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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 March 31, 2005
[ ] 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
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
One MetroTech Center, Brooklyn, New York 11201
175 East Old Country Road, Hicksville, New York 11801
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(Address of principal executive offices) (Zip Code)
(718) 403-1000 (Brooklyn)
(631) 755-6650 (Hicksville)
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.[X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).[X}
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding at April 13, 2005
--------------------- -------------------------------
$.01 par value 161,614,217
KEYSPAN CORPORATION AND SUBSIDIARIES
INDEX
Part I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Consolidated Balance Sheet -
March 31, 2005 and December 31, 2004 3
Consolidated Statement of Income -
Three Months Ended March 31, 2005 and 2004 5
Consolidated Statement of Cash Flows -
Three Months Ended March 31, 2005 and 2004 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 34
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 59
Item 4. Controls and Procedures 62
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 62
Item 6. Exhibits and Reports on Form 8-K 62
Signatures 63
2
CONSOLIDATED BALANCE SHEET
(Unaudited)
- --------------------------------------------------------------------------------------------------------------------------
(In Millions of Dollars) March 31, 2005 December 31, 2004
- --------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and temporary cash investments $ 223.0 $ 922.0
Accounts receivable 1,160.3 788.5
Unbilled revenue 500.9 591.4
Allowance for uncollectible accounts (85.5) (67.8)
Gas in storage, at average cost 212.2 515.5
Material and supplies, at average cost 127.6 123.4
Other 130.9 162.7
Assets of discontinued operations 3.4 42.9
------------------------------ ---------------------------
2,272.8 3,078.6
------------------------------ ---------------------------
Investments and Other 236.6 272.9
Property
Gas 6,938.7 6,871.2
Electric 2,433.7 2,402.1
Other 403.2 398.6
Accumulated depreciation (2,757.2) (2,702.3)
Gas exploration and production, at cost 181.3 187.1
Accumulated depletion (105.7) (97.5)
Property of discontinued operations 3.2 8.7
------------------------------ ---------------------------
7,097.2 7,067.9
------------------------------ ---------------------------
Deferred Charges
Regulatory assets 537.9 555.4
Goodwill and other intangible assets 1,666.7 1,677.6
Other 770.2 711.7
------------------------------ ---------------------------
2,974.8 2,944.7
------------------------------ ---------------------------
Total Assets $ 12,581.4 $ 13,364.1
============================== ===========================
- --------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to the Consolidated Financial Statements.
3
CONSOLIDATED BALANCE SHEET
(Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------
(In Millions of Dollars) March 31, 2005 December 31, 2004
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND CAPITALIZATION
Current Liabilities
Accounts payable and other liabilities $ 777.9 $ 906.7
Commercial paper 470.9 912.2
Current redemption of long-term debt 1.5 16.1
Current redemption of preferred stock 75.0 55.3
Taxes accrued 247.4 161.6
Dividends payable 72.7 74.1
Customer deposits 41.7 43.3
Interest accrued 63.9 48.8
Liabilities of discontinued operations 4.6 64.2
------------------------------ -----------------------------
1,755.6 2,282.3
------------------------------ -----------------------------
Deferred Credits and Other Liabilities
Regulatory liabilities:
Miscellaneous liabilities 145.7 74.0
Removal cost recovered 509.5 496.5
Deferred income tax 1,117.9 1,124.1
Postretirement benefits and other reserves 938.0 901.3
Other 119.8 139.1
------------------------------ -----------------------------
2,830.9 2,735.0
------------------------------ -----------------------------
Commitments and Contingencies (See Note 6) - -
Capitalization
Common stock 3,509.5 3,502.0
Retained earnings 953.3 792.2
Other comprehensive income (73.3) (54.3)
Treasury stock (322.2) (345.1)
------------------------------ -----------------------------
Total common shareholders' equity 4,067.3 3,894.8
Preferred stock - 19.7
Long-term debt and capital leases 3,914.2 4,418.7
------------------------------ -----------------------------
Total Capitalization 7,981.5 8,333.2
------------------------------ -----------------------------
Minority Interest in Subsidiary Companies 13.4 13.6
------------------------------ -----------------------------
Total Liabilities and Capitalization $ 12,581.4 $ 13,364.1
============================== =============================
- ---------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to the Consolidated Financial Statements.
4
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
- -------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31,
(In Millions of Dollars, Except Per Share Amounts) 2005 2004
- --------------------------------------------------------------------------------------------------- ------------------
Revenues
Gas Distribution $ 2,025.5 $ 1,927.8
Electric Services 400.4 359.1
Energy Services 44.5 44.1
Gas Exploration and Production - 152.4
Energy Investments 10.1 27.2
---------------------- ------------------
Total Revenues 2,480.5 2,510.6
---------------------- ------------------
Operating Expenses
Purchased gas for resale 1,308.8 1,226.6
Fuel and purchased power 133.1 101.6
Operations and maintenance 387.2 407.0
Depreciation, depletion and amortization 106.1 171.2
Operating taxes 111.9 122.3
---------------------- ------------------
Total Operating Expenses 2,047.1 2,028.7
---------------------- ------------------
Income from equity investments 5.3 5.7
---------------------- ------------------
Operating Income 438.7 487.6
---------------------- ------------------
Other Income and (Deductions)
Interest charges (60.0) (84.1)
Gain on sale of investments 4.1 -
Cost of debt redemption (20.9) -
Minority interest - (20.3)
Other 9.1 2.6
---------------------- ------------------
Total Other Income and (Deductions) (67.7) (101.8)
---------------------- ------------------
Income Taxes
Current 128.8 154.5
Deferred 6.5 (16.8)
---------------------- ------------------
Total Income Taxes 135.3 137.7
---------------------- ------------------
Earnings from continuing operations 235.7 248.1
Discontinued Operations
Loss from discontinued operations, net of tax (2.2) (0.4)
Gain on disposal, net of tax 2.2 -
---------------------- ------------------
Loss from discontinued operations - (0.4)
---------------------- ------------------
Net Income 235.7 247.7
Preferred stock dividend requirements 1.3 1.5
---------------------- ------------------
Earnings for Common Stock $ 234.4 $ 246.2
====================== ==================
Basic Earnings Per Share:
Continuing Operations,
less preferred stock dividends $ 1.45 $ 1.54
Discontinued Operations - -
---------------------- ------------------
Basic Earnings Per Share $ 1.45 $ 1.54
====================== ==================
Diluted Earnings Per Share
Continuing Operations,
less preferred stock dividends 1.44 $ 1.53
Discontinued Operations - -
---------------------- ------------------
Diluted Earnings Per Share $ 1.44 $ 1.53
====================== ==================
Average Common Shares Outstanding (000) 161,125 159,892
Average Common Shares Outstanding - Diluted (000) 162,245 161,164
- -------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to the Consolidated Financial Statements.
