deduct: total stock-based compensation expense, net of tax (2,371) (2,969) (4,959) (6,070)
- ----------------------------------------------------------------------------------------------------------------------------------
Pro-forma earnings $ 128,297 $ (9,236) $ 373,349 $ 230,325
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic - as reported $ 0.81 $ (0.05) $ 2.35 $ 1.49
Basic - pro-forma $ 0.80 $ (0.06) $ 2.33 $ 1.46
Diluted - as reported 0.80 $ (0.05) $ 2.33 $ 1.48
Diluted - pro-forma 0.79 $ (0.06) $ 2.32 $ 1.45
- ----------------------------------------------------------------------------------------------------------------------------------
8. POSTRETIREMENT BENEFITS
Pension Plans: The following information represents the consolidated net
periodic pension cost for the six months ended June 30, 2004 and 2003 for our
noncontributory defined benefit pension plans which cover substantially all
employees. Benefits are based on years of service and compensation. Funding for
pensions is in accordance with requirements of federal law and regulations.
KEDLI and Boston Gas Company are subject to certain deferral accounting
requirements mandated by the NYPSC and DTE, respectively for pension costs and
other postretirement benefit costs. Further, KeySpan's electric subsidiaries are
subject to certain "true-up" provisions in accordance with the LIPA service
agreements.
The calculation of net periodic pension cost is as follows:
- -------------------------------------------------------------------------------------------------------------
Six Months Ended June 30,
(In Thousands of Dollars) 2004 2003
- -------------------------------------------------------------------------------------------------------------
Service cost, benefits earned during the period $ 26,454 $ 23,766
Interest cost on projected benefit obligation 72,121 69,135
Expected return on plan assets (79,134) (65,278)
Net amortization and deferral 31,654 33,475
- -------------------------------------------------------------------------------------------------------------
Total pension cost $ 51,095 $ 61,097
- -------------------------------------------------------------------------------------------------------------
Other Postretirement Benefits: The following information represents the
consolidated net periodic other postretirement benefit cost for the six months
ended June 30, 2004 and 2003 for our noncontributory defined benefit plans
covering certain health care and life insurance benefits for retired employees.
We have been funding a portion of future benefits over employees' active service
lives through Voluntary Employee Beneficiary Association ("VEBA") trusts.
Contributions to VEBA trusts are tax deductible, subject to limitations
contained in the Internal Revenue Code.
24
Net periodic other postretirement benefit cost included the following
components:
- -----------------------------------------------------------------------------------------------------------
Six Months Ended June 30,
(In Thousands of Dollars) 2004 2003
- -----------------------------------------------------------------------------------------------------------
Service cost, benefits earned during the period $ 10,060 $ 9,413
Interest cost on accumulated
postretirement benefit obligation 37,006 34,902
Expected return on plan assets (16,946) (13,765)
Net amortization and deferral 23,398 17,908
- -----------------------------------------------------------------------------------------------------------
Other postretirement cost $ 53,518 $ 48,457
- -----------------------------------------------------------------------------------------------------------
In 2004, KeySpan is expected to contribute approximately $89 million to its
pension plans and approximately $58 million to its other postretirement benefit
plans, which are the same funding levels as reported in KeySpan's Annual Report
on Form 10-K for the Year Ended December 31, 2003. For the six months ended June
30, 2004, $115.4 million has been contributed.
9. LONG-TERM DEBT and COMMERCIAL PAPER
At June 30, 2004, KeySpan had $460 million of MEDS Equity Units outstanding at
8.75% consisting of a three-year forward purchase contract for our common stock
and a six-year note. The purchase contract commits us, in May 2005, three years
after the date of issuance of the MEDS Equity Units, to issue and the investors
to purchase, a number of shares of our common stock based on a formula tied to
the market price of our common stock at that time. The 8.75% coupon is composed
of interest payments on the six-year note of 4.9% and premium payments on the
three-year equity forward contract of 3.85%. These instruments have been
recorded as long-term debt on the Consolidated Balance Sheet. Further, upon
issuance of the MEDS Equity Units, we recorded a direct charge to retained
earnings of $49.1 million, which represents the present value of the forward
contract's premium payments.
There were 9.2 million MEDS Equity units issued which are subject to conversion
upon execution of the three-year forward purchase contract. The number of shares
to be issued depends on the average closing price of KeySpan's common stock over
the 20 day trading period ending on the third trading day prior to May 16, 2005.
If the average closing price over this time frame is less than or equal to
$35.30 of KeySpan's common stock, 13 million shares will be issued. If the
average closing price over this time frame is greater than or equal to $42.36,
10.9 million shares will be issued. The number of shares issued at a price
between $35.30 and $42.36 will be between 10.9 million and 13 million shares
based upon a sliding scale.
