UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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OR
---TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 333-92003-01
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KEYSPAN GAS EAST CORPORATION
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(Exact name of Registrant as specified in its charter)
New York 11-3434848
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(State or other jurisdiction of ) (I.R.S. Employer Identification No.)
incorporation or organization)
175 East Old Country Road, Hicksville, New York 11801
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(Address of principal executive offices) (Zip Code)
(631) 755-6650
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(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
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
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding
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$.01 par value All Common stock, 100 shares, are held by
KeySpan Corporation
The registrant meets the conditions set forth in Generation Instruction
(H)(1)(a) and (b) of Form 10-Q and is therefore filing this form with the
reduced disclosure format.
KEYSPAN GAS EAST CORPORATION
INDEX
Part I. FINANCIAL INFORMATION Page No.
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Item 1. Financial Statements
Statement of Income -
Three Months Ended March 31, 2000 and 1999 3
Balance Sheet -
March 31, 2000 and December 31, 1999 4
Statement of Cash Flows -
Three Months Ended March 31, 2000 and 1999 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis Of Financial
Condition and Results of Operations 10
Part II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 14
Signatures 15
2
STATEMENT OF INCOME
(Unaudited)
(IN THOUSANDS OF DOLLARS)
THREE MONTHS Three Months
ENDED Ended
MARCH 31, 2000 March 31, 1999
- ------------------------------------------------------------- ---------------------- ---------------------
REVENUES $ 298,660 $ 268,302
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OPERATING EXPENSES
Purchased gas 144,262 127,498
Operations and maintenance 41,383 28,474
Depreciation, depletion and amortization 8,839 7,168
Operating taxes 27,291 26,173
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Total Operating Expenses 221,775 189,313
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OPERATING INCOME 76,885 78,989
OTHER INCOME 2,054 505
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INCOME BEFORE INTEREST CHARGES
AND INCOME TAXES 78,939 79,494
INTEREST CHARGES 12,201 13,469
INCOME TAXES 23,105 23,095
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NET INCOME $ 43,633 $ 42,930
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See accompanying Notes to the Financial Statements.
3
BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
MARCH 31, 2000 December 31, 1999
(Unaudited) (Audited)
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ASSETS
CURRENT ASSETS
Customer accounts receivable $ 160,071 $ 122,889
Accounts receivable, intercompany 45,924 43,405
Other accounts receivable 124,684 117,738
Allowance for uncollectible accounts (10,226) (5,310)
Gas in storage, at average cost 14,573 72,741
Materials and supplies, at average cost 6,035 5,507
Other 1,180 1,445
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342,241 358,415
PROPERTY
Gas 1,414,701 1,393,533
Accumulated depreciation (253,313) (245,956)
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1,161,388 1,147,577
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DEFERRED CHARGES
Regulatory assets 184,759 179,742
Deferred income tax 46,713 52,065
Other 588 373
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232,060 232,180
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TOTAL ASSETS $ 1,735,689 $ 1,738,172
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See accompanying Notes to the Financial Statements.
4
BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
MARCH 31, 2000 December 31, 1999
(Unaudited) (Audited)
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LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
Current maturities of long-term debt $ - $ 397,000
Accounts payable and accrued expenses 118,941 142,481
Taxes accrued 11,836 5,005
Customer deposits 3,945 3,845
Interest accrued 5,162 -
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139,884 548,331
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INTERCOMPANY ACCOUNTS PAYABLE, LONG-TERM 215,242 258,079
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DEFERRED CREDITS AND OTHER LIABILITIES
Regulatory liabilities 26,259 20,888
Operating reserves and other 81,693 81,896
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107,952 102,784
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CAPITALIZATION
Premium on capital stock 657,862 657,862
Retained earnings 38,845 (4,788)
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Total common shareholders' equity 696,707 653,074
Long-term debt 575,904 175,904
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TOTAL CAPITALIZATION 1,272,611 828,978
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TOTAL LIABILITIES AND CAPITALIZATION $ 1,735,689 $ 1,738,172
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See accompanying Notes to the Financial Statements.