5
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31,
(In Millions of Dollars) 2005 2004
- ------------------------------------------------------------------------------------------------- -------------------
Operating Activities
Net income $ 235.7 $ 247.7
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Depreciation, depletion and amortization 106.1 171.2
Deferred income tax 6.5 (16.8)
Income from equity investments (5.3) (5.7)
Dividends from equity investments - 0.1
Amortization of interest rate swap (11.7) (2.4)
(Gain) on sale of investment (4.1) -
Minority interest - 20.3
Loss from discontinued operations - 0.4
Changes in assets and liabilities
Accounts receivable (262.3) (305.5)
Materials and supplies, fuel oil and gas in storage 297.8 336.3
Accounts payable and other liabilities (126.5) (183.6)
Taxes accrued 85.7 151.1
Interest accrued 15.0 38.4
Captive insurance - 43.2
Other 46.5 83.6
--------------------- -------------------
Net Cash Provided by Operating Activities 383.4 578.3
--------------------- -------------------
Investing Activities
Construction expenditures (111.8) (219.0)
Cost of removal (4.8) (6.2)
Net proceeds from sale of property and investments 48.1 13.1
--------------------- -------------------
Net Cash Used in Investing Activities (68.5) (212.1)
--------------------- -------------------
Financing Activities
Treasury stock issued 22.9 11.8
Issuance of long-term debt - 20.0
Payment of long-term debt (515.0) (94.9)
Payment of commercial paper (441.4) (187.8)
Preferred stock dividends paid (1.3) (1.5)
Common stock dividends paid (74.6) (71.4)
Other 10.5 9.2
--------------------- -------------------
Net Cash Used in Financing Activities (998.9) (314.6)
--------------------- -------------------
Net Increase (Decrease) in Cash and Cash Equivalents (684.0) 51.6
Net Cash Flow from Discontinued Operations (15.0) 1.9
Cash and Cash Equivalents at Beginning of Period 922.0 203.4
--------------------- -------------------
Cash and Cash Equivalents at End of Period $ 223.0 $ 256.9
===================== ===================
- -----------------------------------------------------------------------------------------------------------------------
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
2.6 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, lease 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 1.1 million electric customers of the Long Island Power Authority
("LIPA"). KeySpan's other operating subsidiaries are primarily involved in gas
exploration and production; underground gas storage; liquefied natural gas
storage; retail electric marketing; large energy-system ownership, installation
and management; service and maintenance of energy systems; 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 March 31, 2005, and the results of operations for the three months ended
March 31, 2005 and March 31, 2004, as well as cash flows for the three months
ended March 31, 2005 and March 31, 2004. The accompanying financial statements
should be read in conjunction with the consolidated financial statements and
notes included in KeySpan's Annual Report on Form 10K for the year ended
December 31, 2004. The December 31, 2004 financial statement information has
been derived from the 2004 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
contributions 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.
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.
7
We have approximately 1.7 million common stock options outstanding at March 31,
2005, 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.
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 March 31,
(In Millions of Dollars, Except Per Share Amounts) 2005 2004
- --------------------------------------------------------------------------------------------------------------------------
Earnings for common stock $ 234.4 $ 246.2
Interest savings on convertible preferred stock - 0.1
Houston Exploration dilution - (0.1)
- --------------------------------------------------------------------------------------------------------------------------
Earnings for common stock - adjusted $ 234.4 $ 246.2
- --------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding (000) 161,125 159,892
Add dilutive securities:
Options 1,120 1,050
Convertible preferred stock - 222
- --------------------------------------------------------------------------------------------------------------------------
Total weighted average shares outstanding - assuming dilution 162,245 161,164
- --------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 1.45 $ 1.54
- --------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 1.44 $ 1.53
- --------------------------------------------------------------------------------------------------------------------------
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 three to eight years
and power purchase agreements with remaining terms that range from eight to 22
years. The Electric Services segment also includes subsidiaries that own, lease
and operate the 2,200 megawatt ("MW") Ravenswood electric generation facility
("Ravenswood Facility"), located in Queens, New York, as well as a 250 MW
combined cycle electric generating facility located at the Ravenswood site
("Ravenswood Expansion"). Collectively, the Ravenswood Facility and Ravenswood
Expansion are referred to as the "Ravenswood Generating Station." All of the
8
energy, capacity and ancillary services related to the Ravenswood Generating
Station are sold to the New York Independent System Operator ("NYISO") energy
markets. The Electric Services segment also provides retail marketing of
electricity to commercial customers.
The Energy Services segment includes companies that provide primarily
energy-related services to customers located primarily within the Northeastern
United States, with concentrations in the New York City and Boston metropolitan
areas 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
operation and maintenance, design, engineering, consulting and fiber optic
services to commercial, institutional and industrial customers.
In January and February of 2005, KeySpan sold its mechanical contracting
subsidiaries. The operating results and financial position of these companies,
which were previously consolidated within the Energy Services segment, have been
reflected as discontinued operations on the Consolidated Statement of Income,
Consolidated Balance Sheet and Consolidated Statement of Cash Flows.
