SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period from January 1, 1999 to December 31, 1999
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 incorporation (I.R.S.)employer
or organization identification no.)
175 EAST OLD COUNTRY ROAD, HICKSVILLE, NEW YORK 11801
ONE METROTECH CENTER, BROOKLYN, NEW YORK 11201
(Address of principal executive offices) (Zip code)
(516) 755-6650 (HICKSVILLE)
(718) 403-1000 (BROOKLYN)
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $.01 par value New York Stock Exchange
Pacific Stock Exchange
Series AA Preferred Stock, $25 par value New York Stock Exchange
Pacific Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
(Title of class)
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. Yes. X No.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
As of March 1, 2000, the aggregate market value of the common stock held
by non-affiliates (129,408,442 shares) of the registrant was 2,628,608,978
(based on the closing price, on such date, of $20.3125 per share).
As of March 1, 2000, there were 133,876,426 shares of common stock, $.01
par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement dated on or about March 27, 2000 is incorporated by reference
into Part III hereof.
1
KEYSPAN CORPORATION D/B/A KEYSPAN ENERGY
INDEX TO FORM 10-K
Page
PART I
Item 1. Business................................................................
Item 2. Properties..............................................................
Item 3. Legal Proceedings.......................................................
Item 4. Submission of Matters to a Vote of Security Holders.....................
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data.................................................
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations...........................................................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..............
Item 8. Financial Statements and Supplementary Data.............................
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure....................................................
PART III
Item 10. Directors and Executive Officers of the Registrant......................
Item 11. Executive Compensation..................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions..........................
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.........
2
PART I
ITEM 1. BUSINESS
OVERVIEW
KeySpan Corporation d/b/a KeySpan Energy (the "Company" or "KeySpan Energy")
provides a range of energy-related services through operations and investments
in selected areas of the energy industry. The Company is the fourth largest gas
utility in the United States with approximately 1.6 million customers in New
York City and Long Island. The Company engages in three core downstream
businesses: natural gas distribution, electric services and energy-related
services. It also competes in two additional lines of business: gas exploration
and production and select energy- related investments.
The Company was formed to facilitate the combination (the "Combination"),
completed on May 28, 1998, of KeySpan Energy Corporation ("KSE") and its
principal subsidiary, The Brooklyn Union Gas Company ("Brooklyn Union") and the
non-nuclear electric generation and natural gas distribution businesses of the
Long Island Lighting Company ("LILCO"). To effect the Combination, all of the
assets used by LILCO in connection with its gas distribution business, its
non-nuclear electric generation business and the assets common to its prior
operations (the "Transferred Assets") were transferred to the Company. The Long
Island Power Authority ("LIPA") then acquired all of the common stock of LILCO
for approximately $2.5 billion in cash and the direct or indirect assumption of
certain liabilities. The Company sold to the former holders of LILCO common
stock, shares of the Company's common stock and then acquired KSE by merger with
a wholly-owned subsidiary of the Company in exchange for shares of the Company's
common stock.
The assets of LILCO not transferred to the Company (the "Retained Assets") were
retained by LIPA and primarily consist of LILCO's electric transmission and
distribution ("T&D") system located on Long Island, its 18% ownership interest
in Nine Mile Point Nuclear Power Station, Unit 2 ("NMP2"), located in upstate
New York, and certain of LILCO's regulatory assets and liabilities associated
with its electric business.
The Company was organized as a corporation under New York law in 1998. Brooklyn
Union was formed in 1895 through the consolidation of several existing
companies, the oldest of which commenced operations in 1849, providing gas
distribution services throughout the New York City Boroughs of Brooklyn, Staten
Island and most of Queens, New York. LILCO was organized in 1910 to provide
electric and gas services in the Long Island counties of Nassau and Suffolk and
the Rockaway peninsula in the Borough of Queens, all in New York.
In November 1999, the Company and Eastern Enterprises ("Eastern") announced that
they had signed a definitive merger agreement under which the Company will
acquire all of the common stock of Eastern for $64.00 per share in cash (the
"K/E Transaction"). Through its subsidiaries, Eastern is the largest gas utility
in New England. It owns and operates Boston Gas Company, Colonial Gas
3
Company and Essex Gas Company, all of which are natural gas distribution
companies operating in Massachusetts.
Boston Gas Company is a regulated utility that distributes natural gas in
eastern and central Massachusetts, and also sells natural gas for resale in
Massachusetts. Boston Gas has been wholly- owned by Eastern since 1929 and has
been in business for 177 years, making it the second oldest gas company in the
United States. Colonial Gas Company also is a regulated utility that distributes
natural gas in Cape Cod and eastern Massachusetts. Colonial Gas has been in
business for 150 years and was acquired by eastern in August 1999. Essex Gas
Company also is a regulated utility that distributes natural gas in eastern
Massachusetts. Essex Gas has been in business for 146 years and was acquired by
Eastern in September 1998.
Eastern also owns Midland Enterprises Inc., the second largest independent
operator of tow boats and barges on the nations inland river system; Transgas
Inc., an unregulated energy trucking company and ServicEdge Partners, Inc.,
which is engaged in heating, ventilation and air conditioning ("HVAC")
installation and maintenance. At December 31, 1999, Eastern had total assets of
$2.0 billion; long-term debt and preferred stock of $515.2 million; common
shareholders equity of $754.6 million; gross revenues of $978.7 million of which
$690.8 million (or approximately 71%) were derived from regulated gas sales and
gas transportation; operating earnings of $113.4 million; and earnings before
extraordinary items of $55.1 million.
In July 1999, Eastern announced that it had entered into an agreement to acquire
EnergyNorth Inc., owner of New Hampshire's largest natural gas distributor,
Energy North Natural Gas, Inc. ("Energy North"). Energy North is located across
the border from, but contiguous to, areas served by Eastern's gas distribution
subsidiaries. In connection with the Company's acquisition of Eastern, Eastern
has amended its agreement with EnergyNorth Inc. to provide for an all cash
acquisition of EnergyNorth Inc. shares at a price per share of $61.13. The
restructured EnergyNorth Inc. merger is expected to close contemporaneously with
the K/E Transaction (collectively, the K/E Transaction and the restructured
EnergyNorth Inc.'s merger are referred to as the "Eastern Transaction").
The Eastern Transaction is conditioned upon, among other things, the approval of
Eastern's shareholders, the Securities and Exchange Commission (the "SEC") and
the New Hampshire Public Utility Commission. The Company anticipates that the
transaction will be completed in the third or fourth quarter of 2000, but is
unable to determine when or whether all of the required approvals will be
obtained.
The Eastern transaction has a total value of approximately $2.5 billion ($1.7
billion in equity and $0.8 billion in assumed debt and preferred stock).
With the consummation of the Eastern Transaction, the Company will become a
registered holding company under the Public Utility Holding Company Act of 1935,
as amended ("PUHCA"). As such, the corporate and financial activities of the
Company and its subsidiaries, including the ability of each such entity to pay
dividends, will be subject to regulation of the SEC.
The increased size and scope of the combined organization should enable the
combined company to: provide enhanced, cost-effective customer service;
capitalize on the above-average growth
4
opportunities for natural gas in the Northeast; and provide additional resources
to the Company's unregulated businesses. The combined company will serve
approximately 2.4 million customers and will be the largest gas distributor in
the Northeast.
As used herein, the "Company" or "KeySpan Energy" refers to KeySpan Corporation
d/b/a KeySpan Energy, Brooklyn Union and KeySpan Gas East Corporation d/b/a
Brooklyn Union of Long Island ("Brooklyn Union of Long Island"), its two
principal gas distribution subsidiaries, and its other subsidiaries,
individually and in the aggregate. In 1998, the Company changed its fiscal year
end from March 31 to December 31. For financial reporting purposes, financial
statements included, or incorporated by reference, herein for the period ending
December 31, 1998 are for the nine months then ended and have been prepared on
the basis that LILCO was deemed the acquiring company in the Combination for
financial reporting purposes. Unless otherwise specified, other information
contained in Part I hereof, for the twelve month periods ended December 31, 1998
and 1997, has been compiled on a combined basis ("Combined Company Basis") to
aggregate the information shown for both KSE and LILCO. Additional information
about the Company's industry segments is contained in Note 2 to the Consolidated
Financial Statements, "Business Segments" included herein and incorporated by
reference thereto.
Certain statements contained in this Annual Report on Form 10-K concerning
expectations, beliefs, plans, objectives, goals, strategies, future events or
performance and underlying assumptions and other statements which are other than
statements of historical facts, are "forward-looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
Without limiting the foregoing, all statements under the captions "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Item 7A. Quantitative and Qualitative Disclosures About Market
Risk" relating to the Company's future outlook, anticipated capital
expenditures, future cash flows and borrowings, pursuit of potential future
acquisition opportunities and sources of funding are forward-looking statements.
Such forward-looking statements reflect numerous assumptions and involve a
number of risks and uncertainties and actual results may differ materially from
those discussed in such statements. Among the factors that could cause actual
results to differ materially are: available sources and cost of fuel; federal
and state regulatory initiatives that increase competition, threaten cost and
investment recovery, and impact rate structures; the ability of the Company to
successfully reduce its cost structure; the successful integration of the
Company's subsidiaries, including the Eastern Transaction companies; the degree
to which the Company develops unregulated business ventures; the ability of the
Company to identify and make complementary acquisitions, as well as the
successful integration of such acquisitions; inflationary trends and interest
rates; and other risks detailed from time to time in other reports and other
documents filed by the Company with the SEC. For any of these statements, the
Company claims the protection of the safe harbor for forward-looking information
contained in the Private Securities Litigation Reform Act of 1995, as amended.
For additional discussion on these risks, uncertainties and assumptions, see
"Item 1. Business," "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Item 7A. Quantitative and Qualitative
Disclosures About Market Risk" contained herein.
The Company's principal executive offices are located at One MetroTech Center,
Brooklyn, New York 11201 and 175 East Old Country Road, Hicksville, New York
11801 and its telephone
5
numbers are (718) 403-1000 (Brooklyn) and (516) 755-6650 (Hicksville). Financial
and other information is also available through the World Wide Web at
http://www.keyspanenergy.com.
BUSINESS STRATEGY
The Company seeks to become the premier energy and services company in the
Northeastern United States, delivering energy, products and services to people
at their homes and businesses. The Company engages in three core downstream
businesses: natural gas distribution, electric services and energy-related
services primarily focused in the Northeast. It also competes in two additional
lines of business: gas exploration and production and select energy-related
investments, which include investments in select energy markets or regions,
including the Gulf of Mexico, Western Canada and Northern Ireland. The Company
intends to grow through investments in its core businesses and other
energy-related activities; by expanding its gas distribution business through
the completion of the Eastern Transaction and the continued penetration of the
Long Island gas market; by emphasizing superior customer service; and by taking
advantage of the increasing trend towards deregulation and competition to offer
an expanded array of energy services to its customers.
Key elements of the Company's business strategy include:
INVESTMENTS IN CORE BUSINESSES AND ENERGY-RELATED ACTIVITIES. In recent years,
the Company has made a number of acquisitions and energy-related investments
designed to enhance its presence in the Northeastern United States. On June 18,
1999, the Company acquired the 2,168 megawatt Ravenswood electric generating
plant (the "Ravenswood Facility") located in Long Island City, Queens, New York
City. The Company's total power generation capacity, including its Long Island
generation, now approximates 6,200 megawatts, making it one of the largest power
generators in the region.
As previously noted, on November 4, 1999, the Company entered into a definitive
merger agreement with Eastern to acquire all of its common stock. The Eastern
Transaction will increase the number of gas distribution utilities owned by the
Company, to include Boston Gas Company, Colonial Gas Company, Essex Gas Company
and EnergyNorth, resulting in the Company being the largest gas distributor in
the Northeast serving approximately 2.4 million customers.
The Company has also expanded its unregulated energy services operations in the
Northeast, through several significant acquisitions, including one of the
largest heating, ventilation and air conditioning ("HVAC") contractors in the
state of Rhode Island and a New Jersey based HVAC contractor. Further, in
February 2000, the Company acquired additional companies. For information
concerning these acquisitions, see Note 2 to the Consolidated Financial
Statements, "Business Segment."
Consistent with the Company's strategy to make investments in certain select
markets outside of the Northeast, the Company made two additional investments in
Western Canada. In September 1999, the Company acquired a 37% interest in the
Paddle River gas processing plant and associated gathering systems ("Paddle
River"); and in December 1999, the Company acquired certain oil properties in
Alberta, Canada.
6
These acquisitions and energy-related investments reflect the Company's
commitment to enhancing its presence as an energy and service company focused
primarily on the customer-oriented segment of the energy market in the
Northeastern United States, with additional complementary interests in the Gulf
of Mexico and Western Canadian supply basins, as well as Northern Ireland.
EXPANDED GAS DISTRIBUTION SERVICES. The Company has achieved a high degree of
penetration in its Brooklyn Union service territory, with approximately 79% of
all one and two family homes currently using natural gas for space heating. In
contrast, only 28% of one and two family homes in Brooklyn Union of Long
Island's service territory currently use natural gas for space heating. The
Company believes that there remains a significant opportunity for increased gas
heating penetration of the Long Island service territory and continues to make
capital expenditures to expand its gas distribution infrastructure in this area
in order to maximize long-term growth objectives while enhancing shareholder
value. In addition, the Company expects to provide a focused marketing effort in
both service territories, in an attempt to capitalize on the current substantial
price advantage that natural gas enjoys over competing fuel oil in residential
and small commercial markets in the metropolitan New York City - Long Island
area. Examples of focused marketing programs include concentrated efforts to
convert current non-heating natural gas customers, which would require little or
minimal capital investment; continued targeting of the new construction segments
where natural gas heating is the preferred choice; and conversion to gas of
small to medium size commercial businesses and large volume dual-fuel customers.
SUPERIOR CUSTOMER SERVICE. The Company's utility operations have an outstanding
reputation for customer service and have consistently received excellent marks
for customer loyalty and satisfaction, as measured by independent
customer-satisfaction specialists. In 1999, for the second consecutive year,
Brooklyn Union was awarded the Brand Keys Customer Loyalty Award, as the United
States energy provider that had achieved the highest level of success in
anticipating and exceeding customer expectations.
The Company was also recognized for its outstanding commitment to the community.
In 1999, Brooklyn Union was honored by the New York City Council on the 30th
Anniversary of its Cinderella Program, which has contributed to the development
of more than 10,000 units of residential housing as well as the revitalization
of commercial facilities in Brooklyn, Queens, and Staten Island.
During 1999, Chairman and Chief Executive Officer, Robert B. Catell, received
the American Gas Association's Distinguished Service Award, the association's
highest honor. In addition, in its Century of Power edition, Energy Markets
Magazine honored Chairman and CEO Robert B. Catell as one of the 20th Century's
100 most influential people in gas and electricity. Mr. Catell was cited for his
role in helping to integrate U.S. and Canadian gas lines to supply natural gas
in the Northeast through the Iroquois Transmission System.
The Company intends to continue to emphasize superior customer service, both to
differentiate itself from competitors as markets become increasingly deregulated
and to take advantage of selling opportunities available for complementary
energy-related services such as appliance repair and energy system installation
and management.
7
EXPANDED SERVICES. With its strong market presence in the metropolitan New York
City -Long Island area, the Company believes it is well-positioned to provide
customers with an expanded array of energy-related services. In recent years,
the Company offered gas and electric marketing services throughout New York,
Connecticut, New Jersey, Maryland, Delaware, Pennsylvania and Ohio and appliance
repair, energy management, and related services for residential, commercial and
industrial customers throughout the metropolitan New York City - Long Island
area, as well as in Rhode Island. The Company owns a fiber optic
telecommunications network consisting in excess of 350 miles of fiber optics on
Long Island and, in addition to use in its operations, it provides use of the
network to local carriers. The Company also has become the exclusive provider of
residential fuel cell units distributed on behalf of a joint venture between GE
MicroGen, a subsidiary of General Electric Power Systems and Plug Power in New
York City and Long Island and is the authorized service provider for PC25(TM)
natural-gas-powered fuel cells manufactured by International Fuel Cells
(IFC)/ONSI(R) Corporation, subsidiaries of United Technologies, in the New York
metropolitan area. The Company believes that its investments in the fiber optic
network and fuel cells provide increased growth opportunities for the Company in
new and developing technologies.
INDUSTRY AND COMPETITION
The electric and natural gas sectors of the regulated energy industry are
undergoing significant change, as market forces are moving towards replacing or
supplementing rate regulation as a means of controlling prices for natural gas
and electricity. Competition also presents utilities with greater opportunities
to manage the cost of their natural gas and electric supplies, and through
unregulated affiliates, to earn profits on energy sales and to expand their
business activities.
Historically, government regulation served both to control prices in the natural
gas and electric sectors of the energy industry and to substantially shield
industry participants from competition. The natural gas sector was segmented
into three regulated parts: production; interstate transportation; and
franchised retail sales and local distribution. The electric sector featured
vertically integrated utilities providing generation, transmission and
distribution services for their franchised service territories. Under
traditional rate regulation, utilities were provided the opportunity to earn a
fair, but regulated, return on invested capital in exchange for a commitment to
serve all customers within a franchised service territory. An extensive and
complex regime for the regulation of public utility companies and public utility
holding companies limited natural gas and electric utilities' opportunities for
geographic expansion and business diversification.
Between the 1930's and the late 1970's, federal and state energy regulatory
policies remained relatively stable, and the structure of the regulated energy
industry changed little. However, after the energy crises in the 1970's, new
legislation and changes in regulatory policy set in motion competitive forces
that are continuing to reshape the energy industry.
Beginning in 1978 with federal legislation that authorized the phased
deregulation of wellhead natural gas prices and the establishment of unregulated
electric generation companies, competition has been increasingly introduced into
segments of the regulated energy industry. To foster competition, federal
regulators adopted "open access" rules which required interstate natural gas
pipelines and electric transmission systems to "unbundle" wholesale sales, I.E.,
the sale of gas or electricity for resale, from transportation and transmission
services. Open access also required
8
interstate gas pipelines and electric utilities, for the first time, to provide
transportation and transmission service on a non-discriminatory basis to all
qualified customers. Recent initiatives also permit market forces, rather than
regulation, to establish rates charged under short-term contracts for interstate
natural gas transportation and to determine the allocation of increased
electricity costs that result when electric transmission constraints prevent
lower priced electricity from reaching electric customers. By enabling natural
gas producers and electric generators to reach new markets, open access policies
have led to intensified competition in wholesale markets and are altering the
geographic character of the industry. No longer typified by isolated local
companies, the natural gas and electric sectors in many parts of the country
include a growing number of firms with regional, national and international
dimensions.
Parallel changes in the regulation of retail electric and gas markets are being
implemented by many state public utility commissions, including the Public
Service Commission of the State of New York ("NYPSC"). On a state-by-state
basis, initially in the Northeast, Mid-Atlantic and California, and now
spreading to other regions, local franchised utilities are being required to
separate their marketing and retail sales businesses from the physical
distribution of natural gas and electricity through pipes and wires. Just as at
the federal level, distribution services are increasingly required to be
unbundled from retail sales, and made available on a non-discriminatory open
access basis to all qualified retail customers. Retail natural gas and
electricity marketers are being permitted to compete for energy customers in
what were formerly exclusive service territories of electric and natural gas
utilities. However, natural gas and electric utilities are likely to remain
exclusive providers of unbundled distribution services through pipes and wires,
and may remain obligated to continue to sell natural gas or electricity to
customers who do not select other suppliers.
In New York State, large-volume retail customers have been able to purchase
natural gas supplies directly from non-utility vendors for about 15 years, while
direct sales to aggregations of small customers have been permitted since 1996.
New York regulators have commenced initiatives to further enhance retail
competition in the state. In November 1998, the NYPSC issued a policy statement
setting forth its vision for furthering competition in the natural gas industry
and requesting that each of the gas utility subsidiaries file a restructuring
proposal. In response, the Company's two gas distribution utility subsidiaries
filed their restructuring proposal with the NYPSC in October 1999. For
additional discussion on gas deregulation, see "NYPSC Regulation."
Similarly, the NYPSC has been encouraging the development of retail competition
in the electric sector in New York. In the past three years, electric utilities
have begun to unbundle electric sales from retail distribution services, open
their franchised territories to competitors, transfer control over their
transmission systems to an independent system operator, and divest many of their
generating plants. Several New York investor-owned utilities have divested their
non-nuclear generating plants, including Consolidated Edison Company of New
York, Inc. ("Con Edison"). In response to a divestiture plan by Con Edison, in
June 1999, the Company completed the acquisition of the Ravenswood Facility from
Con Edison, as discussed under the heading "The Company - Electric Services."
The Company's electric operations on Long Island are governed by a service
agreement with LIPA, discussed in greater detail below, and FERC. This agreement
generally provides for recovery of all costs of production, operation and
maintenance, and capital improvements, subject to certain
9
incentive provisions. Also, since Long Island is considered a "load pocket,"
I.E., there are insufficient transmission ties to permit a significant amount of
energy to be transported into Long Island, at this time, the Company faces
minimal competitive pressures associated with its electric operations on Long
Island.
As indicated, the Company also has electric operations in New York City. The
Company currently bids and sells the energy produced by the Ravenswood Facility
through bidding it into the energy market operated by the New York Independent
System Operator ("NYISO"). Further, the Company has a capacity contract with Con
Edison, which provides Con Edison with 100% of the available capacity of the
Ravenswood Facility. The Company anticipates that this contract will expire on
April 30, 2000, at which time the available capacity of the Ravenswood Facility
will be bid into the capacity auction conducted by the NYISO. New York City
local reliability rules currently require that 80% of the electric capacity
needs of New York City is to be provided by "in-city" generators. The Company
expects that the current New York City reliability rules will remain in effect
through at least 2000. However, in the future, should new, more efficient
electric power plants be built in New York City and/or the in-city capacity
requirements be modified, the capacity and energy sales quantities of the
Ravenswood Facility could be adversely affected. The Company can not predict,
however, when or if new power plants will be built or the nature of future New
York City requirements.
A significant number of natural gas and electric utilities have reacted to the
changing structure of the regulated energy industry by entering into business
combinations, with the goal of reducing common costs, gaining size to better
withstand competitive pressures and business cycles, and attaining synergies
from the combination of electric and natural gas operations. The Combination and
related transactions which resulted in the formation of the Company, as well as
the pending Eastern Transaction, illustrate these attributes.
The transformation of the energy industry is an ongoing process. Larger
regional, national and international companies are being formed through
acquisitions and mergers. The remaining legal barriers to interregional natural
gas and electric distribution companies, which have been relaxed as the result
of regulatory decisions, are the subject of legislative proposals calling for
repeal or substantial modifications. The advent of industry restructuring has
meant that regional, national and international companies are increasingly
offering energy consumers a wide array of choices as to the supply, type,
quality and cost of natural gas and electric services as well as other services,
such as telecommunications and cable. For the Company, industry restructuring
means increased opportunities to enter new markets and pressures to manage its
costs of doing business.
THE COMPANY
GAS DISTRIBUTION
OVERVIEW
The Company sells, distributes and transports natural gas in two separate, but
contiguous service territories of approximately 1,417 square miles in the
aggregate in the New York City - Long Island metropolitan area. The Company owns
and operates gas distribution, transmission and storage
10
systems that consist of approximately 10,146 miles of distribution pipelines,
576 miles of transmission pipelines and two gas storage facilities. The Company
serves approximately 1.6 million customers, of which approximately 1.5 million,
or 94%, are residential. Gas is offered for sale to residential customers on a
"firm" basis, and to commercial and industrial customers on a "firm" or
"interruptible" basis. "Firm" service is offered to customers under schedules or
contracts which anticipate no interruptions, whereas "interruptible" service is
offered to customers under schedules or contracts which anticipate and permit
interruption on short notice, generally in peak- load seasons. Gas is available
at any time of the year on an interruptible basis, if the supply is sufficient
and the supply system is adequate. The Company also participates in the
interstate markets by releasing pipeline capacity or bundling pipeline capacity
with gas for "off-system" sales. An "off- system" customer consumes gas at
facilities located outside the Company's service territories, by connecting to
the Company's facilities or one of its transporter's facilities, at a point of
delivery agreed to by the Company and the customer. The Company purchases its
natural gas for sale to its customers under long-term supply contracts and
short-term spot contracts. Such gas is transported under both firm and
interruptible transportation contracts. In addition, the Company has commitments
for the provision of gas storage capability and peaking supplies.
For the year ended December 31, 1999, gas revenues were $1.753 billion, or 59%
of the Company's revenues, and gas operating income was $308.4 million.
The gas operations of the Company can be significantly affected by seasonal
weather conditions. Traditionally, annual revenues are substantially realized
during the heating season as a result of higher sales of gas due to cold
weather. Accordingly, operating results historically are most favorable in the
first and fourth calendar quarters. However, the Company's gas utility tariffs
contain weather normalization adjustments that provide for recovery from or
refund to firm customers of material shortfalls or excesses of firm net revenues
(revenues less applicable gas costs, if any) during a heating season due to
variations from normal weather. For additional discussion, see "Regulation and
Rate Matters" below.
SALES AND DISTRIBUTION
The Company is the fourth largest gas distribution company in the United States,
providing, through its gas distribution subsidiaries, natural gas sales and
transportation services to customers in the New York City Boroughs of Brooklyn,
Queens and Staten Island and the Long Island counties of Nassau and Suffolk.
11
Gas sales and revenues for 1999 by class of customer are set forth below:
Revenues
Sales Revenues (% of
Customer (MDTH) (thousands of $) Total)
- -------------------------------------------- ----------- ----------------- ---------------
FIRM
Residential Heating......................... 102,135 976,193 55.68
Residential Non-Heating..................... 9,916 192,810 11.00
Temperature-Controlled heating.............. 31,112 137,422 1.84
Commercial/Industrial....................... 28,856 226,675 12.93
----------- ----------------- ---------------
Total Firm.................................. 172,019 1,533,100 87.45
----------- ----------------- ---------------
Firm Transportation......................... 21,249 88,168 5.03
Transportation - Electric Generation........ 82,503 15,150 0.86
----------- ----------------- ---------------
Total Firm Transportation................... 103,752 103,318 5.89
----------- ----------------- ---------------
Total Firm Gas Sales and Transportation... 275,771 1,636,418 93.34
INTERRUPTIBLE............................... 10,903 32,825 1.87
OFF-SYSTEM SALES............................ 14,323 32,006 1.83
TRANSPORTATION.............................. 29,435 11,492 .66
----------- ----------------- ---------------
Total Gas Sales and Transportation........ 330,432 1,712,741 97.70
OTHER RETAIL SERVICES....................... N/A 40,391 2.30
Total Sales and Revenues*................. 330,432 1,753,132 100.00
<
=========== ================= ===============
- -----------------------
*Excludes lost and unaccounted for gas.
Set forth below is information, on a Combined Company Basis, concerning certain
operating statistics applicable to the Company's gas distribution business:
1999 1998 1997
-------------- -------------- --------------
Revenues ($000)............................. 1,753,132 1,766,949 1,991,793
Net Income ($000)........................... 151,217 133,685 * 134,403
Firm Gas Sales and Transportation (MDTH).... 193,268 179,305 203,587
Transportation - Electric Generation (MDTH). 82,503 40,614 --
Other Deliveries (MDTH)..................... 54,661 65,482 73,132
Heating customers........................... 677,000 665,000 657,000
Degree Days, Cooler (Warmer) than Normal %.. (10.0) (17.5) 0.2
Capital Expenditures ($000)................. 213,845 181,700 178,651
- -----------------------
*Excludes non-recurring and special charges associated with the Combination.
-An MDTH is 10,000 therms (British Thermal Units) and reflects the heating
content of approximately one million cubic feet of gas. A therm reflects the
heating content of approximately 100 cubic feet of gas.
The Company sells gas to its firm gas customers at the Company's cost for such
gas, plus a charge designed to recover the costs of distribution (including a
return of and a return on invested capital). The Company shares with its firm
gas customers net revenues (operating revenues less the cost of gas purchased
for resale) from off-system sales and, in addition, Brooklyn Union of Long
Island credits its firm gas customers net revenues from on-system interruptible
gas sales, thereby reducing its rates to these firm customers.
12
The yearly variations in firm gas sales and transportation quantities is due,
primarily, to variations in weather between the periods presented. Measured in
annual degree days, weather was 10% warmer than normal in 1999, 17.5% warmer
than normal in 1998 and 0.2% colder than normal in 1997. After normalizing for
weather, firm sales volumes increased by 2.4% in 1999, as compared to 1998. Firm
sales quantities, after normalizing for weather, were approximately the same in
1998 as compared to 1997.
Transportation volumes related to electric generation, reflect the
transportation of gas to the Company's electric generating facilities located on
Long Island. The Company has been reporting these quantities since the
Combination.
The decrease in other deliveries in all periods is primarily due to the
discontinuance by Brooklyn Union of its off-system sales program in April 1998.
The program was replaced by a management agreement with Enron Capital and Trade
Resources Corp. For a further discussion and additional information on this
agreement, see "Supply and Storage."
For additional details on gas revenues, gas sales quantities and market
saturation, see Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
SUPPLY AND STORAGE
The Company has contracts for the purchase of firm long-term transportation and
storage services. The Company's gas supplies are purchased under long-term
contracts and on the spot market and are transported by interstate pipelines
from domestic and Canadian sources. Storage and peaking supplies are available
to meet system requirements during winter periods.
Regulatory actions, economic factors and changes in customers and their
preferences continue to reshape the Company's gas operations markets. A number
of multi-family, commercial and industrial customers and a growing number of
residential customers currently purchase their gas supplies from natural gas
marketers and then contract with the Company for local transportation, balancing
and other unbundled services. Since these customers are no longer reliant on the
Company for sales service, the quantity of gas that the Company must obtain to
meet remaining sales customers' requirements has been reduced. This trend is
likely to continue as state regulators continue to implement policies designed
to encourage customers to purchase their gas from suppliers other than the
traditional gas utilities. In October 1999, the Company filed a proposal with
the NYPSC consistent with the NYPSC's policy objective of local distribution
companies ending their role as providers of merchant sales service for the
natural gas commodity. For further information, see "NYPSC Regulation" below.
PEAK-DAY CAPABILITY. The design criteria for the Company's gas system assumes an
average temperature of 0(0)F for peak-day demand. Under such criteria, the
Company estimates that the requirements to supply its firm gas customers would
amount to approximately 1,863 MDTH of gas for a peak-day during the 1999/2000
winter season and that the gas supplies available to the Company on such a
peak-day amounts to approximately 2,033 MDTH. For the 2000/2001 winter season,
the Company estimates that the peak-day requirements would amount to
approximately 1,904 MDTH and that the gas supplies available to the Company on
such a peak day amounts to
13
approximately 2,033 MDTH. The 1999/2000 winter peak-day throughput to the
Company's customers was 1,721 MDTH, which occurred on January 17, 2000, at an
average temperature of 9 degrees Fahrenheit, representing 85% of the Company's
per day capability at that time. The Company had sufficient gas available to
meet the requirements of firm gas customers for the 1999/2000 winter season, and
projects that it also will have sufficient gas supply available to meet such
requirements for the 2000/2001 winter season. The Company's firm gas peak-day
capability is summarized in the following table:
Source MDTH per day % of Total
Pipeline.................... 750 37
Underground Storage......... 779 38
Peaking Supplies............ 504 25
Total................... 2,033 100
=============== ===============
PIPELINES. The Company purchases natural gas for sale to its customers under
contracts with suppliers located in domestic and Canadian supply basins and
arranges for its transportation to the Company's facilities under firm long-term
contracts with interstate pipeline companies. For the 1999/2000 winter,
approximately 78% of the Company's natural gas supply was available from
domestic sources and 22% from Canadian sources. The Company has available under
firm contract 750 MDTH per day of year-round and seasonal pipeline
transportation capacity to its facilities in the New York City metropolitan
area. Major providers of interstate pipeline capacity and related services to
the Company include: Transcontinental Gas Pipe Line Corporation ("Transco"),
Texas Eastern Transmission Corporation ("Texas Eastern"), Iroquois Gas
Transmission System ("Iroquois"), Tennessee Gas Pipeline Company ("Tennessee"),
CNG Transmission Corporation ("CNG") and Texas Gas Transmission Company ("Texas
Gas").
STORAGE. In order to meet higher winter demand, the Company also has long-term
contracts with Transco, Texas Eastern, Tennessee, CNG, Equitrans, Inc.,
Hattiesburg First Reserve and Honeoye Storage Corporation, for underground
storage capacity of 58,935 MDTH for the winter season, with 779 MDTH per day,
maximum deliverability.
PEAKING SUPPLIES. In addition to the pipeline and storage supply, the Company
supplements its winter supply with peaking supplies which are available on the
coldest days of the year to enable the Company to economically meet the
increased requirements of its heating customers. The Company's peaking supplies
include gas provided by the Company's two liquefied natural gas ("LNG") plants
and under peaking supply contracts with four cogeneration facilities/independent
power producers located in its franchise areas. For the 1999/2000 winter season,
the Company has the capability to provide a maximum peak-day supply of 504 MDTH
on extremely cold days. The LNG plants have a storage capacity of approximately
2,053 MDTH and peak-day throughput capacity of 395 MDTH, or 19% of peak-day
supply. The Company has contract rights with Trigen Services Corporation,
Brooklyn Navy Cogeneration Partners, LP, Nissequogue Cogen Partners and the New
York Power Authority to purchase peaking supplies with a maximum daily capacity
of 110 MDTH and total available peaking supplies during the winter season of
3,349 MDTH.
14
GAS SUPPLY MANAGEMENT. Enron Capital and Trade Resources Corp., a subsidiary of
Enron Corp. ("Enron"), provides gas supply asset management services to Brooklyn
Union. Under the terms of this agreement, which has been in effect since April
1, 1998 and expires on March 31, 2000, Enron is responsible for managing certain
aspects of Brooklyn Union's interstate pipeline transportation, gas supply and
storage. Enron is also responsible for satisfying certain of the Company's gas
supply requirements; however, the Company remains contractually obligated to its
gas suppliers and has not terminated any of its supply and delivery contracts.
Pursuant to this agreement, Enron paid the Company a fee in 1999, a portion of
which was credited to the Company's gas ratepayers, and obtained the right to
earn revenues based upon its management of the Company's gas supply
requirements, storage arrangements and off-system capacity.
The Company also has an arrangement with Coral Energy Resources, L.P., a
subsidiary of Shell Oil Company ("Coral"), whereby Coral assists the Company in
the origination, structuring, valuation and execution of energy-related
transactions relating to Brooklyn Union of Long Island and the Company's
energy-management services undertaken on behalf of LIPA. A sharing agreement
exists between the gas ratepayers and the Company for off-system gas
transactions and between the Company and LIPA for off-system electric
transactions. The Company's share of the profits on such transactions is then
shared with Coral. The Company also shares in revenues arising from certain
transactions initiated by Coral. This agreement also expires on March 31, 2000.
The Company currently is in negotiations with a large energy corporation to
provide energy supply management services to both Brooklyn Union and Brooklyn
Union of Long Island beginning on April 1, 2000.
GAS COSTS. Gas costs for 1999 were $702.0 million and reflect warmer than normal
weather during the year. Variations in gas costs have little impact on operating
results of the Company since its current gas rate structures include gas
adjustment clauses whereby variations between actual gas costs and gas cost
recoveries are deferred and subsequently refunded to or collected from
customers.
ELECTRIC SERVICES
OVERVIEW
The Company's electric services primarily consist of (i) the ownership and
operation of oil and gas fired generating facilities located on Long Island and
New York and the delivery of the power generated by the Long Island facilities
to LIPA; (ii) the management and operation of LIPA's T&D System; and (iii) the
management of LIPA's fuel and electric energy purchases and off-system sales.
As more fully described below, the Company (i) provides to LIPA all operation,
maintenance and construction services relating to the Retained Assets through a
Management Services Agreement (the "MSA"); (ii) supplies LIPA with capacity,
energy conversion and ancillary services through a Power Supply Agreement (the
"PSA") to allow LIPA to provide electricity to its customers on Long Island; and
(iii) manages all aspects of the fuel supply for the Generating Facilities (as
defined below) as well as all aspects of the capacity and energy owned by or
under contract to LIPA through an Energy Management Agreement (the "EMA"). Each
of the MSA, PSA and EMA became effective on May 28, 1998 and are collectively
referred to herein as the "LIPA Agreements."
15
On June 18, 1999, the Company completed its acquisition of the 2,168 megawatt
Ravenswood Facility located in New York City from Con Edison for approximately
$597 million. As a means of financing this acquisition, the Company entered into
a lease agreement with a special purpose, unaffiliated financing entity that
acquired a portion of the Ravenswood Facility directly from Con Edison and
leased it to a subsidiary of the Company under a ten year lease. The Company has
guaranteed all payment and performance obligations of its subsidiary under the
lease. Another subsidiary of the Company provides all operating, maintenance and
construction services for the facility. The lease program was established in
order to reduce the Company's cash requirements by $425 million. The lease
qualifies as an operating lease for financial reporting purposes while
preserving the Company's ownership of the facility for federal and state income
tax purposes. The balance of the funds needed to acquire the facility were
provided from cash on hand. The Company has recorded an asset of approximately
$200 million, representing its ownership interest in the assets acquired.
The Company currently sells the energy produced by the Ravenswood Facility
through daily and/or hourly bidding into the energy market conducted by the
NYISO. Revenues are recorded when the energy is sold to the NYISO. Further, the
Company has an interim capacity contract with Con Edison which provides Con
Edison with 100% of the available capacity of the Ravenswood Facility under the
capacity contract. Capacity charges are billed to Con Edison on a monthly
fixed-fee basis. The Company anticipates that this contract will expire on April
30, 2000, at which time the available capacity of the Ravenswood Facility will
be bid into an auction process conducted by the NYISO.
For the year ended December 31, 1999, electric revenues were $861.6 million or
29% of the Company's revenues and electric operating income was $139.9 million.
GENERATING FACILITY OPERATIONS.
The Company owns and operates an aggregate of 73 electric generation units
throughout Long Island and Queens (the Long Island electric generation units are
referred to as the "Generating Facilities"), 40 of which can be powered either
by oil or natural gas at the Company's election. In recent years, the Company
has reconfigured several of its facilities to enable them to burn either oil or
natural gas, thus enabling the Company to switch periodically between fuel
alternatives based upon cost and seasonal environmental requirements.
The following table indicates the 1999 summer capacity of the Company's steam
generation facilities and internal combustion ("IC") Units as reported to the
NYISO:
16
LOCATION OF UNITS Description Fuel Units MW
- ---------------------- ---------------------- -------------------------- -----
Long Island City Steam Turbine Dual* 3 1,743
Northport, L.I. Steam Turbine Dual* 3 1,167
Northport, L.I. Steam Turbine Oil 1 381
Port Jefferson, L.I. Steam Turbine Dual* 2 387
Glenwood, L.I. Steam Turbine Gas 2 228
Island Park, L.I. Steam Turbine Dual* 2 390
Far Rockaway, L.I. Steam Turbine Dual* 1 108
Long Island City IC Units Dual* 17 425
Throughout L.I. IC Units Dual* 12 296
Throughout L.I. IC Units Oil 30 1,075
Total 73 6,200
====================== ====================== =================================
*Dual - Oil or natural gas.
