Prospectus filed pursuant to Rule 424(b)(5)
Registration No. 333-43768
Prospectus Supplement
To Prospectus dated October 26, 2000
$1,650,000,000
[GRAPHIC_OMITTED]
KeySpan Corporation
$700,000,000 7.25% NOTES DUE 2005
$700,000,000 7.625% NOTES DUE 2010
$250,000,000 8.00% NOTES DUE 2030
The Company will pay interest on the Notes on a semi-annual basis on May 15 and
November 15 of each year, beginning May 15, 2001. Interest will accrue from
November 20, 2000. The Company may redeem the Notes in whole or in part at any
time at the redemption prices described on page S-26. The Notes will be issued
in minimum denominations of $1,000 increased in multiples of $1,000.
Neither the Securities and Exchange Commission nor any state commission has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
- --------------------------------------------------------------------------------
Price to Discounts and Proceeds to
Public Commissions the Company
- --------------------------------------------------------------------------------
Per 2005 Note 99.784% 0.600% 99.184%
- --------------------------------------------------------------------------------
Total $698,488,000 $4,200,000 $694,288,000
- --------------------------------------------------------------------------------
Per 2010 Note 99.926% 0.650% 99.276%
- --------------------------------------------------------------------------------
Total $699,482,000 $4,550,000 $694,932,000
- --------------------------------------------------------------------------------
Per 2030 Note 99.844% 0.875% 98.969%
- --------------------------------------------------------------------------------
Total $249,610,000 $2,187,500 $247,422,500
- --------------------------------------------------------------------------------
The Notes will not be listed on any national securities exchange. Currently,
there is no public market for the Notes.
It is expected that delivery of the Notes will be made on or about November 20,
2000.
J.P. MORGAN & CO.
CHASE SECURITIES INC.
SALOMON SMITH BARNEY
ABN AMRO INC. FLEET SECURITIES INC.
BANK OF AMERICA SECURITIES LLC PNC CAPITAL MARKETS, INC.
BANC ONE CAPITAL MARKETS, INC. RBC DOMINION SECURITIES
BNY CAPITAL MARKETS, INC. THE ROYAL BANK OF SCOTLAND GROUP
BARCLAYS CAPITAL INC. SCOTIA CAPITAL
CREDIT LYONNAISE SECURITIES INC. UTENDAHL CAPITAL PARTNERS, L.P.
THE WILLIAMS CAPITAL GROUP, L.P.
November 15, 2000
No person is authorized to give any information or to make any
representations other than those contained or incorporated by reference in this
prospectus supplement or the accompanying prospectus, and, if given or made,
such information or representations must not be relied upon as having been
authorized. This prospectus supplement and the accompanying prospectus do not
constitute an offer to sell or the solicitation of an offer to buy any
securities other than the securities described in this prospectus supplement or
an offer to sell or the solicitation of an offer to buy such securities in any
circumstances in which such offer or solicitation is unlawful. Neither the
delivery of this prospectus supplement or the accompanying prospectus, nor any
sale made hereunder and thereunder shall, under any circumstances, create any
implication that there has been no change in the affairs of KeySpan since the
date hereof or that the information contained or incorporated by reference
herein or therein is correct as of any time subsequent to the date of such
information.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
----
KeySpan Corporation..............................................................................................................S-1
Use of Proceeds..................................................................................................................S-2
Capitalization...................................................................................................................S-2
Selected Financial Information...................................................................................................S-3
Pro Forma Financial Information..................................................................................................S-5
Management's Discussion and Analysis of Financial Condition and Results of Operations...........................................S-13
Description of Notes............................................................................................................S-25
Underwriting....................................................................................................................S-29
Index to Financial Statements...................................................................................................FS-1
PROSPECTUS
PAGE
----
About this Prospectus..............................................................................................................1
Risk Factors.......................................................................................................................1
Where You Can Find More Information................................................................................................1
Forward-Looking Statements.........................................................................................................2
KeySpan Corporation................................................................................................................3
Use of Proceeds....................................................................................................................3
Ratio of Earnings to Fixed Charges.................................................................................................4
Description of Securities..........................................................................................................5
Certain U.S. Federal Income Tax Consequences......................................................................................16
Plan of Distribution..............................................................................................................18
Legal Opinions....................................................................................................................19
Experts...........................................................................................................................19
KEYSPAN CORPORATION
KeySpan Corporation, a New York corporation, was formed in May 1998,
as a result of the business combination of KeySpan Energy Corporation, the
parent of The Brooklyn Union Gas Company, and certain businesses of Long Island
Lighting Company. On November 8, 2000, we acquired Eastern Enterprises, a
Massachusetts business trust, and the parent of several gas utilities operating
in Massachusetts. Also on November 8, 2000, Eastern acquired EnergyNorth, Inc.,
the parent of a gas utility operating in central New Hampshire.
Our core business is gas distribution, conducted by our six regulated
gas utility subsidiaries: The Brooklyn Union Gas Company d/b/a KeySpan Energy
Delivery New York and KeySpan Gas East Corporation d/b/a KeySpan Energy Delivery
Long Island distribute gas to customers in the Boroughs of Brooklyn, Queens and
Staten Island in New York City and the Counties of Nassau and Suffolk on Long
Island, respectively; Boston Gas Company, Colonial Gas Company and Essex Gas
Company, each doing business as KeySpan Energy Delivery New England, distribute
gas to customers in eastern and central Massachusetts; and EnergyNorth Natural
Gas, Inc. d/b/a KeySpan Energy Delivery New England distributes gas to customers
in central New Hampshire. Together, these companies distribute gas to
approximately 2.4 million customers throughout the Northeast.
We are also a major, and growing, generator of electricity. We own
and operate five large generating plants and 42 smaller facilities in Nassau and
Suffolk Counties on Long Island and lease and operate a major facility in Queens
County in New York City. Under contractual arrangements, we provide power,
electric transmission and distribution services, billing and other customer
services for approximately one million electric customers of the Long Island
Power Authority on Long Island.
Our other subsidiaries are involved in oil and gas exploration and
production; gas storage; wholesale and retail gas and electric marketing;
appliance service; heating, ventilation and air conditioning installation and
services; large energy-system ownership, installation and management;
telecommunications; energy-related internet activities; fuel cells; water
barging activities, including the hauling of fuel and other cargo;
transportation by truck of liquid natural gas and propane; and providing meter
reading equipment and services to municipal utilities. We also invest in, and
participate in the development of, pipelines and other energy-related projects,
domestically and internationally.
KEYSPAN CORPORATION
|
|
|
- ----------------------------------------------|------------------------------
| | | | |
Gas Distribution-----Electric-----Gas Exploration-----Energy-------Energy
| Services & Production Services Investments
| | | | |
| | | | |
- -------|-----------------|--------------|----------------|------------|-------
KeySpan Energy KeySpan Houston KeySpan KeySpan
Delivery New Generation Exploration Services Canada
York and Long KeySpan KeySpan Inc. Midland
Island Electric Exploration Home Enterprises
Boston Gas Services & Production Energy Iroquois
Colonial Gas KeySpan Services Pipeline
Essex Gas Ravenswood Business Premier
EnergyNorth Gas KeySpan Solutions Transmission
Energy KeySpan Phoenix
Trading Energy Natural Gas
Supply
KeySpan
Communications
ServicEdge
MyHomeKey.com
We are a registered holding company under the Public Utility Holding
Company Act of 1935, as amended. Therefore, our corporate and financial
activities and those of our subsidiaries (including their ability to pay
dividends to us) are subject to regulation by the Securities and Exchange
Commission. Under our holding company structure, we have no independent
operations or source of income of our own and conduct substantially all of our
operations through our subsidiaries and, as a result, we depend on the earnings
and cash flow of, and dividends or distributions from, our subsidiaries to
provide the funds necessary to meet our debt and contractual obligations.
Furthermore, a substantial portion of our consolidated assets, earnings and cash
flow is derived from the operations
S-1
of our regulated utility subsidiaries, whose legal authority to pay dividends or
make other distributions to us is subject to regulation by state regulatory
authorities.
USE OF PROCEEDS
The net proceeds from the offering will be used to repay
approximately $1.65 billion of commercial paper backed by a $1.65 billion bank
credit facility issued to finance a portion of the acquisitions of Eastern and
EnergyNorth (the "Bridge Financing"). The Bridge Financing bears interest at a
rate of approximately 6.78% and has a maturity of up to 364 days.
CAPITALIZATION
The following table sets forth as of September 30, 2000:
o our actual capitalization;
o our pro forma capitalization showing the Eastern and EnergyNorth
acquisitions; and
o our pro forma capitalization as adjusted to reflect the receipt
of the net proceeds of the offering of the Notes and use of the
proceeds thereof to repay the Bridge Financing.
PROFORMA FOR
THE EASTERN/ PROFORMA
ENERGYNORTH ADJUSTED FOR
ACTUAL ACQUISITION OFFERING
------------------- ------------------------------------------------
(in thousands)
Short-term debt $ 382,090 $ 2,691,959 (1) $ 1,041,959(2)
=================== =================== ===================
Long-term debt $ 2,120,752 $ 2,667,900 $ 4,317,900(2)
Current maturities of long-term debt - 6,849 6,849
------------------- ------------------- -------------------
Total long-term debt 2,120,752 2,674,749 4,324,749
------------------- ------------------- -------------------
Preferred stock 84,323 101,060 101,060
------------------- ------------------- -------------------
Common stock, $.01 par value, authorized
450,000,000 shares; outstanding 134,575,028 2,987,242 2,991,914(3) 2,991,914
Retained earnings 481,658 481,658 481,658
Accumulated comprehensive income (6,476) (6,476) (6,476)
Treasury stock purchased (702,435) (702,435) (702,435)
------------------- ------------------- -------------------
Total common shareholders' equity 2,759,989 2,764,661 2,764,661
------------------- ------------------- -------------------
Total capitalization $ 4,965,064 $ 5,540,470 $ 7,190,470
=================== =================== ===================
- ------------------------------
(1)Short-term debt includes commercial paper borrowings outstanding at
September 30, 2000, the Bridge Financing, gas inventory financing and
commercial paper issued to finance transaction and restructuring
costs incurred in connection with the acquisitions.
(2)Adjusted for the issuance of the Notes and repayment of the Bridge Financing.
(3)Adjusted for the conversion of Eastern options to KeySpan options.
S-2
SELECTED FINANCIAL INFORMATION
We derived the selected financial information presented below from
our audited historical consolidated financial statements as of and for the year
ended December 31, 1999, our unaudited consolidated financial statements as of
and for the nine months ended September 30, 1999 and 2000, and our pro forma
financial information which combines the historical information of KeySpan,
Eastern and EnergyNorth. You should read the selected financial information
together with our consolidated financial statements, the consolidated financial
statements of Eastern, our pro forma financial information and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," each
of which is included in this document.
PROFORMA
NINE MONTHS
YEAR ENDED NINE MONTHS ENDED ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1999 2000
-----------------------------------
1999 2000
------------------ ----------------- -------------- -----------------
(dollars in thousands)
INCOME SUMMARY
REVENUES
Gas distribution $ 1,753,132 $ 1,208,254 $ 1,458,595 $ 2,183,827
Electric services 861,582 606,552 1,097,616 1,097,616
Gas exploration and production 150,581 103,622 169,966 169,966
Energy related services and other 189,318 124,675 485,161 504,874
Marine services - - - 211,751
---------- ---------- ---------- ----------------
TOTAL REVENUES 2,954,613 2,043,103 3,211,338 4,168,034
OPERATING EXPENSES
Purchased gas and fuel 761,684 498,609 1,051,275 1,393,854
Depreciation, depletion and amortization 253,440 180,698 216,364 322,229
Other operating expenses 1,457,320 1,023,576 1,421,591 1,884,232
--------- --------- --------- -----------------
OPERATING INCOME 482,169 340,220 522,108 567,719
Other income 37,496 32,202 9,096 14,564
Interest charges 124,692 98,824 120,106 283,062
Income taxes 136,362 98,372 170,858 144,603
---------- ---------- ---------- -----------------
NET INCOME $ 258,611 $ 175,226 $ 240,240 $ 154,618
================== ================= ============== =================
FINANCIAL SUMMARY
EBITDA (1) $ 735,609 $ 520,898 $ 738,472 $ 889,948
Total assets 6,730,691 6,357,880 7,252,521 10,722,953
Common equity 2,715,025 2,701,898 2,759,989 2,764,661
Long term debt (2) 1,682,702 1,664,040 2,120,752 4,324,749
Total capitalization (3) 4,845,066 4,813,297 4,965,064 7,190,470
Short term debt (4) 208,300 103,950 382,090 1,041,959
Capital expenditures 725,670 512,991 403,611 463,557
FINANCIAL STATISTICS
Ratio of earnings to fixed charges (5) 3.23x 3.04x 3.41x N/A
EBITDA / interest expense (6) 5.90x 5.27x 6.15x 3.14x
Cash flow from operations / interest expense 4.72x 4.48x 3.89x N/A
Long term debt / total capitalization 34.73% 34.57% 42.71% 60.15%
UTILITY OPERATING STATISTICS
Firm gas and transportation sales (MDTH) (7) 275,771 197,194 189,966 313,602
Other sales (MDTH) 54,661 38,279 67,380 68,254
Total active gas meters 1,628,497 1,616,000 1,633,838 2,447,854
Gas heating customers 677,000 668,927 680,417 1,232,138
- ------------------
(1) Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA") reflects operating income with depreciation, depletion and
amortization added back. We present EBITDA because it is a widely
accepted financial indicator used by certain investors and analysts
to analyze and compare companies on the basis of operating
performance and because we believe that EBITDA is an additional
meaningful measure of performance and liquidity.
S-3
EBITDA does not represent cash flows for the period, nor is it an
alternative to operating income (loss) as an indicator of operating
performance. You should not consider it in isolation or as a
substitute for measures of performance prepared in accordance with
generally accepted accounting principles. The items excluded from the
calculation of EBITDA are significant components in understanding and
assessing our financial performance. Our computation of EBITDA may
not be comparable to the computation of similarly titled measures of
other companies. EBITDA does not represent funds available for
discretionary uses.
(2) Long term debt includes current maturities of long term debt.
(3) Total capitalization reflects shareholders' equity, preferred stock
(including currently redeemable preferred stock) and long-term debt
outstanding (including current maturities). Outstanding commercial
paper and gas inventory financing have not been reflected in total
capitalization.
(4) Short-term debt reflects commercial paper borrowings and gas
inventory financing.
(5) For the ratio of earnings to fixed charges calculation, earnings is
the amount resulting from adding (a) pre-tax income from continuing
operations before adjustment for minority interest in consolidated
subsidiaries or income or loss from equity investees, (b) fixed
charges, (c) amortization of capitalized interest and (d) distributed
income of equity investees. From this total, capitalized interest was
subtracted. The term "fixed charge" is the sum of the following: (a)
interest expensed and capitalized, (b) amortized premiums and
discounts related to indebtedness and (c) an estimate of the interest
expenses within rental expense.
(6) Interest expense included in this calculation includes interest on
long-term debt, short-term debt and amortized premiums and discounts
related to indebtedness. Capitalized interest is not included in
interest expense.