In regard to the January 2005 transactions, KeySpan received proceeds of
approximately $16 million, approximately $5 million of which is to be paid
within a three year period. In addition, KeySpan retained a portion of its
previously incurred surety indemnity support obligations related to certain
performance and payment bonds issued for the benefit of KeySpan's former
subsidiaries prior to closing. The current estimated cost to complete projects
supported by such indemnity obligations is approximately $20 million. The buyers
have agreed to complete the projects for which such indemnity obligations were
incurred and to indemnify and hold KeySpan harmless with respect to its
liabilities in connection with such bonds.
In connection with the February 2005 transaction, KeySpan paid or contributed
approximately $26 million to its former subsidiary prior to closing the sale
transaction in exchange for, among other things, the disposition of outstanding
shares in the former subsidiary and the settlement of intercompany advances and
replacement of a performance and payment bond issued for the benefit of its
former subsidiary with respect to a pending project, which bond had been
supported by a $150 million indemnity obligation of KeySpan. In addition,
KeySpan received from its former subsidiary an indemnity bond issued by a third
party surety company, the purpose of which is to reimburse KeySpan in an amount
up to $80 million in the event it is required to perform under all other
indemnity obligations previously incurred by KeySpan to support the remaining
bonded projects of its former subsidiary as of the closing. As of March 31,
2005, the total cost to complete such remaining bonded projects is estimated to
be approximately $65 million. The aforementioned guarantees are reflected in
Note 6 "Financial Guarantees and Contingencies." KeySpan's former subsidiary has
also agreed to complete the projects for which such indemnity obligations were
incurred and indemnify and hold KeySpan harmless with respect to any liabilities
in connection with such bonds.
9
In the fourth quarter of 2004, KeySpan's investment in its mechanical
contracting subsidiaries was written-down to fair value.
The Energy Investments segment consists of our gas exploration and production
investments, as well as certain other domestic energy-related investments.
KeySpan's gas exploration and production activities include its wholly-owned
subsidiaries Seneca Upshur Petroleum, Inc. ("Seneca-Upshur") and KeySpan
Exploration and Production, LLC ("KeySpan Exploration"). Seneca-Upshur is
engaged in gas exploration and production activities primarily in West Virginia.
KeySpan Exploration is engaged in a joint venture with The Houston Exploration
Company ("Houston Exploration"), an independent natural gas and oil exploration
company located in Houston, Texas. During the first quarter of 2004, our gas
exploration and production investments also included a 55% equity interest in
Houston Exploration, the operations of which were fully consolidated in
KeySpan's Consolidated Financial Statements. Houston Exploration's revenues and
operating income were $152.4 million and $62.1 million, respectively, for the
first quarter of 2004. In the fourth quarter of 2004 KeySpan sold its remaining
interests in Houston Exploration.
This segment is also engaged in pipeline development activities. KeySpan and
Duke Energy Corporation each own a 50% interest in the Islander East Pipeline
Company, LLC ("Islander East"). Islander East was created to pursue the
authorization and construction of an interstate pipeline from Connecticut,
across Long Island Sound, to a terminus near Shoreham, Long Island. Once in
service, the pipeline is expected to transport up to 260,000 DTH daily to the
Long Island and New York City energy markets. Further, KeySpan has a 21%
interest in the Millennium Pipeline project which is expected to transport up to
500,000 DTH of natural gas a day from Corning to Ramapo, New York, where it will
connect to an existing pipeline. Additionally, subsidiaries in this segment 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. These subsidiaries are accounted for under the equity method.
Accordingly, equity income from these investments is reflected as a component of
operating income in the Consolidated Statement of Income.
Through its wholly owned subsidiary, KeySpan LNG, KeySpan owns a 600,000 barrel
liquefied natural gas storage and receiving facility in Providence, Rhode
Island, the operations of which are fully consolidated.
During the first quarter of 2004, we also had an approximate 61% investment in
certain midstream natural gas assets in Western Canada through KeySpan Energy
Canada Partnership ("KeySpan Canada"). These assets included 14 processing
plants and associated gathering systems that produced approximately 1.5 BCFe of
natural gas daily and provided associated natural gas liquids fractionation.
These operations were fully consolidated in KeySpan's Consolidated Financial
Statements. KeySpan Canada's revenues and operating income were $22.2 million
and $8.6 million, respectively, for the first quarter of 2004. In the fourth
quarter of 2004 KeySpan sold its remaining interests in KeySpan Canada.
10
In the first quarter of 2005, KeySpan sold its 50% interest in Premier
Transmission Limited ("PTL"), a gas pipeline from southwest Scotland to Northern
Ireland. On February 25, 2005, KeySpan entered into a Share Sale and Purchase
Agreement with BG Energy Holdings Limited and Premier Transmission Financing
Public Limited Company ("PTFPL"), pursuant to which all of the outstanding
shares of PTL were to be purchased by PTFPL. On March 18, 2005 the sale was
completed and generated cash proceeds of approximately $48.1 million. In the
fourth quarter of 2004, KeySpan recorded a pre-tax non-cash impairment charge of
$26.5 million reflecting the difference between the anticipated cash proceeds
from the sale of PTL compared to its carrying value. The final sale of PTL
resulted in a pre-tax gain of $4.1 million reflecting the difference from
earlier estimates.
The accounting policies of the segments are the same as those used for the
preparation of the Consolidated Financial Statements. The segments are strategic
business units that are managed separately because of their different operating
and regulatory environments. Operating results of our segments are evaluated by
management on an operating income basis. At March 31, 2005, the total assets of
each reportable segment have not changed materially from those levels reported
at December 31, 2004. As mentioned, the mechanical contracting subsidiaries,
included in Energy Services, are reported as discontinued operations for March
31, 2004. The reportable segment information is as follows:
- -----------------------------------------------------------------------------------------------------------------------------------
Energy Investments
------------------------
Gas
Exploration
Gas Electric Energy and Other
(In Millions of Dollars) Distribution Service Services Production Investments Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2005
Unaffiliated revenue 2,025.5 400.4 44.5 - 10.1 - 2,480.5
Intersegment revenue - 4.6 2.6 - - (7.2) -
Operating Income 391.9 51.0 (2.8) - 6.4 (7.8) 438.7
Three Months Ended March 31, 2004
Unaffiliated revenue 1,927.8 359.1 44.1 152.4 27.2 - 2,510.6
Intersegment revenue - - 2.5 - 1.3 (3.8) -
Operating Income 379.7 47.2 (17.5) 62.1 12.9 3.2 487.6
- -----------------------------------------------------------------------------------------------------------------------------------
Eliminating items include intercompany interest income and expense, the
elimination of certain intercompany accounts, as well as activities of our
corporate and administrative areas.