LIPA AGREEMENTS
POWER SUPPLY AGREEMENT. The PSA provides for the sale to LIPA by the Company of
all of the capacity and, to the extent LIPA requests, energy from the Generating
Facilities. Capacity refers to the ability to generate energy and, pursuant to
NYISO requirements, must be maintained at specified levels (including reserves)
regardless of the source and amount of energy consumption. By contrast, energy
refers to the electricity actually generated for consumption by consumers. Such
sales of capacity and energy from the Generating Facilities are made at
cost-based wholesale rates regulated by FERC. These rates may be modified in the
future in accordance with the terms of the PSA for (i) agreed upon labor and
expense indices applied to the base year; (ii) a return of and on the capital
invested in the Generating Facilities; and (iii) reasonably incurred expenses
that are outside the control of the Company.
The PSA provides incentives and penalties for the Company to maintain the output
capability of the Generating Facilities, as measured by annual industry-standard
tests of operating capability, and plant availability and efficiency. These
combined incentives and penalties may total as much as $4 million annually. In
1999, the Company earned approximately $3.3 million in incentives under the PSA.
The PSA provides LIPA with all of the capacity from the Generating Facilities.
However, LIPA has no obligation to purchase energy conversion services from the
Generating Facilities and is able to purchase energy on a least-cost basis from
all available sources consistent with existing transmission interconnection
limitations of the T&D system. Under the terms of the PSA, LIPA is obligated to
pay for capacity at rates which reflect a large percentage of the overall fixed
cost of maintaining and operating the Generating Facilities. A variable
maintenance charge is imposed for each unit of energy actually generated by the
Generating Facilities. The PSA expires on May 28, 2013 and is renewable on
similar terms. However, the PSA provides LIPA the option of electing to reduce
or "ramp-down" the capacity it purchases from the Company in accordance with
agreed-upon schedules. In years 7 through 10 of the PSA, if LIPA elects to
ramp-down, the Company is entitled to receive payment for 100 percent of the
present value of the capacity charges otherwise payable
17
over the remaining term of the PSA. If LIPA ramps-down the generation capacity
in years 11 through 15 of the PSA, the capacity charges otherwise payable by
LIPA will be reduced in accordance with a formula established in the PSA. If
LIPA exercises its ramp-down option, the Company may use any capacity released
by LIPA to bid on new LIPA capacity requirements or to bid on LIPA's capacity
requirements to replace other ramped-down capacity. If the Company continues to
operate the ramped-down capacity, the PSA requires it to use reasonable efforts
to market the capacity and energy from the ramped-down capacity and to share any
profits with LIPA. Capacity and energy sold by the Company from ramped-down
capacity must be transported over the T&D system, and the Company will be
required to pay LIPA's standard transmission (and, if applicable, distribution)
rates for the service. The PSA will be terminated in the event that LIPA
exercises its right to purchase, at fair market value, all of the Generating
Facilities in the twelve- month period beginning on May 28, 2001.
The Company has an inventory of sulfur dioxide ("SO2") and nitrogen oxide
("NOx") emission allowances that may be sold to third party purchasers. The
amount of allowances varies from year to year relative to the level of emissions
from the Generating Facilities which is greatly dependent on the mix of natural
gas and fuel oil used for generation and the amount of purchased power that is
imported onto Long Island. In accordance with the PSA, 33% of emission allowance
sales revenues attributable to the Generating Facilities is kept by the Company
and the other 67% is credited to LIPA. LIPA also has a right of first refusal on
any potential emission allowance sales of the Generating Facilities.
Additionally, the Company is bound by a memorandum of understanding with the New
York State Department of Environmental Conservation ("DEC"), which memorandum
prohibits the sale of SO2 allowances into certain states and requires the
purchaser to be bound by the same restriction, which may affect the market value
of the allowances.
MANAGEMENT SERVICES AGREEMENT. Under the MSA, the Company performs day-to-day
operation and maintenance services and capital improvements for the T&D system,
including, among other functions, transmission and distribution facility
operations, customer service, billing and collection, meter reading, planning,
engineering, and construction, all in accordance with policies and procedures
adopted by LIPA. The Company furnishes such services as an independent
contractor and does not have any ownership or leasehold interest in the T&D
system.
In exchange for providing these services, the Company is entitled to earn an
annual management fee of $10 million and may also earn certain incentives, or be
responsible for certain penalties, based upon its performance. The incentives
provide for the Company to retain 100% of the first $5 million of cost
reductions and 50% of any additional cost reductions up to 15% of the total cost
budget. Thereafter, all savings accrue to LIPA. The Company also is required to
absorb any total cost budget overruns up to a maximum of $15 million in each
contract year.
In addition to the foregoing cost-based incentives and penalties, the Company is
eligible for incentives for performance above certain threshold target levels
and subject to disincentives for performance below certain other threshold
levels, with an intermediate band of performance in which neither incentives nor
disincentives will apply, for system reliability, worker safety, and customer
satisfaction. In 1999, the Company earned $7.2 million in non-cost performance
incentives.
18
The MSA shall continue in effect until May 28, 2006. Thereafter, LIPA will
commence a competitive process to solicit a new management services agreement.
Generally, the Company is eligible to submit a bid for such new management
services agreement.
ENERGY MANAGEMENT AGREEMENT. Pursuant to the EMA, the Company (i) procures and
manages fuel supplies for LIPA to fuel the Generating Facilities, (ii) performs
off-system capacity and energy purchases on a least-cost basis to meet LIPA's
needs, and (iii) makes off-system sales of output from the Generating Facilities
and other power supplies either owned or under contract to LIPA. LIPA is
entitled to two-thirds of the profit from any off-system electricity sales
arranged by the Company. The term for the service provided in (i) above is
fifteen years, and the term for the service provided in (ii) and (iii) above is
eight years.
In exchange for these services, the Company earns an annual fee of $1.5 million,
plus an allowance for certain costs incurred in performing services under the
EMA. The EMA further provides incentives for control of the cost of fuel and
electricity purchased on behalf of LIPA by the Company. Fuel and electricity
purchase prices will be compared to regional price indices and the Company will
receive a payment from LIPA, or be obligated to make a payment to LIPA, for fuel
and/or purchased electricity costs which are below or above, respectively,
specified tolerance bands. The total fuel purchase incentive or disincentive can
be no greater than $5 million annually and the electricity purchase incentive or
disincentive can be no greater than $2 million annually. For the year ended
December 31, 1999, the Company earned an aggregate of $5.3 million in incentives
under the EMA.
OTHER RIGHTS. Pursuant to other agreements between LIPA and the Company, certain
future rights have been granted to LIPA. Subject to certain conditions, these
rights include the right for 99 years to lease or purchase, at fair market
value, parcels of land and to acquire unlimited access to, as well as
appropriate easements at, the Generating Facilities for the purpose of
constructing new electric generating facilities to be owned by LIPA or its
designee. Subject to this right granted to LIPA, the Company has the right to
sell or lease property on or adjoining the Generating Facilities to third
parties. In addition, LIPA has the right to acquire a parcel at the Shoreham
Nuclear Power Station site suitable as the terminus for a potential transmission
cable under Long Island Sound or the potential site of a new gas-fired combined
cycle generating facility.
The Company owns the common plant (such as administrative office buildings and
computer systems) formerly owned by LILCO and recovers LIPA's allocable share of
the carrying costs of such plant through the MSA. The Company has agreed to
provide LIPA, for a period of 99 years, the right to enter into leases at fair
market value for common plant or sub-contract for common services which it may
assign to a subsequent manager of the T&D system. The Company has also agreed
(i) for a period of 99 years not to compete with LIPA as a provider of
transmission or distribution service on Long Island; (ii) that LIPA will share
in synergy (I.E., efficiency) savings over a 10-year period attributed to the
Combination (estimated to be approximately $1 billion), which savings are
incorporated into the cost structure under the LIPA Agreements; and (iii) not to
commence any tax certiorari case (until termination of the PSA) challenging
certain property tax assessments relating to the Generating Facilities.
19
GUARANTEES AND INDEMNITIES. The Company and LIPA also have entered into
agreements providing for the guarantee of certain obligations, indemnification
against certain liabilities and allocation of responsibility and liability for
certain pre-existing obligations and liabilities. In general, liabilities
associated with the Transferred Assets have been assumed by the Company and
liabilities associated with the Retained Assets are borne by LIPA, subject to
certain specified exceptions. The Company has assumed all liabilities arising
from all manufactured gas plant ("MGP") operations of LILCO and its predecessors
and LIPA has assumed certain liabilities relating to the Generating Facilities
and all liabilities traceable to the business and operations conducted by LIPA
after completion of the Combination.
An agreement also provides for an allocation of liabilities which relate to the
assets that were common to the operations of LILCO and/or shared services and
are not traceable directly to either the business or operations conducted by
LIPA or the Company. LIPA bears 53.6% of the costs associated therewith and the
Company bears the remainder.
In addition, the Company has assumed environmental obligations relating to the
Ravenswood Facility operations, but not including liabilities arising from
pre-closing disposal of waste at off-site locations and any monetary fines
arising from Con Edison's pre-closing conduct. For additional discussion, see
"Remediation of Contaminated Property."
20
GAS EXPLORATION & PRODUCTION
The Company is also engaged in the exploration and production of domestic gas
and oil, through its 64% equity interest in The Houston Exploration Company
("THEC"), an independent natural gas and oil company, and its wholly owned
subsidiary, KeySpan Exploration and Production, LLC "KeySpan Exploration."
THEC was organized by the Company in 1985 to conduct natural gas and oil
exploration and production activities. It completed an initial public offering
in 1996 and its shares are currently traded on the New York Stock Exchange under
the symbol "THX." At March 1, 2000, its aggregate market capitalization was
approximately $372.3 million (based upon the closing price on the New York Stock
Exchange on that date of $15.5625. THEC has approximately 23,923,020 shares of
common stock, $.01 par value, outstanding. More detailed information concerning
the operations of THEC is contained in the annual, quarterly and periodic
reports filed by THEC with the SEC.
KeySpan Exploration was organized in 1999, as a Delaware corporation,
principally to form a joint venture with THEC. On March 15, 1999, KeySpan
Exploration and THEC entered into a joint exploration agreement (the "THEC Joint
Venture") to explore for natural gas and oil over a term of three years and
expiring on December 31, 2001, subject to earlier termination, at the option of
either party, upon proper notice to the other party. THEC contributed all of its
then undeveloped offshore leases to the THEC Joint Venture, and KeySpan
Exploration and Production, LLC acquired a 45% working interest in all prospects
to be drilled under the THEC Joint Venture . THEC retained a 55% interest in the
leases, and the revenues generated from this joint program are shared between
the Company and THEC on a 45% and 55% basis, respectively. The Company commit
approximately $25 million for exploration and development activities, and will
reimburse THEC for certain general and administrative expenses relating to the
THEC Joint Venture during 2000.
Information with respect to net proved reserves, production, productive wells
and acreage, undeveloped acreage, drilling activities, present activities and
drilling commitments is contained in Note 16 to the Consolidated Financial
Statements, "Supplemental Gas and Oil Disclosures," included herein.
During 1999, the Company's revenues attributable to gas exploration and
production were $150.6 million, and gas exploration and production operating
income was $48.5 million. Set forth below is certain selected information with
respect to the Company's gas exploration and production activities:
1999* 1998 1997
---------- ----------- ---------
Net Proved Reserves (BCFe)....................... 553.0 480.3 337.1
Production of Natural Gas and Oil (BCFe)......... 71.2 62.8 51.3
Average Realized Price of Natural Gas ($/per MCF) 2.10 2.02 2.25
Average Unhedged Price of Natural Gas ($/per MCF) 2.14 1.96 2.45
Capital Expenditures ($000)...................... 183,322 302,837 145,175
*1999 is the first year which includes KeySpan Exploration's activities.
- One billion cubic feet (BCFe) of gas equals 1,000 MDTH. Gas reserves and
production are stated in BCFe and MCFe, which includes equivalent oil
reserves.
21
The Company's interests in exploration and production have achieved significant
growth in net proved reserves, production and revenues over the past five years.
The Company, primarily through its interests in THEC, has increased net proved
reserves from 150 BCFe at December 31, 1994 to 553 BCFe at December 31, 1999.
During this period, annual production increased from 22 BCFe in 1994 to 71 BCFe
in 1999. At the close of 1999, daily production averaged 195 MMcfe per day. The
Company's oil and gas revenues from its interests in exploration and production
activities have increased from $42 million in 1994 to $150.6 million in 1999.
In September 1999, the Company and THEC jointly announced their intention to
begin a process to review strategic alternatives for THEC. The process included
an assessment of the role of THEC within the Company's strategic plans,
including the sale of all or a portion of THEC by the Company. After completing
the review of strategic alternatives for THEC, the Company concluded that it
would retain its equity interest in THEC.
In November 1998, the Company extended a $150 million revolving credit line to
THEC (the "THEC Facility"). The THEC Facility matures on March 31, 2000 and is
convertible to equity, if borrowings remain outstanding at maturity. Currently,
there is approximately $80 million outstanding and it is anticipated that such
debt will convert into additional common equity on April 1, 2000, increasing the
Company's equity ownership interest in THEC to approximately 70%.
THEC focuses its operations offshore in the Gulf of Mexico and onshore in South
Texas, South Louisiana, the Arkoma Basin, East Texas and West Virginia. The
geographic focus of its operations enables it to manage a comparatively large
asset base with relatively few employees and to add and operate production at
relatively low incremental costs. THEC seeks to balance its offshore and onshore
activities so that the lower risk and more stable production typically
associated with onshore properties complement the high potential exploratory
projects in the Gulf of Mexico by balancing risk and reducing volatility. THEC's
business strategy is to seek to continue to increase reserves, production and
cash flow by pursuing internally generated prospects, primarily in the Gulf of
Mexico, by conducting development and exploratory drilling on its offshore and
onshore properties and by making selective opportune acquisitions.
OFFSHORE PROPERTIES. THEC holds interests in 86 lease blocks, representing
527,279 gross (286,953 net) acres, in federal and state waters in the Gulf of
Mexico, of which 28 have current operations. THEC operates 22 of these blocks,
accounting for approximately 79% of THEC's offshore production. Over the past
five years, THEC has drilled 21 successful exploratory wells and 18 successful
development wells in the Gulf of Mexico, representing a historical success rate
of 71%. During 1999, THEC drilled 6 successful exploratory wells and 8
successful development wells on its Gulf of Mexico properties.
ONSHORE PROPERTIES. THEC owns onshore natural gas and oil properties
representing interests in 1,179 gross (779 net) wells, approximately 86% of
which THEC is the operator of record, and 166,450 gross (116,639 net) acres.
Over the past five years, THEC has drilled or participated in the drilling of
108 successful development wells and 9 successful exploratory wells onshore,
representing a historical success rate of 80%. During 1999, THEC drilled 31
successful development wells and 2 successful exploratory wells on its onshore
properties. During the same period, THEC drilled or participated in the drilling
of 6 development wells that were not successful.
22
Effective October 1, 1999, THEC acquired from a private undisclosed party an
interest in offshore producing properties in the West Cameron 587 field of the
Gulf of Mexico. The newly acquired properties are comprised of 21 BCFe of proved
reserves and 6 BCFe of probable reserves. The net purchase price of $21.0
million was paid in cash and financed by borrowings under the THEC Facility.
THEC plans to drill 2 additional wells and install a minimal structure with test
facilities to commence production in 2000.
JOINT VENTURE
During 1999, THEC completed the drilling of eight wells, six of which were
successful. At December 31, 1999, two additional joint venture wells were
drilled, and subsequently, in January and February 2000, three new wells were
spud. During 2000, the THEC Joint Venture plans to drill approximately five to
eight offshore exploratory wells and to complete the development and facility
installation of the successful exploratory wells drilled in 1999.
23
ENERGY-RELATED SERVICES
As part of its business strategy, the Company is focusing on continuing to
develop and grow its energy services through non-regulated subsidiaries that
market and manage natural gas, electricity, and consumer products and services
to residential, commercial and industrial customers, including those within the
Company's traditional utility service territories. These non-regulated
subsidiaries, some of which are currently in the start-up phase, had revenues of
$188.6 million and an operating loss of $3.4 million in 1999.
ENERGY MARKETING. The Company buys, sells and markets gas and electricity and
arranges for transportation and related services to over 100,000 customers
throughout the Northeastern United States, including those in the gas service
territories of the Company.
ENERGY MANAGEMENT. The Company owns, designs, constructs and/or operates energy
systems for commercial and industrial customers and provides energy-related
services to clients in the metropolitan New York City - Long Island area and in
New England.
APPLIANCE SERVICES. The Company provides various technical and maintenance
services to customers throughout the metropolitan New York City - Long Island
area, including the installation, maintenance and repair of heating equipment,
water heaters, central air conditioners and other appliances. With over 125,000
service contracts, the Company is the largest provider of these services in the
State of New York.
TELECOMMUNICATIONS. The Company owns a fiber optic network in excess of 350
miles on Long Island. The fiber optic network serves the telecommunication needs
of the Company on Long Island and also serves several carriers under short and
long-term agreements.
FUEL CELLS. The Company has also become the exclusive provider of residential
fuel cell units distributed on behalf of a joint venture between GE MicroGen, a
subsidiary of GE Power Systems and Plug Power in New York City and Long Island
and is the authorized service provider for PC25(TM) natural-gas-powered fuel
cells manufactured by International Fuel Cells (IFC)/ONSI(R) Corporation,
subsidiaries of United Technologies, in the metropolitan New York - Long Island
area.
As previously stated, during 1999 and in February 2000, the Company made several
acquisitions to expand its energy services operations in the metropolitan New
York City - Long Island area and in New England.
The Company's energy-related services operations compete with the marketing and
management operations of both independent and major energy companies in addition
to electric utilities, independent power producers, local distribution companies
and various energy brokers. As a result of the continuing efforts to deregulate
both the natural gas and electric industries, the relative energy cost
differences among different forms of energy are expected to be reduced in the
future. Competition is based largely upon pricing, availability and reliability
of supply, technical and financial capabilities, regional presence and
experience. The Company's energy-related services subsidiaries are expected to
enable the Company to take advantage of emerging deregulated energy markets for
both gas and electricity and the Company anticipates that it will continue to
target other
24
acquisitions which also provide it with opportunities to expand those services
both within and outside its traditional service territories.
25
ENERGY-RELATED INVESTMENTS
As one of its complementary lines of business, the Company has investments in
energy-related businesses, including natural gas pipelines, midstream natural
gas processing and gathering facilities and gas storage facilities in the
Northeast region of the United States and in Canada and the United Kingdom.
During 1999, net income from energy-related investments was $7.8 million, and
the Company's capital expenditures in this segment were $49.4 million, which
represents the Company's acquisition of a 37% interest in Paddle River, its
purchase of certain oil properties in Canada, as well as its share of capital
expenditures in the midstream natural gas assets owned jointly with Gulf Canada
Resources Limited ("Gulf Canada") and its capital expenditures related to its
investment in the gas distribution system in Northern Ireland, as discussed
below.
The Company owns a 20% interest in Iroquois, the partnership that owns a
374-mile pipeline that currently transports 946 MDTH of Canadian gas supply
daily from the New York-Canadian border to markets in the Northeastern United
States. The Company is also a shipper on Iroquois and currently transports up to
137 MDTH of gas per day on the pipeline.
The Company owns a 24.5% interest in Phoenix Natural Gas ("Phoenix") and a 50%
interest in Premier Transco Pipeline ("Premier") in Northern Ireland. Phoenix is
a gas distribution system serving the City of Belfast, Northern Ireland, which
is in its early stages of development pursuant to an eight-year program of
capital development and line extensions. Premier is an 84-mile pipeline to
Northern Ireland from southwest Scotland that has planned transportation
capacity of approximately 300 MDTH of gas supply daily to markets in Northern
Ireland.
The Company has equity investments in two gas storage facilities in the State of
New York, Honeoye Storage Corporation and Steuben Gas Storage Company.
The Company also has a 50% interest in midstream natural gas assets located in
Western Canada owned jointly with Gulf Canada. The assets include interests in
14 processing plants and associated gathering systems that can process
approximately 1.5 BCFe of natural gas daily, and associated natural gas liquids
fractionation. Additionally, as previously discussed, a 37% interest in Paddle
River was acquired by the Company in September 1999 and in December 1999, the
Company acquired the Nipisi oil property all in Western Canada.
26
REGULATION AND RATE MATTERS
Gas and electric public utility companies, and corporations which own gas and
electric public utility companies (I.E., public utility holding companies) may
be subject to either or both state and federal regulation. In general, state
public utility commissions, such as the NYPSC, regulate the provision of retail
services, including the distribution and sale of natural gas and electricity to
consumers. FERC regulates interstate natural gas transportation and electric
transmission, and has jurisdiction over certain wholesale natural gas sales and
wholesale electric sales. Public utility holding companies, especially those
with operations in several states, are regulated by the SEC under PUHCA, and to
some extent by state utility commissions through the regulation of corporate,
financial and affiliate activities of public utilities.
PUBLIC UTILITY HOLDING COMPANY REGULATION. KeySpan Energy is a public utility
holding company, although it is currently exempt from most regulation under
PUHCA because of the predominately intrastate character of its public utility
subsidiaries. The only provision of PUHCA from which KeySpan Energy is not
currently exempt is the requirement that any person must obtain advance SEC
approval for the acquisition of 5% or more of voting securities issued by any
public utility company or public utility holding company. However, following the
consummation of the Eastern Transaction, the Company will become a "registered"
holding company under PUHCA. As such, the corporate and financial activities of
the Company and its subsidiaries, including the ability of each entity to pay
dividends will be subject to regulation of the SEC. On March 6, 2000, the
Company filed its application with the SEC to become a registered holding
company under PUHCA.
KeySpan Energy also is subject to indirect regulation by the NYPSC in the form
of conditions attached to NYPSC orders authorizing the formation of the Company
and approving the Combination, among other matters. Those conditions address the
manner in which KeySpan Energy and its subsidiaries interact with their two
NYPSC-regulated natural gas distribution subsidiaries, Brooklyn Union and
Brooklyn Union of Long Island.
NYPSC REGULATION
NATURAL GAS UTILITIES. The NYPSC is the principal agency in the State of New
York which regulates, as "gas corporations" - companies that own, operate or
manage pipelines and other facilities used to distribute or sell natural gas.
The NYPSC regulates the construction, use and maintenance of intrastate natural
gas facilities, the retail rates, terms and conditions of service offered by gas
corporations, as well as matters relating to the quality, reliability and safety
of service. The NYPSC also regulates the corporate, financial and affiliate
activities of gas corporations. Both Brooklyn Union and Brooklyn Union of Long
Island are gas corporations subject to the full scope of NYPSC regulation.
Beginning in the mid-1980's, the NYPSC has taken a number of steps to require
the "unbundling" of natural gas sales and other services from the distribution
of natural gas through pipelines in order to encourage competition among gas
sellers and energy service providers. In 1985, the NYPSC ordered the major gas
utilities in the state to offer transportation service for large volume
customers who choose to purchase natural gas from other suppliers. Subsequently,
the NYPSC required that transportation service be made available to all
customers beginning on May 1, 1996. Brooklyn
27
Union and Brooklyn Union of Long Island have been providing a transportation
service option to all their customers in compliance with that NYPSC requirement.
In April 1997, the NYPSC ordered gas utilities to cease providing non-safety
related appliance repair service by no later than May 1, 2000. Brooklyn Union
stopped providing these services in April 1998, and Brooklyn Union of Long
Island ceased providing non-emergency appliance repair services on July 1, 1999.
During a transition period from September 22, 1999 through April 30, 2000,
Brooklyn Union of Long Island is implementing a transition program to assist
customers in their change to new non-emergency appliance service providers.
In November 1998, the NYPSC issued a policy statement that anticipated that
natural gas utilities would cease sales of gas, and become transportation-only
providers, within three to seven years. Marketers, including those that are
affiliated with the natural gas utilities, are permitted to compete for retail
natural gas sales. The NYPSC's policy statement envisions proceedings to
restructure the operations of natural gas utilities in order to facilitate the
achievement of the objectives articulated in the policy statement.
On October 18, 1999, Brooklyn Union and Brooklyn Union of Long Island (the "Gas
Companies") filed a Joint Restructuring Proposal (the "Proposal") with the
NYPSC. The Proposal outlines how the Gas Companies would restructure their
operations by encouraging all gas consumers to migrate to transportation-only
service. The Proposal is designed to (i) provide significant impetus towards the
Gas Companies exiting the gas supply business and (ii) present opportunities for
the development of a competitive unbundled gas supply market for all customers.
Settlement discussions with the Staff of the NYPSC and other interested parties
have been held regarding the Gas Companies' restructuring proposals. The Company
is unable to predict the outcome of this matter. For more information on gas
deregulation, see Item 7A, Quantitative and Qualitative Disclosures About Market
Risk.
Brooklyn Union currently is operating under a six-year rate plan that ends on
September 30, 2002. Brooklyn Union is subject to an earnings sharing provision
under which it will be required to credit to certain customers 60% of any
utility earnings up to 100 basis points above specified common equity return
levels (other than any earnings associated with discrete incentives) and 50% of
any utility earnings in excess of 100 basis points above such threshold levels.
The threshold levels are13.50% for rate years, September 30 1999, 2000 and 2001;
and 13.25% for rate year 2002. A safety and reliability incentive mechanism
provides a maximum 12 basis point pre-tax penalty return on common equity if
Brooklyn Union fails to achieve certain safety and reliability performance
standards, and a customer service incentive performance program with a maximum
40 basis point pre-tax penalty return on equity. With the exception of the
simplification of the customer service performance standards and the imposition
of the earnings sharing provisions, the Brooklyn Union rate plan approved by the
NYPSC in 1996 remains unchanged.
Brooklyn Union of Long Island currently is operating under a three-year rate
plan. The rate plan applies to the period December 1, 1997 through November 30,
2000. Under the plan, if Brooklyn Union of Long Island's earned return on common
equity devoted to its operations exceeds 11.10%, it must credit back to certain
customers 60% of earnings up to 100 basis points above the 11.10% and 50% of any
earnings in excess of a 12.10% return. Both a customer service and a safety and
28
reliability incentive performance program became effective on December 1, 1997,
with maximum pre-tax return on equity penalties of 40 and 12 basis points,
respectively, if Brooklyn Union of Long Island fails to achieve certain
performance standards in these areas. At the conclusion of the Brooklyn Union of
Long Island rate plan on November 30, 2000, Brooklyn Union of Long Island or the
NYPSC on its own motion, may initiate a proceeding to revise the rates and
charges of that company.
As part of the settlement agreement approved by the NYPSC in connection with its
approval of the Combination (the "Stipulation"), Brooklyn Union and Brooklyn
Union of Long Island are subject to certain affiliate transaction restrictions,
cost allocation and financial integrity conditions and a code of conduct
governing affiliate relationships. These restrictions and conditions eliminate
or relax many restrictions previously applicable to Brooklyn Union in such areas
as affiliate transactions, use of the name and reputation of Brooklyn Union by
unregulated affiliates, common officers of the Company, the utility subsidiaries
and unregulated subsidiaries, dividend payment restrictions, and the composition
of the Board of Directors of Brooklyn Union.
ELECTRIC SUPPLIERS. KeySpan Generation LLC ("KeySpan Generation") and KeySpan
Ravenswood, Inc. ("KeySpan Ravenswood"), KeySpan Energy's electric generation
subsidiaries, are not subject to NYPSC rate regulation because their energy
transactions are made exclusively at wholesale; however, KeySpan Generation and
KeySpan Ravenswood are subject to NYPSC financial, reliability and safety
regulation. As wholesale generators, KeySpan Generation and KeySpan Ravenswood
qualify for "lightened" regulatory treatment, I.E. certain discretionary
regulations are waived and others are applied with less scrutiny than would be
the case for fully-regulated electric utilities.
FEDERAL REGULATION
NATURAL GAS COMPANIES. The FERC has jurisdiction to regulate certain natural gas
sales for resale in interstate commerce, the transportation of natural gas in
interstate commerce, and, unless an exemption applies, companies engaged in such
activities. The natural gas distribution activities of Brooklyn Union and
Brooklyn Union of Long Island and certain related intrastate gas transportation
functions are not subject to FERC jurisdiction. However, to the extent that
Brooklyn Union and Brooklyn Union of Long Island sell gas for resale in
interstate commerce, such sales are subject to FERC jurisdiction and have been
authorized by the FERC.
The Company also owns an approximate 20% interest in Iroquois and 52% and 18.6%
interests in the Honeoye and Steuben gas storage facilities, respectively.
Iroquois, Honeoye and Steuben are fully regulated by the FERC as natural gas
companies.
ELECTRIC SUPPLIERS. The FERC regulates the sale of electricity at wholesale and
the transmission of electricity in interstate commerce as well as certain
corporate and financial activities of companies that are engaged in such
activities.
The Generating Facilities and the Ravenswood Facility are subject to FERC
regulation based on their wholesale energy transactions. LIPA, KeySpan
Generation, and the Staff of FERC stipulated to setting rates designed to
recover $300.5 million in the first year with agreed-upon adjustments to set
rates for the remainder of the five-year rate period. The only party opposed to
this stipulation is the
29
County of Suffolk. Parties submitted initial briefs to a FERC Administrative Law
Judge ("ALJ") on December 8, 1998 and reply briefs on January 15, 1999. On April
15, 1999, the presiding ALJ issued an Initial Decision which ordered, subject to
review of the Commission on exceptions or on its own motion, that the rates and
terms contained in the PSA, as modified by the June 30, 1998 Stipulation and
Agreement, are just and reasonable. On June 17, 1999, this initial decision was
made a final order of the FERC. The FERC retains the ability in future
proceedings, either on its own motion or upon a complaint filed with the FERC,
to modify KeySpan Generation's rates, either upward or downward, if the FERC
finds that the public interest requires it to do so.
KeySpan Ravenswood's rates are based on its market based rate application
approved by FERC. The rates that KeySpan Ravenswood may charge are subject to
mitigation measures due to market power concerns of the FERC. As is the case
with KeySpan Generation, the FERC retains the ability in future proceedings,
either on its own motion or upon a complaint filed with the FERC, to modify
KeySpan Ravenswood's rates, either upward or downward, if the FERC concludes
that it is in the public interest to do so.
REGULATION IN OTHER COUNTRIES
The Company's operations in Northern Ireland, conducted through Premier and
Phoenix, are subject to licensing by the Northern Ireland Department of Economic
Development and regulation by the U.K. Department of Trade and Industry (with
respect to the subsea and on-land portions of the Premier pipeline) and the
Northern Ireland Director General, Office for the Regulation of Electricity and
Gas (with respect to the Northern Ireland portion of the Premier pipeline and
Phoenix's operations generally). The licenses establish mechanisms for the
establishment of rates for the conveyance and transportation of natural gas, and
generally may not be revoked except upon long- term notice. Charges for the
supply of gas by Phoenix are largely unregulated unless a determination is made
of an absence of competition.
The Company's assets in Canada are subject to regulation by Canadian provincial
authorities. Such regulatory authorities license the operations of the
facilities and regulate safety matters and certain changes in such facilities'
operations.
ENVIRONMENTAL MATTERS
OVERVIEW
The Company's ordinary business operations subject it to various federal, state
and local laws, rules and regulations dealing with the environment, including
air, water, and hazardous waste, and its business operations are regulated by
various federal, regional, state and local authorities, including the United
States Environmental Protection Agency (the "EPA"), the DEC, the New York City
Department of Environmental Protection (NYC DEP) and the Nassau and Suffolk
County Departments of Health. These requirements govern both the normal, ongoing
operations of the Company and the remediation of contaminated properties
historically used in utility operations. Potential liability associated with the
Company's historical operations may be imposed without regard to fault, even if
the activities were lawful at the time they occurred.
30
Ensuring continuing compliance with environmental requirements may require
significant expenditures for capital improvements or modifications in some
areas. Total capital expenditures for environmental improvements and related
studies, for other than MGP matters, amounted to approximately $1.7 million for
the year ended December 31, 1999, and are expected to be in the $1 to $2 million
range for the year ending December 31, 2000.
Except as set forth below, no material proceedings relating to environmental
matters have been commenced or, to the knowledge of the Company, are
contemplated by any federal, state or local agency against the Company, and the
Company is not a defendant in any material litigation with respect to any matter
relating to the protection of the environment. The Company believes that its
operations are in substantial compliance with environmental laws and that
requirements imposed by environmental laws are not likely to have a material
adverse impact upon the Company. The Company believes that all prudently
incurred costs not recoverable through insurance or some other means with
respect to environmental requirements will be recoverable from its customers.
The Company also is pursuing claims against insurance carriers and potentially
responsible parties which seek the recovery of certain costs associated with the
investigation and remediation of contaminated properties.
AIR. Federal, state and local laws currently regulate a variety of air emissions
from new and existing electric generating plants, including SO2, NOx, opacity
and particulate matter and, in the future, may also regulate emissions of fine
particulate matter, hazardous air pollutants, and carbon dioxide. The Company
has submitted timely applications for permits in accordance with the
requirements of Title V of the 1990 amendments to the Federal Clean Air Act
("CAA"). Final permits have been issued for all of the Company's electric
generating facilities with the exception of the Far Rockaway and KeySpan
Ravenswood facilities, which are pending. The permits allow the Company's
electric generating plants to continue to operate without any additional
significant expenditures, except as described below.
The Company's generating facilities are located within a CAA severe ozone
non-attainment area, and are subject to the Phase I, II, and III NOx reduction
requirements established under the Ozone Transportation Commission ("OTC")
memorandum of understanding. The Company's investments in boiler combustion
modifications and the use of natural gas firing at its steam electric generating
stations has enabled the Company to achieve the NOx emission reductions required
under Phase I and II in a cost-effective manner. In addition, software and
equipment upgrades of approximately $1 million for continuous emissions monitors
("CEM") may be required in 2000 to meet EPA requirements for the NOx allowance
tracking/trading program and certain other regulatory changes affecting the
operation of CEM systems. The Company currently estimates that it may be
required to spend between $5 million and $25 million by the year 2003 for
additional pollution control equipment to achieve the OTC Phase III NOx
reduction requirements and/or new requirements imposed under the EPA NOx state
implementation plan, depending on the actual level of NOx emission reductions
which are required when pending regulations are implemented by the State of New
York.
WATER. The Company possesses permits for its generating units which authorize
discharges from cooling water circulating systems and chemical treatment
systems. These permits are renewed from
31
time to time, as required by regulation. The Company does not foresee any new,
material obligations arising from these permit renewals.
On behalf of LIPA, the Company provides management and operations support for
the LIPA- Connecticut Light and Power Company electric transmission cable system
located under the Long Island Sound (the "Sound Cable"). The Connecticut
Department of Environmental Protection and the DEC separately have issued
Administrative Consent Orders ("ACOs") in connection with releases of insulating
fluid from the Sound Cable. The ACOs require the submission of a series of
reports and studies describing cable system condition, operation and repair
practices, alternatives for cable improvements or replacement, and environmental
impacts associated with prior leaks of fluid into the Long Island Sound.
Compliance activities associated with the ACOs are ongoing and are recoverable
from LIPA under the MSA.
REMEDIATION OF CONTAMINATED PROPERTY
SUPERFUND SITES. Federal and New York State Superfund laws impose liability,
regardless of fault, upon generators of hazardous substances for costs
associated with remediating contaminated property. In the course of its business
operations, the Company generates materials which are subject to these laws.
From time to time, the Company has received notices under these laws concerning
possible claims with respect to sites at which hazardous substances generated by
the Company and other potentially responsible parties ("PRPs") allegedly were
disposed.
The DEC has notified the Company, pursuant to the State Superfund program, that
the Company may be responsible for the disposal of hazardous substances at the
Huntington/East Northport Site, a municipal landfill property. The DEC
investigation is in its preliminary stages, and the Company currently is unable
to estimate its share, if any, of the costs required to investigate and
remediate this site.
MANUFACTURED GAS PLANT SITES. The Company has identified twenty-six MGP sites
which were historically owned or operated by Brooklyn Union or Brooklyn Union of
Long Island (or such companies' predecessors). Operations at these plants in the
late 1800's and early 1900's may have resulted in the release of hazardous
substances. These former sites, some of which are no longer owned by the
Company, have been identified to both the DEC for inclusion on appropriate waste
site inventories and the PSC. The currently-known conditions of fourteen of
these former MGP sites, their period and magnitude of operation, generally
observed cleanup requirements and costs in the industry, current land use and
ownership, and possible reuse have been considered in establishing contingency
reserves that are discussed below.
In 1995, Brooklyn Union executed an ACO with the DEC which addressed the
investigation and remediation of a site in Coney Island, Brooklyn. In 1998,
Brooklyn Union executed an ACO for the investigation and remediation of the
Clifton MGP site in Staten Island. At the initiative of DEC, the City of New
York and the Company are in negotiations on a cost sharing arrangement to
conduct investigations in 2000 at the Citizen's MGP site in Brooklyn, which is
now primarily owned by the City, but was formerly owned and operated by a
Brooklyn Union predecessor. The DEC notified the Company in 1998 that the Sag
Harbor and Rockaway Park MGP sites owned by Brooklyn Union of Long Island would
require remediation under the State's Superfund program. Accordingly, the
32
Sag Harbor and Rockaway Park sites; as well as the Bay Shore, Glen Cove,
Halesite and Hempstead MGP sites; are the subject of two separate ACOs, which
the Company executed with the DEC in March and September 1999, respectively.
Field investigations and, in some cases, interim remedial measures, are underway
or scheduled to occur at each of these sites under the supervision of the DEC
and the New York State Department of Health.
The Company was also requested by the DEC to perform preliminary site
assessments at the Patchogue, Babylon, Far Rockaway, Garden City and Hempstead
(Clinton St.) MGP sites, each of which were formerly owned by LILCO, under a
separate ACO entered into in September 1999. Initial studies based on existing,
available documentation have been completed for each such site and the DEC has
requested that the Company collect additional samples at each of the subject
properties.
With the exception of the Coney Island site, which will be redeveloped for
commercial or industrial use, the final end uses for the sites identified above
and, therefore, acceptable remediation goals have not yet been determined. The
Company is required to prepare a feasibility study for the remediation of each
such site, based on cleanup levels derived from risk analyses associated with
the proposed or anticipated future use of the properties. The schedule for
completing this phase of the work under the ACOs for the identified sites
discussed above extends through 2001.
Thus, thirteen sites identified above are currently the subject of ACOs with the
DEC and one is subject to the negotiation of such an agreement. The Company's
remaining MGP sites may not become subject to ACOs in the future, and
accordingly no liability has been accrued for these sites. It is possible, based
on future investigation, that the Company may be required to undertake
investigation and potential remediation efforts at these, or other currently
unknown former MGP sites. However, the Company is currently unable to determine
whether or to what extent such additional costs may be incurred.
The Company believes that in the aggregate, the accrued liability for
investigation and remediation of the MGP sites identified above are reasonable
estimates of likely cost within a range of reasonable, foreseeable costs.