(7) A 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.
S-4
PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma consolidated condensed balance sheet as of
September 30, 2000 and the unaudited pro forma consolidated condensed income
statements for the nine months ended September 30, 2000 and the year ended
December 31, 1999 combine the historical information of KeySpan, Eastern and
EnergyNorth. The unaudited pro forma consolidated condensed financial statements
have been prepared to reflect our acquisitions of Eastern and EnergyNorth under
the purchase method of accounting. Under the purchase method of accounting,
assets acquired and liabilities assumed are recorded at their estimated fair
values. The excess of the purchase price, including estimated fees and expenses
directly related to the acquisition, in excess of the fair value of the net
assets acquired is classified as goodwill on the accompanying unaudited pro
forma consolidated condensed balance sheet. The estimated fair values and useful
lives of assets acquired and liabilities assumed and any resulting goodwill, are
subject to final valuation adjustments in accordance with generally accepted
accounting principles.
The pro forma adjustments reflected in the unaudited pro forma
consolidated condensed balance sheet are as if the transactions had occurred on
September 30, 2000. The unaudited pro forma consolidated condensed income
statement for the nine months ended September 30, 2000 assumes that these
transactions were completed on January 1, 2000. The unaudited pro forma
consolidated condensed income statement for the year ended December 31, 1999
assumes that these transactions were completed on January 1, 1999. The unaudited
pro forma consolidated condensed financial statements reflect our purchase of
all of the outstanding common stock of Eastern for $64.56 per share in cash and
all of the outstanding common stock of EnergyNorth for $61.46 per share in cash
on November 8, 2000.
On August 31, 1999, Eastern completed a merger with Colonial Gas
Company which was accounted for using the purchase method of accounting; Eastern
was the acquiring company for financial reporting purposes. The unaudited pro
forma consolidated condensed income statement for the year ended December 31,
1999, therefore, reflects the results of operations of Colonial for the four
month period September 1, 1999 through December 31, 1999.
The unaudited pro forma consolidated condensed financial statements
do not reflect the anticipated cost savings that may be obtained from the
elimination of duplicate corporate and administrative programs in connection
with the acquisitions or operating efficiencies that may result. We have
identified before-tax synergy savings to be approximately $40 million annually.
The following unaudited pro forma consolidated condensed financial
statements should be read in conjunction with the historical consolidated
financial statements and related notes thereto of KeySpan, Eastern and
EnergyNorth. The following statements are not necessarily indicative of the
financial position or operating results that would have occurred had the
proposed transactions been consummated on the date, or at the beginning of the
period, for which the proposed transactions are being given effect nor are they
necessarily indicative of future operating results or financial position.
KEYSPAN
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
SEPTEMBER 30, 2000
Transaction Transaction
KeySpan Eastern Adjustments Pro Forma EnergyNorth Adjustments Pro Forma
------------ ------------ -------------- ------------ -------------- ------------- ----------
(in thousands)
ASSETS
- ------
CURRENT ASSETS
Cash and temporary cash
investments $ 63,618 $ 39,122 $ (53,747)(4) $ 48,993 $ 175 $ (6,253) (11) $ 42,915
Customer accounts receivable, net 806,087 74,397 - 880,484 14,478 - 894,962
Other 486,856 195,025 - 681,881 15,916 - 697,797
----------- ---------- ---------- ------------ --------- -------- -------------
1,356,561 308,544 (53,747) 1,611,358 30,569 (6,253) 1,635,674
----------- ---------- ---------- ------------ --------- -------- -------------
EQUITY INVESTMENTS AND OTHERS 427,557 14,265 - 441,822 - - 441,822
----------- ---------- ---------- ------------ --------- -------- -------------
PROPERTY
Electric 1,386,206 - - 1,386,206 - - 1,386,206
Gas 3,584,690 1,538,249 - 5,122,939 179,838 - 5,302,777
Other 393,252 684,401 - 1,077,653 8,016 - 1,085,669
Accumulated depreciation (1,688,283) (943,081) - (2,631,364) (60,445) - (2,691,809)
Gas exploration and production 1,346,357 - - 1,346,357 - - 1,346,357
Accumulated depletion (582,912) - - (582,912) - - (582,912)
----------- ---------- ---------- ------------ --------- -------- -------------
4,439,310 1,279,569 - 5,718,879 127,409 - 5,846,288
----------- ---------- ---------- ------------ --------- -------- -------------
DEFERRED CHARGES
Goodwill, net of amortization 350,552 242,497 1,126,767(1) 1,719,816 - 174,870(8) 1,894,686
Regulatory assets and other 678,541 138,778 53,747(4) 881,815 15,164 6,253(11) 904,483
- - 10,749(2) - - 1,251(9) -
----------- ---------- ---------- ------------ --------- -------- -------------
1,029,093 381,275 1,191,263 2,601,631 15,164 182,374 2,799,169
----------- ---------- ---------- ------------ --------- -------- -------------
TOTAL ASSETS $ 7,252,521 $1,983,653 $1,137,516 $ 10,373,690 $ 173,142 $176,121 $ 10,722,953
=========== ========== ========== ============ ========= ======== =============
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
Current maturities of
long-term debt $ - $ 6,072 $ - $ 6,072 $ 777 - $ 6,849
Accounts payable and accrued
expenses 876,771 154,747 - 1,031,518 21,094 - 1,052,612
Commercial paper 382,090 121,990 276,907(1) 899,033 21,503 32,224(8) 970,847
- - 8,100(2) - - 2,100(9) -
- - 99,197(3) - - 14,736(10) -
- - 10,749(2) - - 1,251(9) -
---------- ---------- --------- ---------- -------- --------- -------------
1,258,861 282,809 394,953 1,936,623 43,374 50,311 2,030,308
---------- ---------- --------- ---------- -------- --------- -------------
DEFERRED CREDITS AND OTHER
LIABILITIES
Deferred income taxes 238,748 183,728 - 422,476 21,698 - 444,174
Reserves and other liabilities 681,964 198,673 - 880,637 5,217 - 885,854
---------- ---------- --------- ---------- -------- --------- -------------
920,712 382,401 - 1,303,113 26,915 - 1,330,028
---------- ---------- --------- ---------- -------- --------- -------------
GAS INVENTORY FINANCING - 59,657 - 59,657 11,455 - 71,112
---------- ---------- --------- ---------- -------- --------- -------------
CAPITALIZATION
Long-term debt 2,120,752 501,937 1,478,003(1) 4,100,692 45,211 171,997(8) 4,317,900
---------- ---------- --------- ---------- -------- --------- -------------
Preferred stock 84,323 16,737 - 101,060 - - 101,060
---------- ---------- --------- ---------- -------- --------- -------------
Common stock 2,987,242 274,028 (274,028)(1) 2,991,914 35,966 (35,966)(8) 2,991,914
- - 4,672(3) - - - -
---------- ------------ --------- --------- ---------- -------- -------------
Retained earnings 481,658 466,512 (466,512)(1) 481,658 10,221 (10,221)(8) 481,658
Accumulated comprehensive income (6,476) 155 (155)(1) (6,476) - - (6,476)
Treasury stock purchased (702,435) (583) 583(1) (702,435) - - (702,435)
---------- ---------- --------- ---------- -------- --------- -------------
Total common shareholders
equity 2,759,989 740,112 (735,440) 2,764,661 46,187 (46,187) 2,764,661
---------- ---------- -------- ---------- -------- -------- -------------
Total capitalization 4,965,064 1,258,786 742,563 6,966,413 91,398 125,810 7,183,621
---------- ---------- --------- ---------- -------- --------- -------------
MINORITY INTEREST 107,884 - - 107,884 - - 107,884
---------- ---------- --------- ---------- -------- --------- -------------
TOTAL LIABILITIES AND CAPITALIZATION $7,252,521 $1,983,653 $1,137,516 $10,373,690 $173,142 $ 176,121 $ 10,722,953
========== ========== ========= ========== ======== ========== =============
KEYSPAN
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1999
Transaction Pro Transaction
KeySpan Eastern Adjustments Forma EnergyNorth Adjustments Pro Forma
----------- ----------- ---------- ------------ ---------- ------- ------------
(dollars in thousands)
REVENUES
Gas Distribution $1,753,132 $ 690,809 - $ 2,443,941 $ 124,863 - $ 2,568,804
Marine Services - 267,269 - 267,269 - - 267,269
Electric Services 861,582 - - 861,582 - - 861,582
Gas Exploration and Production 150,581 - - 150,581 - - 150,581
Energy Related Services and Other 189,318 20,624 - 209,942 - - 209,942
---------- ----------- --------- ------------ ---------- --------- -------------
Total Revenues 2,954,613 978,702 - 3,933,315 124,863 - 4,058,178
---------- ----------- --------- ------------ ---------- --------- -------------
OPERATING EXPENSES
Purchased gas 744,432 339,274 - 1,083,706 73,961 - 1,157,667
Purchased fuel 17,252 - - 17,252 - - 17,252
Operations and maintenance 1,091,166 403,465 - 1,494,631 27,086 - 1,521,717
Depreciation, depletion and
amortization 253,440 81,373 28,169(6) 362,982 7,845 4,372 (13) 375,199
Operating taxes 366,154 41,151 - 407,305 3,812 - 411,117
---------- ----------- --------- ----------- ---------- --------- -------------
Total Operating Expenses 2,472,444 865,263 28,169 3,365,876 112,704 4,372 3,482,952
---------- ----------- --------- ----------- ---------- --------- -------------
OPERATING INCOME 482,169 113,439 (28,169) 567,439 12,159 (4,372) 575,226
---------- ----------- --------- ----------- ---------- --------- -------------
OTHER INCOME AND (DEDUCTIONS)
Income from equity investments 15,347 - - 15,347 - - 15,347
Interest income 26,993 7,964 - 34,957 - - 34,957
Minority interest (11,141) - - (11,141) - - (11,141)
Other 6,297 8,980 - 15,277 525 - 15,802
---------- ----------- --------- ----------- ---------- --------- -------------
Total Other Income 37,496 16,944 - 54,440 525 - 54,965
---------- ----------- --------- ----------- ---------- --------- -------------
INCOME BEFORE INTEREST CHARGES
AND INCOME TAXES 519,665 130,383 (28,169) 621,879 12,684 (4,372) 630,191
INTEREST CHARGES 124,692 37,274 147,220(5) 309,186 4,915 17,427 (12) 331,528
INCOME TAXES 136,362 36,154 (51,527(7) 120,989 3,740 (6,099)(14) 118,630
NET INCOME 258,611 56,955 (123,862) 191,704 4,029 (15,700) 180,033
Preferred stock dividend requirements 34,752 1,862 - 36,614 - - 36,614
Earnings for common stock $ 223,859 $ 55,093 $(123,862) $ 155,090 $ 4,029 $ (15,700) $ 143,419
========== =========== ========= =========== ========== ========= =============
Averages shares outstanding (000) 138,526 - - 138,526 - - 138,526
BASIC AND DILUTED EARNINGS PER
COMMON SHARE $ 1.62 - - $ 1.12 - - $ 1.04
========== =========== =============
KEYSPAN
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED INCOME STATEMENT
NINE MONTHS ENDED SEPTEMBER 30, 2000
Transaction Transaction
KeySpan Eastern Adjustments Pro Forma EnergyNorth Adjustments Pro Forma
----------- ---------- ------------ ---------- ----------- ----------- -----------
(in thousands)
REVENUES
Gas Distribution $ 1,458,595 $ 576,084 - $ 2,034,679 $ 149,148 - $ 2,183,827
Marine Services - 211,751 - 211,751 - - 211,751
Electric Services 1,097,616 - - 1,097,616 - - 1,097,616
Gas Exploration and Production 169,966 - - 169,966 - - 169,966
Energy Related Services and Other 485,161 19,713 - 504,874 - - 504,874
--------- ------- --------- --------- -------- -------- ------------
Total Revenues 3,211,338 807,548 - 4,018,886 149,148 - 4,168,034
--------- ------- --------- --------- -------- -------- ------------
OPERATING EXPENSES
Purchased gas 717,140 280,469 - 997,609 94,884 - 1,092,493
Purchased fuel 301,361 - - 301,361 - - 301,361
Operations and maintenance 1,156,355 357,955 - 1,514,310 33,334 - 1,547,644
Depreciation, depletion and
amortization 216,364 73,051 21,127(6) 310,542 8,408 3,279(13) 322,229
Operating taxes 298,010 34,424 - 332,434 4,154 - 336,588
--------- ------- --------- --------- -------- -------- ------------
Total Operating Expenses 2,689,230 745,899 21,127 3,456,256 140,780 3,279 3,600,315
--------- ------- --------- --------- -------- -------- ------------
OPERATING INCOME 522,108 61,649 (21,127) 562,630 8,368 (3,279) 567,719
--------- ------- --------- --------- -------- -------- ------------
OTHER INCOME AND (DEDUCTIONS)
Income from equity investments 16,333 - - 16,333 - - 16,333
Minority interest (13,747) - - (13,747) - - (13,747)
Other 6,510 5,225 - 11,735 243 - 11,978
--------- ------- --------- --------- -------- -------- ------------
Total Other Income 9,096 5,225 - 14,321 243 - 14,564
--------- ------- --------- --------- -------- -------- ------------
INCOME BEFORE INTEREST CHARGES
AND INCOME TAXES 531,204 66,874 (21,127) 576,951 8,611 (3,279) 582,283
INTEREST CHARGES 120,106 34,139 110,415(5) 264,660 5,332 13,070 (12) 283,062
INCOME TAXES 170,858 13,828 (38,645)(7) 146,041 3,137 (4,575)(14) 144,603
NET INCOME 240,240 18,907 (92,897) 166,250 142 (11,774) 154,618
Preferred stock dividend requirements 16,453 1,082 - 17,535 - - 17,535
Earnings for common stock $ 223,787 $17,825 $(92,897) $ 148,715 $ 142 $(11,774) $ 137,083
========= ======= ========= ========= ======== ========= ============
Averages shares outstanding (000) 133,965 - - 133,965 - - 133,965
BASIC AND DILUTED EARNINGS PER
COMMON SHARE $ 1.67 - - $ 1.11 - - $ 1.02
========= ========= ============
NOTES TO THE UNAUDITED PRO FORMA
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2000
NOTE 1. CASH CONSIDERATION AND ESTIMATED GOODWILL RELATED TO THE EASTERN
ACQUISITION
Cash consideration paid to Eastern shareholders will be refinanced
from the proceeds of the Notes and commercial paper issuances. We will issue
approximately $1.478 billion of Notes at an estimated annual effective interest
rate of 8.149% and approximately $277 million of commercial paper at an
estimated annual interest rate of 6.78%. We acquired all of the outstanding
common stock of Eastern for $64.56 per share, in cash.