These securities are currently not considered convertible instruments for
purposes of applying SFAS 128 "Earnings Per Share" calculations, unless or until
such time as the market value of KeySpan's common stock reaches a threshold
appreciation price ($42.36 per share) that is higher than the current per share
market value. Interest payments do, however, reduce net income and earnings per
share.
25
In June 2004, KeySpan completed the restructuring of its credit facilities. We
entered into a new $640 million five year revolving credit facility to replace
the $450 million, 364 day facility which expired in June. We also amended our
existing three year $850 million facility due June 2006 to reduce commitments
thereunder by $190 million to a new level of $660 million. The two credit
facilities total $1.3 billion and are each syndicated among sixteen banks. These
facilities continue to support KeySpan's commercial paper program for working
capital needs.
The fees for these facilities are subject to a ratings-based grid, with an
annual fee of 0.08% on the new five-year facility and 0.125% on the existing
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 in the
five-year facility are based on the Eurodollar rate plus a margin of 0.40% for
loans up to 33% of the total five-year facility, and an additional 0.125% for
loans over 33% of the total five-year facility. In the three-year facility
Eurodollar loans are based on the Eurodollar rate plus a margin of 0.625% for
loans up to 33% of the total three-year facility, and an additional 0.125% for
loans over 33% of the total three-year facility. ABR loans are based on the
highest of the Prime Rate, the base CD rate plus 1%, or the Federal Funds
Effective Rate plus 0.5%. Competitive bid loans are based on bid results
requested by KeySpan from the lenders. We do not anticipate borrowing against
these facilities; however, if the credit rating on our commercial paper program
were to be downgraded, it may be necessary to do so.
The facilities contain certain affirmative and negative operating covenants,
including restrictions on KeySpan's ability to mortgage, pledge, encumber or
otherwise subject its property to any lien, as well as certain financial
covenants that require us to, among other things, maintain a consolidated
indebtedness to consolidated capitalization ratio of no more than 64% until the
expiration of the existing three-year facility in 2006, at which time it will be
lowered to 62%. Violation of this covenant could result in the termination of
the facilities and the required repayment of amounts borrowed thereunder, as
well as possible cross defaults under other debt agreements.
10. GAS EXPLORATION and PRODUCTION PROPERTY - DEPLETION
As described in Note 2 "Business Segments", KeySpan's investments in gas
exploration and production activities consists of its 23.5% ownership interest
in Houston Exploration, as well as KeySpan's wholly-owned subsidiary KeySpan
Exploration and Production, which is engaged in a joint drilling program with
Houston Exploration. Further KeySpan's investments in these activities also
includes its wholly owned subsidiary Seneca-Upshur. These assets are accounted
for under the full cost method of accounting. Under the full cost method, costs
of acquisition, exploration and development of natural gas and oil reserves are
capitalized into a "full cost pool" as incurred. Unproved properties and related
costs are excluded from the depletion and amortization base until a
determination as to the existence of proved reserves. Properties are depleted
and charged to operations using the unit of production method using proved
reserve quantities.
26
To the extent that such capitalized costs (net of accumulated depletion) less
deferred taxes exceed the present value (using a 10% discount rate) of estimated
future net cash flows from proved natural gas and oil reserves and the lower of
cost or fair value of unproved properties, less deferred taxes, such excess
costs are charged to operations, but would not have an impact on cash flows.
Once incurred, such impairment of gas properties is not reversible at a later
date even if gas prices increase. The ceiling test is calculated using natural
gas and oil prices in effect as of the balance sheet date, held flat over the
life of the reserves.
As a result of the stock transaction previously mentioned, KeySpan now accounts
for its investment in Houston Exploration on the equity method, i.e. Houston
Exploration's operations are not consolidated with KeySpan's other subsidiaries.
Therefore, we are now required to calculate the ceiling test on KeySpan
Exploration and Production's and Seneca-Uphsur's assets independently of Houston
Exploration's assets. Based on a report furnished by an indpendent reservoir
engineer, it was determined that the remaining proved undeveloped oil reserves
held in the joint venture required a substantial investment in order to develop.
Therefore, KeySpan and Houston Exploration elected not to develop these oil
reserves. As a result, in the second quarter of 2004 we recorded a $48.2 million
non-cash impairment charge to write down our wholly-owned gas exploration and
production subsidiaries' assets. This charge was recorded in depreciation,
depletion and amortization on the Consolidated Statement of Income.
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 the parent,
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.