Accordingly, the Company presently estimates the cost of its MGP- related
environmental cleanup activities will be $123 million; which amount has been
accrued by the Company as its current best estimate of its aggregate
environmental liability for known sites. As previously indicated, the total
MGP-related costs may be substantially higher, depending upon remediation
experience, selected end use for each site, and actual environmental conditions
encountered.
The NYPSC approved rate plans for Brooklyn Union and Brooklyn Union of Long
Island provide for the recovery of such investigation and remediation costs. The
Brooklyn Union rate plan provides, among other things, that if the total cost of
investigation and remediation varies from that which is specifically estimated
for a site under investigation and/or remediation, then Brooklyn Union will
retain or absorb up to 10% of the variation. The Brooklyn Union of Long Island
rate plan also provides for the recovery of investigation and remediation costs
but with no consideration of the difference between estimated and actual costs.
Under prior rate orders, Brooklyn Union has offset certain moneys due to
ratepayers against its estimated environmental cleanup costs for MGP sites. At
December 31, 1999, the Company has reflected a regulatory asset of $95.6
million.
33
Expenditures incurred to date by the Company with respect to MGP-related
activities total $15.9 million.
Periodic discussions by the Company with insurance carriers and third parties
for reimbursement of some portion of MGP site investigation and remediation
costs continue. In December 1996, LILCO filed a complaint in the United States
District Court for the Southern District of New York against fourteen insurance
companies that issued general comprehensive liability policies to LILCO. In
January 1998, LILCO commenced a similar action against the same, and additional,
insurance companies in New York State Supreme Court, and the federal court
action subsequently was dismissed. The state court action is being conducted by
the Company on behalf of Brooklyn Union of Long Island. The outcome of this
proceeding cannot yet be determined. In addition, Brooklyn Union is in
discussions with insurance carriers regarding the possible resolution of
coverage claims related to its MGP site investigation and remediation activities
without litigation. The Company is not able to predict the outcome of these
discussions.
RAVENSWOOD FACILITY. In connection with the Company's acquisition of the
Ravenswood Facility, the Company assumed all of Con Edison's historical
contingent environmental obligations relating to facility operations other than
liabilities arising from pre-closing disposal of waste at off-site locations and
any monetary fines arising from Con Edison's pre-closing conduct. These
environmental exposures are generally divided between (i) future capital
expenditures, in the nature of property and leasehold improvements, necessary to
address compliance obligations and (ii) expenditures to investigate and, as
necessary, remediate certain on-site contamination which may or may not result
in leasehold improvements.
Presently, there are four ACOs issued to Con Edison by the DEC. The Company has
contractually agreed to assume Con Edison's remaining obligations at the
Ravenswood Facility under these ACOs. Generally, the Company's derivative
obligations are expected to include investigation and remediation of certain
petroleum releases, inspection and any necessary corrective action for certain
aboveground storage tanks and underground piping, potential upgrades to existing
cooling water intake structures, and implementation of an air emissions opacity
reduction program. The Company is currently negotiating a consolidated ACO with
the DEC that will clarify the scope and timing of these activities.
The Company has identified certain capital expenditures for environmental
compliance purposes at the Ravenswood Facility that are reasonably likely to
occur. To address an anticipated shortfall of NOx emissions allowances beginning
in May 2003, the Company may incur capital costs for additional air pollution
control equipment. Alternatively, the Company may elect to purchase additional
NOx allowances. The Company may be required to upgrade the Ravenswood Facility
cooling intake structures in order to meet the best available technology
requirements of the Federal Clean Water Act. The extent and cost of any upgrades
are uncertain and will depend upon the analysis and interpretation of certain
studies submitted by the Company to the DEC and subsequently agreed upon between
the DEC and the Company.
Pursuant to its derivative ACO obligations, the Company will complete the
investigation and remediation of certain petroleum and other hazardous material
releases at the Ravenswood Facility, as necessary. The Company will also address
similar releases not covered by the ACO's. The
34
Ravenswood Facility is located on a former MGP site. The Company has no current
obligation to investigate or remediate the property for contamination resulting
from historical MGP operations, although there may be a need to perform certain
site remediation as part of an overall improvement of property related to the
installation of new generation capacity. Based on information currently
available for environmental contingencies related to the Ravenswood acquisition,
the Company has accrued $5 million as the minimum liability to be incurred.
EMPLOYEE MATTERS
On December 31, 1999, the Company had approximately 7,723 full-time employees.
Of that total, approximately 4,946 employees are covered under collective
bargaining agreements; 1,726 employees are represented by Local 101, Utility
Division, of the Transport Workers Union of America, 205 employees are
represented by Local 3 of the International Brotherhood of Electrical Workers
(the "IBEW"), 1,882 employees are represented by Local 1049 of the IBEW and
1,133 employees are represented by Local 1381 of the IBEW.
The Company maintains collective bargaining agreements covering each of the four
collective bargaining units detailed above, all of which expire in 2001. The
Company has not experienced any work stoppage during the past five years and
considers its relationship with employees, including those covered by collective
bargaining agreements, to be good.
EXECUTIVE OFFICERS OF THE COMPANY
Certain information regarding the Company's Executive Officers, all of whom
serve at the will of the Board of Directors, is set forth below:
ROBERT B. CATELL
Mr. Catell, age 62, has been a Director of the Company since its creation in May
1998 and served as its President and Chief Operating Officer from May 1998-July
1998. He was elected Chairman of the Board and Chief Executive Officer in July
1998. Mr. Catell joined Brooklyn Union in 1958 and became an officer in 1974. He
was elected Vice President in 1977, Senior Vice President in 1981 and Executive
Vice President in 1984. He was elected Chief Operating Officer in 1986 and
President in 1990. Mr. Catell served as President and Chief Executive Officer
from 1991 to 1996, when he was elected Chairman and Chief Executive Officer. In
1997, Mr. Catell was elected Chairman, President and Chief Executive Officer of
the Company.
LAWRENCE S. DRYER
Mr. Dryer, age 40, was elected Vice President of Internal Audit for the Company
in September 1998. Mr. Dryer had been with the Long Island Lighting Company
(LILCO) since 1992 as Director of Internal Audit and was responsible for
providing independent appraisals and recommendations to improve management
controls and increase operational efficiency. Prior to joining LILCO, Mr. Dryer
was an Audit Manager with Coopers & Lybrand.
35
ROBERT J. FANI
Mr. Fani, age 46, was elected Executive Vice President of Strategic Services in
February 2000. Mr. Fani joined Brooklyn Union in 1976, and held a variety of
management positions in distribution, engineering, planning, marketing, and
business development. He was elected Vice President in 1992. In 1997, Mr. Fani
was promoted to Senior Vice President of Marketing and Sales. In 1998, he
assumed that position with the Company and, as of September 1, 1999, assumed
responsibility for Gas Operations.
WILLIAM K. FERAUDO
Mr. Feraudo, age 49, was elected Executive Vice President of KeySpan Services
Group in February 2000. KeySpan Services Group, is the group of non-regulated
energy service companies focusing on gas marketing, energy management and
telecommunications. Since its founding in 1996, the group has grown to more than
2,000 employees, serving customers in the Northeast. Mr. Feraudo began his
career at Brooklyn Union in 1971 and rose through a succession of positions in
Information Systems, Engineering, Customer Operations, Sales, Marketing, and
Product Development before being named Senior Vice President in 1994. He served
as Senior Vice President of Energy Services for the Company prior to his
promotion to Executive Vice President.
RONALD S. JENDRAS
Mr. Jendras, age 52, was named Vice President, Controller and Chief Accounting
Officer of the Company in August 1998. He joined Brooklyn Union in 1969 and held
a variety of positions in the Accounting Department before being named budget
director in 1973. In 1983, Mr. Jendras was promoted to manager of Brooklyn
Union's Rate and Regulatory Affairs area, and in 1997, was named general manager
of the Accounting Division.
GERALD LUTERMAN
Mr Luterman, age 56, has served as Senior Vice President and Chief Financial
Officer since August 1999. He formerly served as Chief Financial Officer of
barnesandnoble.com and Senior Vice President and Chief Financial Officer of
Arrow Electronics, Inc., a distributor of electronic components and computer
products. Prior to that, from 1985-1996, he held executive positions with
American Express, including Executive Vice President and Chief Financial Officer
of the Consumer Card Division from 1991-1996.
DAVID MANNING
Mr. Manning, age 49, was elected Senior Vice President of Corporate Affairs in
April 1999. Before joining KeySpan Energy, Mr. Manning had been president of the
Canadian Association of Petroleum Producers (CAPP) since 1995. From 1993 to
1995, he was Deputy Minister of Energy for the Province of Alberta, Canada, the
source of approximately 14 percent of the natural gas supply serving United
States markets. From 1988 to 1993, he was Senior International Trade Counsel for
the Government of Alberta, based in New York City. Previously he was in the
private practice of law in Canada.
36
CRAIG G. MATTHEWS
Mr. Matthews, age 57, has been President and Chief Operating Officer of KeySpan
Energy and Brooklyn Union since January 1999. Mr. Matthews joined Brooklyn Union
in 1965 and held various management positions in the corporate planning,
financial, marketing, and engineering areas. He has been an officer since 1977.
He was elected Vice President in 1981 and Senior Vice President in 1985. In
1991, Mr. Matthews was named Executive Vice President with responsibilities for
Brooklyn Union's financial, gas supply, information systems, and strategic
planning functions, as well as Brooklyn Union's energy-related investments. In
1996, Mr. Matthews was promoted to President and Chief Operating Officer. He
also served as Executive Vice President and Chief Financial Officer of the
Company from May 1998 through August 1999.
H. NEIL NICHOLS
Mr. Nichols, age 62, was elected Senior Vice President of the Company in March
1999. He also serves as President of KeySpan Energy Development Corporation
(KEDC), a position to which he was elected in March 1998. KEDC is a wholly owned
subsidiary of the Company responsible for spearheading energy-related investment
project development efforts, both domestically and internationally. Since
February 1999, Mr. Nichols also has responsibility for KeySpan Energy Trading
Services, LLC, the Company which provides fuel procurement management and energy
trading services for Brooklyn Union, Brooklyn Union of Long Island and LIPA. Mr.
Nichols, joined KeySpan in 1997, as a broad-based negotiator and business
strategist with comprehensive finance and treasury experience in domestic and
international markets. Prior to joining KeySpan, Mr. Nichols was an owner and
president of Corrosion Interventions, Ltd. in Toronto, Canada. He also served as
Chief Financial Officer and Executive Vice President with TransCanada.
ANTHONY NOZZOLILLO
Mr. Nozzolillo, age 51, was elected Executive Vice President of Electric
Operations in February 2000. He previously served as Senior Vice President of
the Company's Electric Business Unit from December 1998 to January 2000. He
joined LILCO in 1972 and held various positions, including Manager of Financial
Planning and Manager of Systems Planning. Mr. Nozzolillo served as LILCO's
Treasurer from 1992 to 1994 and as Senior Vice President of Finance and Chief
Financial Officer from 1994 to 1998. He served as Senior Vice President of
Finance of the Company from May 1998 to December 1998. He also serves as a
Director to the Long Island Museum of Science and Technology.
WALLACE P. PARKER, JR.
Mr. Parker, age 50, was elected Executive Vice President of Gas Operations in
February 2000. He previously served as the Company's Senior Vice President of
Human Resources from August 1998 to January 2000. He joined Brooklyn Union in
1971 and served in a wide variety of management positions. In 1987 he was named
Assistant Vice President for marketing and advertising and was elected Vice
President in 1990. In 1994 Mr. Parker was promoted to Senior Vice President of
Human Resources.
37
LENORE F. PULEO
Ms. Puleo, age 46, was elected Executive Vice President of Shared Services in
February 2000. She previously served as Senior Vice President of Customer
Relations for Brooklyn Union from May 1994 to May 1998, and for the Company from
May 1998 to January 2000. She joined Brooklyn Union in 1974 and worked in
management positions in Brooklyn Union's Accounting, Treasury, Corporate
Planning, and Human Resources areas. She was given responsibility for the Human
Resources Department in 1987 and was named a Vice President in 1990. Ms. Puleo
was promoted to Senior Vice President of Brooklyn Union's Customer Relations in
1994.
CHERYL T. SMITH
Ms. Smith, age 48, joined the Company in November 1998 as Senior Vice President
and Chief Information Officer. She came to the Company from Bell Atlantic where
she served as Vice President of Strategic Billing and Corporate Systems. Prior
to Bell Atlantic, she worked at Honeywell Federated Systems Inc. as the Director
of MIS for Honeywell Federal Systems, Inc. Ms. Smith brings to the Company more
than 25 years of information systems technology experience.
MICHAEL J. TAUNTON
Mr. Taunton, age 44, has been the Company's Vice President of Investor Relations
since September 1998. He joined Brooklyn Union in 1975 and has worked in various
management positions in Marketing and Sales, Corporate Planning, Corporate
Finance and Accounting. During the transition process he co-managed the
day-to-day operations of the merger on behalf of Brooklyn Union and LILCO.
Before that, Mr. Taunton was general manager of the Business Process Improvement
teams that were organized to improve the organization's strategic focus.
COLIN P. WATSON
Mr. Watson, age 46, was named Senior Vice President of Strategic Marketing and
E-Business effective March 1, 2000. He previously served as Vice President of
Strategic Marketing from May 1998 until his promotion to Senior Vice President.
Mr Watson joined Brooklyn Union in 1997 as Vice President of Strategic
Marketing. From 1973 to 1997, he held several positions at NYNEX, including vice
president and managing director of worldwide operations.
ROBERT R. WIECZOREK
Mr. Wieczorek, age 57, has been the Company's Vice President, Secretary and
Treasurer since August 1998. Mr. Wieczorek joined Brooklyn Union in 1976 and
held a variety of accounting/ financial related positions. In 1981 he was named
Treasurer responsible for all cash management activities and for overseeing
pension fund investments and retirement administration, pension manager
evaluation, long-term debt and equity financing, investor relations, and
shareholder records. From May 1998 to August 1998, he was Vice President and
Auditor of the Company.
STEVEN L. ZELKOWITZ
Mr. Zelkowitz, age 50, was elected Senior Vice President and General Counsel of
the Company in February 2000. He joined the Company as Senior Vice President and
Deputy General Counsel in October 1998. Before joining the Company, Mr.
Zelkowitz practiced law with Cullen and Dykman in Brooklyn, New York and had
been a partner since 1984. He served on the firm's Executive Committee and was
head of its Corporate/Energy Department. Mr. Zelkowitz specialized in energy and
utility law and represented investor-owned and municipal gas and electric
utilities in New York, New Jersey and Vermont.
ITEM 2. PROPERTIES
Information with respect to the Company's material properties used in the
conduct of its business is set forth in, or incorporated by reference in, Item 1
hereof. Except where otherwise specified, all such properties are owned or, in
the case of certain rights of way used in the conduct of its gas distribution
business, held pursuant to municipal consents, easements or long-term leases,
and in the case of oil and gas properties, held under long-term mineral leases.
In addition to the information set forth therein with respect to properties
utilized by each business segment, the Company owns or leases a variety of
office space used for administrative operations of the Company. In the case of
leased office space, the Company anticipates no significant difficulty in
leasing alternative space at reasonable rates in the event of the expiration,
cancellation or termination of a lease relating to the Company's leased
properties.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is subject to various legal proceedings arising
out of the ordinary course of its business. Except as described below, the
Company does not consider any of such proceedings to be material to its business
or likely to result in a material adverse effect on its results of operations or
financial condition.
In October 1998, the County of Suffolk and the Towns of Huntington and Babylon
commenced an action against LIPA, the Company, the NYPSC and others in the
United States District Court for the Eastern District of New York (the
"Huntington Lawsuit"). The Huntington Lawsuit alleges, among other things, that
LILCO ratepayers (i) have a property right to receive or share in the alleged
capital gain that resulted from the transaction with LIPA (which gain is alleged
to be at least $1 billion); and (ii) that LILCO was required to refund to
ratepayers the amount of a Shoreham-related deferred tax reserve (alleged to be
at least $800 million) carried on the books of LILCO at the consummation of the
LIPA transaction. In December 1998, and again in June 1999, the plaintiffs
amended their complaint. The amended complaint contains allegations relating to
certain payments LILCO had determined were payable in connection with the LIPA
Transaction and KeySpan Acquisition to LILCO's Chairman and certain former
officers and adds the recipients of the payments as defendants. In June 1999,
the Company was served with the second amended complaint. On August 23, 1999,
the Company filed a motion to dismiss the second amended complaint. Pursuant to
an agreement among the parties, the Company's motion to dismiss is being
converted to a summary judgement motion. At this time the Company is unable to
determine the outcome of this ongoing proceeding.
39
A class settlement, which became effective in June 1989 (COUNTY OF SUFFOLK, ET
AL., V. LONG ISLAND LIGHTING COMPANY, ET AL.), resolved a civil lawsuit against
LILCO brought under the federal Racketeer Influenced and Corrupt Organizations
Act, alleging that LILCO made inadequate disclosures before the NYPSC concerning
the construction and completion of nuclear generating facilities. The class
settlement provided electric customers with rate reductions of $390.0 million
that were being reflected as adjustments to their monthly electric bills over a
ten-year period which began on June 1, 1990. The class settlement obligation of
approximately $20 million at December 31, 1999 reflects the present value of the
remaining reductions to be refunded to customers. As a result of the LIPA
Transaction, LIPA will provide the remaining balance to its electric customers
as an adjustment to their monthly electric bills. The Company will then, in
turn, reimburse LIPA on a monthly basis for such reductions on the customer's
monthly bill. The Company remains ultimately obligated for amounts due under the
class settlement. In November 1999, class counsel for the LILCO ratepayers
served a motion, in the United States District Court for the Eastern District of
New York, seeking an order directing the Company to pay $42 million, in addition
to the amounts remaining to be paid under the class settlement. Class counsel
contends that the required rate reductions should have been exclusive of gross
receipts taxes. The Company filed its opposition in January 2000 and class
counsel filed their reply papers in February 2000. In their February papers,
class counsel revised their demand to seek an order directing the Company to pay
approximately $22 million, plus interest, in addition to the amounts remaining
to be paid under the class settlement. The Company filed its rebuttal papers
March 1, 2000 and oral argument was held March 6, 2000. On March 9, 2000, an
order was issued by the court granting class counsel's motion. The Company is in
the process of evaluating the order and, accordingly, is currently unable to
determine the ultimate outcome of the proceeding or what effect, if any, such
outcome will have on its financial condition or results of operations.
In May 1995, eight participants of LILCO's Retirement Income Plan ("RIP") filed
a lawsuit against LILCO, the RIP and Robert X. Kelleher, the Plan Administrator,
in the United States District Court for the Eastern District of New York
(BECHER, ET AL., V. LONG ISLAND LIGHTING COMPANY, ET AL.). In January 1996, the
Court ordered that this action be maintained as a class action. This proceeding
arose in connection with the plaintiffs' withdrawal, approximately 25 years ago,
of contributions made to the RIP, thereby resulting in a reduction of their
pension benefits. The plaintiffs are now seeking, among other things, to have
these reduced benefits restored to their pension accounts. In November 1997, the
Company filed a motion for partial summary judgment with the District Court. On
April 28, 1998, the Court denied the Company's motion and permitted the Company
to file a further motion for partial summary judgment on additional grounds. On
January 27, 1999, the Company entered a stipulation of settlement which was
filed with the Court pursuant to which the Company will pay approximately $8
million, a substantial portion of which is recoverable from LIPA. On August 13,
1999, the Court approved the stipulation of settlement and dismissed the
litigation with prejudice.
40
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the last
quarter of the 12 months ended December 31, 1999.
41
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed and traded on the New York Stock Exchange
and the Pacific Stock Exchange under the symbol "KSE." As of March 1, 2000,
there were approximately 90,500 record holders of the Company's common stock.
The following table sets forth, for the quarters indicated, the high and low
sales prices and dividends declared per share for the periods indicated:
1999 High Low Dividends Per Share
- ------------------ ----------- ----------- ----------------------
First Quarter 31.313 25.125 .445
Second Quarter 27.690 24.250 .445
Third Quarter 31.060 26.380 .445
Fourth Quarter 29.690 22.630 .445
1998 High Low Dividends Per Share
- ------------------------------------- ----------- -------- -------------------
Second Quarter (beginning May 28, 1998) 34 3/16 29 1/8 $0.445
Third Quarter 30 3/4 25 3/8 $0.445
Fourth Quarter 32 1/4 28 11/16 $0.445
1
ITEM 6. SELECTED FINANCIAL DATA
(In Thousands of Dollars, Except Per Share Amounts)
- ------------------------------------------------------------------------------------------------------------
Nine Months Twelve Months Twelve Months
YEAR ENDED Ended Ended Ended Year Ended
DECEMBER 31, 1999 December 31, 1998 March 31, 1998 March 31, 1997 December 31, 1996
- ------------------------------------------------------------------------------------------------------------
INCOME SUMMARY
REVENUES
Gas distribution $ 1,753,132 $ 856,172 $ 645,659 $ 672,705 $ 684,260
Electric services 861,582 408,305 - - -
Electric distribution - 330,011 2,478,435 2,464,957 2,466,435
Gas exploration and production 150,581 70,812 - - -
Energy related services and other 189,318 63,181 - - -
- ------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 2,954,613 1,728,481 3,124,094 3,137,662 3,150,695
OPERATING EXPENSES
Purchased gas 744,432 331,690 299,469 308,400 322,641
Fuel and purchased power 17,252 91,762 658,338 646,448 640,610
Operation and maintenance 1,091,166 842,313 511,165 489,868 499,211
Depreciation, depletion and amortization 253,440 294,864 169,770 154,921 171,681
Electric regulatory amortization - (40,005) 13,359 121,694 97,698
General taxes 366,154 257,124 466,326 469,561 472,076
- ------------------------------------------------------------------------------------------------------------
OPERATING INCOME 482,169 (49,267) 1,005,667 946,770 946,778
OTHER INCOME (DEDUCTIONS) 37,496 (38,745) (6,301) 22,191 26,572
- ------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INTEREST
CHARGES AND INCOME TAXES 519,665 (88,012) 999,366 968,961 973,350
Interest charges (124,692) (138,715) (404,473) (435,219) (447,629)
Income taxes (136,362) 59,794 (232,653) (211,333) (209,257)
- ------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) 258,611 (166,933) 362,240 322,409 316,464
Preferred stock dividend requirements 34,752 28,604 51,813 52,113 52,216
- ------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) FOR COMMON STOCK $ 223,859 $ (195,537$ 310,427$ 270,296$ 264,248
Foreign currency adjustment 8,666 (952) - - -
- ------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $ 232,525 $ (196,489$ 310,427$ 270,296$ 264,248
============================================================================================================
FINANCIAL SUMMARY
Earnings per share ($) 1.62 (1.34) 2.56 2.24 2.20
Cash dividends declared per share ($) 1.78 1.19 1.78 1.78 1.78
Book value per share, year-end ($) 20.28 20.90 21.88 21.07 20.89
Market value per share, year-end ($) 23.19 31.00 31.50 24.00 22.13
Shareholders 90,500 103,239 78,314 77,691 86,607
Capital expenditures ($) 725,670 676,563 297,230 294,943 291,618
Total assets ($) 6,730,691 6,895,102 11,900,725 11,849,574 12,209,679
Common equity ($) 2,715,025 3,022,908 2,662,447 2,549,049 2,523,369
Redeemable preferred stock ($) 363,000 - 562,600 638,500 638,500
Preferred stock ($) 84,339 447,973 - 63,598 63,664
Long term debt ($) 1,682,702 1,619,067 4,381,949 4,457,047 4,456,772
Total capitalization ($) 4,482,066 5,089,948 7,606,996 7,708,194 7,682,305
===============================================================================================================
UTILITY OPERATING STATISTICS
Gas data (MDTH)
Firm gas and transportation sales 275,771 87,179 58,304 60,276 62,375
Other sales 54,661 38,088 21,025 19,838 16,588
Maximum daily capacity, year end 2,033,000 2,033,000 745,000 772,000 771,995
Total active gas meters 1,628,497 1,610,202 464,563 458,910 457,809
Gas heating customers 677,000 665,000 295,000 289,000 286,000
1
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
KeySpan Corporation, d/b/a KeySpan Energy (the "Company" or "KeySpan Energy"),
is a holding company operating two utilities that distribute natural gas to
approximately 1.6 million customers in New York City and on Long Island, making
it the fourth largest gas-distribution company in the United States. Other
KeySpan Energy companies market a portfolio of gas-marketing and energy- related
services in the Northeast, own and operate electric-generation plants in New
York City and on Long Island, and provide operating and customer services to
approximately 1.1 million electric customers of the Long Island Power Authority
("LIPA"). The Company's other energy activities include: gas exploration and
production, primarily through The Houston Exploration Company ("THEC"); domestic
pipelines and storage; and international activities, including gas processing in
Canada, and gas pipelines and local distribution in Northern Ireland. (See Note
2 to the Consolidated Financial Statements, "Business Segments" for additional
information on each operating segment.)
The Company was formed on May 28, 1998 as a result of a transaction between Long
Island Lighting Company ("LILCO") and LIPA (the "LIPA Transaction") and
following the acquisition (the "KeySpan Acquisition") of KeySpan Energy
Corporation ("KSE"). (See Note 14 to the Consolidated Financial Statements,
"Sale of LILCO Assets, Acquisition of KeySpan Energy Corporation and Transfer of
Assets and Liabilities to the Company" for additional information.)
On November 4, 1999, the Company entered into a definitive merger agreement to
acquire all of the common stock of Eastern Enterprises ("Eastern"). Eastern is a
holding company that owns and operates, primarily, Boston Gas Company, Colonial
Gas Company, Essex Gas Company and Midland Enterprises, Inc. Eastern has also
entered into an agreement to acquire all of the common stock of EnergyNorth, a
provider of gas distribution services to customers in New Hampshire. The
acquisition of Eastern is conditioned upon, among other things, the approval of
Eastern shareholders, the Securities and Exchange Commission ("SEC") and, with
respect to the EnergyNorth transaction, the New Hampshire Public Utility
Commission. Upon consummation of the Eastern transaction, the Company will
become a registered holding company under the Public Utility Holding Company Act
of 1935, as amended. The Company anticipates that the transaction will be
consummated in the third or fourth quarter of 2000, but is unable to determine
when or if all required approvals will be obtained. (See Note 11 to the
Consolidated Financial Statements, "Acquisition of Eastern Enterprises" for
further details.)
Current period consolidated results of operations are reported for the year
ended December 31, 1999. In 1998 the Company changed its fiscal year end from
March 31 to December 31. Therefore, results of operations for the period ended
December 31, 1998 reflect the nine month transition period April 1, 1998 to
December 31, 1998 (the "Transition Period"). The Transition Period consists of
the following: (i) the period April 1, 1998 through May 28, 1998, which reflects
the results of LILCO only prior to the LIPA Transaction and KeySpan Acquisition;
and (ii) the period May 29, 1998 through December 31, 1998, which represents the
results of the fully consolidated Company, which includes the KSE-acquired
companies, i.e. The Brooklyn Union Gas Company ("Brooklyn Union")
2
and subsidiaries comprising the Gas Exploration and Production, Energy Related
Services and Energy Related Investment segments. As required under purchase
accounting, the results of operations for all periods prior to May 29, 1998
reflect results of LILCO only, and do not include results of KSE.
Due to the change in the composition of the Company's operations and the change
in the Company's fiscal year, both occurring in 1998, results of operations for
the year ended December 31, 1999, for the Transition Period, and for the fiscal
year ended March 31, 1998 are not truly comparable for the following reasons.
Prior to the LIPA Transaction, LILCO provided fully integrated electric service
to its customers. Included within electric rates charged to customers was a
return on the capital investment in the generation and the transmission and
distribution ("T&D") assets, as well as recovery of the electric business costs
to operate the system. Upon completion of the LIPA Transaction, the nature of
the Company's electric business changed from that of owner of an electric
generation and T&D system, with significant capital investment, to a new role as
owner of the non-nuclear generation facilities and as manager of the T&D system
now owned by LIPA. In its new role, the Company's capital investment is
significantly reduced and accordingly, its revenues under various service
contracts with LIPA reflect that reduction.
Also contributing to the non-comparability between reporting periods, is the
integration of the KSE- acquired companies since May 29,1998. The KSE-acquired
companies, which include the gas distribution operations of Brooklyn Union,
contribute significantly to results of operations. Income available for common
stock for the KSE-acquired companies, for the period January 1, 1998 through May
28, 1998 was $63.4 million and is not reflected in results of operations for the
Transition Period.
The change in the Company's fiscal year also contributed significantly to the
non-comparability between reporting periods. As previously mentioned, results of
operations for the Transition Period reflect results for the period April 1,
1998 through December 31, 1998. As a result, the Transition Period does not
reflect earnings from gas heating-season operations. The Company realizes
approximately 80% of its gas distribution-related earnings, or approximately 50%
of its consolidated earnings, during the months of January through March, due to
the large percentage of gas heating sales to total gas sales.
Since the reporting periods are not truly comparable we have provided, in
addition to the discussion of the results of operations between periods that
follows, a discussion of operating results for each business segment for the
year ended December 31, 1999 compared to the full twelve months ended December
31, 1998. The intent of this additional disclosure is to provide a better
explanation of the variations in operating results between two comparable twelve
month periods for the Company's on- going business activities. (See "Segment
Review of Operations - Combined Company Comparison".)
The commentary that follows should be read in conjunction with the Notes to the
Consolidated Financial Statements.
3
CONSOLIDATED REVIEW OF HISTORICAL RESULTS
EARNINGS SUMMARY
Consolidated earnings for 1999 were $223.9 million, or $1.62 per share.
Consolidated results for the Transition Period reflected a loss of $195.5
million, or $1.34 per share. During the Transition Period, the Company: (i)
incurred substantial non-recurring charges associated with the LIPA Transaction
of $107.9 million after-tax, or $0.74 per share, principally reflecting taxes
associated with the sale of assets to the Company by LIPA and the write-off of
certain regulatory assets that were no longer recoverable under various LIPA
agreements; (ii) incurred charges amounting to $83.5 million after- tax, or
$0.57 per share, associated with implementing an early retirement program and
charges associated with the write-off of a customer-billing system that was in
development; (iii) made a $20 million donation ($13 million after-tax, or $0.09
per share) to establish the KeySpan Foundation; and (iv) recorded an after-tax
non-cash impairment charge of $54.1 million, or $0.37 per share, representing
the Company's share of the impairment charge recorded by THEC to recognize the
effect of low wellhead prices on its valuation of proved gas reserves. (See Note
15 to the Consolidated Financial Statements, "Costs Related to the LIPA
Transaction and Special Charges" for further details of these charges.)
Excluding these non-recurring and special charges, earnings for the Transition
Period were $63.0 million, or $0.43 per share. Earnings for the twelve months
ended March 31, 1998 were $310.4 million, or $2.56 per share, and as noted
above, reflect results of operations of the former LILCO only.
4
Consolidated income (loss) available for common stock by reporting segment is
set forth in the following table for the periods indicated:
(IN THOUSANDS OF DOLLARS)
- -----------------------------------------------------------------------------------------------------------
Transition Period
April 1, 1998 through December 31, 1998
---------------------------------------
Fiscal Year
Year Ended Subsequent Ended
December 31, Prior to the to the March 31,
1999 Acquisition Acquisition Total 1998
- -----------------------------------------------------------------------------------------------------------
Income (Loss ) Available for
Common Stock:
Gas Distribution $ 151,217 $ (4,659)$ 13,241 $ 8,582 $ 33,815
Electric Services 77,099 45,141 11,978 57,119 276,612
Gas Exploration and Production 15,772 - 2,218 2,218 -
Energy Related Services (1,298) - (3,708) (3,708) -
Energy Related Investments 7,753 - (4,186) (4,186) -
Other (26,684) - 2,959 2,959 -
- -----------------------------------------------------------------------------------------------------------
Consolidated $ 223,859 $ 40,482$ 22,502 $ 62,984 $ 310,427
Special Charges (258,521)
- -----------------------------------------------------------------------------------------------------------
Consolidated including $(195,537)
Special Charges
- -----------------------------------------------------------------------------------------------------------
The increase in Gas Distribution earnings in 1999 as compared to the Transition
Period and the fiscal year ended March 31, 1998, reflects, primarily, the
addition of Brooklyn Union from the date of the KeySpan Acquisition. Brooklyn
Union's income available for common stock in 1999 was $109.6 million. Further,
earnings for the Transition Period do not include earnings from heating season
operations (months of January through March) when the Company realizes
approximately 80% of its gas related earnings. The decrease in earnings for the
Transition Period as compared to the fiscal year ended March 31, 1998 is also
due to the absence of heating season operations associated with LILCO's gas
distribution operations during the Transition Period.
In 1999, earnings from Electric Services reflect service-fees under various
service contracts with LIPA and earnings from the operations of the Company's
investment in the 2,168 megawatt Ravenswood electric generation facility,
("Ravenswood Facility") located in Queens, New York, purchased in June 1999. In
order to reduce its cash requirements, the Company entered into a lease
agreement with a special purpose, unaffiliated financing entity that acquired a
portion of the Ravenswood Facility and leased it to a subsidiary of the Company
under a ten year lease. Electric Services earnings increased in 1999 as compared
to the Transition Period due, primarily to the acquisition of the Ravenswood
Facility which contributed $47.5 million to Electric Services earnings in 1999.
Further, 1999 results reflect a full twelve month period of earnings from the
service contracts with LIPA. (For additional details on the electric revenues
and the Ravenswood Facility
5
see "Electric Services- Revenue Mechanisms" and Note 9 to the Consolidated
Financial Statements, "Contractual Obligations, and Contingencies",
respectively.)
As previously mentioned, the Company's operating results under its arrangements
with LIPA are significantly lower than those experienced prior to the LIPA
Transaction, reflecting the change in the nature of the Company's electric
business. As a result, earnings subsequent to the LIPA Transaction reflect these
reduced margins; therefore, earnings for 1999 and the Transition Period are
significantly lower than those experienced for the fiscal year ended March 31,
1998.
Results of operations in 1999 from Gas Exploration and Production, Energy
Related Services, and Energy Related Investments reflect operations for a full
twelve months as compared to seven months for the Transition Period. Earnings
from Gas Exploration and Production operations in 1999 have benefited from the
combined effect of increases in gas production volumes and gas prices. Results
of operations in 1999 from Energy Related Services and Energy Related
Investments reflect the continued development and integration of companies
acquired over the past few years.
Losses from the Other segment reflect preferred stock dividends and general
expenses incurred by the corporate and administrative areas of the Company that
have not been allocated to the various business segments, offset, in part, by
interest income earned on temporary cash investments. Interest income has been
decreasing as the Company continues to use cash to finance acquisitions,
repurchase shares of its common stock, and retire maturing debt.
REVENUES
Consolidated revenues are derived, primarily, from the Company's two core
operating segments - Gas Distribution and Electric Services. In 1999, these two
core segments accounted for approximately 88% of consolidated revenues. The
increase in consolidated revenues of $1.2 billion, or 71%, in 1999, as compared
to the Transition Period, reflects, primarily, revenues from gas heating sales.
For the months of January 1999 through March 1999, gas distribution revenues
were $718.3 million or approximately 41% of total gas distribution revenues for
the entire year. The Transition Period, which reflects the period April 1, 1998
through December 31, 1998, does not include revenues from heating season
operations for the months of January through March. Further, revenues in 1999
reflect a full twelve month period for all segments, whereas the Transition
Period reflects revenues for only seven months from the KSE- acquired companies.
Revenues in 1999 also include $150.8 million of revenues from the Ravenswood
Facility and were further enhanced from the acquisition of companies reflected
in the Energy Related Services segment.
Consolidated revenues for the Transition Period decreased by $1.4 billion, or
45%, as compared to the fiscal year ended March 31, 1998 due to the significant
reduction in electric revenues. Electric revenues for the Transition Period were
derived from service agreements with LIPA for the period May 29, 1998 through
December 31, 1998 and two months of electric services under LILCO. As previously
mentioned, prior to the LIPA Transaction, LILCO provided fully integrated
electric service to its customers. Included within electric rates charged to
customers was a return on the
6
capital investment in the generation and T&D assets, as well as recovery of the
electric business costs to operate the system. Upon completion of the LIPA
Transaction, the Company's capital investment was significantly reduced and
accordingly, its revenues under the LIPA contracts reflect that reduction. This
change in the nature of the Company's electric operations also contributed to
the comparative decrease in revenues for 1999 as compared to the fiscal year
ended March 31, 1998.
See Segment Review of Operations - Combined Company Comparison for additional
information regarding revenues for each segment.
OPERATING EXPENSES
Operating expenses were $2.5 billion in 1999, and $1.8 billion and $2.1 billion
for the Transition Period and fiscal year ended March 31, 1998, respectively.
The increase in 1999 as compared to the Transition Period of $694.7 million, or
39.1%, is due, in part, to the increased reporting time frame and to an increase
of $248.9 million in operations and maintenance expense reflecting, primarily,
the addition of the KSE-acquired companies. The decrease in operating expenses
for the Transition Period as compared to the fiscal year ended March 31, 1998 of
$340.7 million or 16.0%, is due, primarily to the shorter reporting period and
the discontinuance of fuel and purchased power expense associated with the
electric generating facilities on Long Island, offset, in part, by operations
and maintenance expenses of the KSE-acquired companies.
PURCHASED GAS
Variations in gas costs have little impact on operating results as the current
gas rate structure of each of the Company's two gas distribution utilities
includes a gas adjustment clause pursuant to which variations between actual gas
costs and gas cost recoveries are deferred and subsequently refunded to, or
collected from customers. Comparative variations between the reported periods
are due to the addition of the KSE-acquired companies, changes in gas volumes
and prices, and the differences in the reporting periods presented.
FUEL AND PURCHASED POWER
Electric fuel expense was $17.3 million in 1999, and $91.8 million and $658.3
million for the Transition Period and for the fiscal year ended March 31, 1998,
respectively. In accordance with the Energy Management Agreement ("EMA") between
the Company and LIPA, LIPA is responsible for paying directly the costs of fuel,
as well as purchased power to satisfy the energy needs of LIPA's customers. As a
result, since May 29, 1998, the Company no longer incurs any electric fuel
expense for Long Island generation or purchased power expense. Electric fuel
expense for 1999 reflects fuel purchases to operate the Ravenswood Facility.
7
OPERATIONS AND MAINTENANCE EXPENSE
Operations and maintenance expense was $1.1 billion in 1999, and $842.3 million
and $511.2 million for the Transition Period and fiscal year ended March 31,
1998, respectively. The increase in all periods was due primarily to the
addition of the KSE-acquired companies. Operations and maintenance expense for
these companies was $483.6 million for 1999 and $284.1 million for the
Transition Period. Further, the increase in comparative operations and
maintenance expense in 1999 was due, in part, to the operations of the
Ravenswood Facility, which added $61.3 million to expense. Operations and
maintenance expense for the Transition Period included $63.8 million of costs
associated with the write-off of a customer billing system that was in
development and a charge of $64.6 million associated with an early retirement
program.
On a comparable twelve month basis however, the Company has realized significant
reductions in operations and maintenance expense derived, in part, from cost
reduction measures and operating efficiencies employed during the past few
years. To gain a better perspective of operations and maintenance expense on a
comparable twelve month basis see Segment Review of Operations - Combined
Company Comparison.