The estimated goodwill reflects the recognition of the excess
amount of the purchase price over the fair value of the net assets acquired,
including costs incurred directly related to the consummation. The following
represents the estimated goodwill calculation:
Estimated Eastern common shares outstanding at date of closing 27,183,454
Share price $ 64.558
--------------
Purchase price $ 1,754,909,423
Common equity of Eastern (740,112,000)
--------------
$ 1,014,797,423
Estimated transaction costs (see note 2) 8,100,000
Estimated restructuring and other costs (see note 3) 103,870,000
--------------
Estimated goodwill $ 1,126,767,423
==============
Amortization period 40
Estimated yearly amortization $ 28,169,186
Estimated nine months amortization $ 21,126,889
A final determination of goodwill will reflect purchase accounting
adjustments based on the fair value of assets and liabilities acquired,
actuarial valuations related to employee benefit plans, estimates with respect
to the effect of consolidation of corporate and administrative functions,
completion of studies related to environmental issues, possible contract and
asset impairment charges, possible asset sales, and other adjustments.
NOTE 2. ESTIMATED TRANSACTION COSTS ASSOCIATED WITH THE EASTERN ACQUISITION
We have incurred direct expenses related to the acquisition,
including accounting, investment banking, legal and consulting fees. The pro
forma adjustments include an estimate for these costs of $8.1 million, which is
included in goodwill. These costs will be refinanced through the issuance of
commercial paper. We will also incur underwriting fees of approximately $10.7
million. These costs will be amortized to interest expense over the life of the
related debt and will be financed through the issuance of commercial paper.
NOTE 3. ESTIMATED RESTRUCTURING AND OTHER COSTS ASSOCIATED WITH THE EASTERN
ACQUISITION
Eastern has incurred direct expenses related to the acquisition,
including accounting, investment banking, legal and consulting fees, of
approximately $13.9 million. In addition, Eastern incurred expenses of
approximately $76.3 million for contractual obligations, such as "change in
control" payments and non-qualified stock options, that were "cashed out." These
costs have been expensed as incurred by Eastern and have been included in the
calculation of estimated goodwill. These costs will be refinanced through the
issuance of commercial paper. Eastern has also incurred costs of approximately
$9 million associated with a severance program. These costs have also been
included in the calculation of estimated goodwill and will be financed through
the issuance of commercial paper. Further, some Eastern options were converted
to options to purchase KeySpan stock. The estimated value of such options, which
were primarily fully vested, approximated $4.7 million and were recorded as
additional purchase price consideration by us.
NOTE 4. FORWARD STARTING SWAP AGREEMENT
In anticipation of issuing long-term debt, we entered into forward
starting swap agreements to hedge a portion of the risk that the cost of the
issuance of the Notes would be adversely affected by changes in interest rates.
Through September 30, 2000, we entered into $1.35 billion of forward starting
swap agreements with interest rates that ranged from 6.86% to 7.78%. The
maturities on these instruments range from 5 to 30 years. Based on interest
rates effective as of October 30, 2000, we estimate that we may be obligated to
pay counterparties approximately $54 million at the time of the issuance of the
Notes. This amount will be amortized to interest expense over the life of the
Notes and reflects the significant decrease in interest rates since we entered
into the forward starting swap lock agreements.
NOTE 5. INTEREST EXPENSE ASSOCIATED WITH THE EASTERN ACQUISITION
Interest expense reflects the issuance of approximately $1.478
billion of Notes and approximately $277 million of commercial paper to refinance
a portion of the Bridge Financing and other commercial paper, which was issued
to finance a portion of the acquisition price of Eastern at estimated annual
effective interest rates of 8.149% and 6.78%, respectively. The long-term debt
interest rate is an all-inclusive rate that reflects the rates associated with
our forward starting swap agreements, as well as our estimated credit spread and
an estimate for the amortization of underwriting fees. Interest expense also
reflects the issuance of commercial paper to finance transaction costs of
approximately $118 million at an estimated annual interest rate of 6.78%. A
change in the actual interest rate of 0.125%, as compared to the estimated
interest rates, will change net income by approximately $1.5 million annually
and by $1.1 million for nine months.
NOTE 6. AMORTIZATION OF GOODWILL ASSOCIATED WITH THE EASTERN ACQUISITION
Goodwill, which is not tax deductible, will be amortized over a 40
year period.
NOTE 7. INCOME TAXES ASSOCIATED WITH THE EASTERN ACQUISITION
Income taxes on the unaudited pro forma consolidated condensed
income statement have been adjusted to reflect the tax deduction of interest
expense at a rate of 35%. A tax benefit has not been provided for goodwill since
it is not tax deductible.
NOTE 8. CASH CONSIDERATION AND ESTIMATED GOODWILL ASSOCIATED WITH THE
ENERGYNORTH ACQUISITION
Cash consideration paid to EnergyNorth shareholders will be
refinanced from the proceeds of the Notes and commercial paper issuances. We
will issue approximately $172 million of Notes at an estimated annual effective
interest rate of 8.149% and approximately $32 million of commercial paper at an
estimated annual interest rate of 6.78%. We acquired all of the outstanding
common stock of EnergyNorth for $61.46 per share, in cash.
The estimated goodwill reflects the recognition of the excess amount
of the purchase price over the fair value of the net assets acquired, including
adjustments for costs incurred directly related to the consummation. The
following represents the estimated goodwill calculation:
Estimated EnergyNorth common shares outstanding at date of closing 3,322,903
Share price $ 61.4587
-------------
Purchase price $ 204,221,299
Common equity of EnergyNorth (46,187,000)
-------------
$ 158,034,299
Estimated transaction costs (see note 9) 2,100,000
Estimated restructuring and other costs (see note 10) 14,736,000
-- -------------
Estimated goodwill $ 174,870,299
=============
Amortization period 40
Estimated yearly amortization $ 4,371,757
Estimated nine month amortization $ 3,278,818
A final determination of goodwill will reflect purchase accounting
adjustments based on the fair value of assets and liabilities acquired,
actuarial valuations related to employee benefit plans, estimates with respect
to the effect of consolidation of corporate and administrative functions,
completion of studies related to environmental issues, possible contract and
asset impairment charges, possible asset sales, and other adjustments.
NOTE 9. ESTIMATED TRANSACTION COSTS ASSOCIATED WITH THE ENERGYNORTH
ACQUISITION
Together, we and Eastern have incurred direct expenses related to
the EnergyNorth acquisition, including accounting, investment banking, legal and
consulting fees. The pro forma adjustments include an estimate for these costs
of $2.1 million, which is included in goodwill. These costs will be refinanced
through the issuance of commercial paper. We and Eastern will incur underwriting
fees of approximately $1.3 million. These costs will be amortized to interest
expense over the life of the related debt and will be financed through the
issuance of commercial paper.
NOTE 10. ESTIMATED RESTRUCTURING AND OTHER COSTS ASSOCIATED WITH THE
ENERGYNORTH ACQUISITION
EnergyNorth has incurred direct expenses related to the
acquisition, including accounting, investment banking, legal and consulting
fees, of approximately $4.7 million. In addition, EnergyNorth incurred expenses
of approximately $10 million for contractual obligations, such as "change in
control" payments. These costs were expensed as incurred by EnergyNorth and have
been included in the calculation of estimated goodwill. These costs will be
refinanced through the issuance of commercial paper.
NOTE 11. FORWARD STARTING SWAP AGREEMENT
In anticipation of issuing long-term debt, we entered into forward
starting swap agreements to hedge a portion of the risk that the cost of
issuance of the Notes would be adversely affected by changes in interest rates.
Through September 30, 2000, we entered into $150 million of forward starting
swap agreements with interest rates that ranged from 6.86% to 7.78%. The
maturities on these instruments range from 5 to 30 years. Based on interest
rates effective as of October 30, 2000, we estimate that we may be obligated to
pay counterparties approximately $6 million at the time of the issuance of the
Notes. This amount will be amortized to interest expense over the life of the
Notes and reflects the significant decrease in interest rates since we entered
into the forward starting swap lock agreements.
NOTE 12. INTEREST EXPENSE ASSOCIATED WITH THE ENERGYNORTH ACQUISITION
Interest expense reflects the issuance of approximately $172
million of Notes and approximately $32 million of commercial paper to refinance
the Bridge Financing and other commercial paper, which was issued to finance a
portion of the acquisition price of EnergyNorth at estimated effective annual
interest rates of 8.149% and 6.78%, respectively. The long-term debt interest
rate is an all-inclusive rate that reflects the rates associated with our
forward starting swap agreements, as well as our estimated credit spread and an
estimate for the amortization of underwriting fees. Interest expense also
reflects the issuance of commercial paper to finance transaction costs of
approximately $18.1 million at an estimated annual interest rate of 6.78%. A
change in the actual interest rate of 0.125%, as compared to the estimated
interest rates, will change net income by approximately $0.2 million annually
and have an immaterial effect on net income for the nine month period.
NOTE 13. AMORTIZATION OF GOODWILL ASSOCIATED WITH THE ENERGYNORTH ACQUISITION
Goodwill, which is not tax deductible, will be amortized over a 40
year period.
NOTE 14. INCOME TAXES ASSOCIATED WITH THE ENERGYNORTH ACQUISITION
Income taxes on the unaudited pro forma consolidated condensed
income statement have been adjusted to reflect the tax deduction of interest
expense at a rate of 35%. A tax benefit has not been provided for goodwill since
it is not tax deductible.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
The following is a summary of items affecting our comparative
earnings and a discussion of material changes in revenues and expenses during
the nine month period ended September 30, 2000 compared to the nine month period
ended September 30, 1999. For both periods presented, diluted earnings per share
is the same as basic earnings per share, since there was no effect on earnings
per share from our outstanding options. This summary does not include any
discussion of the financial results of Eastern or EnergyNorth.
EARNINGS SUMMARY
Earnings (loss) by reporting segment is set forth in the following
table for the periods indicated:
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
1999 2000
---------------- ---------------
(in thousands)
Gas distribution $ 92,873 $ 101,025
Electric services 59,786 103,316
Gas exploration and production 9,239 29,381
Energy services (2,384) 25,221
Energy investments 5,937 7,877
Other (16,292) (43,033)
------------ ---------------
Consolidated earnings $ 149,159 $ 223,787
============ ===============
Consolidated earnings were $1.67 per share for the nine months ended
September 30, 2000, compared to $1.06 per share for the corresponding period in
1999. Our average common shares outstanding for the nine months ended September
30, 2000 were approximately 4% less than the same period last year.
The increase in consolidated earnings primarily reflects the
operations of the 2,168 megawatt Ravenswood electric generating facility located
in Queens, New York, which was acquired in June 1999, as well as earnings from
our energy services segment which primarily reflect earnings from intercompany
fuel procurement and energy management services provided to the Ravenswood
facility.
The increase in earnings from the gas distribution segment for the
nine months ended September 30, 2000, compared to the corresponding period in
1999, reflects revenue benefits from continued gas sales growth and favorable
gas prices compared to oil prices.
Consolidated earnings for the nine months ended September 30, 2000,
also reflect improved performance from our gas exploration and production
segment, which benefitted from significantly higher realized gas prices and
increased production volumes compared to last year. In addition, on March 31,
2000, we increased our ownership in Houston Exploration from 64% to 70%.
Partially offsetting the aforementioned benefits to comparative
earnings were certain corporate expenses which have not been allocated to
operating segments. We also made an additional contribution to the KeySpan
Foundation, a not-for-profit philanthropic foundation that makes donations to
local charitable community organizations. In addition, we realized lower
interest income on temporary cash investments compared to the nine months ended
September 30, 1999 because we have used cash to repurchase shares of our common
stock and to finance acquisitions and joint venture investments.
S-13
REVENUES
For the nine months ended September 30, 2000, consolidated revenues
were $3.2 billion, compared to $2.0 billion for the corresponding period last
year, an increase of $1.2 billion or 57%. The increase in revenues for the nine
months ended September 30, 2000 is due primarily to:
o an increase of $457.8 million from the Ravenswood facility;
o an increase in gas distribution revenues of $250.3 million; and
o an increase of $357.3 million in revenues from the energy services
segment.
Revenues from the Ravenswood facility benefitted from the sale of
energy, capacity and ancillary services to the New York Independent System
Operator at competitive market prices. Prior to the start of the New York
Independent System Operator on November 19, 1999, all of the energy and capacity
from the Ravenswood facility was sold to Consolidated Edison Company of New York
on a cost recovery and fixed fee basis.
Revenues from the gas distribution segment benefitted from continued
gas sales growth and favorable gas prices compared to oil prices. Revenues from
the gas distribution segment also included recovery of gas costs, which have
been higher in 2000 compared to 1999.
The increase in revenues from the energy services segment resulted
from recent acquisitions of companies providing various energy-related services
throughout the New York tri-state metropolitan area, Pennsylvania and Rhode
Island, and sales growth related to our gas and electric marketing subsidiary,
KeySpan Energy Supply, LLC.
OPERATING EXPENSES
Consolidated operating expenses for the nine months ended September
30, 2000 were $2.7 billion compared to $1.7 billion for the corresponding period
last year, an increase of $1.0 billion, or 58%. The increases in operating
expenses were primarily the result of higher purchased fuel and gas costs, and
higher operations and maintenance expenses. Fuel and purchased power expense for
the operation of the Ravenswood facility was $235.1 million for the nine months
ended September 30, 2000. We did not incur any fuel costs for the Ravenswood
facility for the corresponding period in 1999. The prior owner of the Ravenswood
facility, Consolidated Edison, owned and supplied the fuel necessary to operate
the Ravenswood facility from June 19, 1999, until the start of the New York
Independent System Operator on November 19, 1999. During that time, all of the
energy generated by the Ravenswood facility was supplied to Consolidated Edison.
Purchased fuel expense also reflects costs incurred by our gas and electric
marketing subsidiary which began providing residential, commercial and
industrial customers with electricity sales in January 2000.
The increase in gas cost for the nine months ended September 30,
2000, compared to the same period last year, resulted from gas sales growth
associated with our two New York gas distribution subsidiaries and our gas
marketing subsidiary, as well as higher gas prices. Variations in utility gas
costs have little impact on operating results because the current gas rate
structure of each of our two New York gas distribution utilities includes a gas
adjustment clause under which variations between actual gas costs and gas cost
recoveries are deferred and subsequently refunded to or collected from
customers. However, fluctuations in gas costs can affect earnings of our gas and
electric marketing subsidiary, which in response, employs derivative financial
instruments to hedge a portion of the risk associated with future higher gas
costs.
Operations and maintenance expenses have increased by $358.4 million,
or 47%, for the nine months ended September 30, 2000 compared to the
corresponding period in 1999, primarily as a result of recent acquisitions of
companies providing various energy-related services, the operations of the
Ravenswood facility and the installation of an underground transmission line to
reinforce the electric system capacity on the south fork of Long Island on
behalf of the Long Island Power Authority.
S-14
OTHER INCOME AND (DEDUCTIONS)
Other income includes equity income from subsidiaries comprising the
energy investments segment, primarily our investments in Canada. In addition,
other income also includes interest income from temporary cash investments, the
effect on net income from the minority interest associated primarily with
Houston Exploration, as well as non-operating expenses. We recorded a charge of
$5.0 million during the period ended September 30, 2000, reflecting a
contribution to the KeySpan Foundation. Further, for the nine months ended
September 30, 2000, other income includes a charge of $9.0 million related to
rate settlement issues, compared to a charge of $6.0 million recorded in the
nine months ended September 30, 1999. We also realized lower interest income on
temporary cash investments as compared to the same period last year.