Because of the nature of our Electric Services business, electric revenues are
derived from two large customers - the NYISO and LIPA. Electric Services
revenues from these customers of $371.0 million and $345.6 million for the three
months ended March 31, 2005 and 2004, respectively, represent approximately15%
and 13%, respectively of our consolidated revenues in both periods.
11
3. COMPREHENSIVE INCOME
The table below indicates the components of comprehensive income:
- ------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31,
(In Millions of Dollars) 2005 2004
- ------------------------------------------------------------------------------------------------------------------------
Net Income $ 235.7 $ 247.7
- ------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax
Net losses (gains) on derivative instruments (4.8) 11.0
Foreign currency translation adjustments (5.0) (1.8)
Unrealized gains (losses) on marketable securities (1.8) 0.5
Settlement of derivative premiums - 3.4
Unrealized losses on derivative financial instruments (7.3) (42.5)
- ------------------------------------------------------------------------------------------------------------------------
Other comprehensive loss, net of tax (18.9) (29.4)
- ------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 216.8 $ 218.3
- ------------------------------------------------------------------------------------------------------------------------
Related tax (benefit) expense
Net losses (gains) on derivative instruments (0.5) 5.9
Foreign currency translation adjustments (2.7) (1.0)
Unrealized gains (losses) on marketable securities (1.0) 0.3
Settlement of derivative premiums - 1.9
Unrealized losses on derivative financial instruments (6.7) (22.9)
- ------------------------------------------------------------------------------------------------------------------------
Total Tax (Benefit) Expense $ (10.9) $ (15.8)
- ------------------------------------------------------------------------------------------------------------------------
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 distribution
operations, gas exploration and production activities and its electric
generating facilities at the Ravenswood site.
Derivative financial instruments are employed by our gas distribution operations
to reduce the cash flow variability associated with the purchase price for a
portion of future natural gas purchases for our regulated firm gas sales
customers. The accounting for these derivative instruments is subject to
Statement of Financial Accounting Standards ("SFAS") 71 "Accounting for the
Effects of Certain Types of Regulation." See the caption below "Firm Gas Sales
Derivative Instruments - Regulated Utilities" for a further discussion of these
derivatives. Certain derivative instruments employed by our gas distribution
operations are not subject to SFAS 71. Utility tariffs applicable to certain
large-volume customers permit gas to be sold at prices established monthly
relative to a prevailing alternate fuel price but limited to the cost of gas
plus the tail block rate. KEDNY uses over-the-counter ("OTC") natural gas swaps,
with offsetting positions in OTC fuel oil swaps of equivalent energy value, to
hedge the cash-flow variability of specified portions of gas purchases and sales
associated with these customers. The maximum length of time over which we have
hedged cash flow variability associated with forecasted purchases and sales of
natural gas is through October 2005. We use standard New York Mercantile
12
Exchange ("NYMEX") futures prices to value the gas and heating oil positions. At
March 31, 2005, the fair value of gas swap contracts was $4.4 million; the fair
value of the oil swap contracts was a liability of $13.8 million. These
derivative balances are expected to be reclassified from other comprehensive
income into earnings over the next twelve months.
Seneca-Upshur utilizes OTC natural gas swaps to hedge the cash flow variability
associated with forecasted sales of a portion of its natural gas production. At
March 31, 2005, Seneca-Upshur has hedge positions in place for approximately 85%
of its estimated 2005 through 2007 gas production, net of gathering costs. We
use market quoted forward prices to value these swap positions. The maximum
length of time over which Seneca-Upshur has hedged such cash flow variability is
through December 2007. The fair value of these derivative instruments at March
31, 2005 was a liability of $8.3 million. 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 $3.8 million, or approximately $2.5 million after-tax.
The Ravenswood Generation Station 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
Generation Station also hedges the cash flow variability associated with a
portion of electric energy sales.
With respect to price exposure associated with fuel purchases for the Ravenswood
Generation Station, KeySpan employs 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 by the Ravenswood Generation Station. We use standard NYMEX
futures prices to value the gas futures contracts and market quoted forward
prices to value oil swap contracts. The maximum length of time over which we
have hedged cash flow variability associated with forecasted purchases of
natural gas is through September 2005. The fair value of these derivative
instruments at March 31, 2005 was negligible. The maximum length of time over
which we have hedged cash flow variability associated with forecasted purchases
of fuel oil is through April 2006. The fair value of these derivative
instruments at March 31, 2005 was $1.0 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.
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 Generation Station. Our hedging strategy is to hedge
at least 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 March 2006. We use market quoted forward prices to value these
outstanding derivatives. The fair value of these derivative instruments at March
31, 2005 was a liability of $2.0 million all of which is expected to be
13
reclassified into earnings over the next twelve months. The after-tax impact is
anticipated to be $1.3 million.
The above noted 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 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. 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, which was negligible during the first quarter of 2005, results
from changes during the period in the price differentials between the index
price of the derivative contract and the price of the purchase or sale for the
cash flow that is being hedged, and is recorded directly to earnings.