5
STATEMENT OF CASH FLOWS
(Unaudited)
(IN THOUSANDS OF DOLLARS)
THREE MONTHS Three Months
ENDED Ended
MARCH 31, 2000 March 31, 1999
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OPERATING ACTIVITIES
Net Income $ 43,633 $ 42,930
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES
Depreciation, depletion and amortization 8,839 7,168
Deferred income tax 5,352 23,095
CHANGES IN ASSETS AND LIABILITIES
Accounts receivable and accrued revenues (41,732) (74,465)
Materials and supplies, fuel oil and gas in storage 57,640 57,533
Accounts payable and accrued expenses (16,709) 10,901
Interest accrued 5,162 -
Other (453) (9,728)
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Net Cash Provided by Operating Activities 61,732 57,434
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INVESTING ACTIVITIES
Capital expenditures (21,895) (16,796)
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Net Cash (Used in) Investing Activities (21,895) (16,796)
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FINANCING ACTIVITIES
Issuance of long-term debt 400,000 -
Repayment of long-term debt (397,000) -
Intercompany accounts payable - long-term debt (42,837) (40,638)
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Net Cash (Used in) Financing Activities (39,837) (40,638)
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Net Increase (Decrease) in Cash and Cash Equivalents - -
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Cash and cash equivalents at beginning of period $ - $ -
Net Increase (Decrease) in cash and cash equivalents - -
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Cash and Cash Equivalents at End of Period (See Note 5) $ - $ -
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See accompanying Notes to the Financial Statements.
6
NOTES TO FINANCIAL STATEMENTS
KeySpan Gas East Corporation, d/b/a KeySpan Energy Delivery Long Island (the
"Company") is a wholly owned subsidiary of KeySpan Corporation d/b/a KeySpan
Energy (the "Parent"). The Company provides gas distribution services to
approximately 478,000 customers in the Long Island counties of Nassau and
Suffolk and the Rockaway Peninsula of the Borough of Queens.
1. BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited Financial
Statements contain all adjustments necessary to present fairly the financial
position of the Company as of March 31, 2000, and the results of its
operations and cash flows for the three months ended March 31, 2000 and 1999.
The accompanying financial statements should be read in conjunction with the
financial statements and notes included in the Company's 1999 Annual Report
on Form 10-K. Income from interim periods may not be indicative of future
results. Certain reclassifications were made to conform prior period
financial statements with the current period financial statement
presentation. Other than as noted, adjustments were of a normal, recurring
nature.
2. REVENUES
The gas distribution business is influenced by seasonal weather conditions.
Annual gas revenues are substantially realized during the heating season
(November 1 to April 30) as a result of the large proportion of heating
sales, primarily residential, compared with total sales. Accordingly, results
of operations for gas distribution operations historically are most favorable
in the three months ended March 31, with results of operations being next
most favorable in the three months ended December 31. Results for the quarter
ended June 30 are marginally profitable or unprofitable, and losses are
generally incurred in the quarter ended September 30.
The Company operates under a utility tariff that contains a weather
normalization adjustment that largely offsets shortfalls or excesses of firm
net revenues (i.e., revenues less gas costs and revenue taxes) during a
heating season due to variations from normal weather.
3. ENVIRONMENTAL MATTERS
The Company has identified nineteen manufactured gas plant ("MGP") sites
which were historically owned or operated by the Company (or its
predecessors). These former sites, some of which are no longer owned by the
Company, have been identified to the New York State Department of
Environmental Conservation ("DEC") for inclusion on appropriate waste site
inventories.
The Company presently estimates the cost of its MGP-related environmental
cleanup activities will be approximately $77 million; which amount has been
accrued by the Company as its current best estimate of its aggregate
environmental liability for known sites. The currently-known
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conditions of the 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. 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.
Eleven sites identified are currently the subject of Administrative Consent
Orders ("ACO") with the DEC and one recently identified site is subject to
the negotiation of an agreement under the DEC's Voluntary Clean-up Program.
The Company's remaining MGP sites have also recently been identified to the
DEC and may not become subject to ACOs in the future; accordingly no
liability has been accrued for these sites.
The current rate plan in effect provides for recovery of environmental costs.
At March 31, 2000, the Company has reflected a regulatory asset of
approximately $77 million. Expenditures incurred to date by the Company with
respect to MGP-related activities total $5.4 million.
4. ISSUANCE OF LONG-TERM DEBT
In December 1999, the Company and the Parent jointly filed a shelf
registration statement with the Securities and Exchange Commission ("SEC")
in anticipation of issuing up to $600 million of Medium Term Notes. On
February 1, 2000, the Company issued $400 million 7.875% Notes due February
1, 2010, the net proceeds of which were used to repay the Parent for its
costs in extinguishing certain promissory notes due LIPA that matured in
June 1999. The Medium Term Notes are fully and unconditionally guaranteed
by the Parent.