OTHER EXPENSES
Interest expense was $21.3 million higher for the nine months ended
September 30, 2000, compared to the corresponding period in 1999. Interest
expense for the period ended September 30, 2000 reflects higher levels of debt
outstanding, primarily related to medium terms notes issued in February 2000,
debt associated with our Canadian investments and higher commercial paper
borrowings.
Income tax expense reflects the higher level of pre-tax income for
the nine months ended September 30, 2000, compared to the corresponding period
in 1999. Further, during the nine months ended September 30, 2000, we changed
our basis for computing local income taxes which contributed to the increase in
income tax expense. Income tax expense for the nine months ended September 30,
1999 also reflects an adjustment to deferred tax expense and current tax expense
for the utilization of previously deferred net operating loss carryforwards
recorded in 1998. In 1998, we recorded, as a deferred tax asset, a benefit of
$71.1 million for net operating loss carryforwards. We estimated that $57.4
million of the benefits from the net operating loss carryforwards from 1998
would be realized in our consolidated 1999 federal and state income tax returns,
and accordingly, applied the net operating loss benefits in our 1999 federal and
state tax provisions.
RECENT DEVELOPMENTS
ACQUISITION OF EASTERN
On November 8, 2000, we acquired all of the common stock of Eastern
and EnergyNorth in an all cash acquisition.
The goodwill associated with the transactions is currently estimated
to be approximately $1.3 billion. Consolidated proforma income statements for
the twelve months ended December 31, 1999, including future interest expense and
the amortization of goodwill, indicate that the transactions will have a
dilutive effect on net income. However, the consolidated proforma income
statement does not include:
o continued gas sales growth throughout our service territory,
especially on Long Island and New England;
o earnings enhancement from our investment in the Ravenswood facility;
o the continued successful integration of acquired companies providing
energy-related services within our energy services segment; and
o anticipated before-tax synergy savings of $40 million annually
starting in 2001.
We currently expect that these earnings enhancements will offset the
dilutive effects of the Eastern and EnergyNorth transactions, and we believe
that year-end earnings in 2000 could be as much as 40% higher than earnings
achieved in 1999, excluding the impact of transaction and restructuring charges
to be recorded in the fourth quarter of 2000 which are currently estimated to be
at least $50 million. We are also completing our resource allocation process for
2001 and believe that we will achieve the growth and synergy savings projected
as part of the Eastern and EnergyNorth acquisitions.
S-15
In line with our objective to realize synergy savings, we have
implemented an early retirement program and targeted voluntary severance
programs. Further, we anticipate disposing of some of our non-core assets (I.E.,
assets other than those associated with our gas distribution and electric
generation operations) within the next several years. However, we are unable to
predict when or if any such sales will occur or their impact on our results of
operations or financial condition.
Following our announcement that we had entered into an agreement to
purchase Eastern, Standard & Poor's Rating Services placed our, 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 our, as well as Eastern's, corporate credit, senior unsecured debt,
commercial paper and preferred stock on review for possible downgrade. The
rating agencies have finalized their review process. Moody's has reaffirmed our
long-term A3 issuer rating, and Standard & Poor has upgraded us to an A issuer
rating.
SEGMENT RESULTS
GAS DISTRIBUTION
KeySpan Energy Delivery New York provides gas distribution services
to customers in the New York City Boroughs of Brooklyn, Queens and Staten
Island, and KeySpan Energy Delivery Long Island provides gas distribution
services to customers in the Long Island counties of Nassau and Suffolk and the
Rockaway Peninsula of the Borough of Queens.
The table below highlights significant financial data and operating
statistics for the gas distribution segment for the periods indicated.
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1999 2000
------------------ -------------
(dollars in thousands)
Revenues $ 1,208,254 $ 1,458,595
Purchased gas for resale 470,633 663,246
Revenue taxes 75,578 78,695
-------------- ------------
Net Revenues 662,043 716,654
-------------- ------------
Operations and maintenance 306,364 323,401
Depreciation and amortization 73,235 86,698
Operating taxes 83,879 93,867
-------------- ------------
Total Operating Expenses 463,478 503,966
-------------- ------------
Operating Income $ 198,565 $ 212,688
============== ============
Firm gas sales (MDTH) (1) 120,401 125,318
Firm transportation (MDTH) 15,030 19,306
Transportation - Electric Generation (MDTH) 61,763 45,342
Other sales (MDTH) 38,279 67,380
Warmer than normal 9.7% 5.9%
- ---------------------
(1) A 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. One billion
cubic feet (BCF) of gas equals approximately 1,000 MDTH.
S-16
NET REVENUES
Net gas revenues for the nine months ended September 30, 2000,
increased by $54.6 million, or 8%, compared to the corresponding period last
year. The increase in net gas revenues was due to continued gas sales growth and
favorable gas prices compared to oil prices. Firm net gas revenues grew
approximately $26 million for the nine months ended September 30, 2000 over the
corresponding period in 1999, through the addition of new gas customers and oil
to gas conversions, primarily in the Long Island market. Long Island has a low
natural gas saturation rate and significant gas sales growth opportunities are
believed to be available. We estimate that on Long Island less than 30% of the
residential and multi-family markets, and approximately 70% of the commercial
market currently use natural gas for space heating. In the Long Island service
area, we will continue to seek growth through the expansion of our distribution
system, as well as through the conversion of residential homes from oil-to-gas
for space heating purposes and the pursuit of opportunities to grow
multi-family, industrial and commercial markets.
In the large volume heating markets and other interruptible 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. The price of both
heating grade fuel oil and natural gas have increased significantly during the
past few months. During the nine months ended September 30, 2000, gas generally
sold at a slight discount to heating oil. We increased sales in these markets by
approximately $23 million for the nine months ended September 30, 2000, compared
to the same period in 1999, through aggressive unit pricing and the addition of
two large commercial and industrial customers.
The gas distribution segment 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.
Our New York gas distribution subsidiaries operate under utility
tariffs that each contain 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.
SALES, TRANSPORTATION AND OTHER QUANTITIES
Comparative firm gas sales and transportation quantities for the nine
months ended September 30, 2000, reflect the increase in firm sales, as
discussed above. Firm gas transportation quantities increased in the nine months
ended September 30, 2000, as we continued our natural gas deregulation
initiatives. Our net margins are currently not affected by customers opting to
purchase their gas supply from sources other than us, 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 our electric generating facilities located on Long
Island. Net revenues from these services are minimal.
Other sales quantities include on-system interruptible quantities,
off-system sales quantities (sales made to customers out of our service
territories) and related transportation. Effective April 1, 2000, we entered
into an agreement with Coral Resources, L.P., a subsidiary of Shell Oil Company.
Coral assists in the origination, structuring, valuation and execution of
energy-related transactions. A sharing exists between gas ratepayers and our two
New York gas distribution subsidiaries for off-system gas transactions. Our
share of the profits on such transactions is then shared with Coral. We also
share in revenues arising from transactions initiated by Coral. Prior to this
agreement with Coral, KeySpan Energy Delivery New York had a gas supply and
asset management agreement with Enron Capital and Trade Resources Corp. and
obtained the right to earn revenues based upon its management of KeySpan. As a
result of the Enron agreement, KeySpan Energy Delivery New York did not report
any off-system sales quantities in 1999.
S-17
OPERATING EXPENSES
Operating expenses increased by $40.5 million, or 9%, for the nine
months ended September 30, 2000, compared to the same period in 1999. Operations
and maintenance expense reflects generally higher labor costs and associated
employee benefit expenses and higher marketing costs and incentives related to
our gas expansion initiatives on Long Island. The increase in depreciation and
amortization expense generally reflect continued property additions, and the
amortization of certain regulatory items previously deferred and now being
recovered through revenue recovery mechanisms. Further, operating taxes which
include state and local taxes on property have increased as the applicable
property base and tax rates generally have increased.
ELECTRIC SERVICES
The electric services segment primarily consists of subsidiaries that
own, lease and operate oil and gas fired generating plants in Queens and Long
Island, and through long-term contracts, manage the electric transmission and
distribution system, the fuel and electric purchases, and the off-system
electric sales for the Long Island Power Authority.
Selected financial data for the electric services segment is set
forth in the table below for the periods indicated.
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
1999 2000
----------------- ----------------
Revenues (dollars in thousands)
LIPA service agreements $ 536,428 $ 569,691
Ravenswood facility 70,124 527,925
-------------- ---------------
Total Revenues 606,552 1,097,616
Purchased fuel - 235,131
-------------- ---------------
Net Revenues 606,552 862,485
-------------- ---------------
Operations and maintenance 367,078 503,234
Depreciation 32,660 36,814
Operating taxes 94,162 117,603
-------------- ---------------
Total Operating Expenses 493,900 657,651
-------------- ---------------
Operating Income $ 112,652 $ 204,834
============== ===============
Electric Sales (MWh) 2,155,496 4,013,843
Cooling degree days 1,146 1,124
Capacity (MW) 2,120 2,294
NET REVENUES
Electric net revenues increased by $255.9 million, or 42%, for the
nine months ended September 30, 2000, compared to the same period in 1999. The
increase in electric net revenues is due primarily to the Ravenswood facility.
Revenues from the Ravenswood facility benefitted from the sale of energy,
capacity and ancillary services to the New York Independent System Operator at
competitive market prices, and from effective hedging strategies. Prior to the
start of the New York Independent System Operator, all of the energy and
capacity from the Ravenswood facility was sold to Consolidated Edison on a cost
recovery and fixed fee basis. There were no sales of ancillary services in 1999.
Purchased fuel expense for the operation of the Ravenswood facility
was $235.1 million for the nine months ended September 30, 2000. We did not
incur any fuel costs for the Ravenswood facility for the corresponding period in
1999. Consolidated Edison owned and supplied the fuel necessary to operate the
S-18
Ravenswood facility from the time we acquired it until the start of the New York
Independent System Operator on November 19, 1999.
Net revenues from our service agreements with the Long Island Power
Authority were $33.3 million higher for the nine months ended September 30, 2000
compared to the corresponding period last year. The increase in revenues is
primarily the result of a major construction project performed by us on behalf
of the Long Island Power Authority. In June 2000, we completed the installation
of an underground transmission line to reinforce the electric system capacity on
the south fork of Long Island. The project was performed under a fixed fee
contract with the Long Island Power Authority as part of our management services
agreement.
Further, revenues for the nine months ended September 30, 2000
include $14 million of off-system sales from our Long Island electric generation
units. Under the terms of the energy management agreement with the Long Island
Power Authority, we are entitled to one-third of the profit from any off-system
electricity sales arranged by us on the Long Island Power Authority's behalf.
We have realized significant revenues and profits from the sale of
energy, capacity and ancillary services from the Ravenswood facility and through
the energy management agreement. Ancillary services include primarily spinning
reserves and non-spinning reserves. Due to the significant increase in the
market-clearing price for electricity and certain ancillary services, the New
York Independent System Operator and other market participants have requested
that the Federal Energy Regulatory Commission cap the sales prices for both
energy sales and the sale of ancillary services. See Note 6 to the Consolidated
Financial Statements, "New York State Independent System Operator Matters" for a
further discussion of these matters.
OPERATING EXPENSES
Operating expenses for the nine months ended September 30, 2000,
increased by $163.8 million, or 33%, compared to the same period in 1999. The
increase in operating expenses in 2000, reflects primarily the operations of the
Ravenswood facility. Operating expenses associated with the Ravenswood facility
increased by $120.2 million for the nine months ended September 30, 2000,
compared to the corresponding period of 1999. Since the Ravenswood facility was
acquired by us in June 1999, operating expenses for the period ended September
30, 2000 reflect a full nine months of operations compared to only three months
of operations for the period ended September 30, 1999.
Included in operating expenses for the Ravenswood facility are
charges of $48.7 million for the nine months ended September 30, 2000, for fuel
management services provided by a subsidiary within the energy services segment.
There were no comparable charges in 1999.
Operating expenses incurred by us under the Long Island Power
Authority service agreements increased by $43.5 million for the nine months
ended September 30, 2000 compared to the corresponding period last year, due
primarily to costs incurred to install the new electric transmission line
discussed above.
EARNINGS
In addition to the aforementioned, earnings available for common
stock for the nine months ended September 30, 2000 also reflect an allocation
for interest expense, city, state and federal income tax provisions, and a
charge, net of tax, of $2.2 million for the loss on the sale of selected assets.
OTHER ISSUES
We have filed an application with the New York Public Service
Commission to build a new 250 MW cogeneration facility at the site of the
Ravenswood facility. The new facility, which will generate electricity and
steam, is expected to be in service in 2003. Further, we continue to evaluate
the electric needs on Long Island and may, if economic circumstances and energy
needs so warrant, proceed with strategies to add additional electric capacity on
Long Island.
S-19
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 of our 70% equity interest
in Houston Exploration, as well as KeySpan Exploration and Production, LLC, our
wholly owned subsidiary engaged in a joint venture with Houston Exploration. On
March 31, 2000, under a pre-existing credit arrangement, approximately $80
million in debt owed by Houston Exploration to us was converted into Houston
Exploration common equity. Upon that conversion, our common equity ownership
interest in Houston Exploration increased from 64% to approximately 70%.
Selected financial data and operating statistics for the gas
exploration and production segment are set forth in the following table for the
periods indicated.
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------
1999 2000
----------------- --------------
(dollars in thousands)
Revenues $ 103,622 $ 169,966
Depreciation and amortization 53,673 65,257
Other operating expenses 20,070 32,195
--------------- --------------
Operating income $ 29,879 $ 72,514
=============== ==============
Natural gas production (Mmcfe) 51,572 58,228
Natural gas (per Mcf) realized $ 2.00 $ 2.88
Natural gas (per Mcf) unhedged $ 2.05 $ 3.33
Operating income above represents 100% of our gas exploration and
production subsidiaries' results for the periods indicated. Earnings, however,
are adjusted to reflect our minority interest and, accordingly, include 70% of
Houston Exploration's results since April 1, 2000, and 64% of Houston
Exploration's results for all periods prior to March 31, 2000. Gas reserves and
production are stated in BCFe and Mmcfe, which includes equivalent oil reserves.
OPERATING INCOME
Operating income increased by $42.6 million for the nine months ended
September 30, 2000, compared to the corresponding period in 1999. For the nine
months ended September 30, 2000, operating income reflects the benefits derived
from a 13% increase in production volumes, combined with a 44% increase in
average realized gas prices (average wellhead price received for production for
the nine months ended September 30, 2000, plus hedging gains and losses) over
comparable amounts for the corresponding period in 1999. At December 31, 1999,
our gas exploration and production subsidiaries had 553 BCFe of net proved
reserves of natural gas, of which approximately 75% were classified as proved
developed.
ENERGY SERVICES
Our energy services segment primarily includes companies that provide
services through four lines of business to clients located within the New York
tri-state metropolitan area, Pennsylvania and in Rhode Island. The lines of
business include:
o home energy services;
o business solutions;
o commodity procurement; and
o telecommunications services.