The table below summarizes the fair value of outstanding financially-settled
commodity derivative instruments that qualify for hedge accounting at March 31,
2005 and December 31, 2004 and the related line item on the 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 Millions of Dollars) March 31, 2005 December 31, 2004
- --------------------------------------------------------------------------------------------------------
Gas Contracts:
Other current assets $ 4.5 $ 0.2
Accounts payable and other liabilities (3.8) (6.2)
Other deferred liabilities (4.5) (0.8)
Oil Contracts:
Other current assets 1.0 7.7
Accounts payable and other liabilities (13.8) -
Electric Contracts:
Other current assets - 0.4
Accounts payable and other liabilities (2.0) -
- --------------------------------------------------------------------------------------------------------
$ (18.6) $ 1.3
- --------------------------------------------------------------------------------------------------------
Financially-Settled Commodity Derivative Instruments that Do Not Qualify for
Hedge Accounting: KeySpan subsidiaries also have employed a limited number of
financial derivatives that do not qualify for hedge accounting treatment under
SFAS 133. In 2004, we purchased a series of call options on the spread between
the price of heating oil and the price of natural gas. The options cover the
period February 2005 through October 2005 and further complement our hedging
strategy noted above regarding sales to certain large-volume customers. As
stated, we sell gas to certain large-volume customers at prices established
14
monthly relative to a prevailing alternate fuel price but limited to the cost of
gas plus the tail block rate. Utility tariffs, however, establish an upper limit
on the price KeySpan can charge for the sale of natural gas to these customers.
These options are intended to limit KeySpan's exposure to heating oil price
spikes. These options do not qualify for hedge accounting treatment under SFAS
133. We recorded a $3.1 million benefit in other income and deductions on the
Consolidated Statement of Income to reflect the change in the market value
associated with this derivative instrument for the first quarter of 2005. In
addition, the Ravenswood Generation Station sold a three year option for 30-day
peaking gas service. The 30-day peaking gas service is for the following three
winter seasons: October 2004 - March 2005, October 2005 - March 2006 and October
2006 - March 2007. For each of the winter seasons just mentioned, the
counterparty can call on the Ravenswood Generation Station to supply no more
than 30,000 Mdth of a gas a day for no more than 30 days. We recorded a $3.3
million benefit in other income and deductions on the Consolidated Statement of
Income to reflect the change in the market value associated with this derivative
instrument for the first quarter of 2005.
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. 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 March 31, 2005, these
derivatives had a fair value of $78.6 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. 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 March 31, 2005, these derivatives had a net negative fair value of $3.2
million and are reflected as a regulatory liability of $4.8 million and a
regulatory asset of $8.0 on the Consolidated Balance Sheet.
Interest Rate Derivative Instruments: In January 2005, KeySpan redeemed $500
million of outstanding debt - 6.15% Notes due 2006, and accelerated the
amortization of approximately $11.2 million of previously unamortized benefits
associated with an interest rate swap on these bonds that was previously
settled. The accelerated amortization was recorded as a reduction to interest
expense. (See Note 9 "Long-term Debt and Commercial Paper for additional details
15
regarding the debt redemption.) There were no interest rate derivative
instruments outstanding at March 31, 2005.
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 2004, we entered into heating-degree day put options to mitigate the effect
of fluctuations from normal weather on KEDNE's financial position and cash flows
for the 2004/2005 winter heating season - November 2004 through March 2005.
These put options would have paid KeySpan up to $40,000 per heating degree day
when the actual temperature was below 4,130 heating degree days, or
approximately 5% warmer than normal, based on the most recent 20-year average
for normal weather. The maximum amount KeySpan would have received on these
purchased put options is $16 million. The net premium cost for these options was
$1.6 million and was amortized over the heating season. Unlike previous years if
weather was colder than normal KeySpan would have no financial obligation. Since
weather was colder than normal during the first quarter of 2005 there was no
earnings impact associated with these financial derivative instruments. 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.
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. In instances where counterparties' credit quality has declined, or
credit exposure exceeds certain levels, we may limit our credit exposure by
restricting new transactions with counterparties, requiring additional
collateral or credit support and negotiating the early termination of certain
agreements. 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 2004, the Financial Accounting Standards Board ("FASB") issued FASB Staff
Position ("FSP") 106-2 "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003." This
guidance clarified the accounting and disclosure requirements for employers with
postretirement benefit plans that have been affected by the passage of the
Medicare Prescription Drug Improvement and Modernization Act of 2003 ("the
Act"). The Act introduced two new features to Medicare that an employer needs to
consider in measuring its obligation and net periodic postretirement benefit
costs. KeySpan's retiree health benefit plan currently includes a prescription
16
drug benefit that is provided to retired employees. KeySpan implemented the
requirements of FSP 106-2 in September 2004.
In January 2005, the Department of Health and Human Services/Centers for
Medicare and Medicaid Services (CMS) released final regulations with regard to
the implementation of the major provisions of the Medicare Act. KeySpan is
currently reviewing the new provisions and believes that the new guidance will
not have a material impact on its results of operations or cash flows.
In December 2004 the FASB issued SFAS 123 (revised 2004) "Share-Based Payment."
This Statement focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment transactions. This
Statement revises certain provisions of SFAS 123 "Accounting for Stock-Based
Compensation" and supersedes APB Opinion 25 "Accounting for Stock Issued to
Employees." The fair-value-based method in this Statement is similar to the
fair-value-based method in Statement 123 in most respects. However, the
following are key differences between the two: Entities are required to measure
liabilities incurred to employees in share based payment transactions at fair
value as compared to using the intrinsic method allowed under Statement 123.
Entities are required to estimate the number of instruments for which the
requisite service is expected to be rendered, as compared to accounting for
forfeitures as they occur under Statement 123. Incremental compensation cost for
a modification of the terms or conditions of an award are also measured
differently under this Statement compared to Statement 123. This Statement also
clarifies and expands Statement 123's guidance in several areas. The effective
date of this Statement is the beginning of the first fiscal year beginning after
June 15, 2005. KeySpan adopted the prospective method of transition for stock
options 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 for
grants awarded after January 1, 2003. KeySpan is currently reviewing the
requirements of this Statement, and believes that implementation of this
Statement will not have a material impact on its results of operations or
financial position and no impact on its 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, a 2,200-megawatt electric generating facility located
in Queens, New York, in part, through the variable interest entity from
Consolidated Edison on June 18, 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, or 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 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.
17
The term of the Master Lease extends through June 20, 2009. 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 $336
million.
If our subsidiary that leases the Ravenswood Facility was 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.