5. RELATED PARTY TRANSACTIONS
The Company engages in various transactions with affiliates of the Parent. In
addition, all cash collected from the Company's gas customers is collected
and held by the Parent's corporate and administrative subsidiary. Further,
all payments to third parties for Company payables, including labor, are made
by the Parent's corporate and administrative subsidiary on behalf of the
Company. The Company is also obligated to reimburse the Parent for the
Company's allocated share of principal and interest on the promissory notes
due to the Long Island Power Authority ("LIPA"). At March 31, 2000 and
December 31, 1999, the Company had a current intercompany accounts receivable
balance of $45.9 million and $43.4 million from the Parent's corporate and
administrative subsidiary, approximating twelve months of interest payments
on the Company's long-term debt outstanding at March 31, 2000 and December
31, 1999, respectively.
The balance of intercompany accounts payable amounted to $215.2 million and
$258.1 million at March 31, 2000 and December 31, 1999, respectively. This
balance reflects, primarily, the Company's allocated pension and other
postretirement liability due to the Parent, as well as natural gas purchases.
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The Company incurs expenses related to services it provides to affiliates of
the Parent. These expenses are offset by intercompany billings to the various
affiliates of the Parent for which the Company provides such services.
Billings to various affiliates of the Parent amounted to $0.4 million and
$0.8 million for the quarter ended March 31, 2000 and March 31, 1999,
respectively. These billings reduced operating expenses in the accompanying
Income Statement.
6. ACQUISITION OF EASTERN ENTERPRISES
On November 4, 1999, the Parent and Eastern Enterprises ("Eastern") announced
that the companies had signed a definitive merger agreement under which the
Parent will acquire all of the common stock of Eastern for $64.00 per share
in cash. The Agreement and Plan of Merger is included as an exhibit to the
Parent's Form 8-K filed on November 5, 1999.
In connection with the merger, Eastern has amended its merger agreement with
EnergyNorth, Inc. ("EnergyNorth") to provide for an all cash acquisition by
Eastern 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.
The merger is conditioned upon the approval the of the SEC. Shareholders of
both Eastern and EnergyNorth, as well as the New Hampshire Public Utility
Commission (with respect to Eastern's acquisition of EnergyNorth) have
approved the transactions. The Parent anticipates that the transaction will
be consummated in the third or fourth quarter of 2000, but is unable to
determine when or if the required approval will be obtained.
Eastern owns and operates Boston Gas Company, Colonial Gas Company, Essex
Gas Company, Midland Enterprises Inc., Transgas Inc., and ServicEdge
Partners, Inc.
7. NEW FINANCIAL ACCOUNTING STANDARDS
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 of March 31, 2000, the Company did not have
any derivative financial instruments.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NET REVENUES AND GAS SALES QUANTITIES
The table below highlights net revenues and sales quantity statistics for the
Company for the periods indicated.
(IN THOUSANDS OF DOLLARS)
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
- -------------------------------------- ----------------------------------------
Revenues $ 298,660 $ 268,302
Purchased gas 144,262 127,498
Revenue taxes 11,790 12,900
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Net Revenues 142,608 127,904
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Firm gas sales (MDTH) 26,879 25,241
Firm transportation (MDTH) 2,260 2,172
Transportation -
Electric Generation (MDTH) 12,786 8,488
Other sales (MDTH) 10,643 8,725
Warmer than normal 8.7% 8.2%
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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.
Net gas revenues increased during the first quarter of 2000, as compared to the
first quarter of last year, by $14.7 million, due primarily to the addition of
new gas customers and oil to gas conversions. Long Island has a very low natural
gas saturation rate and significant gas-sales growth opportunities are believed
to be 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.
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.
Firm gas sales and transportation quantities increased during the first quarter
of 2000, as compared to the same period last year, due to an increase in
normalized firm sales resulting from gas-sales growth. Firm gas transportation
quantities increased slightly in the first quarter of 2000, as the Company
continues its natural gas deregulation initiatives. The Company's net margins
are not
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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 full sales service customers.
Transportation quantities related to electric generation, reflect the
transportation of gas to the Parent's electric generating facilities located on
Long Island. Net revenues from these volumes are minimal.