S-20
In February 2000, we acquired three additional companies that provide
energy-related services within these lines of business. Further, in August 2000,
we acquired another company that builds, installs and services heating,
ventilation and air-conditioning equipment throughout New Jersey and eastern
Pennsylvania, with customers ranging from small industrial facilities to large
pharmaceutical plants. This company has 400 employees and reported revenues of
$93 million in 1999. In addition, we are also involved, through a joint venture,
in providing energy-related services to consumers through the MyHomeKey.com
website. MyHomeKey is a personalized, internet-based home management system that
puts service providers at customers' fingertips, delivers advice and one-stop
shopping for most home products and services. MyHomeKey.com was launched in
September 2000.
Selected financial data for the energy services segment is set forth
in the following table for the periods indicated.
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------
1999 2000
---------------- --------------
(in thousands)
Unaffiliated revenues $ 123,165 $ 480,511
Intersegment revenues - 48,677
Cost of goods sold 100,706 408,985
-------------- --------------
Gross Profit Margin 22,459 120,203
Depreciation and amortization 2,292 7,252
Other operating expenses 24,658 60,993
-------------- --------------
Operating Income (Loss) $ (4,491) $ 51,958
============== ==============
The increase in results of operations of the energy services segment
for the nine months ended September 30, 2000, compared to the corresponding
period in 1999, reflects primarily, fuel-management services provided to the
Ravenswood facility. For the nine months ended September 30, 2000, these
services provided this segment with earnings of $25.7 million. A subsidiary
within this segment, KeySpan Energy Supply, LLC, provides the Ravenswood
facility with energy procurement advisory services and acts as an energy broker
for the sale of electricity and ancillary services. For these services, KeySpan
Energy Supply receives a management fee and shares in the operating profit
generated by the Ravenswood facility on the sale of electricity and ancillary
services. There was no energy procurement and fuel-management advisory services
agreement between KeySpan Energy Supply and the Ravenswood facility in 1999.
This segment also realized significantly greater gross profit margins
for the nine months ended September 30, 2000, compared to the corresponding
period last year, for each of its other lines of business. These gross margin
enhancements resulted from recent acquisitions of companies providing
energy-related services and through customer additions related to energy sales.
These benefits to gross profit margins, however, were offset by increases in
general and administrative expenses. This segment is expected to continue to
realize earnings from its energy procurement and fuel-management advisory
services for the remainder of 2000 and the other business lines are projected to
be profitable in 2000.
ENERGY INVESTMENTS
Earnings for this segment are derived, primarily, from our 20%
interest in the Iroquois Gas Transmission System LP; our 50% interest in Gulf
Midstream Services in Canada; and our 50% interest in the Premier Transmission
Pipeline and a 24.5% interest in Phoenix Natural Gas, both in Northern Ireland.
Earnings for this segment for the nine months ended September 30,
2000 increased by $2.0 million over the comparable period last year reflecting
earnings growth from our Canadian investments. Results of operations from
Canadian gas and oil operations were enhanced through the acquisition, in the
fourth quarter of 1999, of the Paddle River Gas Plant and oil producing
properties in Alberta, Canada, and more efficient operations of Gulf Midstream.
In addition, Iroquois realized higher transportation sales quantities and
revenues from its interruptible
S-21
customers during this period compared with the same period in 1999. Earnings
from our investments in Northern Ireland in 2000 are essentially the same as
their earnings for the corresponding period in 1999. The subsidiaries in this
segment are primarily accounted for under the equity method since our ownership
interests are 50% or less. Accordingly, income from these investments is
reflected, primarily in other income and (deductions) in the consolidated
statement of income.
In October 2000, we sold our interest in certain oil producing
properties in Alberta, Canada. An after tax gain of approximately $1.3 million
from the sale will be reported in the fourth quarter of 2000. Additionally, in
October 2000, we acquired the remaining 50% interest in Gulf Midstream making us
the sole owner of Gulf Midstream. The transaction required us to borrow an
additional $48 million from a Canadian bank. For financial reporting purposes,
the operations of Gulf Midstream will now be fully consolidated with our other
operations.
OTHER
The other segment incurred a loss of $43.0 million for the nine
months ended September 30, 2000 compared to a loss of $16.3 million for the nine
months ended September 30, 1999. Results for the other segment generally reflect
preferred stock dividends and charges incurred by our corporate and
administrative areas that have not been allocated to the various business
segments and preferred stock dividends, offset, in part, by interest income
earned on temporary cash investments. Interest income has decreased as we
utilized cash to finance acquisitions, invest in joint ventures, and repurchase
shares of our common stock. Additionally, during the nine months ended September
30, 2000, we incurred an expense of $5.0 million for a contribution to the
KeySpan Foundation. During this same time period, we recorded charges of $9.0
million associated with outstanding regulatory issues, compared to a similar
charge of $6.0 million in the nine months ended September 30, 1999. Moreover, we
recorded a charge of $5.6 million in the nine months ended September 30, 2000 to
write-off a computer system that will not be utilized as a result of the Eastern
acquisition.
LIQUIDITY, CAPITAL EXPENDITURES AND FINANCING
LIQUIDITY
Cash flow provided by operating activities for the nine months ended
September 30, 2000, reflects stable growth from our gas distribution operations,
as well as positive contributions from the Ravenswood facility. Further, in
September 2000, we received a cash payment of approximately $48.0 million from
the Long Island Power Authority representing amounts due for services performed
by us under the various service agreements. These benefits to cash flow from
operations were offset, in part, by a decrease in interest income; negative
operating cash flow from our energy services segment; an increase in the cost of
gas in storage, which will be recovered from customers in later periods; and
increased interest expense associated with increased levels of debt outstanding.
Additionally, cash flow from operations in 1999 also reflect the cash
utilization of a $57.4 million federal income tax net operating loss on income
tax payments for 1999, as previously discussed.
At September 30, 2000, we had cash and temporary cash investments of
$63.6 million. In addition, we had a $700 million revolving credit agreement,
with a one-year term and one-year renewal option, with a commercial bank
syndicate. This credit facility is used to support our $700 million commercial
paper program. During the nine months ended September 30, 2000, we issued $1.6
billion of commercial paper and repaid $1.4 billion, including the outstanding
balance at December 31, 1999. Commercial paper was issued during the nine months
ended September 30, 2000 to support ongoing working capital needs and the
mandatory redemption of our preferred stock 7.95% Series AA. At September 30,
2000, $382.1 million of commercial paper remained outstanding at a weighted
average annualized interest rate of 6.73%. We had available borrowing of
commercial paper of $317.9 million at September 30, 2000.
Houston Exploration has an unsecured available line of credit with a
commercial bank that provides for a maximum commitment of $250 million, subject
to certain conditions. At September 30, 2000, $174.0 million was outstanding at
a weighted average annualized interest rate of 7.84%. At September 30, 2000,
Houston Exploration had available borrowings of $35.6 million.
S-22
Also, a subsidiary included in the energy investments segment has
revolving credit facilities with financial institutions in Canada. During the
nine months ended September 30, 2000, borrowings were $33.6 million at a
weighted average annualized interest rate of 6.48%. Since September 30, 2000, an
additional $48.0 million was borrowed to finance the acquisition of the
remaining 50% interest in Gulf Midstream. This subsidiary has $50.1 million
available for borrowing under these facilities.
We satisfy our seasonal working capital requirements primarily
through internally generated funds and the issuance of commercial paper.
Additionally, beginning in the third quarter of 2000, we issued shares of our
common stock out of treasury to satisfy the requirements of our employee common
stock plans. We believe that our sources of funds are sufficient to meet our
seasonal working capital needs.
CAPITAL EXPENDITURES
The table below sets forth KeySpan's capital construction
expenditures by segment for the periods indicated:
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
1999 2000
---------------- ----------------
(in thousands)
Gas Distribution $ 136,803 $ 160,561
Electric Services 229,795 42,421
Gas Exploration and Production 112,006 163,443
Energy Services 3,323 10,799
Energy Investments and Other 31,064 26,387
--------------- ----------------
$ 512,991 $ 403,611
=============== ================
The capital construction expenditures reflect, primarily, costs
associated with the gas distribution segment for the renewal and replacement of
mains and services and for the expansion of the gas distribution system on Long
Island. Electric service's construction expenditures reflect primarily costs to
maintain our electric generating facilities and, for 1999, reflect the
acquisition of the Ravenswood facility. Construction expenditures related to gas
exploration and production reflect, in part, costs related to the development of
properties acquired in Southern Louisiana and in the Gulf of Mexico in 1999 and
costs related to the continued development of other properties previously
acquired. Expenditures also include our joint venture with Houston Exploration
to explore for natural gas and oil. Energy investments and other construction
expenditures reflect, primarily costs related to Canadian affiliates.
EQUITY INVESTMENTS
During the nine months ended September 30, 2000, the energy services
segment acquired four additional companies located in the New York tri-state
metropolitan area and Pennsylvania. The newly acquired companies specialize in
engineering-consulting, plumbing and mechanical contracting, and heating,
ventilation and air conditioning contracting. Combined, these companies have
over 1,300 employees and annual revenues of approximately $260 million.
In addition, in March 2000, we and TXU Energy Services formed a joint
venture with MyHomeKey.com, Inc. We and TXU Energy Services have each invested
$12.5 million in the project; Bechtel Enterprises has also invested $5 million.
TXU Energy Services is a unit of TXU, an investor-owned energy service company,
and Bechtel Enterprises is an affiliate of Bechtel. The MyHomeKey.com website
was launched in September 2000.
S-23
FINANCING
In June 2000, we redeemed, at maturity, our preferred stock 7.95%
Series AA through the utilization of internally generated funds and the proceeds
from the issuance of commercial paper. Our obligation of $370.2 million included
the mandatory redemption price of $25 per share totaling $363 million and a
dividend of $7.2 million.
On February 1, 2000, KeySpan Energy Delivery Long Island issued $400
million 7.875% notes due February 1, 2010. The net proceeds from this issuance
were used to reimburse our treasury for costs in extinguishing $397 million of
promissory notes to Long Island Power Authority that matured in June 1999. The
notes issued are fully and unconditionally guaranteed by us. At September 30,
2000, KeySpan Energy Delivery Long Island had $200 million of medium term notes
available for issuance under the shelf registration statement.
We have accessed the financial markets and raised approximately $2
billion of Bridge Financing and other commercial paper for the Eastern and
EnergyNorth transactions. We plan to replace the Bridge Financing with the
proceeds of the Notes.
In connection with the Eastern and EnergyNorth transactions, we
entered into forward starting swap agreements to hedge a portion of the risk of
interest rate changes associated with the issuance of the Notes. The agreements
had a total notional principal amount of $1.5 billion. See note 4 to the
consolidated financial statements, "Liquidity and Financings" for additional
details.
In addition to our financing arrangements for the Eastern and
EnergyNorth transactions, it is currently our intention to issue preferred stock
during 2001. We have also increased our current commercial paper program to $1.4
billion. We anticipate that we may issue approximately $800 million in
commercial paper in the last quarter of 2000 to refinance a portion of the
Eastern acquisition and meet the combined seasonal working capital needs of
KeySpan, Eastern and EnergyNorth. We believe that our sources of funding (i.e.,
the Notes, preferred stock issuances and commercial paper) will be sufficient to
meet our anticipated cash needs.
GAS DISTRIBUTION - RATE MATTERS
By orders dated February 5, 1998 and April 14, 1998 the New York
Public Service Commission approved a stipulation and agreement among KeySpan
Energy Delivery New York, Long Island Lighting Company, the staff of the New
York Public Service Commission and six other parties that in effect approved the
merger of KeySpan Energy Corporation and Long Island Lighting Company and
established gas rates for our two New York gas distribution subsidiaries that
are currently in effect. On November 30, 2000, KeySpan Energy Delivery Long
Island's rate agreement with the New York State Public Service Commission
expires. Under the terms of the agreement, current gas rates will remain in
effect through 2001, unless either KeySpan Energy Delivery Long Island or the
staff of the New York State Public Service Commission requests a hearing. We do
not intend to initiate such a proceeding and at this time, we have no reason to
believe that the staff of the New York State Public Service Commission will
initiate such a rate proceeding either. Therefore, we expect current gas
distribution rates for our two New York gas distribution utilities to remain in
effect through 2001. For more information on these agreements, refer to our
annual report on Form 10-K for the year ended December 31, 1999.
ENVIRONMENTAL MATTERS
We are 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. We estimate that the remaining minimum cost of our
manufactured gas plant-related environmental cleanup activities, including costs
of $5.0 million associated with the Ravenswood facility, will be approximately
$119 million and have recorded a related liability for such amount. Further, as
of September 30, 2000, we had expended a total of approximately $20 million. See
note 3 to the consolidated financial statements "Environmental Matters."
S-24
DESCRIPTION OF NOTES
This description of the terms of the 7.25% Notes due 2005 (the "2005
Notes"), the 7.625% Notes due 2010 (the "2010 Notes") and the 8.00% Notes due
2030 (the "2030 Notes" and, together with the 2005 Notes and the 2010 Notes, the
"Notes") supplements the description of the general terms and provisions of the
securities in the accompanying prospectus. If this summary differs in any way
from that description in the accompanying prospectus, you should rely on this
summary. The 2005 Notes, the 2010 Notes and the 2030 Notes will each be issued
as a separate series of debt securities which we have registered for issuance on
terms to be determined at the time of their sale. Whenever we refer in this
Description of Notes to terms defined in the indenture, we intend that the
defined terms be incorporated in this description by reference.
GENERAL
The Notes will be issued under an indenture, dated as of November 1,
2000, between us and The Chase Manhattan Bank, as trustee.
The Notes initially will be limited to $1,650,000,000 principal
amount, consisting of $700,000,000 principal amount of 2005 Notes, $700,000,000
principal amount of 2010 Notes, and $250,000,000 principal amount of 2030 Notes.
The 2005 Notes will mature on November 15, 2005, the 2010 Notes will mature on
November 15, 2010, and the 2030 Notes will mature on November 15, 2030. The
Notes will be redeemable at any time at their principal amount plus an
applicable premium and accrued interest, as described under Optional Redemption.
Notes will be issued in minimum denominations of $1,000 and in
integral multiples of $1,000 thereof.
The Notes will be our unsecured obligations. Each of the 2005 Notes,
the 2010 Notes and the 2030 Notes will rank senior to our future debt that is
subordinated to that series of Notes, and will rank equally with our debt that
is not subordinated to that series of Notes.
Any money we pay to a paying agent for the payment of principal of,
premium, or interest on the Notes which remains unclaimed for two years after
the date the payment was due will be returned to us. Upon the return of those
moneys to us, holders of the Notes, with respect to moneys so returned, will
look to us for payment as our unsecured general creditors and any liability of
the paying agent with respect to those moneys will cease.
INTEREST ON THE NOTES
The 2005 Notes, the 2010 Notes and the 2030 Notes will bear interest
at the applicable annual rate noted on the cover page of this prospectus
supplement. Interest will be payable in arrears on May 15 and November 15 of
each year, beginning May 15, 2001. Interest on the Notes will be paid to holders
of record on the May 1 and November 1 preceding the related interest payment
date.