Sale/leaseback Transaction: KeySpan also 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 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."
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. KeySpan's only asset retirement obligation
("ARO") relates to its investment in Seneca-Upshur and was approximately $1.9
million at March 31, 2005.
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
18
perpetuity and cannot be measured, no liability has been 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. These former
sites, some of which are no longer owned by us, have been identified to the New
York State Public Service Commission ("NYPSC") and the Department of
Environmental Conservation ("DEC") for inclusion on appropriate site
inventories. Administrative Orders on Consent ("ACO") or Voluntary Cleanup
Agreements have been executed with the DEC to address the investigation and
remediation activities associated with certain sites. KeySpan submitted
applications to the DEC for each of the remaining sites in August 2004 under the
DEC's Brownfield Cleanup Program ("BCP"). As a result of a recent United States
Supreme Court decision, KeySpan withdrew its applications in the DEC's BCP
program and will resubmit applications for individual sites under various DEC
cleanup programs on a case-by-case basis.
We have identified 28 of these sites as being associated with the historical
operations of KEDNY. One site has been fully remediated. Subject to the issues
described in the preceding paragraph, the remaining 27 sites will be
investigated and, if necessary, remediated under the terms and conditions of
various types of DEC cleanup orders. Expenditures incurred to date by us with
respect to KEDNY MGP-related activities total $50.0 million.
The remaining 15 sites have been identified as being associated with the
historical operations of KEDLI. Expenditures incurred to date by us with respect
to KEDLI MGP-related activities total $44.7 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 various types
of DEC cleanup orders.
We presently estimate the remaining cost of our KEDNY and KEDLI MGP-related
environmental remediation activities will be $202.4 million, which amount has
been accrued by us as a reasonable estimate of probable cost for known sites.
However, remediation costs for each site may be materially higher than noted,
depending upon changing technologies and regulatory standards, selected end use
for each site, and actual environmental conditions encountered.
With respect to remediation costs, the KEDNY and KEDLI rate plans generally
provide for the recovery from customers of investigation and remediation costs
of certain sites. At March 31, 2005, we have reflected a regulatory asset of
$225.8 million for our KEDNY/KEDLI MGP sites. In accordance with NYPSC policy,
KeySpan records a reduction to regulatory liabilities as costs are incurred for
environmental cleanup activities. At March 31, 2005, these previously deferred
regulatory liabilities totaled $31.2 million. In October 2003, KEDNY and KEDLI
19
filed a joint petition with the NYPSC seeking rate treatment for additional
environmental costs that may be incurred at all of our New York MGP sites. That
petition is still pending.
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 $2.3 million, which amount has been
accrued by us. Expenditures incurred to date total $2.7 million.
New England Sites: Within the Commonwealth of Massachusetts and the State of New
Hampshire, we are aware of 77 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 67 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 eight other
sites. In addition, Boston Gas Company, Colonial Gas Company, and Essex Gas
Company have assumed responsibility for remediating three sites each. 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.
We presently estimate the remaining cost of these Massachusetts KEDNE
MGP-related environmental cleanup activities will be $14.9 million, which amount
has been accrued by us as a reasonable estimate of probable cost for known
sites, however remediation costs for each site may be materially higher than
noted, depending upon changing technologies and regulatory standards, selected
end use for each site, and actual environmental conditions encountered.
Expenditures incurred since November 8, 2000, the date KeySpan acquired Eastern
Enterprises, with respect to these MGP-related activities total $24.1 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
so-called Nashua River Asbestos Site, adjacent to the Nashua MGP site.
20
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 however,
remediation costs for each site may be materially higher than noted, depending
upon changing technologies and regulatory standards, selected end use for each
site, and actual environmental conditions encountered. Expenditures incurred
since November 8, 2000, with respect to these MGP-related activities total $10.3
million.
By rate orders, the Massachusetts Department of Telecommunications and Energy
("MADTE") and the New Hampshire Public Utility Commission ("NHPUC") provide for
the recovery of site investigation and remediation costs and, accordingly, at
December 31, 2004, we have reflected a regulatory asset of $44.0 million for the
KEDNE MGP sites. As previously mentioned, 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 orders 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, a successor company to Eastern
Enterprises, 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.
We presently estimate the remaining cost of our environmental cleanup activities
for the three non-utility sites will be approximately $18.9 million, which
amount has been accrued by us as a reasonable estimate of probable costs for
known sites however, remediation costs for each site may be materially higher
than noted, depending upon changing technologies and regulatory standards,
selected end use for each site, and actual environmental conditions encountered.
Expenditures incurred since November 8, 2000, with respect to these sites total
$13.9 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.
21
See KeySpan's Annual Report on Form 10K for the year ended December 31, 2004
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 10K for the year ended December 31, 2004, 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.
On February 9, 2005, KeySpan was served with a shareholder derivative action
asserting claims on behalf of KeySpan based upon breach of fiduciary duty. The
complaint, which was filed in the New York State Supreme Court for the County of
Kings, relates to the 2001 Roy Kay related losses and alleges that KeySpan's
directors and certain senior officers breached their fiduciary duties when they
placed their own personal interests above the interests of KeySpan by using
material non-public information (the losses at Roy Kay) to sell securities at
artificially inflated prices.
This new complaint asserts essentially the same allegations as contained in two
prior federal shareholder derivative actions which were commenced in October
2001 and June 2002. On March 15, 2004, KeySpan and the individual defendants
filed a motion to dismiss those earlier federal complaints. On April 14, 2004,
the plaintiffs filed a notice of voluntary withdrawal of their actions. On April
23, 2004, the federal court dismissed both actions without prejudice. KeySpan
intends to file a motion to dismiss this new complaint. While KeySpan denies any
wrongdoing, the outcome of this proceeding cannot be determined as yet.
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.