Other sales quantities include on-system interruptible quantities, off-system
sales quantities (sales made to customers outside of the Company's service
territory) and related transportation. A subsidiary of the Parent, which is
responsible for gas procurement and off-system sales, has an agreement with
Coral Energy Resources, L.P., a subsidiary of Shell Oil Company ("Coral") in
which Coral assists in the origination, structuring, valuation and execution of
energy-related transactions on behalf of the Company. A sharing agreement exists
between gas ratepayers and the Company for off-system gas 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.
OPERATING EXPENSES
Comparative operating expenses increased by $32.5 million, or 17.1%, in the
first quarter of 2000 as compared to the corresponding period last year. The
increase in gas costs for the first quarter of 2000 as compared to the first
quarter of last year was due to the increase in gas sales growth, as discussed
above and increases in gas prices generally. Variations in gas costs have little
impact on operating results as the current gas rate structure 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. Operations and maintenance expense in the first quarter of 2000
reflects, generally, higher labor costs and associated employee benefit
expenses, and additional provisions for uncollectible accounts. The increase in
depreciation and amortization expense generally reflects continued property
additions. Further, operating taxes which include state and local taxes on
property have increased as the applicable property base and tax rates generally
have increased.
OTHER EXPENSES
Income tax expense reflects the higher level of pre-tax income for the quarter
ended March 31, 2000 as compared to the corresponding quarter last year.
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LIQUIDITY, CAPITAL EXPENDITURES AND FINANCING
LIQUIDITY
Cash flow from operations reflects continued gas-sales growth through new
customer additions and oil to gas conversions. The Company does not maintain a
cash balance. All cash generated from billings to customers for gas service is
maintained by the Parent's corporate and administrative subsidiary. Further, all
payments to third parties for Company payables, including labor, are made by the
Parent's corporate and administrative subsidiary on behalf of the Company. (See
Note 5 to the Financial Statements, "Related Party Transactions".) The Company
records as an intercompany accounts receivable or intercompany accounts payable
to the Parent's corporate and administrative subsidiary the difference between
the cash received from customers compared to third party payments. At March 31,
2000, the Company had an intercompany accounts payable of $215.2 million due to
the Parent's corporate and administrative subsidiary. In addition, at March 31,
2000 the Company had a current intercompany accounts receivable balance of $45.9
million from the Parent's corporate and administrative subsidiary, approximating
twelve months of interest payments on the Company's long-term debt outstanding
at March 31, 2000.
CAPITAL EXPENDITURES
Capital expenditures were $21.9 million for the quarter ended March 31, 2000 and
were primarily for the renewal and replacement of mains and services and for the
expansion of the gas distribution system on Long Island. The amount of capital
expenditures is reviewed on an ongoing basis and can be affected by timing,
scope and changes in investment opportunities.
FINANCING
In December 1999, the Company and the Parent jointly filed a shelf registration
statement with the Securities and Exchange Commission in anticipation of issuing
up to $600 million of Medium Term Notes. On February 1, 2000, the Company issued
$400 million 7.875% Notes due February 1, 2010. The net proceeds from the
issuance were used to repay the Parent for its costs in extinguishing certain
promissory notes due LIPA that matured in June 1999. The notes issued are fully
and unconditionally guaranteed by the Parent.
GAS DISTRIBUTION - RATE MATTERS
By orders dated February 5, 1998 and April 14, 1998 the Public Service
Commission of the State of New York ("NYPSC") approved a Stipulation and
Agreement ("Stipulation") among KeySpan Energy Delivery New York, Long Island
Lighting Company, the Staff of the NYPSC and six other parties that established
gas rates for the Company. (For more information on these agreements refer to
the Company's Annual Report on Form 10-K for the year ended December 31, 1999.)
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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 minimum cost of
its MGP-related environmental cleanup activities will be approximately $77
million and has recorded a related liability for such amount. Further, as of
March 31, 2000, the Company has expended a total of $5.4 million. (See Note 3 to
the Financial Statements "Environmental Matters".)
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q 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 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; 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 Securities and Exchange
Commission. 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.
13
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27)* Financial Data Schedule on Schedule U-T for the quarter ended March 31,
2000.
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*Filed Herewith
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KEYSPAN GAS EAST CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf of the undersigned
there unto duly authorized.
KEYSPAN GAS EAST CORPORATION
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(Registrant)
Date: May 12, 2000 /s/ Anne C. Jordan
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Anne C. Jordan
Vice President and Chief
Financial Officer
Date: May 12, 2000 /s/ Paul R. Nick
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Paul R. Nick
Controller and Chief Accounting
Officer
15