Interest payments in respect of the 2005 Notes, the 2010 Notes and
the 2030 Notes will equal the amount of interest accrued from and including the
immediately preceding interest payment date in respect of which interest has
been paid or duly made available for payment (or from and including the date of
issue, if no interest has been paid or duly made available for payment with
respect to the applicable Notes) to but excluding the applicable interest
payment date or maturity date, as the case may be. Interest on the Notes will be
computed on the basis of a 360-day year of twelve 30-day months.
If any interest payment date or maturity date falls on a day that is
not a business day, the required payment of principal and/or interest will be
made on the next business day as if made on the date that payment was due, and
no interest will accrue on that payment for the period from and after the
interest payment date or maturity date, as the case may be, to the date of the
payment on the next business day. As used in this prospectus supplement,
"business day" means any day, other than a Saturday or Sunday, that is neither a
legal holiday nor a day on which commercial banks are authorized or required by
law, regulation or executive order to close in The City of New York.
S-25
OPTIONAL REDEMPTION
The 2005 Notes, the 2010 Notes and the 2030 Notes will be redeemable
at any time, at our option, in whole, on not less than 30 nor more than 60 days'
prior notice, prior to their maturity at a redemption price equal to the sum of
the principal amount of the Notes, the Make-Whole Amount described below with
respect to such series and any accrued and unpaid interest to the date of
redemption. Holders of record on a record date that is on or prior to a
redemption date will be entitled to receive interest due on the interest payment
date.
The term "Make-Whole Amount" means, the excess, if any, of:
o the aggregate present value as of the date of the redemption of
principal being redeemed and the amount of interest (exclusive of
interest accrued to the date of redemption) that would have been
payable if redemption had not been made, determined by discounting, on
a semiannual basis, the remaining principal and interest at the
Reinvestment Rate described below (determined on the third business
day preceding the date notice of redemption is given) from the dates
on which the principal and interest would have been payable if the
redemption had not been made, to the date of redemption, over
o the aggregate principal amount of the Notes being redeemed.
The term "Reinvestment Rate" means 25 basis points for the 2005
Notes, 30 basis points for the 2010 Notes and 35 basis points for the 2030 Notes
plus, in each case, the arithmetic mean of the yield under the heading "Week
Ending" published in the most recent Statistical Release under the caption
"Treasury Constant Maturities" for the maturity (rounded to the nearest month)
corresponding to the remaining life to maturity, as of the payment date of the
principal being redeemed or paid. If no maturity exactly corresponds to the
maturity, yields for the two published maturities most closely corresponding to
the maturity would be so calculated and the Reinvestment Rate would be
interpolated or extrapolated on a straight-line basis, rounding to the nearest
month. The most recent Statistical Release published prior to the date of
determination of the Make-Whole Amount will be used for purposes of calculating
the Reinvestment Rate.
The Make-Whole Amount will be calculated by an independent investment
banking institution of national standing appointed by us. If we fail to make the
appointment at least 45 business days prior to the date of redemption, or if the
institution is unwilling or unable to make the calculation, the calculation will
be made by an independent investment banking institution of national standing
appointed by the trustee. If the Reinvestment Rate is not available as described
above, the Reinvestment Rate will be calculated by interpolation or
extrapolation of comparable rates selected by the independent investment banking
institution.
FURTHER ISSUES
We may from time to time without notice to, or the consent of, the
holders of a series of Notes, create and issue further Notes of the same series
as any of the series of Notes offered hereby, equal in rank to such Notes in all
respects (or in all respects except for the payment of interest accruing prior
to the issue date of the new securities or except for the first payment of
interest following the issue date of the new securities) so that the new
securities may be consolidated and form a single series with the relevant series
of Notes and have the same terms as to status, redemption or otherwise as the
relevant series of Notes.
BOOK ENTRY, DELIVERY AND FORM
Each series of Notes will be issued in one or more fully registered
global securities which will be deposited with, or on behalf of, The Depository
Trust Company, New York, New York (the "Depository") and registered in the name
of Cede & Co., the Depository's nominee. We will not issue Notes in certificated
form. Beneficial interests in the global securities will be represented through
book-entry accounts of financial institutions acting on behalf of beneficial
owners as direct and indirect participants in the Depository (the "Depository
Participants"). Investors may elect to hold interests in the global securities
through either the Depository (in the United States), or Clearstream Banking,
societe anonyme ("Clearstream") or Morgan Guaranty Trust Company of New York,
Brussels
S-26
Office, as operator of the Euroclear System ("Euroclear") (in Europe)
if they are participants of those systems, or, indirectly, through organizations
that are participants in those systems.
Clearstream and Euroclear will hold interests on behalf of their
participants through customers' securities accounts in Clearstream's and
Euroclear's names on the books of their respective depositories, which in turn
will hold those interests in customers' securities accounts in the depositories'
names on the books of the Depository. At the present time, Citibank, N.A. acts
as U.S. depositary for Clearstream and The Chase Manhattan Bank acts as U.S.
depositary for Euroclear (the "U.S. Depositories"). Beneficial interests in the
global securities will be held in denominations of $1,000 and integral multiples
thereof. Except as set forth below or in the accompanying prospectus, the global
securities may be transferred, in whole but not in part, only to another nominee
of the Depository or to a successor of the Depository or its nominee.
Clearstream has advised us that it is incorporated under the laws of
Luxembourg as a professional depositary. Clearstream holds securities for its
participating organizations ("Clearstream Participants") and facilitates the
clearance and settlement of securities transactions between Clearstream
Participants through electronic book-entry changes in accounts of Clearstream
Participants, thereby eliminating the need for physical movement of
certificates. Clearstream provides to Clearstream Participants, among other
things, services for safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing.
Clearstream interfaces with domestic markets in several countries. As a
professional depositary, Clearstream is subject to regulation by the Luxembourg
Monetary Institute. Clearstream Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations and may include the underwriters or their affiliates. Indirect
access to Clearstream is also available to others, such as banks, brokers,
dealers and trust companies that clear through, or maintain a custodial
relationship with, a Clearstream Participant either directly or indirectly.
Distributions with respect to each series of Notes held beneficially
through Clearstream will be credited to cash accounts of Clearstream
Participants in accordance with its rules and procedures, to the extent received
by the U.S. Depositary for Clearstream.
Euroclear has advised us that it was created in 1968 to hold
securities for participants of Euroclear ("Euroclear Participants") and to clear
and settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need for
physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Euroclear includes various other services,
including securities lending and borrowing and interfaces with domestic markets
in several countries. Euroclear is operated by the Brussels, Belgium office of
Morgan Guaranty Trust Company of New York (the "Euroclear Operator"), under
contract with Euroclear Clearance Systems S.C., a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for Euroclear on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries
and may include the underwriters or their affiliates. Indirect access to
Euroclear is also available to other firms that clear through or maintain a
custodial relationship with a Euroclear Participant, either directly or
indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation, which is a member bank of the Federal Reserve System. As a result,
it is regulated and examined by the Board of Governors of the Federal Reserve
System, the New York State Banking Department and the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System, and applicable Belgian
law (the "Terms and Conditions"). The Terms and Conditions govern transfers of
securities and cash within Euroclear, withdrawals of securities and cash from
Euroclear, and receipts of payments with respect to securities in Euroclear. All
securities in Euroclear are held on a fungible basis without attribution of
specific certificates to specific securities clearance accounts. The Euroclear
Operator acts under the Terms and Conditions only on behalf of Euroclear
Participants, and has no record of, or relationship with, persons holding
through Euroclear Participants.
S-27
Distributions with respect to each series of Notes held beneficially
through Euroclear will be credited to the cash accounts of Euroclear
Participants in accordance with the Terms and Conditions, to the extent received
by the U.S. Depositary for Euroclear.
GLOBAL CLEARANCE AND SETTLEMENT PROCEDURES
Initial settlement for each series of Notes will be made in
immediately available funds. Secondary market trading between Depository
Participants will occur in the ordinary way in accordance with the Depository's
rules and will be settled in immediately available funds using the Depository's
Same-Day Funds Settlement System. Secondary market trading between Clearstream
Participants and Euroclear Participants will occur in the ordinary way in
accordance with the applicable rules and operating procedures of Clearstream and
Euroclear and will be settled using the procedures applicable to conventional
eurobonds in immediately available funds.
Cross-market transfers between persons holding directly or indirectly
through the Depository on the one hand, and directly or indirectly through
Clearstream or Euroclear Participants, on the other, will be effected within the
Depository in accordance with the Depository's rules on behalf of the relevant
European international clearing system by its U.S. Depository; however,
cross-market transactions will require delivery of instructions to the relevant
European international clearing system by the counterparty in that system in
accordance with its rules and procedures and within its established deadlines
(European time). The relevant European international clearing system will, if
the transaction meets its settlement requirements, deliver instructions to its
U.S. Depositary to take action to effect final settlement on its behalf by
delivering or receiving Notes in the Depository, and making or receiving payment
in accordance with normal procedures for same-day funds settlement applicable to
the Depository. Clearstream Participants and Euroclear Participants may not
deliver instructions directly to their respective U.S. Depositories.
Because of time-zone differences, credits of Notes received in
Clearstream or Euroclear as a result of a transaction with a Depository
Participant will be made during subsequent securities settlement processing and
dated the business day following the Depository settlement date. Those credits,
or any transactions in the Notes settled during processing, will be reported to
the relevant Euroclear Participants or Clearstream Participants on that business
day. Cash received in Clearstream or Euroclear as a result of sales of Notes by
or through a Clearstream Participant or a Euroclear Participant to a Depository
Participant will be received with value on the business day of settlement in the
Depository but will be available in the relevant Clearstream or Euroclear cash
account only as of the business day following settlement in the Depository.
In the event that the Notes are no longer held through the book-entry
facilities of the Depository or a successor to the Depository, we, so long as
Notes are listed on the Luxembourg Stock Exchange, will maintain an agent in
Luxembourg for making payments on, and transfers of, Notes.
Although the Depository, Clearstream and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of securities among
participants of the Depository, Clearstream and Euroclear, they are under no
obligation to perform or continue to perform those procedures and they may
discontinue the procedures at any time.
S-28
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement dated the date hereof, we have agreed to sell to each of the
underwriters named below, severally, and each of the underwriters has severally
agreed to purchase, the principal amount of the Notes set forth opposite its
name:
PRINCIPAL AMOUNT OF
UNDERWRITER 2005 NOTES 2010 NOTES 2030 NOTES
- ----------- ----------- ---------- ----------
J.P. Morgan Securities Inc..... $381,500,000 $381,500,000 $136,250,000
Chase Securities Inc........... 112,000,000 112,000,000 40,000,000
Salomon Smith Barney Inc....... 84,000,000 84,000,000 30,000,000
ABN AMRO Incorporated.......... 10,500,000 10,500,000 3,750,000
Banc of America Securities LLC. 10,500,000 10,500,000 3,750,000
Banc One Capital Markets, Inc.. 10,500,000 10,500,000 3,750,000
BNY Capital Markets, Inc....... 10,500,000 10,500,000 3,750,000
Barclays Capital Inc........... 10,500,000 10,500,000 3,750,000
Credit Lyonnais Securities (USA) Inc...... 10,500,000 10,500,000 3,750,000
FleetBoston Robertson Stephens Inc........ 10,500,000 10,500,000 3,750,000
PNC Capital Markets, Inc....... 10,500,000 10,500,000 3,750,000
RBC Dominion Securities Corporation....... 10,500,000 10,500,000 3,750,000
The Royal Bank of Scotland plc. 10,500,000 10,500,000 3,750,000
Scotia Capital (USA) Inc....... 10,500,000 10,500,000 3,750,000
Utendahl Capital Partners, L.P............ 3,500,000 3,500,000 1,250,000
The Williams Capital Group, L.P........... 3,500,000 3,500,000 1,250,000
------------ ------------ ------------
Total $700,000,000 $700,000,000 $250,000,000
============ ============ ============
Under the terms and conditions of the underwriting agreement, if the
underwriters take any of the Notes, then the underwriters are obligated to take
and pay for all of the Notes.
The Notes are a new issue of securities with no established trading market and
will not be listed on any national securities exchange. The underwriters have
advised us that they intend to make a market for the Notes, but they have no
obligation to do so and may discontinue market making at any time without
providing any notice. No assurance can be given as to the liquidity of any
trading market for the Notes. Expenses associated with this offering, to be paid
by us, are estimated to be $1 million.
The underwriters initially propose to offer part of the Notes directly to the
public at the offering prices described on the cover page and part to certain
dealers at a price that represents a concession not in excess of .35% of the
principal amount of the 2005 Notes, .40% of the principal amount of the 2010
Notes and .50% of the principal amount of the 2030 Notes. Any underwriter may
allow, and any such dealer may re-allow, a concession not in excess of .225%, in
the case of the 2005 Notes, and .25%, in the case of the 2010 and 2030 Notes, of
the principal amount of the Notes to certain other dealers. After the initial
offering of the Notes, the underwriters may from time to time vary the offering
price and other selling terms.
JP Morgan Securities Inc. will make securities available for
distribution on the internet through a proprietary web site and/or a third_party
system operated by Market Axess Inc., an internet_based communications
technology provider. Market Axess is providing the system as a conduit for
communications between JP Morgan Securities Inc. and their customers and is not
a party to this offering. We do not believe that Market Axess will function as
an underwriter or agent of this offering, nor do we believe that Market Axess
will act as a broker for any
S-29
customer of JP Morgan Securities Inc. Market Axess is a registered broker_dealer
and will receive compensation from JP Morgan Securities Inc. based on
transactions conducted through the system. JP Morgan Securities Inc. will make
the notes available to their customers through the internet distributions,
whether made through a proprietary or third_party channel, on the same terms as
distributions made through other channels.
We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
or to contribute to payments which the underwriters may be required to make in
respect of any such liabilities.
In connection with the offering of the Notes, the underwriters may
engage in transactions that stabilize, maintain or otherwise affect the price of
the Notes. Specifically, the underwriters may over-allot in connection with the
offering of the Notes, creating a syndicate short position. In addition, the
underwriters may bid for, and purchase, Notes in the open market to cover
syndicate short positions or to stabilize the price of the Notes. Finally, the
underwriting syndicate may reclaim selling concessions allowed for distributing
the Notes in the offering of the Notes, if the syndicate repurchases previously
distributed Notes in syndicate covering transactions, stabilization transactions
or otherwise. Any of these activities may stabilize or maintain the market price
of the Notes above independent market levels. The underwriters are not required
to engage in any of these activities, and may end any of them at any time.
In the ordinary course of their respective businesses, the
underwriters and their affiliates have engaged, and may in the future engage, in
commercial banking and/or investment banking transactions with us and our
affiliates. Affiliates of a majority of the underwriters are participants in the
bank credit facility that backs the Bridge Financing and in our revolving credit
agreement. Because more than 10% of the net proceeds of the offering may be paid
to affiliates of National Association of Securities Dealers, Inc. members which
are participating in the distribution of the Notes, the offering is being made
in compliance with Conduct Rule 2710(c)(8) of the National Association of
Securities Dealers, Inc.