22
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
March 31, 2005, 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:
- -----------------------------------------------------------------------------------------------------------------------------
Nature of Guarantee (In Thousands of Dollars) Amount of Exposure Expiration Dates
- -----------------------------------------------------------------------------------------------------------------------------
Guarantees for Subsidiaries
Medium-Term Notes - KEDLI (i) $ 525,000 2008-2010
Industrial Development Revenue Bonds (ii) 128,000 2027
Ravenswood - Master Lease (iii) 425,000 2009
Ravenswood - Sale/leaseback (iv) 385,000 2040
Surety Bonds (v) 126,000 2005 - 2008
Commodity Guarantees and Other (vi) 58,000 2005
Letters of Credit (vii) 74,000 2005
- --------------------------------------------------------------------------------------------------------------------------
$ 1,721,000
- --------------------------------------------------------------------------------------------------------------------------
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. The face value of
these notes is included in long-term debt on the Consolidated Balance
Sheet.
(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 term of the lease
has been extended to 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 Ravenswood Expansion. The initial term of the lease is for 36
years. As noted previously, this lease qualifies as an operating lease and
is not reflected on the Consolidated Balance Sheet.
23
(v) KeySpan has agreed to indemnify the issuers of various surety and
performance bonds associated with certain construction projects currently
being performed by certain current and former subsidiaries within the
Energy Services segment. In the event that the current or former
subsidiaries fail to perform their obligations under 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. Although KeySpan is not guaranteeing
any new bonds for any of the former subsidiaries, KeySpan's indemnity
obligation supports the contractual obligations of these current and former
subsidiaries. It is contemplated that the majority of the current contracts
will be completed by the end of 2005. In addition, a performance and
payment bond issued for the benefit of a former subsidiary with respect to
a pending project, which bond had been supported by a $150 million
indemnity obligation, has been replaced. KeySpan has also received from a
former subsidiary an indemnity bond issued by a third party insurance
company, the purpose of which is to reimburse KeySpan in an amount up to
$80 million in the event it is required to perform under all other
indemnity obligations previously incurred by KeySpan to support such
company's bonded projects existing prior to divestiture.
(vi) KeySpan has guaranteed commodity-related payments for subsidiaries within
the Energy Services segment, as well as KeySpan Ravenswood, LLC. These
guarantees are provided to third parties to facilitate physical and
financial transactions involved in the purchase of natural gas, oil and
other petroleum products for electric production and marketing activities.
The guarantees cover actual purchases by these subsidiaries that are still
outstanding as of March 31, 2005.
(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.
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 or former
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.
24
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
May 28, 2006 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.
In addition, LIPA is in the process of performing a long-term strategic review
initiative regarding its future direction. It has engaged a team of advisors and
consultants and has been conducting public hearings to develop recommendations
to be submitted to the LIPA Trustees. Some of the strategic options that LIPA is
considering include whether LIPA should continue its operations as they
presently exist, fully municipalize or privatize, sell some, but not all of
their assets and become a regulator of rates and services. LIPA was initially
required to make a determination by May 2005 as to whether it would exercise its
option to purchase our Long Island generating plants pursuant to the terms of
the Generation Purchase Rights Agreement. KeySpan and LIPA have mutually agreed
to extend the date by which LIPA must make this determination to December 15,
2005. At the time, we are unable to determine what the outcome of this strategic
review will have on our financial condition, results of operations or cash
flows. Any action that may be taken will have to take into consideration the
long-term nature of our existing contracts.
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 exercise
periods from five to ten years. In 2003, KeySpan 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 continues 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
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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 March 31,
(In Millions of Dollars, Except Per Share Amounts) 2005 2004
- ------------------------------------------------------------------------------------------------------------------
Earnings available for common stock:
As reported $ 234.4 $ 246.2
Add: recorded stock-based compensation expense, net of tax 2.9 1.5
Deduct: total stock-based compensation expense, net of tax (3.4) (2.9)
- ------------------------------------------------------------------------------------------------------------------
Pro-forma earnings $ 233.9 $ 244.8
- ------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic - as reported $ 1.45 $ 1.54
Basic - pro-forma $ 1.45 $ 1.53
Diluted - as reported $ 1.44 $ 1.53
Diluted - pro-forma $ 1.44 $ 1.52
- ------------------------------------------------------------------------------------------------------------------
8. POSTRETIREMENT BENEFITS
Pension Plans: The following information represents the consolidated net
periodic pension cost for the three months ended March 31, 2005 and 2004 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 the MADTE, 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:
- --------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31,
(In Millions of Dollars) 2005 2004
- --------------------------------------------------------------------------------------------------------------------------------
Service cost, benefits earned during the period $ 15.0 $ 13.1
Interest cost on projected benefit obligation 37.4 36.0
Expected return on plan assets (42.9) (36.5)
Net amortization and deferral 18.9 16.9
- --------------------------------------------------------------------------------------------------------------------------------
Total pension cost $ 28.4 $ 29.5
- --------------------------------------------------------------------------------------------------------------------------------
Other Postretirement Benefits: The following information represents the
consolidated net periodic other postretirement benefit cost for the three months
ended March 31, 2005 and 2004 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.
26
Contributions to VEBA trusts are tax deductible, subject to limitations
contained in the Internal Revenue Code.
Net periodic other postretirement benefit cost included the following
components:
- ------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31,
(In Millions of Dollars) 2005 2004
- ------------------------------------------------------------------------------------------------------------------------------
Service cost, benefits earned during the period $ 6.3 $ 5.4
Interest cost on accumulated
postretirement benefit obligation 19.9 18.5
Expected return on plan assets (9.1) (7.7)
Net amortization and deferral 16.5 11.3
- ------------------------------------------------------------------------------------------------------------------------------
Other postretirement cost $33.6 $27.5
- ------------------------------------------------------------------------------------------------------------------------------
>
During the first quarter of 2005, KeySpan has contributed $4.0 million to its
pension plans and $9.0 million to its other postretirement benefit plans.
Subsequent to March 31, 2005, KeySpan contributed an additional $94.5 million to
its pension plans. At the present time, KeySpan does not anticipate contributing
any additional funds to its pension plans for the remainder of 2005. However,
KeySpan anticipates contributing an additional $17 million to its other
postretirement benefit plans during the remainder of 2005. These estimated
contribution levels are subject to change based on future market returns,
interest rates and certain other measurements. Actual contributions, therefore,
may vary from these levels.