ELECTRIC REGULATORY AMORTIZATIONS
Prior to the LIPA Transaction, the Rate Moderation Component ("RMC"), included
within electric regulatory amortizations, represented the difference between
LILCO's revenue requirements under conventional ratemaking and the revenues
provided by its electric rate structure.
In April 1998, the New York Public Service Commission (NYPSC") authorized a
revision, effective December 1, 1997, to LILCO's method of recording its monthly
RMC amortization. As a result of this change, for the period April 1, 1998
through May 28, 1998, LILCO recorded $51.5 million more of non-cash RMC credits
to income, or $33.5 million after-tax, than it would have under the previous
method. In addition, for the fiscal year ended March 31, 1998, LILCO recorded
approximately $65.1 million more of non-cash RMC credits to income, or $42.5
million after-tax, than it would have under the previous method. In connection
with the LIPA Transaction, which included the sale of all electric related
regulatory assets, the RMC and all other electric regulatory amortizations were
discontinued.
OTHER OPERATING EXPENSES
Depreciation and depletion expense reflects gas utility property and electric
generation property additions for all periods and electric T&D property
additions for the periods prior to the LIPA Transaction. In addition,
depreciation and depletion expense in 1999 and for the Transition Period,
includes depletion expense associated with the gas production activities of
THEC. The decrease in depreciation and depletion expense in 1999 as compared to
the Transition Period is due, primarily, to the fact that THEC recorded an
impairment charge of $130 million in December 1998 to reduce the value of its
proved gas reserves in accordance with the asset ceiling test limitations of the
SEC
8
applicable to gas exploration and development operations accounted for under the
full cost method. Excluding this impairment charge, depreciation expense
increased in all periods due to property additions and the addition of the
KSE-acquired companies. Offsetting these increases, in part, is the effect on
depreciation expense from the sale of significant property related assets to
LIPA as a result of the LIPA Transaction.
Operating taxes principally include state and local taxes on utility revenues
and property. The applicable property base and tax rates generally have
increased in all periods. The increase in operating taxes in 1999, as compared
to the Transition Period, reflects the addition of the KSE- acquired companies
for a full twelve month period, and operating taxes associated with the
Ravenswood Facility. Operating taxes associated with the KSE-acquired companies
was $140.8 million in 1999 and $69.8 million during the Transition Period. The
Ravenswood Facility had operating taxes of $19.6 million in 1999. Significant
property related assets were sold to LIPA as part of the LIPA Transaction and,
as a result, subsequent to May 28, 1998, property taxes related to such assets
are no longer incurred by the Company. Therefore, operating taxes in 1999 and
for the Transition Period are significantly lower than for the fiscal year ended
March 31, 1998.
OTHER INCOME AND DEDUCTIONS
Other income includes equity earnings from subsidiaries comprising the Energy
Related Investments segment, primarily the Company's 20% interest in the
Iroquois Gas Transmission System LP ("Iroquois") and 50% investment in Gulf
Midstream Services Partnership ("GMS"). In addition, other income also includes
interest income from temporary cash investments. Equity earnings in 1999 reflect
twelve months of results for Iroquois as compared to only seven months of
results for the Transition Period. Further, GMS was acquired in December 1998
and, therefore, there are no equity earnings associated with GMS for the
Transition Period. The Company recognized equity earnings of $7.1 million and
$5.8 million for 1999, from its investment in Iroquois and GMS, respectively.
Interest income has decreased in 1999, as compared to the Transition Period, as
the Company continues to use cash to make acquisitions, repurchase shares of its
common stock, and retire maturing debt. Other income and deductions also
includes the minority interest effect associated with the Company's 64%
ownership interest in THEC. Other income and deductions for the Transition
Period reflects non-recurring charges associated with the LIPA Transaction of
$107.9 million after- tax and a $20 million before-tax charge for the funding of
the KeySpan Foundation. (See Note 15 to the Consolidated Financial Statements,
"Costs Related to the LIPA Transaction and Special Charges".)
Other income and deductions for the fiscal year ended March 31, 1998 primarily
includes a charge of $31 million before-tax with respect to certain benefits
earned by former officers of LILCO offset by carrying charges on certain
electric regulatory assets resulting from electric ratemaking mechanisms that
have been discontinued due to the LIPA Transaction.
9
INTEREST EXPENSE
The decrease in interest expense in 1999 and for the Transition Period, as
compared to the fiscal year ended March 31, 1998, primarily reflects the
significantly reduced level of outstanding debt resulting from the LIPA
Transaction. Upon consummation of the LIPA Transaction, LIPA assumed
substantially all of the outstanding debt of LILCO. The Company, in return,
issued promissory notes to LIPA for its continuing obligation to pay principal
and interest on certain series of bonds that were assumed by LIPA. Outstanding
debt at December 31, 1999 was $1.7 billion as compared to $4.5 billion (LILCO
only) prior to the LIPA Transaction. In addition, interest expense in 1999 also
reflects the repayment of $397 million of promissory notes due LIPA that matured
in June 1999. The reduction in interest expense in 1999 from the lower levels of
debt outstanding was offset, in part, by the interest expense from the
KSE-acquired companies for the full twelve months.
INCOME TAXES
Income tax expense reflects the level of pre-tax income in all periods and for
1999, an adjustment to deferred tax expense and current tax expense for the
utilization of previously deferred net operating loss ("NOL") carryforwards
recorded in 1998. In the Transition Period, the Company recorded, as a deferred
tax asset, a benefit of $71.1 million for NOL carryforwards. The Company
estimates that $57.4 million of the benefits from the NOL carryforwards from
1998 will be realized in its consolidated 1999 federal and state income tax
returns, and accordingly, applied the NOL benefits in its 1999 federal and state
tax provisions. Pre-tax income and the related deferred income tax expense for
the Transition Period were significantly affected by charges related to the LIPA
Transaction, the write-off of a customer billing system, charges related to the
early retirement program, and the impairment charge associated with the
write-down of proved gas reserves. (See Note 3 to the Consolidated Financial
Statements, "Income Tax".)
10
SEGMENT REVIEW OF OPERATIONS - COMBINED COMPANY COMPARISON
Due to the change in the structure of the Company's electric business as a
result of the LIPA Transaction and the requirements of purchase accounting
applicable to the KeySpan Acquisition (as discussed previously), results of
operations for 1999 are not truly comparable to the results of operations for
the Transition Period. For comparative purposes, we have combined the results of
operations, excluding non-recurring and special charges, of KSE and LILCO for
the entire twelve month period ended December 31, 1998. This combined
presentation is intended to reflect the results of the Company as if the KeySpan
Acquisition occurred on the first day of the reporting period, January 1, 1998.
This "combined company basis" format will also be used to explain variations in
operating results, for each business segment, between the twelve months ended
December 31, 1999 and 1998.
Consolidated income (loss) available for common stock, on a combined company
basis excluding non- recurring and special charges, by reporting segment is set
forth in the following table for the periods indicated:
(IN THOUSANDS OF DOLLARS)
================================================================================
"Combined Company"
Year Ended Twelve Months Ended
December 31, 1999 December 31, 1998
- ----------------------------- --------------------- ------------------------
Income (Loss ) Available for
Common Stock:
Gas Distribution $ 151,217 $ 133,685
Electric Services 77,099 120,568*
Gas Exploration and Production 15,772 8,995
Energy Related Services (1,298) (8,623)
Energy Related Investments 7,753 (6,098)
Other (26,684) 1,279
- --------------------------------------------------------------------------------
$ 223,859 $ 249,806
================================================================================
* 1998 reflects the LIPA service agreements for the period May
29, 1998 through December 31, 1998 and electric operations of
the former LILCO for the period January 1, 1998 through May
28, 1998.
11
GAS DISTRIBUTION
With the exception of a small portion of Queens County, the Company's gas
distribution subsidiaries are the only providers of gas distribution services in
the New York City counties of Kings, Richmond and Queens and the Long Island
counties of Nassau and Suffolk. Brooklyn Union provides gas distribution
services to customers in the New York City boroughs of Brooklyn, Queens and
Staten Island, and KeySpan Gas East Corporation d/b/a Brooklyn Union of Long
Island ("Brooklyn Union of Long Island"), provides gas distribution services to
customers in the Long Island counties of Nassau and Suffolk and the Rockaway
Peninsula of Queens County.
The table below highlights certain significant financial data and operating
statistics for the Gas Distribution segment for the periods indicated.
(IN THOUSANDS OF DOLLARS)
================================================================================
"Combined Company"
Year Ended Twelve Months Ended
December 31, 1999 December 31, 1998
- --------------------------------------------------------------------------------
Revenues $ 1,753,132 $ 1,766,949
Cost of gas 702,044 702,669
Revenue taxes 108,488 109,194
- --------------------------------------------------------------------------------
Net Revenues 942,600 955,086
- --------------------------------------------------------------------------------
Operations and maintenance 415,888 464,296
Depreciation and amortization 102,997 91,438
Operating taxes 115,305 106,891
- --------------------------------------------------------------------------------
Total Operating Expenses 634,190 662,625
- --------------------------------------------------------------------------------
Operating Income $ 308,410 $ 292,461
================================================================================
Earnings for Common Stock $ 151,217 $ 133,685
================================================================================
Firm gas sales (MDTH) 172,019 165,331
Firm transportation (MDTH) 21,249 13,974
Transportation -
Electric Generation (MDTH) 82,503 40,614
Other sales (MDTH) 54,661 65,482
Degree days 4,296 3,940
Warmer than normal 10.0% 17.5%
================================================================================
12
NET REVENUES
Net gas revenues decreased in 1999 by $12.5 million, or 1.3%, due primarily, to
rate reductions associated with the KeySpan Acquisition. Brooklyn Union reduced
rates to its core customers by $23.9 million on an annual basis effective May
29, 1998 and Brooklyn Union of Long Island reduced its rates to core customers
by $12.2 million annually effective February 5, 1998 and by an additional $6.3
million annually effective May 29, 1998. For the year ended December 31, 1999,
rate reductions impacted revenues by approximately $19.2 million as compared to
1998.
Firm sales quantities, normalized for weather variations, increased by 2.4%,
contributing approximately $10 million to net revenues. Firm sales additions
were generated primarily on Long Island from the addition of new gas customers
and oil to gas conversions. Weather normalized firm sales on Long Island
increased by 3.7% and by 1.6% in the Company's New York City service area. Long
Island has a very low natural gas saturation rate and significant gas-sales
growth opportunities remain available. The Company estimates that only 28% of
one and two-family homes on Long Island currently use natural gas for space
heating, while 28% of the multi-family market and 69% of the commercial market
use gas for space heating. In this service area, the Company will seek growth
through the expansion of its distribution system as well as through the
conversion of residential homes and the pursuit of opportunities to grow
multi-family, industrial and commercial markets.
In the Company's service area of the New York City boroughs of Brooklyn, Queens
and Staten Island, 79% of one and two- family homes currently use gas for space
heating, while 54% of the multi-family market and 76% of the commercial market
use gas for space heating. In these areas, the Company intends to seek growth
with an aggressive marketing effort designed to encourage conversions of
residential and multi-family homes and businesses from fuel oil to natural gas
heating.
In the large volume heating markets, which include large apartment houses,
government buildings and schools, gas service is provided under rates that are
set to compete with prices of alternative fuel, including No. 2 and No. 6 grade
heating oil. During 1999, gas generally sold at a premium to heating oil.
However, due to the recent increase in the price of heating grade fuel oil, gas
is currently selling at a discount to heating oil. The Company increased sales
in this market in 1999, by approximately $6 million, through aggressive unit
pricing and the addition of new customers.
Contributing to the reduction in comparative net margins in 1999 was a decrease
in certain regulatory incentives earned by the Company, offset, in part, by
revenue benefits associated with colder weather. Further, since April 1998, net
revenues no longer reflect revenues derived from Brooklyn Union's appliance and
repair services since these services have been "spun-off" to another Company
subsidiary and are now reflected in the Energy Related Services segment.
SALES, TRANSPORTATION AND OTHER VOLUMES
Comparative firm gas sales volumes increased by 4.0% in 1999, due to the
increase in normalized firm sales, as discussed above, and the benefits derived
from colder weather in 1999 as compared to 1998.
13
Firm gas transportation volumes also increased in 1999, as a result of natural
gas deregulation initiatives. At December 31, 1999, approximately 46,000
residential, commercial and industrial customers, with annual requirements of
approximately 22,000 MDTH, or 10% of the Company's annual firm gas system
requirements, purchased their gas supply from sources other than the Company, as
compared to 32,900 customers with annual requirements of approximately 19,500
MDTH in 1998. The Company's net margins are not affected by customers opting to
purchase their gas supply from sources other than the Company, since
distribution rates charged to transportation customers are the same as those
charged to sales customers. (See Item 7A. Quantitative and Qualitative
Disclosures About Market Risk for a discussion of competitive issues facing the
Company.)
Transportation volumes related to electric generation, reflect the
transportation of gas to the Company's electric generating facilities located on
Long Island. The Company began reporting these volumes since the LIPA
Transaction. Net revenues from these volumes are marginal.
Other sales volumes include on-system interruptible volumes, off-system sales
volumes (sales made to customers outside of the Company's service territories)
and related transportation. The decrease in these sales reflects, primarily, the
fact that Brooklyn Union discontinued its off-system sales program beginning
April 1, 1998 and replaced it with a management agreement with Enron Capital and
Trade Resources Corp. and its parent company, Enron Corp. (collectively,
"Enron"), in which Enron pays the Company a fixed fee in exchange for the right
granted Enron to earn revenues based upon its management of Brooklyn Union's gas
supply requirements, storage arrangements, and off- system capacity. This
agreement expires on March 31, 2000. The Company currently is in negotiations
with a large energy corporation to provide energy supply management services to
both Brooklyn Union and Brooklyn Union of Long Island beginning on April 1,
2000.
OPERATING EXPENSES
Comparative operating expenses decreased in 1999 by $28.4 million, or 4.3%.
During the year, the Company realized significant reductions in operations and
maintenance expense reflecting, primarily, the benefits derived from cost
reduction measures and operating efficiencies employed during the past few
years. Such measures included, but were not limited to, the early retirement
program completed in 1998, in which over 600 employees participated. The Company
intends to continue its on-going cost containment initiatives and anticipates
further reductions in operations and maintenance expenses in 2000. In addition,
Brooklyn Union's "spin-off" of non-safety related appliance repair services to
KeySpan Energy Solutions LLC, a Company subsidiary, in April 1998 contributed to
the reduction in operations and maintenance expense for this segment. Brooklyn
Union of Long Island discontinued providing non-safety related appliance repair
services on July 1, 1999, further reducing operating expenses for this segment.
The increase in depreciation and amortization expense reflects continued
property additions and, more significantly, amortization of previously deferred
merger related expenses. As provided for in the Stipulation Agreement, which in
effect approved the KeySpan Acquisition, the Company's gas distribution
subsidiaries deferred certain merger related costs at the time of the merger.
These costs
14
are being amortized over a ten year period. (See Gas Distribution - Rate Matters
for further details on the Stipulation Agreement.) Further, operating taxes
which include state and local taxes on property have increased as the applicable
property base and tax rates generally have increased.
EARNINGS
Earnings increased in 1999 by $17.5 million, or 13.1% due primarily, to the net
result of the aforementioned items. In addition, earnings were favorably
affected by carrying charges on certain regulatory deferrals previously
mentioned and lower interest expense.
15
ELECTRIC SERVICES
The Electric Services segment primarily consists of subsidiaries that own and
operate oil and gas fired generating plants in Queens and Long Island, and
through long-term contracts, manage the electric T&D system, the fuel and
electric purchases, and the off-system electric sales for LIPA. Prior to the
LIPA Transaction, LILCO provided fully integrated electric distribution services
to over one million customers on Long Island.
Selected financial data for the Electric Services segment is set forth in the
table below for the periods indicated.
(IN THOUSANDS OF DOLLARS)
=====================================================================================================
Electric
Electric Services Electric Services Distribution
----------------- ------------------ ------------
` January 1, 1998 "Combined Company"
Year Ended May 29, 1998 through through Twelve Months Ended
December 31, 1999 December 31, 1998 May 28, 1998 December 31, 1998
- ----------------------------- ----------------- ------------------ -------------- -------------------
Revenues
Management Services
Agreement ("MSA") $ 398,304 $ 226,374 $ - $ 226,374
Power Supply
Agreement ("PSA") 303,163 178,367 - 178,367
Energy Management
Agreement ("EMA") 6,535 3,564 - 3,564
Ravenswood Facility 150,836 - - -
Electric Distribution - - 885,693 885,693
Other 2,744 - - -
Total Revenues 861,582 408,305 885,693 1,293,998
- ----------------------------- ----------------- ------------------ -------------- -------------------
Operating expenses
Fuel and purchased power 17,252 - 257,786 257,786
Operations and maintenance 527,729 289,943 171,960 461,903
Depreciation 44,334 22,913 56,491 79,404
Regulatory amortizations - - (79,874) (79,874)
Operating taxes 132,327 65,129 153,289 218,418
Total Operating Expenses 721,642 377,985 559,652 937,637
- ----------------------------- ----------------- ------------------ -------------- -------------------
Operating Income $ 139,940 $ 30,320 $ 326,041 $ 356,361
- ----------------------------- ----------------- ------------------ -------------- -------------------
Earnings for Common Stock $ 77,099 $ 11,978 $ 108,590 $ 120,568
- ----------------------------- ----------------- ------------------ -------------- -------------------
16
REVENUES
Revenues related to the LIPA service contracts have increased in 1999, as
compared to the Transition Period, due primarily, to the fact that 1999 reflects
a full year of operations under these contracts. In addition in 1999, the
Company earned $15.8 million associated with non-cost performance incentives
provided for under these agreements, as compared to the maximum incentive level
of $16.5 million. (See Electric Services- Revenue Mechanisms- LIPA Agreements
for a further description of these agreements.) Revenues were further enhanced
in 1999 by the operations of the Ravenswood Facility. Total revenues in 1999,
however, decreased by $432.4 million, or 33.4%, as compared to 1998. As
previously indicated, in addition to revenues from the Ravenswood Facility,
electric revenues are also derived from service agreements with LIPA. As a
result of the change in the nature of the Company's electric operations due to
the LIPA Transaction, the Company's electric capital investment has been
significantly reduced and accordingly, its revenues and margins under the LIPA
contracts reflect that reduction.
OPERATING EXPENSES
Operating expenses in 1999 decreased by $216.0 million, or 23.0%, compared to
1998, reflecting primarily, the discontinuance of fuel and purchased power
expense associated with the generating facilities located on Long Island. In
accordance with the EMA, LIPA is responsible for paying directly the costs of
fuel, as well as purchased power to satisfy LIPA's customers. As a result, the
Company since May 29, 1998 no longer incurs any electric fuel expense for Long
Island generation or purchased power expense. Further, depreciation expense and
operating taxes have also decreased in 1999 due to the sale of significant
property related assets to LIPA as a result of the LIPA Transaction. Offsetting
these reductions is the discontinuance of certain electric regulatory
amortizations, as previously discussed, and an increase in operations and
maintenance expense. Since the LIPA Transaction, operations and maintenance
expense includes the costs associated with the management of the T&D assets
acquired by LIPA. All T&D related costs are expensed when incurred and recovered
from LIPA through monthly billings in accordance with the terms of the
Management Services Agreement entered into between the Company and LIPA. Prior
to the LIPA Transaction, all T&D related construction costs were capitalized and
charged to depreciation expense over the estimated useful life of the related
asset.
EARNINGS
In addition to the effect on earnings from the above mentioned items, earnings
in 1999 were favorably affected by a decrease of $135.3 million in interest
expense reflecting the significantly reduced level of outstanding debt resulting
from the LIPA Transaction. Further, prior to the KeySpan Acquisition,
approximately $18.2 million of preferred stock dividends were allocated to
electric operations. Partially offsetting these benefits was the elimination of
carrying charges on certain electric regulatory assets resulting from electric
ratemaking mechanisms that have been discontinued due to the LIPA Transaction.
17
GAS EXPLORATION AND PRODUCTION
The Gas Exploration and Production segment is engaged in gas and oil exploration
and production, and the development and acquisition of domestic natural gas and
oil properties. This segment consists, primarily, of the Company's 64% equity
interest in THEC. In September 1999, the Company and THEC jointly announced
their intention to begin a process to review strategic alternatives for THEC.
The process included an assessment of the role of THEC within the Company's
strategic plans, including the possible sale of all or a portion of THEC by the
Company. After completing the review, the Company concluded that it would retain
its equity interest in THEC. Further, under a pre-existing credit arrangement,
approximately $80 million in debt owed by THEC to the Company will be converted
into common equity on April 1, 2000. The Company's common equity ownership
interest in THEC will increase to approximately 70% upon such conversion.
Selected financial data and operating statistics for the Gas Exploration and
Production segment are set forth in the following table for the periods
indicated.
(IN THOUSANDS OF DOLLARS)
================================================================================
"Combined Company"
Twelve Months
Year Ended Ended
December 31, 1999 December 31, 1998*
================================================================================
Revenues $ 150,581 $ 127,124
Operating Expenses 102,051 107,089
- --------------------------------------------------------------------------------
Operating Income $ 48,530 $ 20,035
- --------------------------------------------------------------------------------
Earnings for Common Stock $ 15,772 $ 8,995
- --------------------------------------------------------------------------------
Production Data:
Natural gas production (Mmcf) 71,227 62,829
Natural gas (per Mcf) realized $ 2.10 $ 2.02
Proved reserves at year-end (BCFe) 553 480
================================================================================
* Excludes an after-tax charge of $54.1 million representing the
Company's share of an impairment charge to reduce the value of proved
gas reserves.
OPERATING INCOME
Operating income increased by $28.5 million, or 142.2%, in 1999 as compared to
1998, due to higher revenues and, to a lesser extent, a decrease in operating
expenses. Revenues in 1999 reflect the benefits derived from a 13% increase in
production volumes, combined with an 4% increase in average realized gas prices
(average wellhead price received for production including hedging gains and
losses). At December 31, 1999, THEC had 541 BCFe of net proved reserves of
natural gas, of which 75% was classified as proved developed. The comparative
decrease in operating expenses in
18
1999 was largely due to a lower depletion rate resulting, primarily, from the
ceiling test write down in 1998.
EARNINGS
Operating income above represents 100% of THEC's actual results for 1999 and
1998, excluding the impairment charge. Earnings however, reflect the Company's
64% ownership interest. This principally accounts for the difference between
operating income and earnings. Additionally, THEC incurred $8.7 million more in
interest expense in 1999 due to higher levels of debt outstanding.
19
ENERGY RELATED SERVICES
The Company's Energy Related Services segment primarily includes KeySpan Energy
Management Inc. ("KEM"), KeySpan Energy Services Inc. ("KES"), KeySpan
Communications Corporation, KeySpan Energy Solutions, LLC ("KESol"), Fritze
KeySpan, LLC ("Fritze"), and Delta KeySpan Inc. ("Delta"). These subsidiaries
own, design and/or operate energy systems for commercial and industrial
customers and provide energy-related appliance services and heating, ventilation
and air conditioning system installation and maintenance services to residential
and commercial clients located primarily within the New York City metropolitan
area and Rhode Island. In addition, subsidiaries in this segment: market gas and
electricity, and arrange transportation and related services, largely to retail
customers, including those served by the Company's two gas distribution
subsidiaries; and own a fiber optic network on Long Island. KESol was
established in April 1998, Fritze was acquired in November 1998 and Delta was
acquired in September 1999.
The table below highlights selected financial information for the Energy Related
Services segment.
(IN THOUSANDS OF DOLLARS)
================================================================================
"Combined Company"
Twelve Months
Year Ended Ended
December 31, 1999 December 31, 1998
================================================================================
Revenues $ 188,630 $ 88,822
Operating Expenses $ 192,077 103,120
- --------------------------------------------------------------------------------
Operating Loss (3,447) $ (14,298)
- -------------------------------------------------------------------------------
Loss for Common Stock $ (1,298) $ (8,623)
================================================================================
The decrease in the loss in 1999 as compared to 1998, is due to an increase in
revenues of 112%, offset, in part, by an increase in operating expenses of 86%.
The increase in comparative revenues was due, in part, to the inclusion of
revenues from Fritze for a full twelve month period. Fritze contributed $39.6
million to the increase in segment revenues in 1999. Delta, the Company's newly
acquired heating, ventilation and air conditioning ("HVAC") contractor,
contributed revenues of $12.3 million in 1999. Further, the combined revenues
from KEM, KES and KESol increased by $43.9 million in 1999, due to the benefits
derived from companies acquired during the past two years and the growth in the
number of customers purchasing energy from KES and services from KESol.
The comparative increase in operating expenses for both periods, was due
primarily, to the acquisition of Fritze and Delta, the integration of operations
of other companies acquired during the past few years, and increased purchased
gas costs of KES necessary to serve a larger customer base. The formation and
commencement of operations of KESol, in April 1998, also contributed to the
comparative increase in operating expenses in 1999.
20
The Company has been successful in integrating the operations of its recently
acquired companies into its consolidated operations. Fritze, Delta and other
energy management operations posted profitable results in 1999. KES and KESol
both incurred losses in 1999, as both companies seek to establish significant
market penetration. Gas deregulation of commodity purchases in the Northeast is
still in its infancy and gas sales margins have remained slim, contributing to
the loss incurred by KES. In February 2000, the Company acquired three companies
that provide energy related services in the New York metropolitan area with
combined revenues of approximately $170 million. The newly acquired companies
include, an engineering-consulting firm, a plumbing and mechanical contracting
firm, and a firm specializing in mechanical contracting and HVAC.
21
ENERGY RELATED INVESTMENTS
Earnings for this segment are derived, primarily, from the Company's: 20%
interest in the Iroquois Gas Transmission System LP; 50% ownership interest in
Gulf Midstream Services Partnership ("GMS"); and 50% interest in the Premier
Transco Pipeline and a 24.5% interest in Phoenix Natural Gas, both in Northern
Ireland.
Comparative earnings from this segment increased by $13.9 million in 1999,
reflecting, primarily, earnings from the Company's investment in GMS, formed in
December 1998, and more favorable results from investments in Northern Ireland.
In addition, in 1998 results of operations from this segment reflect after-tax
costs of $7.8 million to settle certain contracts associated with the sale, in
1997, of certain cogeneration investments and related fuel management
operations. These subsidiaries are accounted for under the equity method since
the Company's ownership interests are 50% or less. Accordingly, equity income
from these investments is reflected in other income and (deductions) in the
Consolidated Statement of Income.
OTHER
The Other segment incurred a loss of $26.7 million in 1999 compared to income of
$1.3 million in 1998 and, generally, reflects preferred stock dividends and
charges incurred by the corporate and administrative areas of the Company that
have not been allocated to the various business segments, offset, in part, by
interest income earned on temporary cash investments. Interest income has been
decreasing as the Company continues to utilize cash to finance certain
acquisitions, repurchase shares of its common stock, and retire maturing debt.
Also, all preferred stock dividends were allocated to the Other segment in 1999,
whereas, prior to the LIPA Transaction preferred stock dividends were allocated
to gas and electric operations.
22
FUTURE OUTLOOK
Results of operations for 1999 reflect strong results from the Company's core
gas-distribution operations. These results reflect gas sales growth, primarily
on Long Island, as the benefits from the Company's gas expansion initiatives
begin to be realized. Gas sales growth on Long Island was approximately 4% in
1999, after normalizing for weather variations. Moreover, ongoing synergy
programs have proven to be successful. In addition, the Company's June 1999
acquisition of the Ravenswood Facility provided the Company with significant
earnings enhancement. Results from operations of the Ravenswood Facility
contributed $0.34 per share to consolidated earnings in 1999. Finally, the
successful integration of companies purchased by the Energy Related Services
segment are expected to form the basis for additional benefits to consolidated
earnings in future years.
For 2000, the Company intends to continue its gas distribution growth activities
throughout its service territory, and especially on Long Island, through the
conversion of residential homes and the pursuit of opportunities to grow
multi-family, industrial and commercial markets. Gas sales growth throughout the
Company's service territory in 2000, is anticipated to grow at approximately the
same rate as 1999. As the Company evolves within the new deregulated gas
environment, gas sales growth will remain a critical core strategy. The Company
sells gas to its firm customers at the Company's cost for such gas. In addition,
rates include a charge to recover the costs of distribution, including a profit
margin for return of and on invested capital. As the Company adds customers to
its gas distribution network, the Company's gross profit margin from
transportation sales should increase incrementally. As a result, customer
additions are and will remain critical to the Company's earnings enhancement in
the future, regardless of whether a customer purchases gas from the Company or a
third party supplier.
Further, the Company intends to grow its Energy Related Services operations in
order to deliver an extensive array of home energy-related services and business
solutions to a broad spectrum of customers. These operations are expected to be
enhanced through the acquisition of companies providing energy-related services.
In line with this strategy, as previously mentioned, the Company acquired three
additional companies, in February 2000 that provide energy-related services.
A key component in the Company's strategy for growth in the Northeast region is
its anticipated acquisition of Eastern. In November 1999, the Company announced
that it has signed a definitive agreement with Eastern under which the Company
will acquire all of the common stock of Eastern. Eastern is the largest natural
gas distribution company in New England with significant upside potential due to
the relatively low penetration of customers using gas for heat in the region.
The Northeast region represents a significant portion of the country's
population and energy consumption. With recent price spikes for fuel oil in the
Northeast, the Company anticipates even stronger demand for natural gas and
related services. Together, KeySpan and Eastern will have approximately 2.4
million customers making the "new" company the largest gas distribution company
in the Northeast. Further, the Company expects pre-tax annual synergy savings to
be approximately $30 million. The transaction, which will be accounted for as a
purchase, is expected to close in the third or fourth quarter of calendar year
2000. Upon consummation of the transaction, the Company will become
23
a registered holding company under the Public Utility Holding Company Act of
1935, as amended. The transaction has a total value of approximately $2.5
billion ($1.7 billion in equity and $0.8 billion in assumed debt.) See Note 11
to the Consolidated Financial Statements, "Acquisition of Eastern Enterprises"
for additional information on the transaction.
As mentioned, the Company intends to continue its gas expansion initiatives
throughout its service territory, and especially on Long Island, and will
continue to seek additional synergies in all its operations. In 2000, the
Company anticipates continued earnings growth in core gas-distribution
operations, full annual benefits from the Ravenswood Facility, continued
successful integration of companies providing energy-related services and gas
sales growth from the acquisition of Eastern. To ensure that its assets are
utilized in the most effective manner, the Company will continue to review and
evaluate the strategic nature of all its assets deployed.
LIQUIDITY, CAPITAL EXPENDITURES AND FINANCING, AND DIVIDENDS
LIQUIDITY
The increase in cash flow from operations in 1999 as compared to the Transition
Period, reflects the significant positive cash flows that are realized from
revenues generated during a heating season, continued strong results from core
utility operations, cash generated from the Ravenswood Facility, and the
benefits derived from the integration of KSE-acquired companies for an entire
twelve month period. Approximately 75% of total annual gas revenues are realized
during the heating season (November 1 to April 30) as a result of the large
proportion of heating sales compared to total gas sales. Results from
gas-heating season operations are not reflected in the Transition Period, as
previously explained. Further, cash flow from operations in 1999 reflects the
utilization of a $57.4 million NOL on income tax payments for 1999, as
previously discussed. Moreover, during the Transition Period, $250 million was
funded into Voluntary Employee Beneficiary Trusts to fund certain employee
postretirement welfare benefits and, as a result, cash flow from operations for
the Transition Period was adversely affected. The slight decrease in cash flow
from operations in 1999 as compared to the fiscal year ended March 31, 1998,
reflects, primarily, lower margins realized from electric operations due to the
LIPA Transaction, as previously discussed, offset, in part, by increased cash
flows from KSE-acquired companies and utilization of the NOL.
At December 31, 1999, the Company had cash and temporary cash investments of
$128.6 million compared to $942.8 million at December 31, 1998. During the year,
the Company deployed its cash to, among other things: acquire a portion of the
Ravenswood Facility for a cash requirement of approximately $214 million;
purchase shares of its common stock on the open market for $299 million; and
retire maturing debt of $397 million. In addition, the Company utilized its cash
on-hand and internally generated funds to expand its gas distribution network,
primarily on Long Island and expand its operations through increased investments
in energy-related activities.
In November 1999, the Company negotiated a $700 million revolving credit
agreement, with a one- year term and one-year renewal option, with a commercial
bank. This credit facility is used to
24
support the Company's $700 million commercial paper program. At December 31,
1999, the Company had $208.3 million of commercial paper outstanding at an
annualized interest rate of 6.56%. The proceeds received from the issuance of
commercial paper were used to repay outstanding borrowings under the Company's
previous existing line of credit (discussed below) and for general corporate
purposes. During 2000, the Company anticipates issuing commercial paper rather
than borrowing on the revolving credit agreement. (See Note 8 to the
Consolidated Financial Statements, "Notes Payable" for further information on
the credit agreement.)
Prior to the new revolving credit agreement and commercial paper program, the
Company had an available unsecured bank line of credit of $300 million.
Borrowings were made under the facility during the months of September, October
and November 1999 to finance seasonal working capital needs. This line of credit
was terminated upon the execution of the new revolving credit agreement.
In addition, THEC has an unsecured available line of credit with a commercial
bank that provides for a maximum commitment of $250 million, subject to certain
conditions. During 1999, THEC borrowed $48 million under this facility and at
December 31, 1999, $181 million was outstanding. Also, a subsidiary included in
the Energy Related Investment segment has a revolving loan agreement with a
financial institution in Canada. Borrowings under this agreement during 1999
were U.S.$13.5 million, and at December 31, 1999, U.S.$86.4 million was
outstanding. (See Note 7 to the Consolidated Financial Statements, "Long-Term
Debt" for further information on these agreements.)
CAPITAL EXPENDITURES AND FINANCING
Capital Expenditures
Consolidated capital expenditures during 1999 were $725.7 million and are
reflected in the following business segments.
Capital expenditures related to the Gas Distribution segment were $213.8 million
in 1999 and were primarily for the renewal and replacement of mains and services
and for the expansion of the gas distribution system on Long Island.
Electric Services had capital expenditures of $245.2 million during 1999,
reflecting primarily, the Company's June 1999 acquisition of the Ravenswood
Facility. As a means of financing the acquisition, the Company entered into a
lease agreement with a special purpose, unaffiliated financing entity that
acquired a portion of the facility directly from Con Edison and leased it to a
subsidiary of the Company. The acquisition cost of the facility was $597 million
and the lease program was established in order to reduce the Company's cash
requirement by $425 million. The balance of the funds needed to acquire the
facility, including the purchase of inventory and materials, was approximately
$214 million and was provided from cash on hand. (See Note 9 to the Consolidated
Financial Statements, "Contractual Obligations and Contingencies" for more
details on the lease agreement.) Capital expenditures during 1999 also included
costs to maintain the generating facilities located on Long Island.
25
Capital expenditures related to Gas Exploration and Production were $183.3
million during 1999. These capital expenditures reflected, in part, costs
related to the development of properties acquired in Southern Louisiana and in
the Gulf of Mexico and costs related to the continued development of other
properties previously acquired. Capital expenditures also included $35.6 million
related to the Company's joint venture with THEC to explore for natural gas and
oil. The Company will commit approximately $25 million to the drilling program
in 2000. The joint venture may be terminated, upon notice, at the option of
either party at the end of a given calendar quarter.
Capital expenditures of $20.6 million during 1999 related to Energy Related
Services, includes the acquisition of HVAC contractors in Rhode Island and New
Jersey that build and install HVAC systems primarily for commercial customers.
Capital expenditures related to the Energy Related Investments segment were
$49.4 million during 1999. In 1999, the Company, through GMS, completed the
acquisition of Richland Petroleum's 37% interest in the Paddle River Gas Plant.
The gas plant, located in Alberta, Canada, is capable of processing up to 82
million cubic feet of gas per day. In addition, in December 1999, the Company
purchased certain oil properties in Alberta, Canada that can produce
approximately 1600 barrels of oil per day. Capital expenditures related to this
segment also include the Company's share of capital expenditures in GMS and
expenditures for the on-going expansion and upgrade of a gas distribution system
in Northern Ireland, in which the Company has a 24.5% ownership interest.
Common plant capital expenditures were $13.4 million during 1999 and reflect
primarily, the purchase of computer equipment and miscellaneous office
equipment.
Consolidated capital expenditures for 2000, exclusive of expenditures necessary
for the Eastern acquisition, are estimated to be at approximately the same level
as 1999. The amount of future capital expenditures is reviewed on an ongoing
basis and can be affected by timing, scope and changes in investment
opportunities.
Financing
In October 1999, the Company's wholly-owned subsidiary, KeySpan Generation, LLC
issued, through the New York State Energy Research and Development Authority,
$41.1 million of Pollution Control Revenue Bonds, 1999 Series A. The proceeds
from this financing were used to extinguish $45.5 million of the Company's
promissory notes due LIPA. The initial interest rate on these tax- exempt bonds
was established at 3.95%, which rate applies through January 13, 2000.
Thereafter, the interest rate will be reset based on an auction procedure. The
Company anticipates that the interest rate on these tax-exempt bonds will be
substantially lower than the interest rate on the two series of bonds it is
replacing, which were 7.50% and 7.80%.
In December 1999, Brooklyn Union of Long Island and the Company jointly filed a
shelf registration statement with the SEC in anticipation of issuing, during
2000, up to $600 million of Medium Term Notes. These notes will be issued by
Brooklyn Union of Long Island and unconditionally guaranteed by the Company. On
February 1, 2000, Brooklyn Union of Long Island issued $400 million 7.875
26
% Notes due February 1, 2010, the net proceeds of which were used to replace
$397 million of the Company's promissory notes due LIPA that matured in June
1999. (See Note 7 to the Consolidated Financial Statements, "Long-Term Debt" for
a further discussion of these financings and the associated repayments of a
portion of the promissory notes.)
In addition to the above financing, the Company intends to access the financial
markets in 2000 to replace maturing preferred stock and to finance the purchase
of Eastern. In June 2000, $363 million of preferred stock series 7.95% Series AA
will mature. The Company currently anticipates issuing additional preferred
stock to replace this maturing series. The timing of this issuance will depend
on market conditions during 2000.
As previously mentioned, on November 4, 1999, the Company entered into a
definitive agreement with Eastern, pursuant to which the Company will acquire
all of the outstanding common stock of Eastern. The transaction has a total
value of approximately $2.5 billion ($1.7 billion in equity and $0.8 billion in
assumed debt and preferred stock). The Company expects to raise $1.7 billion of
initial financing to purchase Eastern in short-term markets, a significant
portion of which will be replaced with long-term financing as soon as
practicable thereafter.
In connection with the Company's anticipated purchase of Eastern and the
anticipated issuance of long-term debt securities, the Company entered into
forward interest rate lock agreements in January and February 2000, to hedge a
portion of the risk that the cost of the future issuance of fixed-rate debt may
be adversely affected by changes in interest rates. The agreements have a total
notional principal amount of $400 million. (See Note 10 to the Consolidated
Financial Statements, "Hedging, Derivative Financial Instruments and Fair
Values" for additional details.)