S-30
INDEX TO FINANCIAL STATEMENTS
PAGE
----
KeySpan's Consolidated Balance Sheet at December 31, 1999 and FS-2
September 30, 2000
KeySpan's Consolidated Statements of Income for the nine month periods FS-4
ended September 30, 1999 and 2000
KeySpan's Consolidated Statement of Cash Flows for the nine month periods FS-5
ended September 30, 1999 and 2000
KeySpan's Notes to Consolidated Financial Statements for the nine month FS-6
period ended September 30, 2000
Eastern's Consolidated Balance Sheet at September 30, 1999, December 31, FS-12
1999 and September 30, 2000
Eastern's Consolidated Statements of Income for the nine month periods ended FS-13
September 30, 1999 and 2000
Eastern's Consolidated Statement of Cash Flows for the nine month periods FS-14
ended September 30, 1999 and 2000
Eastern's Notes to Consolidated Financial Statements for the nine month period FS-15
ended September 30, 2000
FS-1
KEYSPAN'S CONSOLIDATED BALANCE SHEET
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------------- ---------------------
(in thousands)
ASSETS
CURRENT ASSETS
Cash and temporary cash investments $ 128,602 $ 63,618
Customer accounts receivable 425,643 609,890
Other accounts receivable 235,156 222,478
Allowance for uncollectible accounts (20,294) (26,281)
Special deposits 60,863 42,485
Gas in storage, at average cost 144,256 260,738
Materials and supplies, at average cost 84,813 95,004
Other 98,914 88,629
------------------- ---------------------
1,157,953 1,356,561
------------------- ---------------------
EQUITY INVESTMENTS AND OTHER 391,731 427,557
------------------- ---------------------
PROPERTY
Electric 1,346,851 1,386,206
Gas 3,449,384 3,584,690
Other 375,657 393,252
Accumulated depreciation (1,589,287) (1,688,283)
Gas exploration and production, at cost 1,177,916 1,346,357
Accumulated depletion (520,509) (582,912)
------------------- ---------------------
4,240,012 4,439,310
------------------- ---------------------
DEFERRED CHARGES
Regulatory assets 319,167 320,931
Goodwill, net of amortizations 255,778 350,552
Other 366,050 357,610
------------------- ---------------------
940,995 1,029,093
------------------- ---------------------
TOTAL ASSETS $ 6,730,691 $ 7,252,521
=================== =====================
See accompanying Notes to the Consolidated Financial Statements.
FS-2
KEYSPAN'S CONSOLIDATED BALANCE SHEET
DECEMBER 31, SEPTEMBER 30,
1999 2000
----------------------- ------------------------
(in thousands)
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
Current redemption of preferred stock $ 363,000 $ -
Accounts payable and accrued expenses 645,347 670,869
Commercial paper 208,300 382,090
Dividends payable 61,306 61,276
Taxes accrued 50,437 90,195
Customer deposits 31,769 30,552
Interest accrued 28,093 23,879
----------------------- ------------------------
1,388,252 1,258,861
----------------------- ------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Regulatory liabilities 26,618 44,350
Deferred income tax 186,230 238,748
Postretirement benefits and other reserves 501,603 542,596
Other 66,200 95,018
----------------------- ------------------------
780,651 920,712
----------------------- ------------------------
CAPITALIZATION
Common stock, $.01 par value, authorized
450,000,000 shares; outstanding 133,866,077 and
134,575,028 shares 2,973,388 2,987,242
Retained earnings 456,882 481,658
Accumulated foreign currency adjustment 7,714 (6,476)
Treasury stock purchased (722,959) (702,435)
----------------------- ------------------------
Total common shareholders' equity 2,715,025 2,759,989
Preferred stock 84,339 84,323
Long-term debt 1,682,702 2,120,752
------------------------ ------------------------
Total capitalization 4,482,066 4,965,064
----------------------- ------------------------
MINORITY INTEREST IN SUBSIDIARY COMPANIES 79,722 107,884
----------------------- ------------------------
TOTAL LIABILITIES AND CAPITALIZATION $ 6,730,691 $ 7,252,521
======================= ========================
See accompanying Notes to the Consolidated Financial Statements.
FS-3
KEYSPAN'S CONSOLIDATED STATEMENT OF INCOME
NINE MONTHS ENDED
SEPTEMBER 30,
1999 2000
-------------------- -------------------
(dollars in thousands)
REVENUES
Gas distribution $ 1,208,254 $ 1,458,595
Electric services 606,552 1,097,616
Gas exploration and production 103,622 169,966
Energy services and other 124,675 485,161
-------------------- -------------------
Total revenues 2,043,103 3,211,338
-------------------- -------------------
OPERATING EXPENSES
Purchased gas for resale 498,609 717,140
Purchased fuel - 334,135
Operations and maintenance 765,221 1,123,581
Depreciation, depletion and amortization 180,698 216,364
Operating taxes 258,355 298,010
-------------------- -------------------
Total operating expenses 1,702,883 2,689,230
-------------------- -------------------
Operating income 340,220 522,108
-------------------- -------------------
OTHER INCOME AND (DEDUCTIONS)
Income from equity investments 9,749 16,333
Minority interest (5,226) (13,747)
Interest income and other 27,679 6,510
-------------------- -------------------
Total other income 32,202 9,096
-------------------- -------------------
INCOME BEFORE INTEREST CHARGES AND INCOME TAXES 372,422 531,204
-------------------- -------------------
INTEREST CHARGES 98,824 120,106
-------------------- -------------------
INCOME TAXES
Current (14,886) 116,396
Deferred 113,258 54,462
-------------------- -------------------
Total income taxes 98,372 170,858
-------------------- -------------------
NET INCOME 175,226 240,240
Preferred stock dividend requirements 26,067 16,453
-------------------- -------------------
EARNINGS FOR COMMON STOCK $ 149,159 $ 223,787
FOREIGN CURRENCY ADJUSTMENT 3,454 (14,190)
-------------------- -------------------
COMPREHENSIVE INCOME $ 152,613 $ 209,597
==================== ===================
BASIC AND DILUTED EARNINGS PER COMMON SHARE $ 1.06 $ 1.67
AVERAGE COMMON SHARES OUTSTANDING 140,079 133,965
==================== ===================
See accompanying Notes to the Consolidated Financial Statements.
FS-4
KEYSPAN'S CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
1999 2000
--------------- ----------------
(in thousands)
Operating Activities
Net Income $ 175,226 $ 240,240
Adjustments to reconcile net income to net cash provided by
(used in) operating activities
Depreciation, depletion and amortization 180,698 216,364
Deferred income tax 113,258 54,462
Income from equity investments (9,749) (16,333)
Dividends from equity investments 6,375 19,568
Changes in assets and liabilities
Accounts receivable 155,538 (38,759)
Materials and supplies, fuel oil and gas in storage (18,997) (128,705)
Accounts payable and accrued expenses (143,858) 27,451
Interest accrued (11,050) (12,269)
Special deposits 55,050 18,378
Prepayments and other (59,437) 86,803
--------------- ----------------
Net Cash Provided by Operating Activities 443,054 467,200
--------------- ----------------
Investing Activities
Capital expenditures (512,991) (403,611)
Investments - (175,977)
Other 10,749 7,599
--------------- ----------------
Net Cash (Used in) Investing Activities (502,242) (571,989)
--------------- ----------------
Financing Activities
Treasury stock issued (purchased) (289,172) 20,951
Issuance of commercial paper, net 103,950 173,790
Issuance of long-term debt 40,523 463,627
Payment of long-term debt (397,000) (37,000)
Payment of preferred stock - (363,000)
Preferred stock dividends paid (26,067) (18,600)
Common stock dividends paid (185,375) (179,049)
Other (548) (20,914)
--------------- ----------------
Net Cash Provided by (Used in) Financing Activities (753,689) 39,805
--------------- ----------------
Net (Decrease) in Cash and Temporary Cash Investments (1) $ (812,877) $ (64,984)
=============== ================
Cash and temporary cash investments at beginning of period $ 942,776 $ 128,602
Net (Decrease) in cash and temporary cash investments (812,877) (64,984)
--------------- ----------------
Cash and Temporary Cash Investments at End of Period $ 129,899 $ 63,618
=============== ================
- -----------------
(1) Temporary cash investments are short-term marketable securities purchased
with maturities of three months or less that were carried at cost which
approximates fair value.
See accompanying Notes to the Consolidated Financial Statements.
FS-5
KEYSPAN'S NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 30, 2000
KeySpan Corporation (referred to in the notes to the Financial
Statements as "we", "us", and "our") is a holding company currently 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. We are also a major, and growing,
generator of electricity. We own and operate five large generating plants and 42
smaller facilities in Nassau and Suffolk Counties on Long Island and lease and
operate a major facility in Queens County in New York City. Under contractual
arrangements, we provide power, electric transmission-and-distribution services,
billing and other customer services for approximately one million electric
customers of the Long Island Power Authority. Our other subsidiaries are
involved in oil and gas exploration and production; gas storage; wholesale and
retail gas and electric marketing; appliance service; heating, ventilation and
air conditioning installation and services; large energy-system ownership,
installation and management; telecommunications; and energy-related internet
activities. We also invest in, and participate in the development of, pipelines
and other energy-related projects, domestically and internationally.
1. BASIS OF PRESENTATION
In our opinion, the accompanying consolidated financial statements
contain all adjustments necessary to present fairly our financial position as of
September 30, 2000, and the results of our operations and cash flows for the
nine months ended September 30, 2000 and September 30, 1999. The accompanying
financial statements should be read in conjunction with the consolidated
financial statements and notes included in our 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. BUSINESS SEGMENTS
We have six reportable segments: gas distribution, electric services,
gas exploration and production, energy services, energy investments and other.
The gas distribution segment consists of our two New York gas
distribution subsidiaries. KeySpan Energy Delivery New York provides gas
distribution services to customers in the New York City Boroughs of Brooklyn,
Queens and Staten Island. KeySpan Energy Delivery Long Island provides gas
distribution services to customers in the Long Island counties of Nassau and
Suffolk and the Rockaway Peninsula of the Borough of Queens.
The electric services segment consists of subsidiaries that operate
the electric transmission and distribution system owned by the Long Island Power
Authority; own and provide capacity to and produce energy for the Long Island
Power Authority from our generating facilities located on Long Island; and
manage fuel supplies for the Long Island Power Authority to fuel our Long Island
generating facilities, all through long-term service contracts having terms that
range from eight to fifteen years. The electric services segment also includes
subsidiaries that own, lease and operate the Ravenswood facility in Queens, New
York. Our contract with Consolidated Edison provided them with 100% of the
available capacity of the Ravenswood facility on a fixed monthly fee and expired
on April 30, 2000. We now provide all of the energy, capacity and ancillary
services related to the Ravenswood facility to the New York Independent System
Operator. Currently, our primary electric generation customers are the Long
Island Power Authority and the New York Independent System Operator energy
markets.
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 our 70% equity interest
in Houston Exploration, an independent natural gas and oil exploration company,
as well as KeySpan Exploration and Production, our wholly owned subsidiary
engaged in a joint venture with Houston Exploration. On March 31, 2000, under a
pre-existing credit arrangement, approximately $80 million in debt owed by
Houston Exploration to us was converted into common equity of Houston
Exploration. Upon such conversion, our common equity ownership interest in
Houston Exploration increased from 64% to the current level of approximately
70%.
FS-6
The energy services segment primarily includes companies that provide
energy services to customers located within the New York tri-state metropolitan
area, Pennsylvania and in Rhode Island through the following four lines of
business: (i) home energy services provides residential customers with service
and maintenance of energy systems and appliances, as well as the retail
marketing of natural gas and electricity to residential customers; (ii) business
solutions provides professional engineering-consulting and design of energy
systems for commercial and industrial customers, including installation of
plumbing, heating, ventilation and air conditioning equipment; (iii) commodity
procurement provides management and procurement services for fuel supply and
management of energy sales, primarily for the Ravenswood facility; and (iv)
telecommunications services provides various services to carriers of voice and
data transmission on Long Island and in New York City.
Subsidiaries in the energy investments segment hold a 20% equity
interest in Iroquois, a pipeline that transports Canadian gas supply to markets
in the Northeastern United States; a 50% interest in the Premier Transmission
Pipeline and a 24.5% interest in Phoenix Natural Gas, both in Northern Ireland;
investments in certain midstream natural gas assets in western Canada owned
jointly with Gulf Canada Resources Limited, through the Gulf Midstream Services
Partnership and the ownership of certain oil producing properties in Alberta,
Canada. These subsidiaries are primarily accounted for under the equity method.
Accordingly, equity income from these investments is reflected in other income
and (deductions) in the consolidated statement of income. In October 2000, we
sold our interest in certain oil producing properties in Alberta, Canada. An
after-tax gain of approximately $1.3 million from the sale will be reported in
the fourth quarter of 2000. Further, also in October 2000, we acquired the
remaining 50% interest in Gulf Midstream making us the sole owner of Gulf
Midstream. The transaction required us to borrow an additional $48 million from
Canadian banks. For future financial reporting purposes, the operations of Gulf
Midstream, which will now be known as KeySpan Energy Canada, will be fully
consolidated with our operations.
The other segment represents primarily unallocated administrative and
general expenses, interest income earned on temporary cash investments, and
preferred stock dividends.
The accounting policies of the segments are the same as those used
for the preparation of the consolidated financial statements. Our segments are
strategic business units that are managed separately because of their different
operating and regulatory environments. At September 30, 2000, the total assets
of certain reportable segments increased from levels reported at December 31,
1999 as follows: the energy services segment's assets increased by approximately
$260 million due primarily to the acquisition of four additional companies that
provide energy-related services and the investment in MyHomeKey.com.
The segment information presented below reflects amounts reported in
the consolidated financial statements for the nine months ended September 30,
2000 and 1999.
Gas Electric Gas exploration Energy Energy
distribution services and production services investments Other Eliminations Consolidated
- --------------------------------------- ------------- ------------------------------------------------------------------------------
(dollars in thousands)
NINE MONTHS ENDED SEPTEMBER
30, 1999
Unaffiliated Revenue $1,208,254 $606,552 $103,622 $123,165 $1,510 $ - $ - $2,043,103
Intersegment Revenue - - - - - - - -
Operating Income 198,565 112,652 29,879 (4,491) (3,949) 7,564 - 340,220
Earnings for
Common Stock 92,873 59,786 9,239 (2,384) 5,937 (16,292) - 149,159
Basic and Diluted
Earnings Per Share $0.66 $0.43 $0.07 ($0.02) $0.04 ($0.12) $ - $1.06
NINE MONTHS ENDED SEPTEMBER
30, 2000
Unaffiliated Revenue $1,458,595 $1,097,616 $169,966 $480,511 $4,650 $ - $ - $3,211,338
Intersegment Revenue - - - 48,677 - - (48,677) -
Operating Income 212,688 204,834 72,514 51,958 (4,022) (15,864) - 522,108
Earnings for
Common Stock 101,025 103,316 29,381 25,221 7,877 (43,033) - 223,787
Basic and Diluted
Earnings Per Share $0.75 $0.77 $0.22 $0.19 $0.06 ($0.32) $ - $1.67
- ------------------------------------------------------------------------------------------------------------------------------------
3. ENVIRONMENTAL MATTERS
MANUFACTURED GAS PLANT SITES: We have identified thirty-four
manufactured gas plant sites that were historically owned or operated by KeySpan
Energy Delivery New York and KeySpan Energy Delivery Long Island (or such
companies' predecessors). These former sites, some of which are no longer owned
by us, have been identified to the New York State Department of Environmental
Conservation for inclusion on appropriate waste site inventories.