9. LONG-TERM DEBT and COMMERCIAL PAPER
On January 14, 2005, KeySpan redeemed $500 million of outstanding debt - 6.15%
Notes due 2006. KeySpan incurred $20.9 million in call premiums and wrote-off
$1.3 million of previously deferred costs. Further, we accelerated the
amortization of approximately $11.2 million of previously unamortized benefits
associated with an interest rate swap on these bonds. The accelerated
amortization was recorded as a reduction to interest expense.
At December 31, 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 required us, three years from
the date of issuance of the MEDS Equity Units, May 16, 2005, 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 was
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%.
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 our common stock over the
20 day trading period ending on the third trading day prior to May 16, 2005. If
the average closing price of KeySpan's common stock over this time frame is less
than or equal to $35.30, then 13 million shares will be issued. If the average
27
closing price over this time frame is greater than or equal to $42.36, then 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 based upon a
sliding scale.
In 2005, KeySpan was required to remarket the note component of the Equity Units
between February 2005 and May 2005 and reset the interest rate to the then
current market rate of interest; however, the reset interest rate could not be
set below 4.9%. In March 2005, KeySpan remarketed the note component of $394.9
million of the Equity Units at the reset interest rate of 4.9% through their
maturity date of May 2008. The balance of the notes ($65.1 million) were held by
the original MEDS equity holders in accordance with their terms and not
remarketed. KeySpan then exchanged $300 million of the remarketed notes for
$307.2 million of new 30 year notes bearing an interest rate of 5.8%. Therefore,
at March 31, 2005 KeySpan had $160 million of 4.9% notes outstanding with a
maturity date of May 2008 and $307.2 million of 5.8% notes outstanding with a
maturity date of April 2035.
The cash proceeds generated by the remarketing have been deposited in a special
trust that will be used by the original MEDS Equity Units holders to purchase
KeySpan common stock on May 16, 2005 under the formula described earlier. The
note holders who did not remarket their notes were required to post treasury
securities into the special trust as well. The funds in the trust will accrete
to $460 million which will be provided to KeySpan on May 16, 2005 to satisfy the
MEDS purchase contracts. Currently, KeySpan has no legal right to the funds
currently deposited in the special trust and therefore has not reflected this
cash on its Consolidated Balance Sheet.
KeySpan applied the accounting requirements of Emerging Issues Task Force
("EITF") 96-19 "Debtor's Accounting for a Modification or Exchange of Debt
Instruments" to account for these transactions and, as a result, recorded
charges of $4.1 million representing the remaining balance of prior unamortized
issuance costs, as well as fees paid to the prior note holders. KeySpan also
deferred $2.7 million of issuance costs associated with the exchange.
The MEDS Equity Units were 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 reached a threshold
appreciation price of $42.36 per share, which did not occur.
KeySpan currently has two credit facilities totaling $1.3 billion - a $640
million five year revolving credit facility due June 2009 and a three year $660
million facility due June 2006. 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 five-year facility and 0.125% on the three-year
facility. Both credit agreements allow for KeySpan to borrow using several
different types of loans; specifically, Eurodollar loans, 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 facility,
and an additional 0.125% for loans over 33% of the 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 facility, and an additional 0.125% for loans
over 33% of the facility. ABR loans are based on the highest of the Prime Rate,
28
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.
At March 31, 2005, consolidated indebtedness was 51.4% of consolidated
capitalization. Assuming the equity issuance expected to occur on May 16, 2005
as noted above, the consolidated indebtedness at March 31, 2005 would have been
48.8%.
At March 31, 2005, $470.9 million of commercial paper was outstanding at a
weighted average annualized interest rate of 2.83%. We had the ability to borrow
up to an additional $829.1 million at March 31, 2004 under the commercial paper
program.
10. 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 the Long Island Lighting Company. 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.
29
- -----------------------------------------------------------------------------------------------------------------------------------
Statement of Income
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2005
(In Millions of Dollars) Guarantor KEDLI Other Subsidiaries Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues $ 0.2 $ 503.6 $ 1,976.9 $ (0.2) $ 2,480.5
----------------------------------------------------------------------------------------
Operating Expenses
Purchased gas - 314.1 994.7 - 1,308.8
Fuel and purchased power - - 133.1 - 133.1
Operations and maintenance 6.3 32.5 348.4 - 387.2
Intercompany expense - 1.3 (1.3) -
Depreciation and amortization - 26.5 79.6 - 106.1
Operating taxes - 17.0 94.9 - 111.9
----------------------------------------------------------------------------------------
Total Operating Expenses 6.3 391.4 1,649.4 - 2,047.1
----------------------------------------------------------------------------------------
Income from equity investments - - 5.3 - 5.3
----------------------------------------------------------------------------------------
Operating Income (Loss) (6.1) 112.2 332.8 (0.2) 438.7
----------------------------------------------------------------------------------------
Interest charges (29.7) (14.8) (63.3) 47.8 (60.0)
Other income and (deductions) 261.7 0.1 13.4 (282.9) (7.7)
----------------------------------------------------------------------------------------
Total Other Income and (Deductions) 232.0 (14.7) (49.9) (235.1) (67.7)
----------------------------------------------------------------------------------------
Income Taxes (Benefit) (9.8) 34.1 111.0 - 135.3
Discontinued Operations - - - - -
------------------------------------------------------------------------------------------
Net Income $ 235.7 $ 63.4 $ 171.9 $ (235.3) $ 235.7
==========================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Statement of Income
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2004
(In Millions of Dollars) Guarantor KEDLI Other Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues $ 0.2 $ 471.1 $ 2,039.5 $ (0.2) $ 2,510.6
------------------------------------------------------------------------------------------
Operating Expenses
Purchased gas - 291.1 935.5 - 1,226.6
Fuel and purchased power - - 101.6 - 101.6
Operations and maintenance 0.4 33.2 373.4 - 407.0
Intercompany expens