27
- -----------------------------------------------------------------------------------------------------------------------------------
Statement of Income
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 2004
(In Thousands of Dollars) Guarantor KEDLI Other Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues $ 160 $ 181,373 $ 1,184,398 $ (160) $ 1,365,771
--------------------------------------------------------------------------------------------
Operating Expenses
Purchased gas - 96,907 266,223 - 363,130
Fuel and purchased power - - 130,347 - 130,347
Operations and maintenance (3,429) 33,724 447,216 - 477,511
Intercompany expense - 1,432 (1,432) -
Depreciation and amortization - 18,408 170,995 - 189,403
Operating taxes - 12,733 77,751 - 90,484
--------------------------------------------------------------------------------------------
Total Operating Expenses (3,429) 163,204 1,091,100 - 1,250,875
--------------------------------------------------------------------------------------------
Income from equity investments - - 8,416 - 8,416
--------------------------------------------------------------------------------------------
Operating Income (Loss) 3,589 18,169 101,714 (160) 123,312
--------------------------------------------------------------------------------------------
Interest charges (53,278) (14,833) (69,486) 49,122 (88,475)
Other income and (deductions) 177,853 159 175,732 (178,129) 175,615
--------------------------------------------------------------------------------------------
Total Other Income and (Deductions) 124,575 (14,674) 106,246 (129,007) 87,140
--------------------------------------------------------------------------------------------
Income Taxes (Benefit) (4,573) 2,343 81,945 - 79,715
--------------------------------------------------------------------------------------------
Net Income $ 132,737 $ 1,152 $ 126,015 $(129,167) $ 130,737
============================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
Statement of Income
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 2003
(In Thousands of Dollars) Guarantor KEDLI Other Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues $ 34 $ 177,340 $ 1,230,812 $ (34) $ 1,408,152
------------------------------------------------------------------------------------------
Operating Expenses
Purchased gas - 90,611 333,689 - 424,300
Fuel and purchased power - - 102,476 - 102,476
Operations and maintenance (5,424) 32,760 482,300 - 509,636
Intercompany expense 31 735 (735) (31) -
Depreciation and amortization (20) 18,064 124,246 - 142,290
Operating taxes (1,824) 16,954 80,121 - 95,251
------------------------------------------------------------------------------------------
Total Operating Expenses (7,237) 159,124 1,122,097 (31) 1,273,953
------------------------------------------------------------------------------------------
Income from Equity Investments 36 - 3,994 - 4,030
------------------------------------------------------------------------------------------
Operating Income (Loss) 7,307 18,216 112,709 (3) 138,229
------------------------------------------------------------------------------------------
Interest charges (53,403) (16,104) (56,720) 47,029 (79,198)
Other income and (deductions) 34,630 (1,809) (46,030) (36,282) (49,491)
------------------------------------------------------------------------------------------
Total Other Income and (Deductions) (18,773) (17,913) (102,750) 10,747 (128,689)
------------------------------------------------------------------------------------------
Income Taxes (Benefit) (5,528) 1,221 19,785 - 15,478
------------------------------------------------------------------------------------------
Net Income (Loss) $ (5,938) $ (918) $ (9,826) $ 10,744 $ (5,938)
==========================================================================================
28
- ------------------------------------------------------------------------------------------------------------------------------------
Statement of Income
- ------------------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 2004
(In Thousands of Dollars) Guarantor KEDLI Other Subsidiaries Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues $ 313 $ 652,456 $ 3,308,888 $ (313) $ 3,961,344
------------------------------------------------------------------------------------------------
Operating Expenses
Purchased gas - 387,996 1,201,707 - 1,589,703
Fuel and purchased power - - 231,959 - 231,959
Operations and maintenance (3,060) 66,941 906,096 - 969,977
Intercompany expense - 2,787 (2,787) - -
Depreciation and amortization - 48,249 312,839 - 361,088
Operating taxes - 32,276 180,487 - 212,763
------------------------------------------------------------------------------------------------
Total Operating Expenses (3,060) 538,249 2,830,301 - 3,365,490
------------------------------------------------------------------------------------------------
Income from equity investments - 14,132 - 14,132
------------------------------------------------------------------------------------------------
Operating Income (Loss) 3,373 114,207 492,719 (313) 609,986
------------------------------------------------------------------------------------------------
Interest charges (106,766) (30,696) (140,960) 105,882 (172,540)
Other income and (deductions) 475,382 533 173,782 (491,614) 158,083
------------------------------------------------------------------------------------------------
Total Other Income and (Deductions) 368,616 (30,163) 32,822 (385,732) (14,457)
------------------------------------------------------------------------------------------------
Income Taxes (Benefit) (10,435) 25,053 202,477 - 217,095
------------------------------------------------------------------------------------------------
Net Income $ 382,424 $ 58,991 $ 323,064 $ (386,045) $ 378,434
================================================================================================