In 1998, the Company's Board of Directors authorized the repurchase of a portion
of the Company's outstanding common stock. The initial authorization permitted
the repurchase of up to 10 percent of the Company's then outstanding stock, or
approximately 15 million common shares. A second authorization permits the
Company to use up to an additional $500 million of cash for the purchase of
common shares. As of December 31, 1999, the Company had repurchased 25 million
of its common shares for $723 million.
During 2000, the Company will continue its on-going evaluation of its capital
structure and its debt and equity levels. Further, the Company intends to
actively manage its balance sheet to maintain investment grade ratings at each
of its rated entities. At December 31, 1999 the Company's ratio of debt to total
capitalization was 35%. The Company estimates that, based on its projected
financings in 2000, its ratio of debt to total capitalization will be
approximately 60% at the end of 2000, assuming a certain level of dividends and
earnings.
DIVIDENDS
The Company is currently paying a dividend at an annual rate of $1.78 per common
share. The Company's dividend policy is reviewed annually by the Board of
Directors. The amount and timing
27
of all dividend payments is subject to the discretion of the Board of Directors
and will depend upon business conditions, results of operations, financial
conditions and other factors.
Pursuant to the NYPSC's orders dated February 5, 1998 and April 14, 1998
approving the KeySpan Acquisition, Brooklyn Union's and Brooklyn Union of Long
Island's ability to pay dividends to the parent company is conditioned upon
maintenance of a utility capital structure with debt not exceeding 55% and 58%,
respectively, of total utility capitalization. In addition, the level of
dividends paid by both utilities may not be increased from current levels if a
40 basis point penalty is incurred under the customer service performance
program. At the end of Brooklyn Union's and Brooklyn Union of Long Island's rate
years (September 30, 1999 and November 30, 1999, respectively), the ratio of
debt to total utility capitalization was 44% and 47%, respectively. Moreover,
upon consummation of the acquisition of Eastern, the Company expects to register
as a holding company under the Public Utility Holding Company Act of 1935, as
amended. As a result, the corporate and financial activities of the Company and
each of its subsidiaries (including their ability to pay dividends to the
Company) will also be subject to regulation by the SEC.
GAS DISTRIBUTION - RATE MATTERS
By orders dated February 5, 1998 and April 14, 1998 the NYPSC approved a
Stipulation Agreement ("Stipulation") among Brooklyn Union, LILCO, the Staff of
the Department of Public Service and six other parties that in effect approved
the KeySpan Acquisition and established gas rates for both Brooklyn Union and
Brooklyn Union of Long Island. Under the Stipulation, $1 billion of efficiency
savings, excluding gas costs, attributable to operating synergies that are
expected to be realized over the 10 year period following the combination, were
allocated to ratepayers net of transaction costs.
Under the Stipulation, effective May 29, 1998, Brooklyn Union's base rates to
core customers were reduced by $23.9 million annually. In addition, Brooklyn
Union is now subject to an earnings sharing provision pursuant to which it will
be required to credit core customers with 60% of any utility earnings up to 100
basis points above certain threshold return on equity levels over the term of
the rate plan (other than any earnings associated with discrete incentives) and
50% of any utility earnings in excess of 100 basis points above such threshold
levels. The threshold levels are 13.50% for the rate years ended September 30,
1999 through 2001, and 13.25% for the rate year 2002. Brooklyn Union did not
earn above its threshold return level in its rate year ended September 30, 1999.
The Stipulation also required Brooklyn Union of Long Island to reduce base rates
to its customers by $12.2 million annually effective February 5, 1998 and by an
additional $6.3 million annually effective May 29, 1998. Brooklyn Union of Long
Island is subject to an earnings sharing provision pursuant to which it is
required to credit to firm customers 60% of any utility earnings in any rate
year up to 100 basis points above a return on equity of 11.10% and 50% of any
utility earnings in excess of a return on equity of 12.10%. Brooklyn Union of
Long Island did not earn above its threshold return level in its rate year ended
November 30, 1999. At the conclusion of the Brooklyn Union of Long Island rate
plan on November 30, 2000, Brooklyn Union of Long Island or the NYPSC on its own
motion, may initiate a proceeding to revise the rates and charges of that
company.
28
ELECTRIC SERVICES - REVENUE MECHANISMS
LIPA AGREEMENTS
The Company, through certain of its subsidiaries, provides services to LIPA
under the following agreements:
Management Services Agreement ("MSA")
A Company subsidiary manages the day-to-day operations, maintenance and capital
improvements of the T&D system. LIPA will exercise control over the performance
of the T&D system through specific standards for performance and incentives. In
exchange for providing the services, the Company will earn a $10 million annual
management fee and will be operating under an eight-year contract which provides
certain incentives and imposes certain penalties based upon its performance.
Annual service incentives or penalties exist under the MSA if certain targets
are achieved or not achieved. In addition, the Company can earn certain
incentives for cost reductions associated with the day-to-day operations,
maintenance and capital improvements of LIPA's T&D system. These incentives
provide for the Company to (i) retain 100% of cost reductions on the first $5
million in reductions, and (ii) retain 50% of additional cost reductions up to
15% of the total cost budget, thereafter all savings will accrue to LIPA. With
respect to cost overruns, the Company will absorb the first $15 million of
overruns, with a sharing of overruns above $15 million. There are certain
limitations on the amount of cost sharing of overruns. To date, the Company has
performed its obligations under the MSA within the agreed to budget guidelines
and the Company is committed to providing on-going services to LIPA within the
established cost structure. However, no assurances can be given as to future
operating results under this agreement.
Power Supply Agreement ("PSA")
A Company subsidiary sells to LIPA all of the capacity and, to the extent
requested, energy from the Company's existing oil and gas-fired generating
plants. Sales of capacity and energy are made under rates approved by the
Federal Energy Regulatory Commission ("FERC"). The rates may be modified in the
future in accordance with the terms of the PSA for (i) agreed upon labor and
expense indices applied to the base year, (ii) a return of and on net capital
additions required for the generating facilities, and (iii) reasonably incurred
expenses that are outside the control of the Company. Rates charged to LIPA
include a fixed and variable component. The variable component is billed to LIPA
on a monthly basis and is dependent on the amount of megawatt hours dispatched.
LIPA has no obligation to purchase energy from the Company and is able to
purchase energy on a least-cost basis from all available sources consistent with
existing interconnection limitations of the T&D system. The Company must,
therefore, operate its generating facilities in a manner such that the Company
can remain competitive with other producers of energy. To date, the Company has
dispatched to LIPA and LIPA has accepted the level of energy generated at the
agreed to price per megawatt hour. However, no assurances can be given as to the
level and price of energy to be dispatched to LIPA in the future. The PSA
provides incentives and penalties that can total $4 million annually for the
29
maintenance of the output capability of the generating facilities. The PSA runs
for a term of fifteen
years.
In addition, beginning on May 28, 2001, LIPA will have the right for a one-year
period to acquire all of the Company's Long Island based generating assets
included in the PSA at the fair market value at the time of the exercise of the
right, which value will be determined by independent appraisers.
Energy Management Agreement ("EMA")
The EMA provides for a Company subsidiary to procure and manage fuel supplies
for LIPA to fuel the generating facilities under contract to it and perform
off-system capacity and energy purchases on a least-cost basis to meet LIPA's
needs. In exchange for these services the Company earns an annual fee of $1.5
million. In addition, the Company will arrange for off-system sales on behalf of
LIPA of excess output from the generating facilities and other power supplies
either owned or under contract to LIPA. LIPA is entitled to two-thirds of the
profit from any off-system energy sales. In addition, the EMA provides
incentives and penalties that can total $7 million annually for performance
related to fuel purchases and off-system power purchases. The EMA covers a
period of fifteen years for the procurement of fuel supplies and eight years for
off-system management services.
RAVENSWOOD FACILITY
At the time of the Company's purchase of the Ravenswood Facility, the Company
and Con Edison entered into energy and capacity contracts. The energy contract
provided Con Edison with 100% of the energy produced by the Ravenswood Facility
and covered a period of time from the date of closing, June 18, 1999, through
November 18, 1999. With the start-up of the New York Independent System Operator
("NYISO") the electricity market in New York City began a transition to a
competitive market for capacity, energy and ancillary services. Starting on
November 18, 1999, the Company began selling the energy produced by the
Ravenswood Facility through daily and/or hourly bidding into the NYISO energy
markets. The Company also has the option to sell all or a portion of the energy
produced by the Ravenswood Facility to Load Serving Entities ("LSE"), i.e.
entities that sell to end-users. At this point in time, the Company has sold
energy exclusively through the NYISO. The capacity contract, which is still in
effect, provides Con Edison with 100% of the available capacity of the
Ravenswood Facility. The Company anticipates that this contract will expire on
April 30, 2000, at which time the available capacity of the Ravenswood Facility
will be bid into on the auction process conducted by the NYISO. The Company also
has the option to sell the capacity through contracts with LSEs. It is
anticipated that in 2000, at least 75% of the net profit margins from the
Ravenswood Facility will be derived from capacity sales through either the
auction process associated with the NYISO or contracts with LSEs.
30
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state and local laws and regulatory
programs related to the environment. Ongoing environmental compliance
activities, which have not been material, are charged to operation and
maintenance activities. The Company estimates that the remaining cost of its
manufactured gas plant ("MGP") related environmental cleanup activities,
including costs associated with the Ravenswood Facility, will be approximately
$128 million and has recorded a related liability for such amount. Further, as
of December 31, 1999, the Company has expended a total of $15.9 million. (See
Note 9 to the Consolidated Financial Statements, "Contractual Obligations and
Contingencies".)
YEAR 2000 ISSUES
The Company experienced no significant Year 2000 related abnormalities
associated with the roll over to the year 2000. All systems needed to deliver
gas and electric services to customers, as well as those systems needed to
manage daily business functions performed without significant malfunction.
Nevertheless, the Company continues to monitor systems for any unexpected Year
2000 related abnormalities.
The Company has spent a total of approximately $29.6 million to address the Year
2000 issue. While the Year 2000 Project is virtually complete, some minor
expenses will be incurred for the continued review of systems to monitor for
Year 2000 abnormalities. The largest portion of the Year 2000 costs was
attributable to the assessment, modification, and testing of corporate
information technology ("IT") supported computer software and in-house written
applications. The Company's implementation of the Year 2000 Project did not
directly result in delaying any IT projects. The Company's cash flow from
operations and cash on-hand have been sufficient to fund the Year 2000 Project
expenditures.
31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company and its subsidiaries are subject to various risk exposures and
uncertainties associated with their operations. The most significant contingency
involves the evolution of the gas distribution industry toward a more
competitive and deregulated environment. Most important to the Company, is the
evolution of regulatory policy as it pertains to the Company's fixed charges
associated with its firm gas purchase contracts related to its historical gas
merchant role. In addition, the Company is exposed to commodity price risk,
interest rate risk and, to a much less degree, foreign currency translation
risk. Set forth below is a description of these exposures and an explanation as
to how the Company and its subsidiaries have managed and, to the extent
possible, sought to reduce these risks.
REGULATORY ISSUES AND THE COMPETITIVE ENVIRONMENT
The Gas Industry: The energy industry continues to undergo fundamental changes,
which may have a significant impact on the future financial performance of
utilities, as regulatory authorities, elected officials and customers seek lower
energy prices and broader choices.
Over the past few years, the NYPSC has been formulating a policy framework to
guide the transition of New York State's gas distribution industry in the
deregulated gas industry environment. Since 1996, customers in the small-volume
market have been given the option to purchase their gas supplies from sources
other than the Company's two gas utility subsidiaries. Large-volume customers
had this option for a number of years prior to 1996. In addition to transporting
gas that customers purchase from marketers, the Company's utilities have been
providing billing, meter reading and other services for aggregate rates that
match the distribution charge reflected in otherwise applicable sales rates to
supply these customers.
In November 1998, the NYPSC issued a policy statement setting forth its vision
for furthering competition in the natural gas industry. Under this vision,
regulated natural gas utilities or local distribution companies ("LDCs") would
plan to exit the business of purchasing gas for and selling gas to customers
(the merchant function) over the next three to seven years. LDCs would remain
the operators of the gas system (the distribution function) and the provider of
last resort of natural gas supplies during that period and until alternatives
are developed. The NYPSC's goal is to encourage more competition at the local
level by separating the merchant function from the distribution function.
As required by NYPSC's policy statement, the Company's two gas distribution
subsidiaries filed a joint restructuring proposal with the NYPSC in October
1999. The filing offers a comprehensive restructuring plan designed to (i)
provide a significant impetus toward exiting the gas supply business and (ii)
present the NYPSC with an opportunity to realize its vision of a competitive
unbundled gas supply market for all customers within the transitional time frame
of three to seven years. Under the proposal the Company's gas distribution
subsidiaries would continue to be the provider of last resort during the
transition period. The restructuring plan seeks to "jump start" the migration of
the mass customer market (especially the residential and the small commercial
and industrial markets) from bundled utility sales service to unbundled
transportation service, accelerates the elimination of
32
regulatory cost burdens from the gas supply market, provides protections for low
income customers, and sets forth a plan to minimize potential strandable costs.
Currently, the Company's gas distribution subsidiaries have contracts for the
purchase of upstream interstate transportation, storage and supply with annual
fixed demand charges of approximately $280 million. These contracts have terms
that range from one to fourteen years and the associated demand charges through
the term of the contracts are approximately $1.6 billion. The Company has
estimated its strandable costs as the costs under these contracts in excess of
market value. The Company has assumed that, if it were necessary to assign the
contracts to third parties, the Company could recover the market value of the
underlying assets. Therefore, the difference between the contract costs and the
market value is the potential "strandable" costs. The Company estimates that, if
the gas distribution subsidiaries continue to recover demand charges for the
next five years, then the estimated potential strandable costs for contracts
that will not expire by 2005 and would not be needed to provide service to firm
transportation customers will be, on a present value basis, approximately $78
million.
In its proposal, the Company has set forth a plan to recover potential
strandable costs during the transition period. The plan includes the creation of
a price differential between gas utility bundled service and unbundled services
available in the marketplace. The increased revenue generated from this price
differential would be retained by the Company's gas distribution subsidiaries
for future application to recover costs associated with the transition to
competition, including strandable costs. In addition, the Company recommends
retention of certain customer refunds that otherwise would have been refunded to
customers during the transition period. The plan also recommends certain
financial incentives and mechanisms to mitigate potential strandable costs. The
Company believes that implementation of this plan, or some variation designed to
achieve the same objectives, will allow both of its gas distribution
subsidiaries to fully recover their strandable costs.
The Company believes that its proposal strikes a balance among competing
stakeholder interests in order to most effectively make available the benefits
of the unbundled gas supply market to all customers. The Company currently is
not able to determine the outcome of this proceeding and what effect, if any, it
may have on its operations.
The Electric Industry: As previously mentioned, the Company's electric
operations on Long Island are generally governed by its service agreements with
LIPA. The agreements have terms of eight to fifteen years and generally provide
for recovery of virtually all costs of production, operation and maintenance.
Also, since Long Island is considered a "load pocket", i.e., there are
insufficient transmission ties to permit a significant amount of energy to be
transported into Long Island, the Company faces minimal competitive pressures
associated with its electric operations on Long Island at this time.
With its investment in the Ravenswood Facility, the Company also has electric
operations in New York City. The Company currently sells the energy produced by
the Ravenswood Facility through daily and/or hourly bidding into the NYISO
energy markets. Further, the Company has a capacity
33
contract with Con Edison, which provides Con Edison with 100% of the available
capacity of the Ravenswood Facility. The Company anticipates that this contract
will expire on April 30, 2000, at which time the available capacity of the
Ravenswood Facility will be bid into on the auction process conducted by the
NYISO. New York City local reliability rules currently require that 80% of the
electric capacity needs of New York City is to be provided by "in-city"
generators. At this time, there is a current shortage of in-city capacity and
the Company, therefore, anticipates that it can sell the capacity of the
Ravenswood Facility at a level approaching the FERC mandated price cap. The
Company expects that the current local reliability rules will remain in effect
at least through 2000. However, should new, more efficient electric power plants
be built in New York City and/or the requirement that 80% of in-city load be
served by in-city generators be modified, capacity and energy sales volumes
could be adversely affected. The Company can not predict, however, when or if
new power plants will be built or the nature of future New York City
requirements.
DERIVATIVE FINANCIAL INSTRUMENTS
As previously mentioned, and more fully detailed in Note 10 to the Consolidated
Financial Statements, "Hedging, Derivative Financial Instruments and Fair
Values", the Company hedges a portion of its exposure to commodity price risk
and interest rate risk. All of the Company's derivative financial instruments,
except for certain interest rate swaps, are and will continue to be classified
as cash-flow hedges. As a result, implementation of Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities" when adopted, is not expected to have a material effect
on the Company's net income, but could have a significant effect on
comprehensive income because of fluctuations in the market value of the
derivatives employed for hedging certain risks. Under SFAS No. 133, periodic
changes in market value are recorded as comprehensive income, subject to
effectiveness, and then included in net income to match the underlying
transactions.
Commodity Hedges and Financial Instruments: The Company's gas utility
subsidiaries, marketing, and gas exploration and production subsidiaries employ,
from time to time, derivative financial instruments, such as natural gas and oil
futures, options and swaps, for the purpose of hedging exposure to commodity
price risk.
Whenever hedge positions are in effect, the Company's subsidiaries are exposed
to credit risk in the event of nonperformance by counter parties to derivative
contracts, as well as nonperformance by the counter parties of the transactions
against which they are hedged. The Company believes that the credit risk related
to the futures, options and swap instruments is no greater than that associated
with the primary commodity contracts which they hedge, as the instrument
contracts are with major investment grade financial institutions, and that
reduction of the exposure to price risk lowers the Company's overall business
risk.
Interest Rate Hedges: The Company continually monitors the cost relationship
between fixed and variable rate debt. In line with its objective to minimize
capital costs, the Company periodically enters into hedging transactions through
interest rate swaps that effectively convert the terms of the
34
underlying debt obligations from fixed to variable and/or variable to fixed. In
addition, the Company also enters into hedges to fix the rate on commitments to
issue debt securities prior to the actual financing. Swap agreements are only
entered into with creditworthy counter parties.
FOREIGN CURRENCY FLUCTUATIONS
The Company follows the principles of SFAS No. 52, "Foreign Currency
Translation" for recording its investments in foreign affiliates. Due to the
Company's purchases of certain Canadian interests and its continued activities
in Northern Ireland, the Company's investment in foreign affiliates has been
growing. At December 31, 1999, the Company's net assets in these affiliates was
approximately $251.0 million and at December 31, 1999, the accumulated foreign
currency translation adjustment was $7.7 million favorable. (See Note 1 to the
Consolidated Financial Statements, "Summary of Significant Accounting
Policies".)
For additional information concerning market risk, see Note 10 to the
Consolidated Financial Statements, "Hedging, Derivative Financial Instruments,
and Fair Values".
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENT RESPONSIBILITY
The Consolidated Financial Statements of the Company and its subsidiaries were
prepared by management in conformity with generally accepted accounting
principles.
The Company's system of internal controls is designed to provide reasonable
assurance that assets are safeguarded and that transactions are executed in
accordance with management's authorizations and recorded to permit preparation
of financial statements that present fairly the financial position and operating
results of the Company. The Company's internal auditors evaluate and test the
system of internal controls. The Company's Vice President and General Auditor
reports directly to the Audit Committee of the Board of Directors, which is
composed entirely of outside directors. The Audit Committee meets periodically
with management, the Vice President and General Auditor and Arthur Andersen LLP
to review and discuss internal accounting controls, audit results, accounting
principles and practices and financial reporting matters.
36
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
DECEMBER 31, 1999 December 31, 1998
-------------------- --------------------
ASSETS
CURRENT ASSETS
Cash and temporary cash investments $ 128,602 $ 942,776
Customer accounts receivable 419,826 320,836
Other accounts receivable 240,973 230,479
Allowance for uncollectible accounts (20,294) (20,026)
Special deposits 60,863 131,196
Gas in storage, at average cost 144,256 145,277
Materials and supplies, at average cost 84,813 74,193
Other 98,914 72,818
-------------------- --------------------
1,157,953 1,897,549
-------------------- --------------------
EQUITY INVESTMENTS AND OTHER 391,731 303,681
-------------------- --------------------
PROPERTY
Electric 1,346,851 1,109,199
Gas 3,449,384 3,257,726
Other 375,657 345,007
Accumulated depreciation (1,589,287) (1,480,038)
Gas exploration and production, at cost 1,177,916 994,104
Accumulated depletion (520,509) (447,733)
-------------------- --------------------
4,240,012 3,778,265
-------------------- --------------------
DEFERRED CHARGES
Regulatory assets 319,167 279,524
Goodwill, net of amortizations 255,778 254,040
Other 366,050 382,043
-------------------- --------------------
940,995 915,607
-------------------- --------------------
-------------------- --------------------
TOTAL ASSETS $ 6,730,691 $ 6,895,102
==================== ====================
The Notes to the Consolidated Financial Statements are an integral part of these
statements.
37
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
DECEMBER 31, 1999 December 31, 1998
------------------- --------------------
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
Current maturities of long-term debt $ - $ 398,000
Current redemption of preferred stock 363,000 -
Accounts payable and accrued expenses 645,347 519,288
Notes payable 208,300 -
Dividends payable 61,306 66,232
Taxes accrued 50,437 69,742
Customer deposits 31,769 29,774
Interest accrued 28,093 19,965
-------------------- --------------------
1,388,252 1,103,001
------------------- --------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Regulatory liabilities 26,618 27,854
Deferred income tax 186,230 71,549
Postretirement benefits and other reserves 501,603 457,459
Other 66,200 75,740
-------------------- --------------------
780,651 632,602
------------------- --------------------
CAPITALIZATION
Common stock, $.01 par value, authorized
450,000,000 shares; outstanding 133,866,077
and 144,628,654 shares stated at 2,973,388 2,973,388
Retained earnings 456,882 474,188
Accumulated foreign currency adjustment 7,714 (952)
Treasury stock purchased (722,959) (423,716)
------------------- --------------------
Total common shareholders' equity 2,715,025 3,022,908
Preferred stock 84,339 447,973
Long-term debt 1,682,702 1,619,067
-------------------- --------------------
TOTAL CAPITALIZATION 4,482,066 5,089,948
-------------------- --------------------
MINORITY INTEREST IN SUBSIDIARY COMPANIES 79,722 69,551
------------------- --------------------
TOTAL LIABILITIES AND CAPITALIZATION $ 6,730,691 $ 6,895,102
=================== ====================
The Notes to the Consolidated Financial Statements are an integral part of these
statements.
38
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
============================================================================================================
Nine Months Fiscal Year
YEAR ENDED Ended Ended
DECEMBER 31, 1999 December 31, 1998 March 31, 1998
============================================================================================================
Gas Distribution $ 1,753,132 $ 856,172 $ 645,659
Electric Services 861,582 408,305 -
Electric Distribution - 330,011 2,478,435
Gas Exploration and Production 150,581 70,812 -
Energy Related Services and Other 189,318 63,181 -
-------------- ------------- -----------
Total Revenues 2,954,613 1,728,481 3,124,094
-------------- ------------- -----------
OPERATING EXPENSES
Purchased gas 744,432 331,690 299,469
Fuel and purchased power 17,252 91,762 658,338
Operations and maintenance 1,091,166 842,313 511,165
Depreciation, depletion and amortization 253,440 294,864 169,770
Electric regulatory amortizations - (40,005) 13,359
Operating taxes 366,154 257,124 466,326
-------------- ------------- -----------
Total Operating Expenses 2,472,444 1,777,748 2,118,427
-------------- ------------- -----------
OPERATING INCOME 482,169 (49,267) 1,005,667
-------------- ------------- -----------
OTHER INCOME AND (DEDUCTIONS)
Income from equity investments 15,347 5,841 -
Interest income 26,993 50,104 7,022
Transaction related expenses (net of $99,701 income tax) - (107,912) -
Minority interest (11,141) 29,141 -
Other 6,297 (15,919) (13,323)
-------------- ------------- -----------
Total Other Income 37,496 (38,745) (6,301)
-------------- ------------- -----------
INCOME (LOSS) BEFORE INTEREST CHARGES AND INCOME TAXES 519,665 (88,012) 999,366
-------------- ------------- -----------
INTEREST CHARGES 124,692 138,715 404,473
-------------- ------------- -----------
INCOME TAXES
Current 26,618 26,142 85,794
Deferred 109,744 (85,936) 146,859
-------------- ------------- -----------
Total Income Taxes 136,362 (59,794) 232,653
-------------- ------------- -----------
NET INCOME (LOSS) 258,611 (166,933) 362,240
Preferred stock dividend requirements 34,752 28,604 51,813
-------------- ------------- -----------
EARNINGS (LOSS) FOR COMMON STOCK $ 223,859 $ (195,537) $ 310,427
Foreign Currency Adjustment 8,666 (952) -
-------------- ------------- -----------
COMPREHENSIVE INCOME (LOSS) $ 232,525 $ (196,489) $ 310,427
============== ============= ===========
AVERAGE COMMON SHARES OUTSTANDING (000) 138,526 145,767 121,415
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE $ 1.62 $ (1.34) $ 2.56
============== ============= ===========
The Notes to the Consolidated Financial Statements are an integral part of these
statements.
39
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
(IN THOUSANDS OF DOLLARS)
==========================================================================================================
Nine Months Fiscal Year
YEAR ENDED Ended Ended
DECEMBER 31, 1999 December 31, 1998 March 31, 1998
==========================================================================================================
BALANCE AT BEGINNING OF PERIOD $ 474,188 $ 956,092 $ 861,751
Net income (loss) for period 258,611 (166,933) 362,240
- ----------------------------------------------------------------------------------------------------------
732,799 789,159 1,223,991
Deductions
Cash dividends declared on common stock 246,251 214,012 216,086
Cash dividends declared on preferred stock 34,752 28,604 51,813
Other, primarily write-off of capital stock expense (5,086) 72,355 -
- ----------------------------------------------------------------------------------------------------------
BALANCE AT END OF PERIOD $ 456,882 $ 474,188 $ 956,092
==========================================================================================================
CONSOLIDATED STATEMENT OF CAPITALIZATION
============================================================================================================
SHARES ISSUED (IN THOUSANDS OF DOLLARS)
- ------------------------------------------------------------------------------------------------------------
DECEMBER 31, December 31, DECEMBER 31, December 31,
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------
COMMON SHAREHOLDERS' EQUITY
Common stock, $0.01 par value 133,866,077 144,628,654 $ 1,337 $ 1,446
Premium on capital stock 2,972,051 2,971,942
Retained earnings 456,882 474,188
Accumulated foreign currency adjustment 7,714 (952)
Treasury stock purchased 24,971,577 14,209,000 (722,959) (423,716)
- ------------------------------------------------------------------------------------------------------------
TOTAL COMMON SHAREHOLDERS' EQUITY 2,715,025 3,022,908
- ------------------------------------------------------------------------------------------------------------
PREFERRED STOCK - REDEMPTION REQUIRED
Par value $25 per share
7.95% Series AA 14,520,000 14,520,000 363,000 363,000
- ------------------------------------------------------------------------------------------------------------
Less - Mandatory redemption of preferred stock 363,000 -
- ------------------------------------------------------------------------------------------------------------
Total Preferred Stock - Redemption Required - 363,000
- ------------------------------------------------------------------------------------------------------------
PREFERRED STOCK - NO REDEMPTION REQUIRED
Par value $100 per share
7.07% Series B-private placement 553,000 553,000 55,300 55,300
7.17% Series C-private placement 197,000 197,000 19,700 19,700
6.00% Series A-private placement 93,390 99,727 9,339 9,973
- ------------------------------------------------------------------------------------------------------------
Total Preferred Stock - No Redemption Required 84,339 84,973
- ------------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK $ 84,339 $ 447,973
- ------------------------------------------------------------------------------------------------------------
The Notes to the Consolidated Financial Statements are an integral part of these
statements.
40
CONSOLIDATED STATEMENT OF CAPITALIZATION
(CONTINUED)
(IN THOUSANDS OF DOLLARS)
=============================================================================================================
DECEMBER 31, December 31,
LONG-TERM DEBT INTEREST RATE SERIES 1999 1998
- -------------------------------------------------------------------------------------------------------------
AUTHORITY FINANCING NOTES
POLLUTION CONTROL REVENUE BONDS
October 1, 2028 variable 1999A $ 41,125 $ -
ELECTRIC FACILITIES REVENUE BONDS
December 1, 2027 variable 1997A 24,880 24,880
- -------------------------------------------------------------------------------------------------------------
TOTAL AUTHORITY FINANCING NOTES 66,005 24,880
- -------------------------------------------------------------------------------------------------------------
PROMISSORY NOTES TO LIPA
DEBENTURES
July 15, 1999 7.30% - 397,000
March 15, 2023 8.20% 270,000 270,000
POLLUTION CONTROL REVENUE BONDS
December 1, 2006 7.50% 1976A - 26,375
December 1, 2009 7.80% 1979B - 19,100
March 1, 2016 5.15% 1985A 58,022 58,022
March 1, 2016 5.15% 1985B 50,000 50,000
ELECTRIC FACILITIES REVENUE BONDS
September 1, 2019 7.15% 1989B 35,030 35,030
June 1, 2020 7.15% 1990A 73,900 73,900
December 1, 2020 7.15% 1991A 26,560 26,560
February 1, 2022 7.15% 1992B 13,455 13,455
August 1, 2022 6.90% 1992D 28,060 28,060
November 1, 2023 5.30% 1993B 29,600 29,600
October 1, 2024 5.30% 1994A 2,600 2,600
August 1, 2025 5.30% 1995A 15,200 15,200
- -------------------------------------------------------------------------------------------------------------
Total Promissory Notes to LIPA 602,427 1,044,902
- -------------------------------------------------------------------------------------------------------------
GAS FACILITIES REVENUE BONDS
April 1, 2020 6.368% 1993A,B 75,000 75,000
December 1, 2020 variable 1997 125,000 125,000
January 1, 2021 5.50% 1996 153,500 153,500
February 1, 2024 6.75% 1989A 45,000 45,000
February 1, 2024 6.75% 1989B 45,000 45,000
June 1, 2025 5.60% 1993C 55,000 55,000
July 1, 2026 6.95% 1991A,B 100,000 100,000
July 1, 2026 5.635% 1993D-1,D-2 50,000 50,000
- -------------------------------------------------------------------------------------------------------------
Total Gas Facilities Revenue Bonds 648,500 648,500
- -------------------------------------------------------------------------------------------------------------
Unamortized Discount on Debt (1,635) (1,750)
- -------------------------------------------------------------------------------------------------------------
Total 1,315,297 1,716,532
Less Current Maturities - 398,000
Other Subsidiary Debt 367,405 300,535
- -------------------------------------------------------------------------------------------------------------
Total Long-Term Debt 1,682,702 1,619,067
- -------------------------------------------------------------------------------------------------------------
Total Capitalization $ 4,482,066 $ 5,089,948
==============================================================================================================
The Notes to the Consolidated Financial Statements are an integral part of these
statements.
41
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
=====================================================================================================
Nine Months Fiscal Year
YEAR ENDED Ended Ended
DECEMBER 31, December 31, March 31,
1999 1998 1998
=====================================================================================================
OPERATING ACTIVITIES
Net Income (Loss) $ 258,611 $ (166,933) $ 362,240
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES
Depreciation, depletion and amortization 253,440 294,864 169,770
Electric regulatory amortizations - (40,005) (10,273)
Deferred income tax 109,744 (85,936) 146,859
Income from equity investments (15,347) (5,841) -
Dividends from equity investments 9,368 4,219 -
CHANGES IN ASSETS AND LIABILITIES
Accounts receivable (132,114) (81,024) 8,334
Materials and supplies, fuel oil and gas in storage (9,789) (63,195) 14,391
Accounts payable and accrued expenses 83,493 132,028 (54,835)
Interest accrued 8,128 (151,268) (2,624)
Special deposits 52,373 (41,040) (58,159)
Pensions and other post retirement benefits (22,000) (283,774) -
Other (6,902) 27,617 98,381
----------- ----------- -----------
Net Cash Provided by (Used in) Operating Activities 589,005 (460,288) 674,084
----------- ----------- -----------
INVESTING ACTIVITIES
Capital expenditures (725,670) (676,563) (297,230)
Net cash from KeySpan Acquisition - 165,168 -
Net proceeds from LIPA Transaction - 2,314,588 -
Other 30,006 13,466 (31,987)
----------- ----------- -----------
Net Cash (Used in) Provided by Investing Activities (695,664) 1,816,659 (329,217)
----------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from sale of common stock - 10,170 43,218
Treasury stock purchased (299,243) (423,716) -
Issuance of preferred stock - 84,973 -
Issuance of notes payable 208,300 - -
Issuance of long-term debt 102,648 112,535 -
Payment of long-term debt (442,475) (103,000) (2,050)
Preferred stock dividends paid (34,760) (28,604) (51,833)
Common stock dividends paid (249,567) (210,177) (215,790)
Other 7,582 (36,695) (2,032)
----------- ----------- -----------
Net Cash (Used in) Financing Activities (707,515) (594,514) (228,487)
----------- ----------- -----------
Net (Decrease) Increase in Cash and Cash Equivalents (814,174) 761,857 116,380
=========== =========== ===========
Cash and cash equivalents at beginning of period $ 942,776 $ 180,919 $ 64,539
Net (Decrease) Increase in cash and cash equivalents (814,174) 761,857 116,380
----------- ----------- -----------
Cash and Cash Equivalents at End of Period $ 128,602 $ 942,776 $ 180,919
=========== =========== ===========
Interest paid $ 109,614 $ 125,914 $ 364,864
Income tax paid $ 38,700 $ 94,680 $ 108,980
The Notes to the Consolidated Financial Statements are an integral part of these
statements.
42
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION OF THE COMPANY
KeySpan Corporation, d/b/a KeySpan Energy (the "Company" or "KeySpan Energy") is
a holding company operating two utilities that distribute natural gas to
approximately 1.6 million customers in New York City and on Long Island, making
it the fourth largest gas-distribution company in the United States. Other
KeySpan Energy companies market a portfolio of gas- marketing and energy-
related services in the Northeast, own and operate electric-generation plants in
New York City and on Long Island, and provide operating and customer services to
approximately 1.1 million electric customers of the Long Island Power Authority
("LIPA"). The Company's other energy activities include: gas exploration and
production, primarily through The Houston Exploration Company ("THEC"); domestic
pipelines and storage; and international activities, including gas processing in
Canada, and gas pipelines and local distribution in Northern Ireland. (See Note
2, "Business Segments" for additional information on each operating segment.)
The Company is the successor to Long Island Lighting Company ("LILCO"), as a
result of a transaction with LIPA (the "LIPA Transaction") and following the
acquisition (the "KeySpan Acquisition") of KeySpan Energy Corporation ("KSE").
On May 28, 1998, the Company completed two business combinations as a result of
which it (i) became the successor operator of the non-nuclear electric
generating facilities, gas distribution operations and common plant formerly
owned by LILCO and entered into long-term service agreements to operate the
electric transmission and distribution ("T&D") system acquired by LIPA; and (ii)
acquired KSE, the parent company of The Brooklyn Union Gas Company ("Brooklyn
Union"). (See Note 14, "Sale of LILCO Assets, Acquisition of KeySpan Energy
Corporation and Transfer of Assets and Liabilities to the Company".)
B. BASIS OF PRESENTATION
The Consolidated Financial Statements presented herein reflect the accounts of
the Company and its subsidiaries. Most of the Company's subsidiaries are fully
consolidated in the financial information presented, except for subsidiary
investments in the Energy Related Investment segment which are accounted for on
the equity method as the Company does not have a controlling voting interest or
otherwise have control over the management of investee companies. All
significant intercompany transactions have been eliminated.
Certain reclassifications were made to conform prior period financial statements
with the current period financial statement presentation.
The financial statements presented herein include the year ended December 31,
1999, the nine
1
month period April 1, 1998 through December 31, 1998 (the "Transition Period"),
and the fiscal year ended March 31, 1998. For financial reporting purposes,
LILCO is deemed the acquiring company pursuant to a purchase accounting
transaction, in which KSE was acquired. Consequently, financial results of the
Company prior to May 29, 1998 reflect those of LILCO only. Since the acquisition
of KSE was accounted for as a purchase, related accounting adjustments,
including goodwill, have been reflected in the financial statements herein.
Further, in September 1998, the Company changed its fiscal year end to December
31.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
C. ACCOUNTING FOR THE EFFECTS OF RATE REGULATION
The Company's accounting records for its two regulated gas utilities and its
generation subsidiaries are maintained in accordance with the Uniform System of
Accounts prescribed by the Public Service Commission of the State of New York
("NYPSC") and the Federal Energy Regulatory Commission ("FERC"), respectively.
However, the Company's electric generation subsidiaries are not subject to NYPSC
rate regulation, but they are subject to FERC regulation. The Company's
financial statements reflect the ratemaking policies and actions of these
regulators in conformity with generally accepted accounting principles for
rate-regulated enterprises.
The Company's two regulated gas utilities and its electric generation
subsidiaries are subject to the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 71, "Accounting for the Effects of Certain Types of
Regulation." This statement recognizes the ability of regulators, through the
ratemaking process, to create future economic benefits and obligations affecting
rate-regulated companies. Accordingly, the Company records these future economic
benefits and obligations as regulatory assets and regulatory liabilities,
respectively.
2
The following table presents the Company's net regulatory assets at December 31,
1999 and December 31, 1998.
(IN THOUSANDS OF DOLLARS)
December 31, 1999 December 31, 1998
- ------------------------------------------ -------------------- ---------------
Regulatory Assets
Regulatory tax asset $ 65,462 $ 68,780
Property taxes 40,434 12,792
Environmental costs 95,627 100,505
Postretirement benefits other than pensions 48,553 51,788
Costs associated with the KeySpan Acquisition 69,091 45,659
Total Regulatory Assets $ 319,167 $ 279,524
Regulatory Liability 26,618 27,854
Total Net Regulatory Assets $ 292,549 $ 251,670
========================================== ==================== ================
The regulatory assets above are not included in the Company's rate base.
However, the Company records carrying charges on the property tax and costs
associated with the KeySpan Acquisition deferrals. The Company also records
carrying charges on its regulatory liability. The remaining regulatory assets
represent, primarily, costs for which expenditures have not yet been made, and
therefore, carrying charges are not recorded. The Company anticipates recovering
these costs in its gas rates concurrently with future cash expenditures. If
recovery is not concurrent with the cash expenditures, the Company will record
the appropriate level of carrying charges.
The Company estimates that full recovery of its regulatory assets will not
exceed 15 years, except for the tax regulatory asset which will be recovered
over the estimated lives of certain utility property.
Rate regulation is undergoing significant change as regulators and customers
seek lower prices for utility service and greater competition among energy
service providers. In the event that regulation significantly changes the
opportunity for the Company to recover its costs in the future, all or a portion
of the Company's regulated operations may no longer meet the criteria for the
application of SFAS No. 71. In that event, a write-down of all or a portion of
the Company's existing regulatory assets and liabilities could result. If the
Company had been unable to continue to apply the provisions of SFAS No. 71 at
December 31, 1999, the Company would have applied the provisions of SFAS No. 101
"Regulated Enterprises - Accounting for the Discontinuation of Application of
FASB Statement No. 71". The Company estimates that the write-off of its net
regulatory asset could result in a charge to net income of $190.2 million or
$1.37 per share after-tax, which would be classified as an extraordinary item.
In management's opinion, the Company's regulated subsidiaries will be subject to
SFAS No. 71 for the foreseeable future.
As part of the LIPA Transaction, the Company has entered into various service
agreements with LIPA that prescribe the conduct of the Company's electric
operations. These agreements allow the
3
Company to recover its costs incurred to service the agreements and potentially
allow the Company to earn a certain level of profit. The Company's electric
operations, other than the generation function which is FERC regulated, are no
longer subject to rate regulation and, as a result, the Company no longer
applies SFAS No. 71 to certain of its electric operations.
D. REVENUES
Utility gas customers are billed monthly and bi-monthly on a cycle basis.
Revenues include unbilled amounts related to the estimated gas usage that
occurred from the most recent meter reading to the end of each month.
The cost of gas used is recovered when billed to firm customers through the
operation of the gas adjustment clause ("GAC") included in utility tariffs. The
GAC provision requires an annual reconciliation of recoverable gas costs and GAC
revenues. Any difference is deferred pending recovery from or refund to firm
customers during a subsequent twelve-month period. Further, net revenues from
tariff gas balancing services, off-system sales and certain on-system
interruptible sales are refunded to firm customers subject to certain sharing
provisions.
The gas utility tariffs contain weather normalization adjustments that largely
offset shortfalls or excesses of firm net revenues (revenues less gas costs and
revenue taxes) during a heating season due to variations from normal weather.
Electric revenues since the LIPA Transaction are primarily derived from billings
to LIPA for management of LIPA's T&D system, electric generation, and
procurement of fuel. In addition, electric revenues also include revenues from
the Company's investment in the 2,168 megawatt Ravenswood electric generation
facility ("Ravenswood Facility") which the Company acquired in June 1999. (See
Note 9, "Contractual Obligations and Contingencies" for a description of the
Ravenswood transaction.)
The agreements with LIPA include provisions for the Company to earn, in the
aggregate, approximately $11.5 million per year (plus up to an additional $5
million per year if certain cost savings are achieved) in annual management
service fees from LIPA for the management of the LIPA T&D system and the
management of all aspects of fuel and power supply. Costs in excess of budgeted
levels are assumed by the Company up to $15 million, while cost reductions in
excess of $5 million from budgeted levels are shared with LIPA. These agreements
also contain certain non- cost incentive and penalty provisions which could
impact earnings. Billings associated with generation capacity are based on
pre-determined levels of supply to be dispatched to LIPA on a yearly basis.
Rates charged to LIPA include fixed and variable components. The variable
component is billed to LIPA on a monthly basis and is dependent on the amount of
megawatt hours dispatched. In addition, billings related to transmission,
distribution and delivery services are based, in part, on negotiated budgeted
levels.
The Company currently sells the energy produced by the Ravenswood Facility
through daily and/or
4
hourly bidding into the New York Independent System Operator ("NYISO") energy
markets. Revenues are recorded when the energy is sold to the NYISO. Further,
the Company currently has a capacity contract with Consolidated Edison Company
of New York, Inc. ("Con Edison"), which provides Con Edison with 100% of the
available capacity of the Ravenswood Facility. Capacity charges are billed to
Con Edison on a monthly fixed-fee basis in accordance with the terms of the
capacity contract. The Company anticipates that this contract will expire on
April 30, 2000, at which time the available capacity of the Ravenswood Facility
will be bid into on the auction process conducted by the NYISO.
Prior to the LIPA Transaction, electric revenues were comprised of cycle
billings rendered to residential, commercial and industrial customers and the
accrual of electric revenues for services rendered to customers not billed at
month-end. In addition, LILCO's rate structure provided for a revenue
reconciliation mechanism which eliminated the impact on earnings of electric
sales that were above or below the levels reflected in rates. Moreover, LILCO's
electric tariff included a fuel cost adjustment ("FCA") clause which provided
for the disposition of the difference between actual fuel costs and the fuel
costs allowed in base tariff rates. LILCO deferred these differences to future
periods for recovery from or refund to customers, except for base electric fuel
costs in excess of actual electric fuel costs, which were credited to the Rate
Moderation Component ("RMC") as incurred.
E. UTILITY PROPERTY - DEPRECIATION AND MAINTENANCE
Utility gas property is stated at original cost of construction, which includes
allocations of overheads, including taxes, and an allowance for funds used
during construction. As part of the LIPA Transaction, all T&D assets were sold
to LIPA, and as a result, all costs incurred under the Management Services
Agreement in connection with the Company's provision of services for the T&D
system subsequent to May 28, 1998 are expensed and charged to LIPA. As a result,
electric depreciation now consists of depreciation of the non-nuclear electric
generating facilities formerly owned by LILCO and the Ravenswood Facility.
Depreciation is provided on a straight-line basis in amounts equivalent to
composite rates on average depreciable property. The cost of property retired,
plus the cost of removal less salvage, is charged to accumulated depreciation.
The cost of repair and minor replacement and renewal of property is charged to
maintenance expense. The composite rates on average depreciable property were as
follows:
Period Electric Gas
------- -------- ---
Year Ended December 31, 1999 3.56% 2.85%
Nine Months Ended December 31, 1998 2.54% 2.07%
Fiscal Year Ended March 31, 1998 3.20% 2.06%
5
F. GAS EXPLORATION AND PRODUCTION PROPERTY - DEPLETION
The full cost method of accounting is used for investments in natural gas and
oil properties. Under this method, all costs of acquisition, exploration and
development of natural gas and oil reserves are capitalized into a "full cost
pool" as incurred, and properties in the pool are depleted and charged to
operations using the unit-of-production method based on the ratio of current
production to total proved natural gas and oil reserves. 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, such excess costs are charged to operations. If a
write-down is required, it would result in a charge to earnings but would not
have an impact on cash flows from operating activities. Once incurred, such
impairment of gas properties is not reversible at a later date even if gas
prices increase. In December 1998, THEC, the Company's 64% owned gas and oil
exploration and production subsidiary, recorded a $130 million write-down to its
investment in its proved gas reserves, which is reflected in the accompanying
financial statements
As of December 31, 1999, THEC estimates, using prices in effect as of such date,
that the ceiling limitation imposed under full cost accounting rules exceeded
actual capitalized costs.
Provisions for depreciation of all other non-utility property are computed on a
straight line basis over useful lives of three to ten years.
G. HEDGING AND DERIVATIVE FINANCIAL INSTRUMENTS
Commodity Derivatives: The Company's utility, marketing subsidiaries and THEC
employ, from time to time, derivative financial instruments to hedge exposure in
cash flows due to fluctuations in the price of natural gas. The Company's
hedging strategies meet the criteria for hedge accounting treatment under SFAS
No. 80, "Accounting for Futures Contracts." Accordingly, gains and losses on
these instruments are recognized concurrently with the recognition of the
related physical transactions.
The subsidiaries regularly assess the relationship between natural gas commodity
prices in "cash" and futures markets. The correlation between prices in these
markets has been within a range generally deemed to be acceptable. If the
correlation were not to remain in an acceptable range, the subsidiaries would
account for financial instrument positions as trading activities.
Interest Rate Derivatives: The Company continually assesses the cost
relationship between fixed and variable rate debt. In line with its objective to
minimize capital costs, the Company periodically enters into hedging
transactions that effectively convert the terms of underlying debt obligations
from fixed to variable and/or variable to fixed. Monthly payments made or
received are recognized as an adjustment to interest expense as incurred. In
addition, the Company also enters into hedges to fix the rate on commitments to
issue debt securities prior to the actual financing.
6
Hedging transactions that effectively convert the terms of underlying debt
obligations from fixed to variable and/or variable to fixed are considered
fair-value hedges. All of the Company's other derivative financial instruments
are, and will continue to be classified as cash-flow hedges. As a result,
implementation of SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," when adopted, is not expected to have a material effect on
the Company's net income, but could have a significant effect on comprehensive
income because of fluctuations in the market value of the derivatives employed
for hedging certain risks. Under SFAS No. 133, periodic changes in market value
are recorded as comprehensive income, subject to effectiveness, and then
included in net income to match the underlying transactions.
H. EQUITY INVESTMENTS
Certain subsidiaries own as their principal assets investments, including
goodwill, representing ownership interests of 50% or less in energy-related
businesses that are accounted for under the equity method.
I. INCOME TAX
In accordance with SFAS No. 109, "Accounting for Income Taxes" and NYPSC policy,
certain of the Company's regulated subsidiaries record a regulatory asset for
the net cumulative effect of having to provide deferred income taxes on all
differences between tax and book bases of assets and liabilities at the current
tax rate which have not yet been included in rates to customers. Investment tax
credits, which were available prior to the Tax Reform Act of 1986, were deferred
and are amortized as a reduction of income tax over the estimated lives of the
related property.
J. SUBSIDIARY COMMON STOCK ISSUANCES TO THIRD PARTIES
The Company follows an accounting policy of income statement recognition for
parent company gains or losses from issuances of common stock by subsidiaries.
K. FOREIGN CURRENCY TRANSLATION
The Company follows the principles of SFAS No. 52, "Foreign Currency
Translation," for recording its investments in foreign affiliates. Under this
statement, all elements of financial statements are translated by using a
current exchange rate. Translation adjustments result from changes in exchange
rates from one reporting period to another. At December 31, 1999, the foreign
currency translation adjustment was included in comprehensive income and as a
separate component of shareholders' equity.
L. GOODWILL
At December 31, 1999, the Company has recorded goodwill in the amount of $255.8
million, representing the excess of acquisition cost over the fair value of net
assets acquired. Goodwill is
7
amortized over 15 to 40 years. The Company's recorded goodwill, net of
accumulated amortizations, consists of approximately $164.1 million relating to
the KeySpan Acquisition and approximately $91.7 million related to the
acquisitions of energy-related services companies and to certain ownership
interests of 50% or less in energy-related investments in Northern Ireland and
Canada which are accounted for under the equity method.
M. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board ("FASB") issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of SFAS No. 133." SFAS No. 137 defers the effective date of
SFAS No. 133 to fiscal years beginning after July 15, 2000. The Company will
therefore, adopt SFAS No. 133 in the first quarter of fiscal year 2001. SFAS No.
133 establishes accounting and reporting standards for derivative instruments
and for hedging activities. It requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. As previously mentioned, all of the
Company's derivative financial instruments, except for certain interest rate
swaps, are and will continue to be classified as cash-flow hedges. As a result,
implementation of SFAS No. 133 when adopted, is not expected to have a material
effect on the Company's net income, but could have a significant effect on
comprehensive income because of fluctuations in the market value of the
derivatives employed for hedging certain risks. Under SFAS No. 133, periodic
changes in market value are recorded as comprehensive income, subject to
effectiveness, and then included in net income to match the underlying
transactions.
NOTE 2. BUSINESS SEGMENTS
The Company has six reportable segments: Gas Distribution, Electric Services,
Gas Exploration and Production, Energy Related Services, Energy Related
Investments and Other.
The Gas Distribution segment consists of the Company's two gas distribution
subsidiaries. Brooklyn Union provides gas distribution services to customers in
the New York City boroughs of Brooklyn, Queens and Staten Island, and KeySpan
Gas East d/b/a Brooklyn Union of Long Island ("Brooklyn Union of Long Island")
provides gas distribution services to customers in the Long Island counties of
Nassau and Suffolk and the Rockaway Peninsula of Queens County.
The Electric Services segment consists of Company subsidiaries that operate the
electric T&D system owned by LIPA, own and sell capacity and energy to LIPA from
the Company's generating facilities located on Long Island and manage fuel
supplies for LIPA to fuel the Company's Long Island generating facilities
through long-term service contracts that have terms that range from eight to
fifteen years, as well as, Company subsidiaries that own, lease and operate the
2,168 megawatt Ravenswood Facility, located in Long Island City, Queens. (See
Note 9, "Contractual Obligations and Contingencies" for a description of the
Ravenswood transaction.) Currently, the Company's primary electric generation
customers are LIPA and Con Edison.
8
The Gas Exploration and Production segment is engaged in gas and oil exploration
and production, and the development and acquisition of domestic natural gas and
oil properties. This segment consists of the Company's 64% equity interest in
THEC, an independent natural gas and oil exploration company, as well as KeySpan
Exploration and Production LLC, the Company's wholly owned subsidiary engaged in
a joint venture with THEC. In September 1999, the Company and THEC jointly
announced their intention to begin a process to review strategic alternatives
for THEC. The process included an assessment of the role of THEC within the
Company's strategic plans, including the possible sale of all or a portion of
THEC by the Company. After completing the review, the Company concluded that it
would retain its equity interest in THEC. Further, under a pre-existing credit
arrangement, approximately $80 million in debt owed by THEC to the Company will
be converted into common equity on April 1, 2000. The Company's common equity
ownership interest in THEC will increase to approximately 70% upon such
conversion. The Company will commit approximately $25 million to the drilling
program with THEC in 2000, which may be terminated, upon notice, at the option
of either party.
The Company's Energy Related Services segment primarily includes KeySpan Energy
Management Inc. ("KEM"), KeySpan Energy Services Inc. ("KES"), KeySpan
Communications Corporation, KeySpan Energy Solutions, LLC ("KESol"), Fritze
KeySpan, LLC ("Fritze"), and Delta KeySpan Inc. ("Delta"). KEM owns, designs
and/or operates energy systems for commercial and industrial customers and
provides energy-related services to clients located primarily within the New
York City metropolitan area. KES markets gas and electricity, and arranges
transportation and related services, largely to retail customers, including
those served by the Company's two gas distribution subsidiaries. KeySpan
Communications Corporation owns a fiber optic network on Long Island. KESol,
Fritze and Delta provide various appliance, heating, ventilation and air
conditioning ("HVAC") services to customers within the Company's service
territory, New Jersey and Rhode Island. KESol was established in April 1998,
Fritze was acquired in November 1998 and Delta was acquired in September 1999.
Further, in February 2000, the Company acquired three additional companies. The
newly acquired companies include, an engineering-consulting firm, a plumbing and
mechanical contracting firm, and a firm specializing in mechanical contracting
and HVAC.
Subsidiaries in the Energy Related Investments segment include a 20% equity
interest in the Iroquois Gas Transmission System LP; a 50% interest in the
Premier Transco Pipeline and a 24.5% interest in Phoenix Natural Gas, both in
Northern Ireland; and investments in certain midstream natural gas assets in
Western Canada owned jointly with Gulf Canada Resources Limited, through the
Gulf Midstream Services Partnership ("GMS"). These subsidiaries are accounted
for under the equity method since the Company's ownership interests are 50% or
less. Accordingly, equity income from these investments is reflected in other
income and (deductions) in the Consolidated Income Statement.
The Other segment represents primarily, preferred stock dividends, unallocated
administrative expenses and interest income earned on temporary cash
investments. In 1999, all preferred stock dividends were allocated to the Other
segment whereas, prior to the LIPA Transaction, preferred stock dividends were
allocated to gas and electric operations.
9
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company's reportable segments
are strategic business units that are managed separately because of their
different operating and regulatory environments. The reportable segment
information is as follows:
10
YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS OF DOLLARS)
======================================================================================================================
Energy Energy
Gas Electric Gas Exploration Related Related
Distribution Services and Production Services Investments Other Eliminations Consolidated
======================================================================================================================
Revenues $1,753,132 $ 861,582 $ 150,581 $ 188,630 $ 688 $ - $ - $ 2,954,613
- ----------------------------------------------------------------------------------------------------------------------
Purchased gas 702,044 - - 42,388 - - - 744,432
Fuel and purchased
power - 17,252 - - - - - 17,252
Operations and
maintenance 405,095 479,149 27,662 145,929 7,560 25,771 - 1,091,166
Depreciation, depletion
and amortization 102,997 44,334 74,051 3,757 1,099 27,202 - 253,440
Operating taxes 223,793 132,327 338 3 8 9,685 - 366,154
Intercompany billings 10,793 48,580 - - - (59,373) - -
- -----------------------------------------------------------------------------------------------------------------------
Total expenses $ 1,444,722 $ 721,642 $ 102,051 $ 192,077 $ 8,667 $ 3,285 $ - $ 2,472,444
- -----------------------------------------------------------------------------------------------------------------------
Operating income
(loss) $ 308,410 $ 139,940 $ 48,530 $ (3,447)$ (7,979)$ (3,285)$ - $ 482,169
======================================================================================================================
Earnings (loss) for
common stock $ 151,217 $ 77,099 $ 15,772 $ (1,298)$ 7,753 $ (26,684)$ - $ 223,859
======================================================================================================================
Basic and diluted EPS $ 1.09 $ 0.56 $ 0.11 $ (0.01) $ 0.06 $ (0.19) $ - $ 1.62
======================================================================================================================
Additional Information:
Interest income 3,942 - - - 5,016 19,393 (1,358) 26,993
Interest expense 83,000 22,380 13,307 - 3,726 91,563 (89,284) 124,692
Income from equity
method subsidiaries - - - - 15,347 - - 15,347
Total assets 3,774,563 1,267,931 646,657 202,124 503,549 2,584,674 (2,248,807) 6,730,691
Investment in equity
method subsidiaries - - - 13,393 341,874 4,016 - 359,283
Capital expenditures 213,845 245,177 183,322 20,605 49,427 13,294 - 725,670
======================================================================================================================
Electric Services revenues from, primarily LIPA and Con Edison, of
$858.8 million for the year ended December 31, 1999, represents
approximately 29% of the Company's consolidated revenues during that
period.
Eliminating items include intercompany interest income and expense and
the elimination of certain intercompany accounts receivable.
11
NINE MONTHS ENDED DECEMBER 31, 1998 (IN THOUSANDS OF DOLLARS)
======================================================================================================================
Energy Energy
Gas Electric Gas Exploration Related Related
Distribution Services and Production Services Investments Other Eliminations Consolidated
======================================================================================================================
Revenues $ 856,172$ 738,316 $ 70,812 $ 63,064$ 117$ $ - -$ 1,728,481
- ----------------------------------------------------------------------------------------------------------------
Purchased gas 318,703 - - 12,987 - - - 331,690
Fuel and purchased
power - 91,762 - - - - - 91,762
Operations and
maintenance 280,442 337,898 15,879 54,152 3,750 21,713 - 713,834*
Depreciation, depletion
and amortization 57,351 5,895 47,114 1,117 256 13,126 - 124,859*
Operating taxes 121,280 126,015 373 722 1 8,733 - 257,124
Intercompany billings 7,221 23,922 - - - (31,143) - -
Total expenses $ 784,997$ 585,492$ 63,366$ 68,978$ 4,007$ 12,429$ -$ 1,519,269
- ----------------------------------------------------------------------------------------------------------------
Operating income
(loss) $ 71,175$ 152,824$ 7,446$ (5,914)$ (3,890)$ (12,429)$ -$ 209,212
- ----------------------------------------------------------------------------------------------------------------
Earnings (loss) for
common stock before
special charges $ 8,582 $ 57,119 $ 2,218 $ (3,212)$ (4,186)$ 2,463 -$ 62,984*
- ----------------------------------------------------------------------------------------------------------------
Basic and diluted
EPS $ 0.06$ 0.39 $ 0.02$ (0.03)$ $ 0.02 $ -$ 0.43*
- ----------------------------------------------------------------------------------------------------------------
Additional Information:
Interest income 1,328 - - - - 49,200 (424) 50,104
Interest expense 60,678 69,953 3,870 - - 58,682 54,468) 138,715
Income from equity
method subsidiaries - - - - 5,841 - - 5,841
Total assets 3,452,361 693,162 500,162 116,771 429,157 4,439,307 2,735,818) 6,895,102
Investment in equity
method subsidiaries - - - - 289,193 - - 289,193
Capital expenditures 128,405 54,090 182,729 28,421 231,791 51,127 - 676,563
- ----------------------------------------------------------------------------------------------------------------
*Excludes non-recurring charges associated with the LIPA Transaction and
special charges. Total non-recurring and special charges were $258.5
million after-tax. See Note 15 - Costs Related to the LIPA Transaction
and Special Charges.
Electric Services revenues from LIPA of $408.3 million, represents
approximately 24% of the Company's consolidated revenues for the nine
months ended December 31, 1998.
Eliminating items include intercompany interest income and expense and
the elimination of certain intercompany accounts receivable.
----------------------------------------------------------------------
12
FISCAL YEAR ENDED MARCH 31, 1998 (IN THOUSANDS OF DOLLARS)
Electric
Gas Distribution Distribution Consolidated
- -----------------------------------------------------------
Revenues $ 645,659$ 2,478,435$ 3,124,094
- -----------------------------------------------------------
Purchased gas 299,469 - 299,469
Fuel and purchased
power - 658,338 658,338
Operations and
maintenance 107,221 403,944 511,165
Depreciation and
amortization 38,584 144,545 183,129
Operating taxes 77,734 388,592 466,326
Total expenses $ 523,008$ 1,595,419$ 2,118,427
- -----------------------------------------------------------
Operating income $ 122,651$ 883,016$ 1,005,667
- -----------------------------------------------------------
Earnings for common
stock $ 33,815$ 276,612$ 310,427
- -----------------------------------------------------------
Basic and diluted $PS 0.28$ 2.28$ 2.56
- -----------------------------------------------------------
Additional Information:
Interest income 923 6,099 7,022
Interest expense 52,409 352,064 404,473
Total assets 1,444,745 10,455,980 11,900,725
Capital expenditures 78, 897 218,333 297,230
- -----------------------------------------------------------
NOTE 3. INCOME TAX
The Company will file consolidated federal and state income tax returns for
calendar year 1999. A tax sharing agreement between the Company and its
subsidiaries provides for the allocation of a realized tax liability or benefit
based upon separate return contributions of each subsidiary to the consolidated
taxable income or loss in the consolidated income tax returns.
In 1998, the Company incurred tax net operating losses ("NOL") for federal
purposes of $148.9 million and for state purposes of $211.0 million for the
period May 29, 1998 through December 31, 1998, which can be carried forward for
twenty years or until 2017. In accordance with SFAS No. 109 - "Accounting For
Income Taxes," the Company believed that it was more likely than not that the
tax benefits of these losses would be realized. Therefore, in 1998 deferred tax
assets and related tax benefits for the tax effect of the NOL carryforwards were
recorded by the Company ($52.1 million for federal income tax purposes and $19.0
million for state income tax purposes).
The Company estimates that the benefits associated with the NOL carryforwards
from 1998, $57.4 million ($52.1 million for federal income tax purposes and $5.3
million for state income tax purposes), will be realized in its consolidated
1999 federal and state income tax returns.
13
Accordingly, the NOL benefits have been applied in the 1999 current federal and
state tax provisions.
Income tax expense (benefit) is reflected as follows in the Consolidated
Statement of Income:
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
Nine Months
Year Ended Ended Fiscal Year Ended
December 31, 1999 December 31, 1998 March 31, 1998
- --------------------------------------------------------------------------------
Current income tax $ 26,618 $ 26,142$ 85,794
Deferred income tax 109,744 (85,936) 146,859
- --------------------------------------------------------------------------------
136,362 (59,794) 232,653
- --------------------------------------------------------------------------------
Current - transaction related (1) - 291,365 -
Deferred - transaction related (2) - (391,066) -
- --------------------------------------------------------------------------------
- (99,701) -
- --------------------------------------------------------------------------------
Total income tax (benefit) $ 136,362 $ (159,495$ 232,653
- ----------------------------- -------------- --------------------------------
(1) Primarily represents income taxes associated with the sale of assets (the
"Transferred Assets") to the Company by LIPA, which taxes were paid by the
Company, partially offset by tax benefits recognized upon funding of
postretirement benefits.
(2) Primarily represents the deferred federal income taxes necessary to account
for the difference between the carryover basis of the assets sold to the
Company for financial reporting purposes and the new increased tax basis.
The components of deferred tax assets and (liabilities) reflected in the
Consolidated Balance Sheet are as follows:
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
December 31, 1999 December 31, 1998
- -------------------------------------- -------------------- -------------------
Reserves not currently deductible $ 35,569 $ 37,833
Benefits of tax loss carryforwards 13,694 71,096
Property related differences (155,063) (89,934)
Regulatory tax asset (22,912) (24,073)
Property taxes (49,172) (34,541)
Other items - net (8,348) (31,929)
- --------------------------------------------------------------------------------
Net deferred tax liability $ (186,230)$ (71,549)
- --------------------------------------------------------------------------------
14
The following is a reconciliation between reported income tax and tax computed
at the statutory rate of 35%:
(IN THOUSANDS OF DOLLARS)
- ---------------------------------------------------------------------------------------
Nine Months Fiscal Year
Year Ended Ended Ended
December 31, December 31, March 31,
1999 1998 1998
- ------------------------------------------------------------------------------------------
Computed at the statutory rate $ 138,241 $(114,249)$ 208,213
Adjustments related to:
Net benefit from LIPA Transaction (1) - (31,503) -
Tax credits (2,154) (1,809) (2,464)
Excess of book over tax depreciation - 2,859 17,912
Minority interest in THEC 3,105 (10,220) -
Other items - net (2,830) (4,573) 8,992
- -----------------------------------------------------------------------------------------
Total income tax (benefit) $ 136,362 $(159,495)$ 232,653
=========================================================================================
Effective income tax rate 35% N/A 39%
- -----------------------------------------------------------------------------------------
(1)Includes tax benefits relating to (a) the deferred federal income taxes
necessary to account for the difference between the carryover basis of
the Transferred Assets for financial reporting purposes and the new
increased tax basis and (b) certain credits for financial reporting
purposes, including tax benefits recognized on the funding of
postretirement benefits, partially offset by income taxes associated
with the sale of the Transferred Assets to the Company by LIPA which
taxes were paid by the Company.
In 1990 and 1992, LILCO received an Internal Revenue Service Agents' Report
disallowing certain deductions and credits claimed by LILCO on its federal
income tax returns for the years 1981 through 1989. A settlement resolving all
audit issues was reached between LILCO and the Internal Revenue Service in May
1998. The settlement required the payment of taxes and interest of $9 million
and $35 million, respectively, which the Company made in May 1998. Adequate
reserves to cover such taxes and interest were previously provided.
15
NOTE 4. POSTRETIREMENT BENEFITS
PENSION PLANS: The following information represents consolidated results for the
Company and its subsidiaries (Brooklyn Union, Brooklyn Union of Long Island and
the former LILCO), whose noncontributory defined benefit pension plans 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. Prior to the KeySpan Acquisition, pension benefits had been
managed separately by the Company's regulated subsidiaries, which were the only
subsidiaries with defined benefit plans. The Company is currently integrating
its plans and allocations to individual business segments.
The amounts presented are consolidated for periods subsequent to May 28, 1998.
Prior to that date the amounts pertain solely to the plan of LILCO. Brooklyn
Union of Long Island is subject to certain deferral accounting requirements
mandated by the NYPSC for pension costs and other postretirement benefit costs.
The calculation of net periodic pension cost follows:
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
Year Ended Nine Months Ended Fiscal Year Ended
December 31, 1999 December 31, 1998 March 31, 1998
- --------------------------------------------------------------------------------
Service cost, benefits earned
during the period $ 38,372 $ 24,608 $ 21,114
Interest cost on projected
benefit obligation 106,888 66,341 56,379
Return on plan assets (457,529) (51,745) (196,300)
Special termination charge (1) - 61,558 -
Net amortization and deferral 310,224 (33,942) 147,713
- --------------------------------------------------------------------------------
Total pension cost $ (2,045) $ 66,820 $ 28,906
================================================================================
(1) Early retirement plan completed in December 1998.
16
The following table sets forth the pension plans' funded status at December 31,
1999 and December 31, 1998. Plan assets principally are common stock and fixed
income securities.
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
December 31, 1999 December 31, 1998
- --------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of period $ (1,650,120) $ (825,159)
Benefit obligation of acquisitions (1) (11,700) (674,100)
Service cost (38,372) (24,608)
Interest cost (106,888) (66,341)
Amendments (31,350) -
Actuarial gain (loss) 205,798 (61,929)
Special termination benefits (2) - (61,558)
Benefits paid 102,817 63,575
- --------------------------------------------------------------------------------
Benefit obligation at end of period (1,529,815) (1,650,120)
- --------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at
beginning of period 1,675,604 919,100
Fair value of KSE plan assets - 754,127
Actual return on plan assets 457,529 51,745
Employer contribution 18,009 13,500
Benefits paid (102,817) (62,868)
- --------------------------------------------------------------------------------
Fair value of plan assets at end of period 2,048,325 1,675,604
- --------------------------------------- ----------------- ------------------
Funded status 518,510 25,484
Unrecognized net (gain) from past experience
different from that assumed and from
changes in assumptions (667,652) (158,103)
Unrecognized prior service cost 80,087 54,234
Unrecognized transition obligation 3,163 4,138
- --------------------------------------------------------------------------------
Net accrued pension cost reflected
on consolidated balance sheet $ (65,892) $ (74,247)
================================================================================
(1) Reflects the Ravenswood acquisition in 1999 and the KSE-acquisition in 1998.
(2) Early retirement plan completed in December 1998.
- --------------------------------------------------------------------------------
Nine Months Fiscal Year
Year Ended Ended Ended
December 31, 1999 December 31, 1998 March 31, 1998
- --------------------------- ----------------- ----------------- ---------------
Assumptions:
Obligation discount 7.50% 6.50% 7.00%
Asset return 8.50% 8.50% 8.50%
Average annual increase in
compensation 5.00% 5.00% 4.50%
- --------------------------- --------------- ----------------- ---------------
INFORMATION ON THE LILCO SUPPLEMENTAL PLAN
The Supplemental Plan in effect prior to May 28, 1998 provided supplemental
death and retirement benefits for officers and other key executives without
contribution from such employees. The Supplemental Plan was a non-qualified plan
under the Internal Revenue Code of 1986, as amended (the "Code"). For the fiscal
year ended March 31, 1998, a charge of $31 million was recorded relating to
certain benefits earned by former officers of LILCO relating to the termination
of their annuity benefits earned through the supplemental retirement plan and
other executive retirement benefits. This charge, which was borne by LILCO, and
not recovered from ratepayers, resulted from provisions in the employment
contracts of LILCO officers.
OTHER POSTRETIREMENT BENEFITS: RETIREE HEALTH CARE AND LIFE INSURANCE: The
following information represents consolidated results for the Company and its
subsidiaries (Brooklyn Union, Brooklyn Union of Long Island and the former
LILCO) who sponsor noncontributory defined benefit plans covering certain health
care and life insurance benefits for retired employees. The Company has 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 Code. Prior to the KeySpan Acquisition other postretirement
benefits had been managed separately by the Company's regulated subsidiaries,
which were the only subsidiaries with defined benefit plans. The Company is
currently integrating its plans and allocations to individual business segments.
The amounts presented herein are consolidated for periods subsequent to May 28,
1998. Prior to that date the amounts pertain solely to the plan of LILCO.
Net periodic other postretirement benefit cost included the following
components:
(IN THOUSANDS OF DOLLARS)
- -------------------------------------------------------------------------------------------------------------
Nine Months
Year Ended Ended Fiscal Year Ended
December 31, 1999 December 31, 1998 March 31, 1998
- ---------------------------------------- ------------------------ ---------------------- ---------------------
Service cost, benefits earned
during the period $ 16,747 $ 9,569 $ 12,204
Interest cost on accumulated post-
retirement benefit obligation 42,616 26,414 27,328
Return on plan assets (97,452) (13,857) (6,164)
Special termination charge (1) - 3,073 -
Net amortization and deferral 64,039 (14,665) (10,468)
- -----------------------------------------------------------------------------------------------------------
Other postretirement benefit cost $ 25,950 $ 10,534 $ 22,900
- ---------------------------------------- ------------------ ---------------------- -----------------------
(1) Early retirement plan completed in December 1998.
17
The following table sets forth the plan's funded status at December 31, 1999 and
December 31, 1998. Plan assets principally are common stock and fixed income
securities.
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
December 31, 1999 December 31, 1998
- ------------------------------------------ ------------------- -----------------
Change in benefit obligation:
Benefit obligation at beginning of period $ (728,255) $ (358,941)
Benefit obligation of acquisitions (1) (3,075) (226,645)
Service cost (16,747) (9,569)
Interest cost (42,616) (26,414)
Plan participants' contributions (716) (900)
Amendments 8,631 -
Actuarial gain (loss) 148,126 (121,228)
Special termination benefits (2) - (3,073)
Benefits paid 32,599 18,515
- --------------------------------------------------------------------------------
Benefit obligation at end of period (602,053) (728,255)
- ------------------------------------------ -------------- ------------------
Change in plan assets:
Fair value of plan assets at
beginning of period 478,778 108,165
Fair value of KSE plan assets - 113,917
Actual return on plan assets 97,452 13,857
Employer contribution 4,503 250,000
Plan participants' contribution 716 -
Benefits paid (32,599) (7,161)
- --------------------------------------------------------------------------------
Fair value of plan assets at end of period 548,850 478,778
- ------------------------------------------ ------------------- ----------------
Funded status (53,204) (249,477)
Unrecognized net (gain) loss from past
experience different from that
assumed and from changes in assumptions (66,318) 145,834
Unrecognized prior service cost (8,477) 166
- --------------------------------------------------------------------------------
Accrued benefit cost reflected on
consolidated balance sheet $ (127,999) $ (103,477)
- ------------------------------------------ ------------------- -----------------
(1) Reflects the Ravenswood acquisition in 1999 and the KSE-acquisition in 1998.
(2) Early retirement plan completed in December 1998.
- -------------------------------------------------------------------------------------------------------------
Year Ended Nine Months Ended Fiscal Year Ended
December 31, 1999 December 31, 1998 March 31, 1998
- --------------------------------------- ---------------------- ------------------------ ----------------------
Assumptions:
Obligation discount 7.50% 6.50% 7.00%
Asset return 8.50% 8.50% 8.50%
Average annual increase in compensation 5.00% 5.00% 4.50%
- --------------------------------------- ---------------------- ------------------------ ----------------------
The measurement of plan liabilities also assumes a health care cost trend rate
of 6% annually. A 1%
18
increase in the health care cost trend rate would have the effect of increasing
the accumulated postretirement benefit obligation as of December 31, 1999 by
$80.9 million and the net periodic health care expense by $8.1 million. A 1%
decrease in the health care cost trend rate would have the effect of decreasing
the accumulated postretirement benefit obligation as of December 31, 1999 by
$66.6 million and the net periodic health care expense by $6.7 million.
In 1993, LILCO adopted the provisions of SFAS No. 106, "Employer's Accounting
for Postretirement Benefits Other Than Pensions," and recorded an accumulated
postretirement benefit obligation and a corresponding regulatory asset of $376
million. LIPA will reimburse the Company for costs related to postretirement
benefits of the electric business unit employees, therefore, the Company has
reclassified the regulatory asset for postretirement benefits associated with
electric business unit employees to a deferred asset.
In 1994, LILCO established VEBA trusts for union and non-union employees for the
funding of costs collected in rates for postretirement benefits. For the fiscal
year ended March 31, 1998, the trusts were funded with a contribution of $21
million. In May 1998, an additional $250 million was funded into the trusts.
NOTE 5. CAPITAL STOCK
COMMON STOCK: Currently the Company has 450,000,000 shares of authorized common
stock. In 1998, the Company initiated a program to repurchase a portion of its
outstanding common stock on the open market. As of December 31, 1999, the
Company had repurchased 25 million common shares for $723.0 million. During
1999, the Company purchased 1.9 million shares for $52.5 million on the open
market for the dividend reinvestment feature of its Investor Program, the
Employee Stock Discount Purchase Plan for Employees, and the Employee Savings
Plan.
PREFERRED STOCK: The Company has the authority to issue 100,000,000 shares of
preferred stock with the following classifications: 16,000,000 shares of
preferred stock, par value $25 per share; 1,000,000 shares of preferred stock,
par value $100 per share; and 83,000,000 shares of preferred stock, par value
$.01 per share.
At December 31, 1999, 14,520,000 redeemable shares of 7.95% Preferred Stock
Series AA par value $25 was outstanding totaling $363 million, which has a
mandatory redemption requirement on June 1, 2000. The Company also has 553,000
shares outstanding of 7.07% Preferred Stock Series B par value $100; 197,000
shares outstanding of 7.17% Preferred Stock Series C par value $100; and 93,390
shares outstanding of 6% Preferred Stock Series A par value $100, in the
aggregate totaling $84.3 million.
19
NOTE 6. NONQUALIFIED STOCK OPTIONS
At December 31, 1999, the Company had stock-based compensation plans that are
described below. Moreover, under a separate plan, THEC has issued approximately
2.4 million stock options to key THEC employees. The Company and THEC apply APB
Opinion 25, "Accounting for Stock Issued to Employees," and related
Interpretations in accounting for their plans. 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 No. 123, "Accounting for Stock-Based Compensation," the Company's net
income and earnings per share would have been decreased to the proforma amounts
indicated below:
- ---------------------------------------------------------------------------------------------
Year Ended Nine Months Ended
December 31, 1999 December 31, 1998
- --------------------------------------------------------------------------------------------
Income (loss) available for
common stock (000): As reported $223,859 ($195,537)
Proforma $215,416 ($198,996)
Earnings per share: As reported $1.62 ($1.34)
Proforma $1.56 ($1.37)
- --------------------------------------------------------------------------------------------
The weighted average fair value of grants issued in 1999 was $3.65. All grants
are estimated on the date of the grant using the Black-Scholes option-pricing
model. The following weighted average assumptions were used for grants issued in
1999: dividend yield of 6.58%; expected volatility of 23.43%; risk free interest
rate of 5.72%; and expected lives of 6 years. The weighted average exercise
price is $27.58 for the 1999 grants. There were no grants issued in 1998.
A summary of the status of the Company's fixed stock option plans and changes is
presented below for the periods indicated:
- --------------------------------------------------------------------------------
Year Ended Nine Months Ended
December 31, 1999 December 31, 1998
- ---------------------------------------------------------------------------------
Weighted Average Weighted Average
Fixed Options Shares Exercise Price Shares Exercise Price
- ------------------------------------------------------------------------------------
Outstanding at beginning of period 921,066 $30.80 992,300 $30.70
Granted during the year 4,149,000 $27.58 -- --
Exercised (2,666) $27.75 (13,631) $28.67
Forfeited (99,002) $27.22 (57,603) $29.45
- --------------------------------------------------------------------------------
Outstanding at end of period 4,968,398 $28.18 921,066 $30.80
- ------------------------------------------------------------------------------------
Exercisable at end of period 3,638,448 $28.53 921,066 $30.80
- ---------------------------- - -------------------------------------------------------
Weighted Average
Number Outstanding Remaining Weighted Average Number Exercisable
at December 31, 1999 Contractural Life Exercise Price at December 31, 1999
- --------------------------------------------------------------------------------
168,066 6 years $27.00 168,066
344,000 7 years $30.50 344,000
409,000 8 years $32.63 409,000
2,645,332 9 years $27.88 2,306,312
1,402,000 10 years $27.03 411,070
- --------------------------------------------------------------------------------
4,968,398 3,638,448
- --------------------------------------------------------------------------------
Prior to the KeySpan Acquisition, KSE had reserved for issuance 1,500,000 shares
of nonqualified stock options and had issued 426,000, 363,500 and 202,800
nonqualified stock options in November 1997, 1996 and 1995, respectively. Under
the terms of the Merger Agreement, all options vested upon consummation of the
KeySpan Acquisition.
NOTE 7. LONG-TERM DEBT
GAS FACILITIES REVENUE BONDS: Brooklyn Union can issue tax-exempt bonds through
the New York State Energy Research and Development Authority. Whenever bonds are
issued for new gas facilities projects, proceeds are deposited in trust and
subsequently withdrawn to finance qualified expenditures. There are no sinking
fund requirements on any of the Company's Gas Facilities Revenue Bonds. At
December 31, 1999, Brooklyn Union had $648.5 million of Gas Facilities Revenue
Bonds outstanding. The interest rate on the variable rate series due December 1,
2020 is reset weekly and ranged from 1.97% to 5.35% through December 31, 1999,
at which time the average rate was 5.35%. At January 14, 2000, the interest rate
on the variable rate series due December 1, 2020 was changed to an auction rate
with a standard auction period of seven days.
In November 1999, the Company entered into an interest rate swap agreement in
which $90 million of its Gas Facility Revenue Bonds, 6.75% Series A and B, were
effectively exchanged for floating rate debt. (See Note 10, "Hedging, Derivative
Financial Instruments and Fair Values.")
In December 1998, the Company purchased a portfolio of securities representing
direct purchase obligations of the United States Government. These securities
were placed in trust, irrevocably dedicated to the repayment of certain Gas
Facilities Revenue Bonds, thereby effecting an in- substance defeasance. The
in-substance defeasance, of approximately $8.6 million, represented $4 million
of outstanding bonds of each of the 6.75% Series 1989A due February 1, 2024 and
6.75% Series 1989B due February 1, 2024 including interest. The Company has not
been relieved of its
21
obligation and remains the primary obligor for this debt. Therefore, the
liability is recognized on the accompanying Consolidated Balance Sheet.
AUTHORITY FINANCING NOTES: The Company's electric generation subsidiary can also
issue tax- exempt bonds through the New York State Energy Research and
Development Authority. At December 31, 1999, $66 million of Authority Financing
Notes were outstanding.
In October 1999, the Company issued $41.1 million of Authority Financing Notes
1999 Series A Pollution Control Revenue Bonds due October 1, 2028. The initial
interest rate on these bonds was established at 3.95% and applied through
January 13, 2000. Thereafter, the interest rate will be reset based on an
auction procedure. The proceeds from this issuance were used to extinguish a
portion of the Company's obligation under a promissory note to LIPA. (See
"Promissory Notes" for additional information.)
The Company also has outstanding $24.9 million variable rate 1997 Series A
Electric Facilities Revenue Bonds due December 1, 2027. The interest rate on
these bonds is reset weekly and ranged from 2.00% to 5.85% through December 31,
1999 at which time the average rate was 5.85%.
PROMISSORY NOTES: In accordance with the LIPA Agreement, LIPA assumed
substantially all of the outstanding long-term debt of LILCO at May 28, 1998
except for the 1997 Series A Electric Facilities Revenue Bonds due December 1,
2027 which were assigned to the Company. In accordance with the LIPA Agreement,
the Company issued promissory notes to LIPA which represented an amount
equivalent to the sum of: (i) the principal amount of 7.30% Series Debentures
due July 15, 1999 and 8.20% Series Debentures due March 15, 2023 outstanding at
May 28, 1998, and (ii) an allocation of certain of the Authority Financing
Notes. The promissory notes contain identical terms as the debt referred to in
items (i) and (ii) above.
In October 1999, the Company extinguished its obligation under a promissory note
to LIPA, as previously indicated, relating to the 7.50% 1976A Series Pollution
Control Revenue Bonds due December 1, 2006 and the 7.80% 1979B Series Pollution
Control Revenue Bonds due December 1, 2009. The Company's obligation for these
bonds of $47.2 million consisted of the principal amount of $45.5 million and
$1.7 million of interest accrued and unpaid. In addition, in June 1999 the
Company extinguished its obligation under a promissory note to LIPA relating to
the 7.30% Debentures due July 15, 1999. The Company's obligation for these
debentures of $411.5 million consisted of the principal amount of $397 million
and $14.5 million of interest accrued and unpaid. The carrying value of the
promissory notes at December 31, 1999 was $602.4 million.
The promissory notes issued to LIPA included an allocation for certain of the
Authority Financing Notes. On March 1, 1999, LIPA converted the weekly variable
interest rate features on the Authority Financing Notes Series 1993B due
November 1, 2023, Series 1994A due October 1, 2024 and Series 1995A due August
1, 2025 to a fixed rate of 5.30%. In addition, on March 1, 1999, LIPA converted
the annual variable interest rate features on the Authority Financing Notes
Series 1985A
22
due March 1, 2016 and Series 1985B due March 1, 2016 to a fixed rate of 5.15%.
OTHER LONG-TERM DEBT: On February 1, 2000, Brooklyn Union of Long Island issued
$400 million of 7.875 % Medium Term Notes due February 1, 2010. The net proceeds
from the issuance of these notes were used to repay the Company for its costs in
extinguishing certain promissory notes to LIPA, as previously noted. For
additional information on Brooklyn Union of Long Island's issuance see Note 12,
"KeySpan Gas East Corporation Summary Financial Data".
THEC has an unsecured available line of credit with a commercial bank that
provides for a maximum commitment of $250 million subject to certain conditions,
which supports borrowings under a revolving loan agreement. Up to $2 million of
this line is available for the issuance of letters of credit to support
performance guarantees. This credit facility matures on March 1, 2003. THEC
borrowed $48 million under this facility during 1999, and at December 31, 1999,
borrowings of $181 million were outstanding and $0.4 million was committed under
outstanding letter of credit obligations. Borrowings under this facility bear
interest, at THEC's option, at rates indexed at a premium to the Federal Funds
rate or LIBOR rate, or based on the prime rate. The weighted average interest
rate on this debt was 6.59% at December 31, 1999. In addition, at December 31,
1999, THEC had $100 million of 8.625% Senior Subordinated Notes due 2008
outstanding. These notes were issued in a private placement in March 1998 and
are subordinate to borrowings under THEC's line of credit.
A subsidiary of the Energy Related Investment segment has a revolving 12 month
loan agreement with a financial institution in Canada at the Canadian Dollar
Deposit Offered Rate. During 1999, borrowings under this agreement were US$13.5
million. At December 31, 1999 borrowings of US$86.4 million were outstanding at
an interest rate of 5.60%. These borrowings were used to fund capital
expenditures.
DEBT MATURITY SCHEDULE: The Company does not have any long-term debt maturing in
the next five years.
NOTE 8. NOTES PAYABLE
In November 1999, the Company negotiated a $700 million revolving credit
agreement, with a one- year term and one-year renewal option, with a commercial
bank. Pricing under the facility is subject to a ratings-based grid with an
annual fee of .075% per annum on the balance of funds available. Borrowings will
bear interest at LIBOR plus 50 basis points. Borrowings in excess of more than
33% of the total commitment will bear interest at LIBOR plus 62.5 basis points.
This credit facility is used to support the Company's $700 million commercial
paper program. The Company began issuing commercial paper during the fourth
quarter of 1999. The average daily outstanding balance during the quarter was
$199.2 million at a weighted average annualized interest rate of 6.54%. At
December 31, 1999, the Company had $208.3 million of commercial paper
outstanding at an
23
annualized interest rate of 6.56%. The proceeds received from the issuance of
commercial paper was used to repay outstanding borrowings under the Company's
previous existing line of credit (discussed below) and for general corporate
purposes. During 2000, the Company anticipates issuing commercial paper rather
than borrowing on the revolving credit agreement.
Prior to the new revolving credit agreement and commercial paper program, the
Company had an available unsecured bank line of credit of $300 million.
Borrowings were made under this facility during the months of September, October
and November 1999. The average daily outstanding balance during these months was
$83.7 million at a weighted average annualized interest rate of 5.53%. This line
of credit was terminated upon the execution of the new revolving credit
agreement.
NOTE 9. CONTRACTUAL OBLIGATIONS AND CONTINGENCIES
LEASE OBLIGATIONS: Lease costs included in operation expense were $47.1 million
in 1999 reflecting, primarily, the Ravenswood lease of $11.6 million and the
lease of the Company's Brooklyn headquarters of $11.3 million. Lease costs also
include leases for other buildings, office equipment, vehicles and power
operated equipment. Lease costs for the nine months ended December 31, 1998 were
$28.9 million. The future minimum lease payments under various leases, all of
which are operating leases, are $51.8 million per year over the next five years
and $108.2 million, in the aggregate, for all years thereafter.
The Company acquired the 2,168 megawatt Ravenswood Facility located in Long
Island City, Queens, New York, from Con Edison on June 18, 1999 for
approximately $597 million. In order to reduce its cash requirements, the
Company entered into a lease agreement with a special purpose, unaffiliated
financing entity that acquired a portion of the facility directly from Con
Edison and leased it to a subsidiary of the Company under a ten year lease. The
Company has guaranteed all payment and performance obligations of its subsidiary
under the lease. Another subsidiary of the Company provides all operating,
maintenance and construction services for the facility. The lease relates to
approximately $425 million of the acquisition cost of the facility. The lease
qualifies as an operating lease for financial reporting purposes while
preserving the Company's ownership of the facility for federal and state income
tax purposes. The balance of the funds needed to acquire the facility were
provided from cash on hand.
In connection with the financing of the acquisition of the Ravenswood Facility
in June 1999 by a wholly-owned subsidiary of the Company, certain post-closing
conditions including the transfer of certain governmental permits, receipt of a
consent order for the facility and the delivery of evidence that the facility
complies with applicable zoning requirements were to be fulfilled by December
15, 1999. Following notice to affected parties, including the holders of
approximately $412 million of notes issued in connection with the acquisition,
the Company was advised in January 2000 that several such noteholders believed
the steps taken thus far were not sufficient to satisfy fully the post-closing
conditions. Under the relevant financing documents, failure to complete the
required actions on a timely basis constitutes an Event of Default, which in
turn could
24
give various parties to the Ravenswood financing, including the noteholders, the
right to foreclose on the Ravenswood property and/or terminate the Company's
leasehold interest and rights in the property. To date, no party has sought to
take or indicated that it is contemplating taking any such action. The Company
has timely fulfilled all of its payment obligations and believes that it has
also timely fulfilled all other obligations under the relevant financing
documents.
The Company is currently seeking to resolve remaining issues concerning
compliance with the December 15 post-closing conditions and, in connection
therewith, has obtained extensions of the deadlines for certain of the
conditions.
FIXED CHARGES UNDER FIRM CONTRACTS: The Company's utility subsidiaries have
entered into various contracts for gas delivery, storage and supply services.
The contracts have remaining terms that cover from one to fourteen years.
Certain of these contracts require payment of annual demand charges in the
aggregate amount of approximately $280 million. The Company is liable for these
payments regardless of the level of service it requires from third parties. Such
charges are, currently, recovered from utility customers as gas costs. In
response to a NYPSC policy statement regarding gas industry restructuring, the
Company estimated that, if the gas distribution subsidiaries were to continue to
recover the demand charges for the next five years, then the estimated
strandable costs (contract costs above market value) for contracts that will not
expire by 2005 and would not be needed to provide service to firm transportation
customers will be, on a present value basis, approximately $78 million. For
purposes of this calculation, the Company has assumed that, if it exited the
merchant function and if it were necessary to assign the contracts to third
parties, the Company could recover the market value of the underlying assets.
Therefore, the difference between the contract costs and the market value is the
potential "strandable" costs.
LEGAL MATTERS: From time to time, the Company is subject to various legal
proceedings arising out of the ordinary course of its business. Except as
described below, the Company does not consider any of such proceedings to be
material to its business or likely to result in a material adverse effect on its
results of operations or financial condition.
In October 1998, the County of Suffolk and the Towns of Huntington and Babylon
commenced an action against LIPA, the Company, the NYPSC and others in the
United States District Court for the Eastern District of New York (the
"Huntington Lawsuit"). The Huntington Lawsuit alleges, among other things, that
LILCO ratepayers (i) have a property right to receive or share in the alleged
capital gain that resulted from the transaction with LIPA (which gain is alleged
to be at least $1 billion); and (ii) that LILCO was required to refund to
ratepayers the amount of a Shoreham-related deferred tax reserve (alleged to be
at least $800 million) carried on the books of LILCO at the consummation of the
LIPA Transaction. In December 1998, and again in June 1999, the plaintiffs
amended their complaint. The amended complaint contains allegations relating to
certain payments LILCO had determined were payable in connection with the LIPA
Transaction and KeySpan Acquisition to LILCO's chairman and certain of its
officers and adds the recipients of the payments as defendants. In June 1999,
the Company was served with the second amended complaint. On August 23, 1999,
25
the Company filed a motion to dismiss the second amended complaint. Pursuant to
an agreement among the parties, the Company's motion to dismiss is being
converted to a summary judgment motion. At this time the Company is unable to
determine the outcome of this ongoing proceeding.
THE CLASS SETTLEMENT: The Class Settlement, which became effective in June 1989
(County of Suffolk, et al., v. Long Island Lighting Company et al.), resolved a
civil lawsuit against LILCO brought under the federal Racketeer Influenced and
Corrupt Organizations Act, alleging that LILCO made inadequate disclosures
before the NYPSC concerning the construction and completion of nuclear
generating facilities. The class settlement provided electric customers with
rate reductions of $390.0 million that were being reflected as adjustments to
their monthly electric bills over a ten-year period which began on June 1, 1990.
The Class Settlement obligation of approximately $20 million at December 31,
1999 reflects the present value of the remaining reductions to be refunded to
customers. As a result of the LIPA Transaction, LIPA will provide the remaining
balance to its electric customers as an adjustment to their monthly electric
bills. The Company will then, in turn, reimburse LIPA on a monthly basis for
such reductions on the customer's monthly bill. The Company remains ultimately
obligated under the Class Settlement. In November 1999, class counsel for the
LILCO ratepayers served a motion, in the United States District Court for the
Eastern District of New York, seeking an order directing the Company to pay $42
million, in addition to the amounts remaining to be paid under the Class
Settlement. Class counsel contends that the required rate reductions should have
been exclusive of gross receipts taxes. The Company filed its opposition in
January 2000 and class counsel filed their reply papers in February 2000. In
their February papers, class counsel revised their demand to seek an order
directing the Company to pay approximately $22 million, plus interest, in
addition to the amounts remaining to be paid under the Class Settlement. The
Company filed its rebuttal papers March 1, 2000 and oral argument was held March
6, 2000. On March 9, 2000, an order was issued by the court granting class
counsel's motion. The Company is in the process of evaluating the order and,
accordingly, is currently unable to determine the ultimate outcome of the
proceeding or what effect, if any, such outcome will have on its financial
condition or results of operations.
ENVIRONMENTAL MATTERS - MANUFACTURED GAS PLANT SITES: The Company has identified
twenty-six manufactured gas plant ("MGP") sites which were historically owned or
operated by Brooklyn Union or Brooklyn Union of Long Island (or such companies'
predecessors). Operations at these plants in the late 1800's and early 1900's
may have resulted in the release of hazardous substances. These former sites,
some of which are no longer owned by the Company, have been identified to both
the New York State Department of Environmental Conservation ("DEC") for
inclusion on appropriate waste site inventories and the PSC. The currently-known
conditions of fourteen of these former MGP sites, their period and magnitude of
operation, generally observed cleanup requirements and costs in the industry,
current land use and ownership, and possible reuse have been considered in
establishing contingency reserves that are discussed below.
In 1995, Brooklyn Union executed an Administrative Orders on Consent ("ACO")
with the DEC
26
which addressed the investigation and remediation of a site in Coney Island,
Brooklyn. In 1998, Brooklyn Union executed an ACO for the investigation and
remediation of the Clifton MGP site in Staten Island. At the initiative of the
DEC, the City of New York and the Company are in negotiations on a cost sharing
arrangement to conduct investigations in 2000 at the Citizen's MGP site in
Brooklyn, which is now primarily owned by the City, but was formerly owned and
operated by a Brooklyn Union predecessor. The DEC notified the Company in 1998
that the Sag Harbor and Rockaway Park MGP sites owned by Brooklyn Union of Long
Island would require remediation under the State's Superfund program.
Accordingly, the Sag Harbor and Rockaway Park sites; as well as the Bay Shore,
Glen Cove, Halesite and Hempstead MGP sites; are the subject of two separate
ACOs, which the Company executed with the DEC in March and September 1999,
respectively. Field investigations and, in some cases, interim remedial
measures, are underway or scheduled to occur at each of these sites under the
supervision of the DEC and the New York State Department of Health.
The Company was also requested by the DEC to perform preliminary site
assessments at the Patchogue, Babylon, Far Rockaway, Garden City and Hempstead
(Clinton St.) MGP sites, each of which were formerly owned by LILCO, under a
separate ACO entered into in September 1999. Initial studies based on existing,
available documentation have been completed for each such site and the DEC has
requested that the Company collect additional samples at each of the subject
properties.
With the exception of the Coney Island site, which will be redeveloped for
commercial or industrial use, the final end uses for the sites identified above
and, therefore, acceptable remediation goals have not yet been determined. The
Company is required to prepare a feasibility study for the remediation of each
such site, based on cleanup levels derived from risk analyses associated with
the proposed or anticipated future use of the properties. The schedule for
completing this phase of the work under the ACOs for the identified sites
discussed above extends through 2001.
Thus, thirteen sites identified above are currently the subject of ACOs with the
DEC and one is subject to the negotiation of such an agreement. The Company's
remaining MGP sites may not become subject to ACOs in the future, and
accordingly no liability has been accrued for these sites. It is possible, based
on future investigation, that the Company may be required to undertake
investigation and potential remediation efforts at these, or other currently
unknown former MGP sites. However, the Company is currently unable to determine
whether or to what extent such additional costs may be incurred.
The Company believes that in the aggregate, the accrued liability for
investigation and remediation of the MGP sites identified above are reasonable
estimates of likely cost within a range of reasonable, foreseeable costs.
Accordingly, the Company presently estimates the cost of its MGP- related
environmental cleanup activities will be $123 million; which amount has been
accrued by the Company as its current best estimate of its aggregate
environmental liability for known sites. As previously indicated, the total
MGP-related costs may be substantially higher, depending upon remediation
experience, selected end use for each site, and actual environmental conditions
encountered.
27
The NYPSC approved rate plans for Brooklyn Union and Brooklyn Union of Long
Island provide for the recovery of such investigation and remediation costs. The
Brooklyn Union rate plan provides, among other things, that if the total cost of
investigation and remediation varies from that which is specifically estimated
for a site under investigation and/or remediation, then Brooklyn Union will
retain or absorb up to 10% of the variation. The Brooklyn Union of Long Island
rate plan also provides for the recovery of investigation and remediation costs
but with no consideration of the difference between estimated and actual costs.
Under prior rate orders, Brooklyn Union has offset certain moneys due to
ratepayers against its estimated environmental cleanup costs for MGP sites. At
December 31, 1999, the Company has reflected a regulatory asset of $95.6
million. Expenditures incurred to date by the Company with respect to
MGP-related activities total $15.9 million.
Periodic discussions by the Company with insurance carriers and third parties
for reimbursement of some portion of MGP site investigation and remediation
costs continue. In December 1996, LILCO filed a complaint in the United States
District Court for the Southern District of New York against fourteen insurance
companies that issued general comprehensive liability policies to LILCO. In
January 1998, LILCO commenced a similar action against the same, and additional,
insurance companies in New York State Supreme Court, and the federal court
action subsequently was dismissed. The state court action is being conducted by
the Company on behalf of Brooklyn Union of Long Island. The outcome of this
proceeding cannot yet be determined. In addition, Brooklyn Union is in
discussions with insurance carriers regarding the possible resolution of
coverage claims related to its MGP site investigation and remediation activities
without litigation. The Company is not able to predict the outcome of these
discussions.
ENVIRONMENTAL MATTERS - OTHER: The Company will be responsible for environmental
obligations relating to the Ravenswood Facility operations other than
liabilities arising from pre-closing disposal of waste at off-site locations and
any monetary fines arising from Con Edison's pre-closing conduct. Based on
information currently available for environmental contingencies related to the
Ravenswood Facility acquisition, the Company has accrued an additional $5
million as the minimum liability to be incurred.
The Company is awaiting final development of state and federal regulatory
programs with respect to NOx reduction requirements for its existing power
plants. The Company's compliance strategy may be composed of fuel choice
decisions, acquisition of emission credits, and installation of emission control
equipment. The extent of development of new generation in the region will also
impact the Company's compliance strategy. Although the Company is evaluating its
alternatives, final decisions cannot be made until pending regulatory
requirements and new generation decisions are clarified. Expenditures to
implement a final strategy are not expected to begin until 2001.
Additional capital expenditures associated with the renewal of the surface water
discharge permits for the Company's power plants may be required by the DEC.
Until the Company's monitoring obligations are completed and changes to the
Environmental Protection Agency regulations under Section 316 of the Clean Water
Act are promulgated, the need for and the cost of equipment
28
upgrades cannot be determined.
NOTE 10. HEDGING, DERIVATIVE FINANCIAL INSTRUMENTS, AND FAIR VALUES
NATURAL GAS AND OIL FUTURES, OPTIONS AND SWAPS: The Company's utility, marketing
and gas exploration and production subsidiaries employ derivative financial
instruments, such as natural gas and oil futures, options and swaps, for the
purpose of hedging exposure to commodity price risk.
Utility tariffs applicable to certain large-volume customers permit gas to be
sold at prices established monthly within a specified range expressed as a
percentage of prevailing alternate fuel oil prices. The Company uses gas swap
contracts, with offsetting positions in oil swap contracts of equivalent energy
value, with third parties to fix profit margins on specified portions of the
sales to its large- volume market. The "long" gas position follows, generally
within a range of 80% to 120%, the cost of gas to serve this market while the
offsetting oil swap position correspondingly replicates, within the same range,
the selling price of gas. The Company also uses standard New York Mercantile
Exchange ("NYMEX") gas futures to stabilize gas price volatility for its firm
customers during the winter months as recommended by the NYPSC.
KeySpan Energy Services ("KES"), the Company's gas and electric marketing
subsidiary, sells gas at fixed annual rates and utilizes standard NYMEX futures
contracts and swaps to fix profit margins. In the swap instruments, which are
employed to hedge exposure to basis risk, KES pays the other parties the amount
by which the floating variable price (settlement price) is below the fixed price
and receives the amount by which the settlement price exceeds the fixed price.
THEC utilizes collars to hedge future sales prices on a portion of its natural
gas production to achieve a more predictable cash flow, as well as to reduce its
exposure to adverse price fluctuations of natural gas. For any particular collar
transaction, the counter party is required to make a payment to THEC if the
settlement price for any settlement period is below the floor price for such
transaction, and THEC is required to make payment to the counter party if the
settlement price for any settlement period is above the ceiling price for such
transaction. For any particular floor transaction, the counter party is required
to make a payment to THEC if the settlement price for any settlement period is
below the floor price for such transaction. THEC is not required to make any
payment in connection with a floor transaction.
The following table sets forth selected financial data associated with the
Company's derivative financial instruments that were outstanding at December 31,
1999.
- --------------------------------------------------------------------------------------------------
GAS: TYPE OF FISCAL YEAR OF FIXED PRICE PER VOLUME FAIR VALUE
CONTRACTS MATURITY MCF (MCF) ($000)
- ------------------ ------------- ---------------- ------------- --------------
Futures 2000 $2.135-$2.584 5,430,000 (488)
Collars 2000
Ceiling $2.697-$3.648 10,950,000 -
Floor $2.200-$2.550 10,950,000 1,292
Swaps 2000/2001 $2.6448 10,767,500 (2,013)
OIL: TYPE OF FISCAL YEAR OF FIXED PRICE PER VOLUME FAIR VALUE
CONTRACTS MATURITY GALLON (GALLONS) ($000)
- ------------------ ------------- ---------------- ------------- --------------
Swaps 2000/2001 $0.5565 72,744,000 (4,753)
- ------------------ -- ------------- --- ---------------- -- ------------- --- --- --------------
The fair values shown in the above table represent the amounts the Company would
have received or paid if it had closed those derivative positions on December
31, 1999. If the Company had applied the requirements of SFAS No. 133 to the
above derivative financial instruments at December 31, 1999, comprehensive
income would have reflected a reduction of $6.0 million.
As of December 31, 1999, no futures contract extended beyond November 2000.
Margin deposits with brokers at December 31, 1999 of $4.0 million were recorded
in other in the current assets section of the Consolidated Balance Sheet.
Deferred losses on closed positions were $5.4 million at December 31, 1999. Such
deferrals are generally recorded in net income within one month.
The Company and its subsidiaries are exposed to credit risk in the event of
nonperformance by counterparties to derivative contracts, as well as
nonperformance by the counterparties of the transactions against which they are
hedged. The Company believes that the credit risk related to the futures,
options and swap contracts is no greater than that associated with the primary
contracts which they hedge, as these contracts are with major investment grade
financial institutions, and that elimination of the price risk lowers overall
business risk.
INTEREST RATE SWAPS: In November 1999, the Company entered into an interest rate
swap agreement in which $90 million of its Gas Facilities Revenue Bonds, 6.75%
Series A and B, were effectively exchanged for floating rate debt at The Bond
Market Association Swap Index. The interest rate swap agreement expires in
twenty-five years, but can be terminated earlier based on certain market and
contract conditions. For the term of the agreement, the Company will receive a
fixed interest payment of 5.54%. The variable interest rate is reset on a weekly
basis. For the period November 10, 1999 through December 31, 1999 the weighted
average variable interest rate that the Company was obligated to pay was 3.89%.
The gain on the interest rate swap, which was immaterial, reduced recorded
interest expense. The fair value of the interest rate swap at December 31, 1999
was $4.2 million and represents the estimated amount that the Company would have
to pay if the swap had been settled at the then current market rate.
30
In connection with the Company's anticipated purchase of Eastern Enterprises
(See Note 11, "Acquisition of Eastern") and the anticipated issuance of
long-term debt securities for the acquisition, the Company entered into forward
interest rate lock agreements in January and February 2000 to hedge a portion of
the risk that the cost of the future issuance of fixed-rate debt may be
adversely affected by changes in interest rates. Under an interest rate lock
agreement, the Company agrees to pay or receive an amount equal to the
difference between the net present value of the cash flows for a notional
principal amount of indebtedness based on the existing yield of a hedging
instrument at the date of the agreement and at the date the agreement is
settled. Gains and losses on interest rate lock agreements will be deferred and
amortized over the life of the underlying debt to be issued. The notional
amounts of the agreements are not exchanged. The Company has entered into
interest rate lock agreements with more than one major financial institution in
order to minimize counterparty credit risk. The details of the four interest
rate lock agreements are set forth in the following table.
- --------------------------------------------------------------------------------
Notional Amount
Trade Date Hedge Instrument ($000) Lock Rate
- -------------------- ------------------ ------------------ ------------------
Swap locks:
January 14, 2000 10 Year Swap 150,000 7.49%
January 25, 2000 10 Year Swap 100,000 7.50%
Treasury locks:
February 7, 2000 30 Year Treasury 100,000 6.43%
February 8, 2000 30 Year Treasury 50,000 6.32%
- -------------------- ------------------ ------------------ ------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair value of the Company's preferred
stock at December 31, 1999 was $454.6 million and the carrying value was $447.3
million. At December 31, 1999 the Company has classified as a current liability
on the Consolidated Balance Sheet $363 million of preferred stock which has a
mandatory redemption requirement of June 1, 2000.
The Company's long-term debt consists primarily of publicly traded Gas
Facilities Revenue Bonds, Authority Financing Notes and Debentures, the fair
value of which is estimated on quoted market prices for the same or similar
issues. The Authority Financing Notes and Debentures are included in the
promissory notes to LIPA. As previously indicated, there is no maturing
long-term debt within the next five years.
The fair values and carrying amounts of the Company's long-term debt at December
31, 1999 and December 31, 1998 were as follows:
31
FAIR VALUE (IN THOUSANDS OF DOLLARS)
- ---------------------------------------------------------------------
DECEMBER 31, 1999 December 31, 1998
- -------------------------- ------------------ -- ------------------
Gas facilities revenue bonds$ 632,409 $ 687,863
Authority financing notes 66,005 24,880
Promissory notes 569,233 1,097,226
- --------------------------------------------------------------------
Total $ 1,267,647 $ 1,809,969
========================== ================== == ==================
CARRYING AMOUNT (IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------
DECEMBER 31, 1999 December 31, 1998
- -------------------------- ------------------ -- ------------------
Gas facilities revenue bonds $ 648,500 $ 648,500
Authority financing notes 66,005 24,880
Promissory notes 602,427 1,044,902
- -----------------------------------------------------------------------
Total $ 1,316,932 $ 1,718,282
========================== ================== == ==================
At December 31, 1999, THEC's $100 million 8.625% Senior Subordinated Notes due
2008 had a fair market value of $96 million. All other THEC debt and other
subsidiary debt is carried at an amount approximating fair value because
interest rates are based on current market rates. All other financial
instruments included in the Consolidated Balance Sheet are stated at amounts
that approximate fair values.
NOTE 11. ACQUISITION OF EASTERN ENTERPRISES
On November 4, 1999, the Company and Eastern Enterprises ("Eastern") announced
that the companies have signed a definitive merger agreement under which the
Company will acquire all of the common stock of Eastern for $64.00 per share in
cash. This represents a premium of 24% over the Eastern closing price of $51.56
on November 3, 1999, and a 45% premium over the average of the last 90-day
trading period. The Agreement and Plan of Merger was filed as an exhibit to the
Company's Form 8-K filed on November 5, 1999.
The transaction has a total value of approximately $2.5 billion ($1.7 billion in
equity and $0.8 billion in assumed debt and preferred stock) and will be
accounted for as a purchase. The increased size and scope of the combined
organization should enable the Company to provide enhanced, cost-effective
customer service and to capitalize on the above-average growth opportunities for
natural gas in the Northeast and provide additional resources to the Company's
unregulated businesses. The combined companies will serve 2.4 million customers.
It is anticipated that the combined company will have assets of $8.8 billion,
$4.3 billion in revenues, and EBITDA of approximately $950 million. The Company
expects pre-tax annual cost savings will be approximately $30 million. These
cost savings result primarily from the elimination of duplicate corporate and
administrative programs, greater efficiencies in operations and business
processes, and
32
increased purchasing efficiencies. The Company expects to achieve reductions due
to the merger through a variety of programs which would include hiring freezes,
attrition and separation programs. All union contracts will be honored. The
Company expects to raise $1.7 billion of initial financing for the transaction
in short-term markets, a significant portion of which the Company anticipates
will be replaced with long-term financing as soon as practicable.
The merger is conditioned, among other things, upon the approval of Eastern
shareholders, the Securities and Exchange Commission and the New Hampshire
Public Utility Commission. The Company anticipates that the transaction will be
consummated in the third or fourth quarter of 2000, but is unable to determine
when or if all required approvals will be obtained.
In connection with the merger, Eastern has amended its merger agreement with
EnergyNorth, Inc. ("EnergyNorth") to provide for an all cash acquisition of
EnergyNorth shares at a price per share of $61.13. The restructured EnergyNorth
merger is expected to close contemporaneously with the KeySpan/Eastern
transaction.
Following the announcement that the Company has entered into an agreement to
purchase Eastern Enterprises, Standard & Poor's Rating Services placed the
Company's and certain of its subsidiaries', as well as Eastern's corporate
credit, senior unsecured debt, and preferred stock on Credit Watch with negative
implications. Similarly, Moody's Investors Service also placed the Company's and
certain of its subsidiaries', as well as Eastern's corporate credit, senior
unsecured debt, commercial paper and preferred stock on review for possible
downgrade.
Eastern owns and operates Boston Gas Company, Colonial Gas Company, Essex Gas
Company, Midland Enterprises Inc. ("Midland"), Transgas Inc. ("Transgas"), and
ServicEdge Partners, Inc. ("ServicEdge"). Upon completion of the pending merger
with EnergyNorth, Inc., Eastern will serve over 800,000 natural gas customers in
Massachusetts and New Hampshire. Midland, headquartered in Cincinnati, Ohio, is
the leading carrier of coal and a major carrier of other dry bulk cargoes on the
nation's inland waterways. Transgas is the nation's largest over-the-road
transporter of liquefied natural gas. ServicEdge is the largest unregulated
provider of residential HVAC equipment installation and service to customers in
Massachusetts.
NOTE 12. KEYSPAN GAS EAST CORPORATION SUMMARY FINANCIAL DATA
KeySpan Gas East Corporation d/b/a Brooklyn Union of Long Island, is a wholly
owned subsidiary of KeySpan Corporation. Brooklyn Union of Long Island 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 immediately prior to
the LIPA Transaction. Brooklyn Union of Long Island provides gas distribution
services to customers in the Long Island counties of Nassau and Suffolk and the
Rockaway peninsula of Queens county. Brooklyn Union of Long Island established a
program for the issuance, from time to time, of up to $600 million aggregate
principal amount of Medium-Term Notes, which will be fully and unconditionally
guaranteed by the Company. On February 1, 2000,
33
Brooklyn Union of Long Island issued $400 million of 7.875% Medium Term Notes
due 2010. The following represents summarized balance sheet data for Brooklyn
Union of Long Island.
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
December 31, 1999 December 31, 1998
- ---------------------------------------------- --------------------------
Current assets $ 358,415 $ 256,186
Noncurrent assets 1,327,692 1,330,661
Current liabilities 548,331 505,784
Noncurrent liabilities
including long-term debt 484,702 467,736
Net assets (1) $ 653,074 $ 613,327
- ------------------------------- -------------- ---- ---------------------
(1)Net Assets reflect total assets less current and noncurrent
liabilities. Intercompany accounts receivable are included in current
assets and long-term intercompany accounts payable are included in
noncurrent liabilities.
Prior to the LIPA Transaction, certain of LILCO's income statement accounts were
recorded in its books and records as directly related to its gas operations.
These items included: revenues, purchased gas costs, certain operations and
maintenance ("O&M") expenses, depreciation of gas utility plant, revenue taxes,
certain other income and deductions, and federal income taxes.
Certain income and expense accounts common to both LILCO's gas and electric
operations prior to the LIPA Transaction have been allocated/determined based on
the following basis, which is consistent with the methodology utilized by the
NYPSC to establish rates.
Common O&M expenses, operating taxes (excluding revenue taxes) and miscellaneous
income and deductions were based upon methodologies employing: number of active
meters; revenues; utility plant; and labor associated with gas operations, as a
percentage of total operations.
Interest income, interest expense and preferred stock dividend requirements were
allocated based upon gas utility plant as a percentage of total utility plant,
(including certain electric related regulatory assets), adjusted for appropriate
deferred federal income taxes.
Depreciation on common plant was based upon an annual study of the utilization
of common facilities by the gas and electric operations of LILCO.
The Company believes that the basis of allocation described above is reasonable.
Reported results of operations and the financial position of LILCO's gas
operations may have been different if such operations were conducted as a
separate subsidiary of LILCO, rather than as part of a combined integrated gas
and electric company.
Certain common assets which were previously part of LILCO's operations prior to
May 28, 1998
34
have been transferred to other subsidiaries of the Company (e.g. common plant,
inventory, etc.). Income and expenses related to these assets prior to May 28,
1998 have been allocated in the accompanying financial statements. After May 28,
1998, Brooklyn Union of Long Island has been charged by affiliated companies for
the use of these assets, resulting in an operating expense of $10.8 million for
the twelve months ended December 31, 1999 and $7.2 million for the nine months
ended December 31, 1998.
The following represents summarized income statement data for Brooklyn Union of
Long Island.
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
Nine Months
Year Ended Ended Fiscal Year Ended
December 31, December 31, March 31,
1999 1998 (1) 1998
- --------------------- ------------------ ------------------ ------------------
Revenues $ 637,088 $ 356,634 $ 645,659
Operating Income (2) $ 115,075 $ 24,854 $ 122,651
Net Income $ 41,517 $ (11,891)$ 40,558
- --------------------- ------------------ ------------------ ------------------
(1)For the period April 1, 1998 through May 28, 1998 (the period prior to the
LIPA Transaction), certain income and expense items, common to both LILCO's
gas and electric operations, were allocated to its gas and electric
operations consistent with the methodology utilized by the NYPSC to establish
rates.
(2)Operating income is defined as revenues less cost of gas and operating
expenses. Operating expenses include the following expenses: operations and
maintenance, depreciation and amortization and operating taxes. Further, for
the nine months ended December 31, 1998 operating income includes a
before-tax charge of $8.7 million reflecting Brooklyn Union of Long Island's
portion of an early retirement program implemented by the Company.
NOTE 13. SHAREHOLDER RIGHTS PLAN
On March 30, 1999 the Board of Directors of the Company adopted a Shareholder
Rights Plan (the "Plan") designed to protect shareholders in the event of a
proposed takeover of the Company. The Plan creates a mechanism that would dilute
the ownership interest of a potential unauthorized acquirer. The Plan
establishes one preferred stock purchase "right" for each outstanding share of
common stock to shareholders of record on April 14, 1999. Each right, when
exercisable, entitles the holder to purchase 1/100th of a share of Series D
Preferred Stock, at a price of $95.00. The rights generally become exercisable
following the acquisition of more than 20 percent of the Company's common stock
without the consent of the Company's Board of Directors. Prior to becoming
exercisable, the rights are redeemable by the Board of Directors for $0.01 per
right. If not so redeemed, the rights will expire on March 30, 2009.
35
NOTE 14. SALE OF LILCO ASSETS, ACQUISITION OF KEYSPAN ENERGY CORPORATION AND
TRANSFER OF ASSETS AND LIABILITIES TO THE COMPANY
On May 28, 1998, pursuant to the Agreement and Plan of Merger, dated as of June
26, 1997 as amended, by and among the Company, LILCO, LIPA, and LIPA Acquisition
Corp. (the "Merger Agreement"), LIPA acquired all of the outstanding common
stock of LILCO for $2.4975 billion in cash and thereafter directly or indirectly
assumed certain liabilities including approximately $3.4 billion in debt. In
addition, LIPA reimbursed LILCO $339.1 million related to certain series of
preferred stock which were redeemed by LILCO prior to May 28, 1998. Immediately
prior to such acquisition, all of LILCO's assets employed in the conduct of its
gas distribution business and its non-nuclear electric generation business, and
all common assets used by LILCO in the operation and management of its electric
T&D business and its gas distribution business and/or its non-nuclear electric
generation business (the "Transferred Assets") were sold to the Company and
transferred to wholly-owned subsidiaries of the Company at the Company's
direction.
The consideration for the Transferred Assets consisted of (i) 3,440,625 shares
of the common stock of the Company (ii) 553,000 shares of the Series B preferred
stock of the Company, (iii) 197,000 shares of the Series C preferred stock of
the Company, and (iv) the assumption by the Company of certain liabilities of
LILCO. In connection with the transfer and prior to the effectiveness of the
LIPA Transaction, LILCO sold Series B and C preferred stock for $75 million in a
private placement.
Moreover, all of LILCO's outstanding long-term debt as of May 28, 1998, except
for its 1997 Series A Electric Facilities Revenue Bonds due December 1, 2027
which were assigned to the Company, was assumed by LIPA. In accordance with the
LIPA Transaction, the Company issued promissory notes to LIPA amounting to
$1.048 billion which represented an amount equivalent to the sum of (i) the
principal amount of 7.30% Series Debentures due July 15, 1999 and 8.20% Series
Debentures due March 15, 2023 outstanding as of May 28, 1998, and (ii) an
allocation of certain of the Authority Financing Notes. The promissory notes
contain identical terms to the debt referred to in items (i) and (ii) above.
(See Note 7, "Long-Term Debt" for additional information.)
On May 28, 1998, immediately subsequent to the LIPA Transaction, KSE was merged
with and into a subsidiary of the Company, pursuant to an Agreement and Plan of
Exchange and Merger, dated as of December 29, 1996, between LILCO and Brooklyn
Union. This agreement was amended and/or restated as of February 7, 1997, June
26, 1997, and September 29, 1997, to reflect certain technical changes and the
assignment by Brooklyn Union of all of its rights and obligations under the
agreement to KSE. On September 29, 1997, KSE became the parent company of
Brooklyn Union when Brooklyn Union reorganized into a holding company structure.
As a result of these transactions, holders of KSE common stock received one
share of the
36
Company's common stock, par value $.01 per share, for each share of KSE they
owned and holders of LILCO common stock received 0.880 of a share of the
Company's common stock for each share of LILCO they owned. Upon the closing of
these transactions, former holders of KSE and LILCO owned 32% and 68%,
respectively, of the Company's common stock.
The purchase price of $1.223 billion for the acquisition of KSE has been
allocated to assets acquired and liabilities assumed based upon their estimated
fair values. The fair value of the utility assets acquired is represented by its
book value which approximates the value recognized by the NYPSC in establishing
rates for regulated utility services. The estimated fair value of KSE's
non-utility assets approximated their carrying values. At May 28, 1998, the
Company recorded goodwill in the amount of $170.9 million, representing
primarily the excess of the acquisition cost over the fair value of the net
assets acquired; the goodwill is being amortized over 40 years.
The following is the comparative unaudited proforma combined condensed financial
information for the nine months ended December 31, 1998 and the twelve months
ended March 31, 1998. The proforma disclosures are intended to reflect the
results of operations as if the KeySpan Acquisition was consummated on the first
day of each of the reporting periods below. The effects of the LIPA Transaction
have been reflected for the period May 29, 1998 through December 31, 1998. These
disclosures may not be indicative of future results.
================================================================================
Proforma Results Nine Months Fiscal Year
(In Thousands of Dollars Except Ended Ended
Per Share Amounts): December 31, 1998 March 31, 1998
- ----------------------------------- ------------------- -----------------
Revenues $ 1,907,129 $ 4,554,093
Operating income $ 4,416 $ 914,272
Net income (loss) $ (212,424) $ 436,794
Earnings (loss) per share $ (1.38) $ 2.78
NOTE 15. COSTS RELATED TO THE LIPA TRANSACTION AND SPECIAL CHARGES
Special charges for the nine months ended December 31, 1998 were $258.5 million
after-tax. These charges reflect, in part, non-recurring charges associated with
the LIPA Transaction of $107.9 million after-tax. Costs relating to the LIPA
Transaction principally reflect taxes associated with the sale of assets (the
"Transferred Assets") to the Company by LIPA; the write- off of certain
regulatory assets that were no longer recoverable under various LIPA agreements;
and other transaction costs incurred to consummate the LIPA Transaction. These
charges were offset, in part, by tax benefits relating to the deferred federal
income taxes necessary to account for the difference between the carryover basis
of the Transferred Assets for financial reporting purposes and the new increased
tax basis of the assets, and tax benefits recognized on the funding of
postretirement benefits for employees of the Company.
37
Further, the Company incurred charges related to the KeySpan Acquisition of
$83.5 million after-tax. These charges reflect a $42.0 million after-tax charge
for an early retirement program initiated by the Company in December 1998 in
which approximately 600 employees participated, and a $41.5 million after-tax
charge for the write-off of a customer billing system that was in development.
Also, in December 1998, the Company made a $20 million donation ($13 million
after-tax) to establish the KeySpan Foundation, a not-for-profit philanthropic
foundation that will make donations to local charitable community organizations.
Special charges also reflect an after-tax impairment charge of $54.1 million,
which represents the Company's share of the impairment charge, recorded by the
Company's gas and oil exploration and production subsidiary to reduce the value
of its proved gas reserves in accordance with the asset ceiling test limitations
of the Securities and Exchange Commission applicable to gas exploration and
development operations accounted for under the full cost method.
NOTE 16. SUPPLEMENTAL GAS AND OIL DISCLOSURES (UNAUDITED)
This information includes amounts attributable to 100% of THEC and KeySpan
Exploration and Production, LLC at December 31, 1999. Shareholders other than
the Company had a minority interest of 36% in THEC at December 31, 1999 and 1998
and a 34% minority interest in 1997. Gas and oil operations, and reserves, were
predominantly located in the United States in all years.
CAPITALIZED COSTS RELATING TO GAS AND OIL PRODUCING ACTIVITIES
At December 31, 1999 1998
- -------------------------- ------------------------- ----------------- ----------------
(In Thousands of Dollars)
Unproved properties not being amortized $ 176,876 $ 145,317
Properties being amortized - productive and nonproductive 979,615 828,168
- ---------------------------------------------------- ----------------- ----------------
Total capitalized costs 1,156,491 973,485
Accumulated depletion (512,465) (438,974)
- ---------------------------------------------------------------------------------------
Net capitalized costs $ 644,026 $ 534,511
- -------------------------- ------------------------- ----------------- ----------------
The following is a break-out of the costs which are excluded from the
amortization calculation as of December 31, 1999, by year of acquisition: 1999 -
$29.9 million, 1998 - $66.1 million, and prior years $68.3 million. The Company
cannot accurately predict when these costs will be included in the amortization
base, but it is expected that these costs will be evaluated within the next five
years.
38
COSTS INCURRED IN PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT ACTIVITIES
Year Ended December 31, 1999 1998 1997
- --------------------------- ---------------- ---------------- ---------------
(In Thousands of Dollars)
Acquisition of properties-
Unproved properties $ 13,107 $ 33,803 $ 16,613
Proved properties 42,573 162,083 24,007
Exploration 39,649 55,611 44,119
Development 87,965 51,046 59,244
- --------------------------------------------------------------------------------
Total costs incurred $ 183,294 $ 302,543 $ 143,983
- --------------------------- ---------------- ---------------- ---------------
RESULTS OF OPERATIONS FROM GAS AND OIL PRODUCING ACTIVITIES*
================================================================================
Year Ended December 31, 1999 1998 1997
- ------------------------------------ ------------- ------------- -------------
(In Thousands of Dollars)
Revenues $ 150,581 $ 127,124 $ 116,349
- ------------------------------------ ------------- ------------- -------------
Production and lifting costs 23,851 21,166 18,379
Depletion 74,051 209,838 59,081
- --------------------------------------------------------------------------------
Total expenses 97,902 231,004 77,460
- ------------------------------------ ------------- ------------- -------------
Income before taxes 52,679 (103,880) 38,889
Income Taxes 17,477 (37,410) 12,397
- ------------------------------------ ------------- ------------- -------------
Results of operations $ 35,202 $ (66,470)$ 26,492
- ----------------------------- ------------- ------------- -------------
*(excluding corporate overhead and interest costs)
The gas and oil reserves information is based on estimates of proved reserves
attributable to the interest of THEC and KeySpan Exploration and Production, LLC
as of December 31 for each of the years presented. These estimates principally
were prepared by independent petroleum consultants. Proved reserves are
estimated quantities of natural gas and crude oil which geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions.
RESERVE QUANTITY INFORMATION NATURAL GAS (MMCF)
================================================================================
At December 31, 1999 1998 1997
- ------------------------------ ---------- --------------- ---------------
Proved reserves
Beginning of year 470,447 330,601 320,474
Revisions of previous 45,510 (4,656) (18,743)
Extensions and discoveries 70,741 67,272 75,651
Production (69,679) (61,479) (50,310)
Purchases of reserves in place 20,779 139,994 3,778
Sales of reserves in place (3,492) (1,285) (249)
- --------------------------------------------------------------------------------
Proved reserves-
End of year (a) 534,306 470,447 330,601
- ------------------------------------------------ --------------- --------------
Proved developed reserves-
Beginning of year 369,931 256,632 236,544
- --------------------------------------------------------------------------------
End of year (b) 399,482 369,931 256,632
================================================================================
(a) Includes minority interest of 189,427; 169,361; and 112,404 in 1999, 1998
and 1997, respectively.
(b) Includes minority interest of 143,043; 133,175; and 87,255 in 1999, 1998 and
1997, respectively.
CRUDE OIL, CONDENSATE AND NATURAL GAS LIQUIDS (MBBLS)
================================================================================
At December 31, 1999 1998 1997
- -------------------------------- ---------------- --------------- ------------
Proved reserves
Beginning of year 1,650 1,077 1,131
Revisions of previous estimates 237 (105) (62)
Extensions and discoveries 1,574 249 184
Production (258) (225) (171)
Purchases of reserves in place 2 665 1
Sales of reserves in place (69) (11) (6)
- --------------------------------------------------------------------------------
Proved reserves-
End of year (a) 3,136 1,650 1,077
- -------------------------------- ------------- --------------- ---------------
Proved developed reserves-
Beginning of year 1,498 914 1,013
- --------------------------------------------------------------------------------
End of year (b) 2,059 1,498 914
- --------------------------------------- --------------- -----------------------
(a) Includes minority interest of 890; 594; and 366 in 1999, 1998 and 1997,
respectively.
(b) Includes minority interest of 647; 539; and 311 in 1999, 1998 and 1997,
respectively.
The standardized measure of discounted future net cash flows was prepared by
applying year-end prices of gas and oil to the proved reserves, except for those
reserves devoted to future production that is hedged. Such reserves are priced
at their respective hedged amounts. The standardized measure does not purport,
nor should it be interpreted, to present the fair value of gas and oil reserves
of THEC or KeySpan Exploration and Production LLC. An estimate of fair value
would also take into account, among other things, the recovery of reserves not
presently classified as proved, anticipated future changes in prices and costs
and a discount factor more representative of the time value of money and the
risks inherent in reserve estimates.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED GAS
AND OIL RESERVES
- --------------------------------------------------------------------------------
At December 31, 1999 1998
- ------------------------------------------- ----------------- ---------------
(In Thousands of Dollars)
Future cash flows $ 1,146,966 $ 878,448
Future costs -
Production (194,527) (153,567)
Development (128,645) (103,915)
- ------------------------------------------- ----------------- ---------------
Future net inflows before income tax 823,794 620,966
Future income taxes (160,940) (89,032)
- ------------------------------------------- ----------------- ---------------
Future net cash flows 662,854 531,934
10% discount factor (182,222) (135,874)
- --------------------------------------------------------------------------------
Standardized measure of discounted
future net cash flows $ 480,632 $ 396,060
- ------------------------------------------- ----------------- ---------------
(a) Includes minority interest of 168,921 and 142,582 in 1999 and 1998,
respectively.
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM PROVED
RESERVE QUANTITIES
======================================================================================================
Year Ended December 31, 1999 1998 1997
- --------------------------------------------------------- -------------- -------------- --------------
(In Thousands of Dollars)
Standardized measure -
beginning of year $ 396,060 $ 315,380 $ 452,582
Sales and transfers, net of production costs (126,730) (105,958) (97,968)
Net change in sales and transfer prices,
net of production costs 47,330 (104,137) (223,169)
Extensions and discoveries and improved
recovery, net of related costs 106,076 72,333 114,893
Changes in estimated future development costs (25,730) (6,656) (20,499)
Development costs incurred during the period
that reduced future development costs 40,563 15,891 16,154
Revisions of quantity estimates 51,375 (4,982) (23,156)
Accretion of discount 41,293 37,706 57,700
Net change in income taxes (47,097) 44,812 62,733
Net purchases of reserves in place 19,018 155,259 1,855
Changes in production rates (timing) and other (21,526) (23,588) (25,745)
- -------------------------------------------------------------------------------------------------------
Standardized measure -
end of year $ 480,632 $ 396,060 $ 315,380
- ------------------------------------------ -------------- -------------- --------------
AVERAGE SALES PRICES AND PRODUCTION COSTS PER UNIT
- --------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
- ------------------------------------- -------------- ------------- ------------
Average sales price*
Natural gas ($/MCF) 2.14 1.96 2.45
Oil, condensate and natural gas liquid ($/Bbl) 16.41 12.18 18.33
Production cost per equivalent MCF ($) 0.26 0.26 0.28
- --------------------------------------------------------- ----------------------
*Represents the cash price received which excludes the effect of any hedging
transactions.
ACREAGE
- --------------------------------------------------------------------------------
At December 31, 1999 Gross Net
- ---------------------------------- ------------- ------------
Producing 299,707 196,219
Undeveloped 394,022 322,577
- --------------------------------------------------------------------------------
NUMBER OF PRODUCING WELLS
- --------------------------------------------------------------------------------
At December 31, 1999 Gross Net
- ------------------------------- ------------- ------------
Gas wells 1,247 822.6
Oil wells 4 2.4
- ------------------------------- ------------- ------------
DRILLING ACTIVITY (NET)
- ---------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
- -------------------------- -------------------------- ---------------------------- ----------------------------
Producing Dry Total Producing Dry Total Producing Dry Total
--------- --- ----- --------- --- ----- --------- --- -----
Net developmental wells 29.7 3.1 32.8 19.2 4.6 23.8 29.3 8.5 37.8
Net exploratory wells 2.9 1.0 3.9 1.6 4.2 5.8 3.8 2.9 6.7
- -------------------------------------------------------------------------------------------------------------
WELLS IN PROCESS
- --------------------------------------------------------------------------------
At December 31, 1999 Gross Net
- ------------------------------- ------------- ------------
Exploratory 2.0 0.8
Developmental 1.0 1.0
- ------------------------------- ------------- ------------
42
SUMMARY OF QUARTERLY INFORMATION (UNAUDITED)
The following is a table of financial data for each quarter of the Company's
year ended December 31, 1999.
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended Quarter Ended
3/31/99 6/30/99 9/30/99 12/31/99
- --------------------------------------------------------------------------------
Operating revenues 961,108 543,526 538,469 911,510
Operating income 242,226 61,211 36,783 141,949
Net income 143,221 22,989 9,016 83,385
Earnings for common stock 134,532 14,299 328 74,700
Basic and diluted earnings
per common share (A) 0.94 0.10 0.00 0.56
Dividends declared 0.445 0.445 0.445 0.445
- --------------------------------------------------------------------------------
(A) QUARTERLY EARNINGS PER SHARE ARE BASED ON THE AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE QUARTER. BECAUSE OF THE CHANGING NUMBER OF COMMON
SHARES OUTSTANDING IN EACH QUARTER, THE SUM OF QUARTERLY EARNINGS PER SHARE
DOES NOT EQUAL EARNINGS PER SHARE FOR THE YEAR.
The following is a table of financial data for each quarter of the Company's
nine month period ended December 31, 1998.
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended
6/30/98 9/30/98 12/31/98
- ----------------------------------------------------------------------------
Operating revenues (a) 570,856 434,581 723,044
Operating income (loss) 124,735 (18,645) (155,357)
Net income (loss) 37,250 (17,656) (186,527)(b)
Earnings (loss) for common stock 26,034 (26,350) (195,221)
Basic and diluted earnings (loss)
per common share (c) 0.19 (0.17) (1.34)
Dividends declared 0.300(d) 0.445 0.445
- ----------------------------------------------------------------------------
(A) INCLUDES REVENUES FROM VARIOUS LIPA SERVICE AGREEMENTS FOR THE PERIOD MAY
29, 1998 THROUGH DECEMBER 31, 1998 AND ELECTRIC DISTRIBUTION REVENUES FOR
THE PERIOD APRIL 1, 1998 THROUGH MAY 28, 1998.
(B) REFLECTS THE FOLLOWING AFTER-TAX CHARGES: LIPA TRANSACTION CHARGES OF $97.6
MILLION; KEYSPAN ACQUISITION CHARGES OF $83.5 MILLION; AN IMPAIRMENT CHARGE
OF $54.1 MILLION TO WRITE-DOWN THE VALUE OF PROVED GAS RESERVES; AND A
CHARGE OF $13.0 MILLION TO ESTABLISH THE KEYSPAN FOUNDATION. (SEE NOTE 15 TO
THE CONSOLIDATED FINANCIAL STATEMENTS,"COSTS RELATED TO THE LIPA TRANSACTION
AND SPECIAL CHARGES.")
(C) QUARTERLY EARNINGS PER SHARE ARE BASED ON THE AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE QUARTER. BECAUSE OF THE CHANGING NUMBER OF COMMON
SHARES OUTSTANDING IN EACH QUARTER, THE SUM OF QUARTERLY EARNINGS PER SHARE
DOES NOT EQUAL EARNINGS PER SHARE FOR THE YEAR.
(D) PRORATED PORTION FOR APPROXIMATELY TWO MONTHS OF A DIVIDEND OF $1.78 PER
SHARE ANNUALLY.
43
REPORT OF ARTHUR ANDERSEN LLP, INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of KeySpan Corporation d/b/a KeySpan
Energy:
We have audited the accompanying Consolidated Balance Sheet and Consolidated
Statement of Capitalization of KeySpan Corporation (a New York corporation) and
subsidiaries as of December 31, 1999 and December 31, 1998 and the related
Consolidated Statements of Income, Retained Earnings and Cash Flows for the year
ended December 31, 1999 and the nine months ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position and capitalization of KeySpan
Corporation and subsidiaries as of December 31, 1999 and December 31, 1998 and
the results of their operations and their cash flows for the year ended December
31, 1999 and the nine months ended December 31, 1998, in conformity with
accounting principles generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in Item
14 is the responsibility of the Company's management and is presented for the
purpose of complying with the Securities and Exchange Commission's rules and is
not part of the basic consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
January 27, 2000
New York, New York
44
REPORT OF ERNST & YOUNG LLP, INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Long Island Lighting Company:
We have audited the accompanying Statement of Income, Retained Earnings and Cash
Flows of Long Island Lighting Company for the twelve months ended March 31,
1998. Our audit also included the financial statement schedule listed in the
index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, results of operations and cash flows of Long Island
Lighting Company for the twelve months ended March 31, 1998, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
During the twelve months ended March 31, 1998 the Company changed its method of
accounting for revenues provided for under the Rate Moderation Component.
ERNST & YOUNG LLP
May 22, 1998
Melville, New York
45
SCHEDULED OF VALUATION AND QUALIFYING ACCOUNTS
(In Thousands of Dollars)
- ----------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ----------------------------------------------------------------------------------------------------
Additions
- ----------------------------------------------------------------------------------------------------
Adjustment for
the KeySpan
Balance
Balance at Charged to Acquisition at
Beginning Costs and and LIPA Deduction End of
Depreciation of Period Expenses Transaction (1) Period
- ------------------------------------ ----------- ----------- -------------- ------------ ----------
Twelve months ended December 31, 1999
Deducted from asset accounts:
Allowance for doubtful accounts $20,026 $15,793 -- $15,525 $20,294
Nine months ended December 31, 1998
Deducted from asset accounts:
Allowance for doubtful accounts $23,483 $11,064 $3,777 $18,298 $20,026
Twelve months ended March 31, 1998
Deducted from asset accounts: $23,675 $23,239 -- $23,431 $23,483
Allowance for doubtful accounts
- ------------------------------------ ----------- ----------- -------------- ------------ ----------
(1) UNCOLLECTIBLE ACCOUNTS WRITTEN OFF, NET OF RECOVERIES.
46
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A definitive proxy statement is expected to be filed with the SEC on or about
March 27, 2000 (the "Proxy Statement"). The information required by this item is
set forth under the caption "Executive Officers of the Company" in Part I hereof
and under the captions "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" contained in the Proxy Statement, which
information is incorporated herein by reference thereto.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth under the caption "Executive
Compensation" in the Proxy Statement, which information is incorporated herein
by reference thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth under the captions "Security
Ownership of Management" and "Security Ownership of Certain Beneficial Owners"
in the Proxy Statement, which information is incorporated herein by reference
thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the caption
"Transactions with Management and Others" in the Proxy Statement, which
information is incorporated herein by reference thereto.
35
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
1. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and its
subsidiaries and report of independent accountants are filed as part of this
Report:
Report of Independent Public Accountants
Consolidated Statement of Income for the year ended December 31,
1999, the nine months ended December 31, 1998, and the fiscal
year ended March 31, 1998.
Consolidated Statement of Retained Earnings for the year ended
December 31, 1999, the nine months ended December 31, 1998, and
the fiscal year ended March 31, 1998.
Consolidated Balance Sheet at December 31, 1999 and December 31,
1998. Consolidated Statement of Capitalization at December 31, 1998
and December 31,
1998.
Consolidated Statement of Cash Flows for the year ended December 31,
1999, the nine months ended December 31, 1998, and the fiscal
year ended March 31, 1998.
Notes to Consolidated Financial Statements
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
1. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and its
subsidiaries and report of independent accountants are filed as part of this
Report:
Report of Independent Public Accountants
Consolidated Statement of Income for the year ended December 31, 1999,
the nine months ended December 31, 1998, and the fiscal year ended
March 31, 1998.
Consolidated Statement of Retained Earnings for the year ended December
31, 1999, the nine months ended December 31, 1998, and the fiscal
year ended March 31, 1998.
Consolidated Balance Sheet at December 31, 1999 and December 31, 1998.
Consolidated Statement of Capitalization at December 31, 1998 and
December 31,
1998.
Consolidated Statement of Cash Flows for the year ended December 31,
1999, the nine months ended December 31, 1998, and the fiscal year
ended March 31, 1998.
Notes to Consolidated Financial Statements
2. Financial Statements Schedules
Consolidated Schedule of Valuation and Qualifying Accounts for the year ended
December 31, 1999, the nine months ended December 31, 1998, and the fiscal year
ended March 31, 1998.
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
3. Exhibits
Exhibits listed below which have been filed with the SEC pursuant to the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as
amended, and which were filed as noted below, are hereby incorporated by
reference and made a part of this report with the same effect as if filed
herewith.
10.21 Agreement and Plan of Merger dated November 4, 1999, between the
Company, Eastern Enterprises and ACJ Acquisition LLC (filed as
Exhibit 2 to the Company's Form 8-K on November 5, 1999)
10.22Amendment No. 1 to Agreement and Plan of Merger, dated January 26,
2000, between the Company, Eastern Enterprises and ACJ Acquisition LLC
3.1 Certificate of Incorporation of the Company effective April 16,
1998, Amendment to Certificate of Incorporation of the Company
effective May 26,1998, Amendment to Certificate of Incorporation of
the Company effective June 1, 1998, Amendment to the Certificate of
Incorporation of the Company effective April 7, 1999 and Amendment
to the Certificate of Incorporation of the Company effective May 20,
1999 (filed as Exhibit 3.1 to the Company's Form 10-Q for the
quarterly period ended June 30, 1999)
3.2 ByLaws of the Company In Effect on September 10, 1998, as amended
(filed as Exhibit 3.1 to the Company's Form 8-K/A, Amendment No. 2, on
September 29, 1998)
4.1 Participation Agreements dated as of February 1, 1989, between
NYSERDA and The Brooklyn Union Gas Company relating to the
Adjustable Rate Gas Facilities Revenue Bonds ("GFRBs") Series 1989A
and Series 1989B (filed as Exhibit 4 to The Brooklyn Union Gas
Company Form 10-K for the year ended September 30, 1989)
Indenture of Trust, dated February 1, 1989, between NYSERDA and
Manufacturers Hanover Trust Company, as Trustee, relating to the
Adjustable Rate GFRBs Series 1989A and 1989B (filed as Exhibit 4 to
the Brooklyn Union Gas Company Form 10-K for the year ended
September 30, 1989)
4.2 Participation Agreement, dated as of July 1, 1991, between NYSERDA
and The Brooklyn Union Gas Company relating to the GFRBs Series
1991A and 1991B (filed as Exhibit 4 to The Brooklyn Union Gas
Company Form 10-K for the year ended September 30, 1991)
Indenture of Trust, dated as of July 1, 1991, between NYSERDA and
Manufacturers Hanover Trust Company, as Trustee, relating to the
GFRBs Series 1991A and 1991B (filed as Exhibit 4 to The Brooklyn
Union Gas Company Form 10-K for the year ended September 30, 1991)
4.3 First Supplemental Participation Agreement dated as of May 1, 1992
to Participation Agreement dated February 1, 1989 between NYSERDA
and The Brooklyn Union Gas Company relating to Adjustable Rate
GFRBs, Series 1989A & B (filed as Exhibit 4 to The Brooklyn Union
Gas Company Form 10-K for the year ended September 30, 1992)
First Supplemental Trust Indenture dated as of May 1, 1992 to Trust
Indenture dated February 1, 1989 between NYSERDA and Manufacturers
Hanover Trust Company, as Trustee, relating to Adjustable Rate
GFRBs, Series 1989A & B (filed as Exhibit 4 to The Brooklyn Union
Gas Company Form 10-K for the year ended September 30, 1992)
4.4 Participation Agreement, dated as of July 1, 1992, between NYSERDA
and The Brooklyn Union Gas Company relating to the GFRBs Series
1993A and 1993B (filed as Exhibit 4 to The Brooklyn Union Gas
Company Form 10-K for the year ended September 30, 1992)
Indenture of Trust, dated as of July 1, 1992, between NYSERDA and
Chemical Bank, as Trustee, relating to the GFRBs Series 1993A and
1993B (filed as Exhibit 4 to The Brooklyn Union Gas Company Form
10-K for the year ended September 30, 1992)
4.5 First Supplemental Participation Agreement dated as of July 1, 1993
to Participation Agreement dated as of June 1, 1990, between NYSERDA
and The Brooklyn Union Gas Company relating to GFRBs Series C (filed
as Exhibit 4 to The Brooklyn Union Gas Company Form 10-K for the
year ended September 30, 1993)
First Supplemental Trust Indenture dated as of July 1, 1993 to Trust
Indenture dated as of June 1, 1990 between NYSERDA and Chemical
Bank, as Trustee, relating to GFRBs Series C (filed as Exhibit 4 to
The Brooklyn Union Gas Company Form 10-K for the year ended
September 30, 1993)
4.6 Participation Agreement, dated July 15, 1993, between NYSERDA and
Chemical Bank as Trustee, relating to the GFRBs Series D-1 1993 and
Series D-2 1993 (filed as Exhibit 4 to The Brooklyn Union Gas
Company Form S-8 Registration Statement No. 33-66182)
Indenture of Trust, dated July 15, 1993, between NYSERDA and
Chemical Bank as Trustee, relating to the GFRBs Series D-1 1993 and
D-2 1993 (filed as Exhibit 4 to The Brooklyn Union Gas Company Form
S-8 Registration Statement No. 33- 66182)
4.7 Participation Agreement, dated January 1, 1996, between NYSERDA and
The Brooklyn Union Gas Company relating to GFRBs Series 1996 (filed as
Exhibit 4 to The Brooklyn Union Gas Company Form 10-K for the year
ended September 30, 1996)
Indenture of Trust, dated January 1, 1996, between NYSERDA and
Chemical Bank, as Trustee, relating to GFRBs Series 1996 (filed as
Exhibit 4 to The Brooklyn Union Gas Company Form 10-K for the year
ended September 30, 1996)
4.8 Participation Agreement, dated as of January 1, 1997, between
NYSERDA and The Brooklyn Union Gas Company relating to GFRBs 1997
Series A (filed as Exhibit 4 to KeySpan Energy Corporation Form 10-K
for the year ended September 30, 1997)
Indenture of Trust, dated January 1, 1997, between NYSERDA and Chase
Manhattan Bank, as Trustee, relating to GFRBs 1997 Series A (filed
as Exhibit 4 to KeySpan Energy Corporation Form 10-K for the year
ended September 30, 1997)
4.9 Indenture of Trust dated as of December 1, 1997 by and between New
York State Energy Research and Development Authority (NYSERDA) and
The Chase Manhattan Bank, as Trustee, relating to the 1997 Electric
Facilities Revenue Bonds (EFRBs), Series A (filed as Exhibit 10(a)
to the Company's Form 10-Q for the quarterly period ended September
30, 1998)
Participation Agreement dated as of December 1, 1997 by and between
NYSERDA and Long Island Lighting Company relating to the 1997 EFRBs,
Series A (filed as Exhibit 10(a) to the Company's Form 10-Q for the
quarterly period ended September 30, 1998)
*4.10 Participation Agreement, dated as of October 1, 1999, by and between
NYSERDA and KeySpan Generation LLC relating to the 1999 Pollution
Control Refunding Revenue Bonds, Series A
Trust Indenture, dated as of October 1, 1999, by and between New
York State Energy Research and Development Authority (NYSERDA) and
The Chase Manhattan Bank, as Trustee, relating to the 1999 Pollution
Control Refunding Revenue Bonds, Series A
*4.11 First Supplemental Trust Indenture, dated as of January 1, 2000, by
and between New York State Energy Research and Development Authority
(NYSERDA) and The Chase Manhattan Bank, as Trustee, relating to the
GFRBs 1997 Series A
*4.12Credit Agreement, dated as of November 8, 1999, among the Company, as
Borrower, the Several Lenders, Citibank, N.A., as Syndication Agent,
European American Bank, as Documentation Agent and The Chase Manhattan
Bank, as administrative Agent, for a $700,000,000 revolving credit
loan
*4.13 Indenture, dated December 1, 1999, between the Company and KeySpan
Gas East Corporation, the Registrants, and the Chase Manhattan Bank,
as Trustee, with the respect to the issuance of Medium-Term Notes,
Series A, (filed as Exhibit 4-a to Amendment No. 1 to Form S-3
Registration Statement No. 333-92003)
4.14 Form of Medium-Term Note issued in connection with the issuance of 7
7/8% notes (filed as Exhibit 4, to the Company's Form 8-K on
February 1, 2000)
10.1 Agreement of Lease between Forest City Jay Street Associates and The
Brooklyn Union Gas Company dated September 15, 1988 (filed as an
exhibit to The
Brooklyn Union Gas Company Form 10-K for the year ended September 30, 1996)
10.2 Stipulation of Settlement of federal Racketeer Influenced and
Corrupt Organizations Act Class Action and False Claims Action dated
as of February 27, 1989 among the attorneys for Long Island Lighting
Company, the ratepayer class, the United States of America and the
individual defendants named therein (filed as an exhibit to Long
Island Lighting Company's Form 10-K for the year ended December 31,
1988)
10.3 Agreement and Plan of Merger dated as of June 26, 1997 by and among BL
Holding Corp., Long Island Lighting Company, Long Island Power
Authority and LIPA Acquisition Corp. (filed as Annex D to Registration
Statement on Form S-4, No. 333-30353 on June 30, 1997)
10.4 Management Services Agreement between Long Island Power Authority and
Long Island Lighting Company dated as of June 26, 1997 (filed as Annex
D to Registration Statement on Form S-4, No. 333-30353, on June 30,
1997)
10.5 Power Supply Agreement between Long Island Lighting Company and Long
Island Power Authority dated as of June 26, 1997 (filed as Annex D to
Registration Statement on Form S-4, No. 333-30353, on June 30, 1997)
10.6 Energy Management Agreement between Long Island Lighting Company and
Long Island Power Authority dated as of June 26, 1997 (filed as Annex
D to Registration Statement on Form S-4, No. 333-30353, on June 30,
1997)
10.7 Amended and Restated Agreement and Plan of Exchange and Merger dated
June 26, 1997 between The Brooklyn Union Gas Company and Long Island
Lighting Company dated as of June 26, 1997 (filed as Annex A to
Registration Statement on Form S-4, No. 333-30353, on June 30, 1997)
10.8 Amendment, Assignment and Assumption Agreement dated as of September
29, 1997 by and among The Brooklyn Union Gas Company, Long Island
Lighting Company and KeySpan Energy Corporation (filed as Exhibit
2.5 to Schedule 13D by Long Island Lighting Company on October 24,
1997)
*10.9Employment Agreement effective as of September 1, 1999 between the
Company and Craig G. Matthews
*10.10 Employment Agreement effective as of July 29, 1999 between the
Company and Gerald Luterman
10.11 Indenture, dated as of March 2, 1998, between The Houston
Exploration Company and The Bank of New York, as Trustee, with
respect to the 8 5/8%
Senior Subordinated Notes Due 2008 (including form of 8 5/8% Senior
Subordinated Note Due 2008) (filed as Exhibit 4.1 to The Houston
Exploration Company's Registration Statement on Form S-4 (No. 333-50235))
10.12 Subordinated Loan Agreement dated November 30, 1998 between The
Houston Exploration Company and MarketSpan Corporation d/b/a KeySpan Energy
Corporation (filed as Exhibit 10.30 to The Houston Exploration Company's
Annual Report on Form 10-K for the year ended December 31, 1998).
10.13 Subordination Agreement dated November 25, 1998 entered into and
among MarketSpan Corporation d/b/a KeySpan Energy Corporation, The
Houston Exploration Company and Chase Bank of Texas, National
Association (filed as Exhibit 10.31 to The Houston Exploration
Company's Annual Report on Form 10-K for the year ended December 31,
1998 (File No. 001-11899)).
*10.14 First Amendment to Subordinated Loan Agreement and Promissory Note
between KeySpan Corporation and The Houston Exploration Company
dated effective as of October 27, 1999.
10.15Exploration Agreement between The Houston Exploration Company and
KeySpan Exploration and Production, L.L.C., dated March 15,1999,
(filed as Exhibit 10.1 to The Houston Exploration Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999 (File No.
001-11899)).
*10.16 First Amendment to the Exploration Agreement between The Houston
Exploration Company and KeySpan Exploration and Production, L.L.C.
dated November 3, 1999.
10.17 Amended and Restated Credit Agreement among The Houston Exploration
Company and Chase Bank of Texas, National Association, as agent,
dated March 30,1999, (filed as Exhibit 10.2 to The Houston
Exploration Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999 (File No. 001-11899)).
10.18 First Amendment and Supplement to Amended and Restated Credit
Agreement dated May 4, 1999 by and among The Houston Exploration
Company and Chase Bank of Texas, National Association, as agent,
(filed as Exhibit 10.1 to The Houston Exploration Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999
(File No. 001-11899)).
10.19 Second Amendment to Amended and Restated Credit Agreement between
The Houston Exploration Company and Chase Bank of Texas, National
Association, as agent, dated October 6, 1999, (filed as Exhibit
10.32 to The Houston Exploration Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999 (File No. 001-11899)).
*10.20 Third Amendment and Supplement to Amended and Restated Credit
Agreement between The Houston Exploration Company and Chase Bank of
Texas, National Association, as agent, dated December 9, 1999.
10.21 Directors' Deferred Compensation Plan of the Company effective July
1, 1998 (filed as Exhibit 10.16 to the Company's Form 10-K for the
year ended December 31, 1998)
10.22 Corporate Annual Incentive Compensation Plan effective as of
September 10, 1998 (filed as Exhibit 10.18 to the Company's
Form 10-K for the year ended December 31, 1998)
10.23 Senior Executive Change of Control Severance Plan effective as of
October 30, 1998 (filed as Exhibit 10.20 to the Company's Form 10-K
for the year ended December 31, 1998)
10.24 Generating Plant and Gas Turbine Asset Purchase and Sale Agreement
for Ravenswood for Ravenswood Generating Plants and Gas Turbines
dated January 28, 1999, between the Company and Consolidated Edison
Company of New York, Inc. (filed as Exhibit 10(a) to the Company's
Form 10-Q for the quarterly period ended March 31, 1999)
10.25 Rights Agreement dated March 30, 1999, between the Company and the
Rights Agent (filed as Exhibit 4 to the Company's Form 8-K, on March
30, 1999
10.26 Lease Agreement dated June 9, 1999, between KeySpan-Ravenswood, Inc.
and LIC Funding, Limited Partnership (filed as Exhibit 10.2 to the
Company's Form 10-Q for the quarterly period ended June 30, 1999)
10.27 Guaranty dated June 9, 1999, from the Company in favor of LIC
Funding, Limited Partnership (filed as Exhibit 10.1 to the Company's
Form 10-Q for the quarterly period ended June 30, 1999)
* 21 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP, Independent Auditors
23.2 Consent of Ernst and Young LLP, Independent Auditors
24.1 Powers of Attorney executed by Directors and Officers of the
Company
24.2 Certified copy of Resolution of Board of Directors authorizing
signature pursuant to power of attorney
27 Financial Data Schedule on Schedule U-T for the fiscal year ended
December 31, 1999
* Filed herewith
4. Reports on Form 8-K
In its Report on Form 8-K dated November 5, 1999, the Company reported that it
has entered into a definitive agreement with Eastern, pursuant to which KeySpan
will acquire all of the outstanding common stock of Eastern.
In its Report on Form 8-K dated September 16, 1999, the Company reported:
(1)that it intends to begin a process to review strategic alternatives for
the Houston Exploration Company, in which the Company has a 64% share
ownership.
(2)that it currently believes that its earnings for the year ending
December 31, 1999, will exceed most securities analysts' estimates.
In its Report on Form 8-K dated December 2, 1999 the Company reported its
consolidated financial statements for each of the nine months ended December 31,
1998, the twelve months ended March 31, 1998, the three months ended March 31,
1997 and the twelve months ended December 31, 1996 with a new note, containing
summarized financial information for KeySpan Gas East Corporation, had been
added.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
KEYSPAN CORPORATION
d/b/a KeySpan Energy
March 9, 2000 By: /s/Gerald Luterman
Gerald Luterman
Senior Vice President and
Chief Financial Officer
March 9, 2000 By: /s/Ronald S. Jendras
--------------------
Ronald S. Jendras
Vice President, Controller and
Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 9, 2000.
* Chairman of the Board and Chief Executive Officer
________________________ (Principal executive officer)
Robert B. Catell
Senior Vice-President and Chief Financial Officer
(Principal financial officer)
/s/Gerald Luterman
Gerald Luterman
Vice President, Controller and Chief Accounting Officer
/s/Ronald S. Jendras (Principal accounting officer)
----------------------
Ronald S. Jendras
* Director
------------------------
Lilyan H. Affinito
* Director
------------------------
George Bugliarello
* Director
------------------------
Howard R. Curd
* Director
------------------------
Richard N. Daniel
* Director
------------------------
Donald H. Elliott
* Director
------------------------
Alan H. Fishman
* Director
------------------------
James R. Jones
* Director
------------------------
Stephen W. McKessy
* Director
------------------------
Edward D. Miller
* Director
------------------------
Basil A. Paterson
* Director
------------------------
James Q. Riordan
* Director
------------------------
Frederic V. Salerno
* Director
------------------------
Vincent Tese
By: /s/Gerald Luterman
ATTORNEY-IN-FACT
* Such signature has been affixed pursuant to a Power of Attorney filed as an
exhibit hereto and incorporated herein by reference thereto.