We presently estimate that the remaining cost of our manufactured gas
plant-related environmental cleanup activities will be approximately $119
million, which amount has been accrued as our current best estimate of our
aggregate environmental liability for known sites. The currently-known
conditions of the former manufactured gas plant 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. We believe that in the
aggregate, the accrued liability for investigation and remediation of the
manufactured gas plant sites identified above are reasonable estimates of likely
cost within a range of reasonable, foreseeable costs.
Thirteen of the identified sites are currently the subject of
administrative consent orders with the Department of Environmental Conservation
and another site is subject to the negotiation of an administrative consent
order or an agreement under the Department of Environmental Conservation's
voluntary clean-up program. Our remaining manufactured gas plant sites may not
become subject to administrative consent orders in the future, and accordingly
no liability has been accrued for these sites.
Under prior rate orders, the Public Service Commission of the State
of New York has allowed recovery of costs related to certain KeySpan Energy
Delivery New York manufactured gas plant sites. We believe that current rate
plans in effect for both gas distribution subsidiaries provide for recovery of
environmental costs attributable to the gas distribution segment. At September
30, 2000, we had a total regulatory asset of approximately $98 million.
Expenditures incurred to date by us with respect to manufactured gas
plant-related activities total approximately $20 million.
4. LIQUIDITY AND FINANCINGS
During the nine months ended September 30, 2000, we issued $1.6
billion and repaid $1.4 billion of commercial paper to satisfy working capital
needs and the mandatory redemption of preferred stock as previously discussed.
At September 30, 2000, we had $382.1 million of commercial paper outstanding at
an average annualized interest rate of 6.73%.
Houston Exploration also issued and repaid commercial paper to
satisfy working capital needs during the nine months ended September 30, 2000.
For the nine months ended September 30, 2000, Houston Exploration borrowed $30
million under its credit facility with a commercial bank and repaid $37 million
of outstanding borrowings. At September 30, 2000, $174 million remained
outstanding under this facility at a weighted average annualized interest rate
of 7.84%. In addition, during the nine months ended September 30, 2000 a
subsidiary in the energy investments segment increased its borrowings under
revolving credit loan agreements with financial institutions in Canada by $33.6
million. At September 30, 2000, $118 million was outstanding at a weighted
average annualized interest rate of 6.48%.
On June 1, 2000, we redeemed, at maturity, all 14,520,000 outstanding
shares of our 7.95% Preferred Stock Series AA. Our obligation of $370.2 million
included the mandatory redemption price of $25 per share totaling $363 million
and dividends payable totaling $7.2 million. The redemption was satisfied
through the utilization of internally generated funds and proceeds from the
issuance of commercial paper.
KeySpan Energy Delivery Long Island filed a shelf registration
statement with the Securities and Exchange Commission in December 1999 for the
issuance of up to $600 million of medium term notes. On February 1, 2000,
KeySpan Energy Delivery Long Island issued $400 million 7.875 % Notes due
February 1, 2010. The net proceeds from the issuance were used to repay our
treasury for costs in extinguishing $397 million of promissory notes to the Long
Island Power Authority that matured in June 1999. The medium term notes are
fully and unconditionally guaranteed by us. At September 30, 2000, $200 million
of medium term notes remain available for issuance under this shelf registration
statement.
FS-7
In August 2000, we filed a shelf registration statement with the
Securities and Exchange Commission for the issuance of up to $1.65 billion of
debt securities. We intend to issue the Notes to replace short term borrowings
entered into in connection with our acquisitions of Eastern and EnergyNorth.
(See note 5 "Acquisition of Eastern.")
5. ACQUISITION OF EASTERN
On November 4, 1999, we and Eastern announced that the companies had
signed a definitive merger agreement under which we will acquire all of the
common stock of Eastern for $64.00 per share in cash, subject to adjustment. The
agreement and plan of merger is included as an exhibit to our annual report on
Form 10-K for the year ended December 31, 1999. The transaction has a total
value of approximately $2.5 billion and will be accounted for utilizing purchase
accounting.
In connection with the merger, Eastern has amended its merger
agreement with EnergyNorth to provide for an all cash acquisition by Eastern of
EnergyNorth shares at a price per share of $61.00, subject to adjustment. The
restructured EnergyNorth merger is expected to close contemporaneously with the
KeySpan/Eastern transaction. The EnergyNorth transaction has a total value of
approximately $250 million.
We intend to access the financial markets in the fourth quarter of
2000 to finance approximately $2 billion for the Eastern and EnergyNorth
transactions. We intend to use Bridge Financing and other commercial paper to
fund these transactions initially and then replace the Bridge Financing with
$1.65 billion of Notes. We anticipate issuing several different maturities of
Notes to balance our future debt capital maturity structure.
We expect pre-tax annual cost savings resulting from the transactions
to be approximately $40 million. These cost savings result primarily from the
elimination of duplicate corporate and administrative programs, greater
efficiencies in operations and business processes, and increased purchasing
efficiencies. We expect to achieve the majority of the reductions through a
variety of programs which would include hiring freezes, attrition and separation
programs, including implementation of an early retirement program and targeted
voluntary severance program. We have initiated some of these programs and will
report the potential effect of these initiatives on earnings and cash flow from
operations when job positions and cost estimates have been finalized.
Following the closing of these transactions, we will become subject
to the regulation of the Securities and Exchange Commission as a registered
holding company under the Public Utility Holding Company Act of 1935, as
amended. As such, our corporate and financial activities as well as our
subsidiaries, including such entities' ability to pay dividends, will be subject
to Securities and Exchange Commission regulation. The merger is conditioned upon
the approval of the Securities and Exchange Commission. 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. We anticipate that the transaction will be consummated in the
fourth quarter of 2000, but are unable to determine when or if the required
Securities and Exchange Commission approval will be obtained.
6. NEW YORK STATE INDEPENDENT SYSTEM OPERATOR MATTERS
We currently realize revenues from our investment in the Ravenswood
facility through the wholesale sale of energy, capacity and ancillary services.
Ancillary services include spinning reserves and non-spinning reserves available
to replace energy that is unable to be delivered due to the unexpected loss of a
major energy source.
Due to the increase in the market-clearing price of reserves during
the first quarter of 2000, the New York Independent System Operator requested
that the Federal Energy Regulatory Commission approve a bid cap on reserves as
well as requiring a refunding of so-called alleged "excess payments" received by
sellers into the ancillary services market, including the Ravenswood facility
and the Long Island Power Authority. Other market participants, including buyers
of reserves and electric utilities as load serving entities also filed
complaints with the Federal Energy Regulatory Commission and intervened in the
various Federal Energy Regulatory Commission proceedings related to reserves,
and proposed alternative remedies.
On May 31, 2000, the Federal Energy Regulatory Commission issued an
order on spinning and non-spinning reserves that granted approval of a bid cap
for non-spinning reserves which includes payments for the opportunity cost of
not making energy sales. The other requests - such as a bid cap for spinning
reserves, retroactive refunds, recalculation of reserve prices for March 2000,
and convening a technical conference and settlement proceeding - were
FS-8
rejected. Pursuant to the May 31, 2000 order, the New York Independent System
Operator made its first compliance filing to the Federal Energy Regulatory
Commission on June 15, 2000. However, the New York Independent System Operator
and several other market participants have requested rehearing of the May 31
order. In response to the New York Independent System Operator request, the
Federal Energy Regulatory Commission has allowed the New York Independent System
Operator to recalculate prices for reserves for the March 2000 period as if the
bid cap approved effective April 1, 2000 had been effective for March, pending
its review on the rehearing requests of the May 31, 2000 order.
On September 5, 2000, New York State Electric and Gas Corporation
filed a lawsuit against the New York Independent System Operator, in Supreme
Court Broome County, seeking recovery of overcharges and damages related to the
New York Independent System Operator's administration of the reserves market. We
are not a party to the lawsuit.
Additionally, the wholesale energy market has also been the focus of
increased market based pricing. On June 30, 2000, the New York Independent
System Operator petitioned the Federal Energy Regulatory Commission to approve a
$1,300/MWh bid cap in the energy market to be effective July 6, 2000 through
October 28, 2000. The New York Independent System Operator requested the bid cap
because it believed that there was a lack of price responsive demand and the
start-up problems associated with implementation of the New York Independent
System Operator might cause severe price spikes during the summer peak months.
In response, on July 26, 2000, the Federal Energy Regulatory Commission issued
an order approving a $1,000/MWh bid cap in the energy market effective July 26,
2000 through October 28, 2000. The July 26 order also required the New York
Independent System Operator to identify certain "market flaw problems" and to
report them to the Federal Energy Regulatory Commission by September 1, 2000.
On September 8, 2000 the New York Independent System Operator issued
to the Federal Energy Regulatory Commission revised tariff sheets and a
corrected combined compliance filing and report related to reserve markets. The
compliance filing proposes tariff changes to become effective November 1, 2000
with the exception of the effective date for the payment of lost opportunity
costs to suppliers of 10-minute reserves, where such filing proposes an
effective date of May 31, 2000. The compliance filing proposed a number of
changes, including the gradual removal of the bid cap in the reserve market from
$15/MWh on November 1, 2000, to $30/MWh on January 1, 2001 and to eliminate it
completely on May 1, 2001. Various parties filed comments to the compliance
filing requesting additional changes including extending the $1,000/MWh energy
price cap beyond October 28, 2000. The compliance filing and comments are
pending the Federal Energy Regulatory Commission review.
We are opposing the relief requested by the New York Independent
System Operator and the load serving entities and believe that the ultimate
resolution of these issues will not have a material effect on our consolidated
financial position or results of operations.
7. DERIVATIVE FINANCIAL INSTRUMENTS
In connection with our anticipated purchase of Eastern (see note 5,
"Acquisition of Eastern") and the anticipated issuance of Notes to finance the
acquisition, we entered into forward starting swap agreements 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. Through September 30, 2000, we
have entered into $1.5 billion of forward starting swap agreements with interest
rates that range from 6.86% to 7.78%. The maturities on these instruments range
from 5 to 30 years. Under a forward starting swap, we agree to pay or receive an
amount equal to the difference between the net present value of the cash flows
for a notional 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. We have entered into these
agreements with more than one major financial institution in order to minimize
counter party credit risk. Based on interest rates as of October 30, 2000, we
estimate that we may be obligated to pay counterparties approximately $60
million at the time of issuance of the Notes. This amount will be amortized over
the life of the Notes. This amount reflects the significant decrease in interest
rates since we entered into the forward starting swap agreements. As a result of
the decrease in interest rates, we anticipate that we will be able to issue the
Notes at rates that will be lower than originally projected.
During the third quarter of 2000, we also entered into a number of
derivative swap instruments to fix the selling price on a portion of our
estimated 2001 summer peak electric sales through the Ravenswood facility and to
fix the
FS-9
purchase price of fuel used to generate electricity. For the months of July and
August 2001, we have hedged the sales price on 105,600 megawatt hours of summer
peak electric sales to protect against a potential degradation in market prices
during the summer. Under these swap agreements, we will receive a fixed price
per megawatt hour of electricity sold during summer peak hours and pay the
counter party the then current floating market price for peak electric supply.
We will receive the then current floating market price of peak electric energy
when the Ravenswood facility sells electric energy to the New York Independent
System Operator. These derivatives are accounted for as hedges. We also have a
tolling arrangement with two counter parties under which we have "locked-in" a
profit margin on 52,800 megawatt hours of summer season sales and 211,200
megawatt hours of winter sales. Under these arrangements, we will receive an
up-front fee and will pay the counter party, on a monthly basis, our actual
realized profit margin from the sale of electric energy. As a result of these
hedging arrangements, we have hedged approximately 9% of our estimated peak 2001
summer electric sales and approximately 6% of our estimated 2001 yearly electric
sales.
8. NEW FINANCIAL ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("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. We 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.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - An Amendment of FASB
Statement No 133." SFAS No. 138 amends the accounting and reporting standards of
SFAS No. 133 for a number of transactions. The most significant amendment to
SFAS 133 as it relates to our operations is that the normal purchases and normal
sales exception found in SFAS 133 may now be applied to contracts that
implicitly or explicitly permit net settlement, and contracts that have a market
mechanism to facilitate net settlement. Therefore, under SFAS 138 our gas
procurement contracts are not considered derivative financial instruments.
All of our derivative financial instruments, except for an interest
rate swap, are cash-flow hedges. SFAS No. 133 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. Periodic changes in market
value of derivatives which meet the definition of a cash-flow hedge are recorded
as comprehensive income, subject to effectiveness, and then included in net
income to match the underlying hedged transactions. Our derivative instruments
currently in place qualify for hedge accounting, and as a result, implementation
of SFAS No. 133 and SFAS No. 138 when adopted are not expected to have a
material effect on our 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.
FS-10
EASTERN'S CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1999 1999 2000
---------------- ---------------- ------------------
(in thousands)
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 30,718 $ 44,332 $ 39,122
Receivables, less reserves 87,920 135,409 74,397
Inventories 76,340 74,555 101,952
Deferred gas costs 21,589 64,503 85,000
Other current assets 7,319 5,008 8,073
---------------- ---------------- ------------------
TOTAL CURRENT ASSETS 223,886 323,807 308,544
PROPERTY AND EQUIPMENT, AT COST 2,179,169 2,197,156 2,222,650
Less accumulated depreciation 910,068 906,953 943,081
---------------- ---------------- ------------------
NET PROPERTY AND EQUIPMENT 1,269,101 1,290,203 1,279,569
Goodwill, less amortization 248,351 247,137 242,497
Deferred postretirement health care costs 74,551 72,760 68,579
Investments 15,437 14,671 14,265
Deferred charges and other costs, less amortization 77,169 71,179 70,199
---------------- ---------------- ------------------
TOTAL OTHER ASSETS 415,508 405,747 395,540
---------------- ---------------- ------------------
TOTAL ASSETS $ 1,908,495 $ 2,019,757 $ 1,983,653
================ ================ ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current debt 61,984 $ 123,251 128,062
Accounts payable 57,456 75,770 63,914
Accrued expenses 40,322 37,516 39,887
Other current liabilities 48,678 50,234 50,946
---------------- ---------------- ------------------
TOTAL CURRENT LIABILITIES 208,440 286,771 282,809
GAS INVENTORY FINANCING 43,285 54,020 59,657
LONG-TERM DEBT 516,683 515,232 501,937
RESERVES AND OTHER LIABILITIES
Deferred income taxes 174,069 179,426 183,728
Postretirement health care 98,946 100,016 97,253
Preferred stock of subsidiary 26,447 26,454 16,737
Other reserves 104,866 103,208 101,420
---------------- ---------------- ------------------
TOTAL RESERVES AND OTHER LIABILITIES 404,328 409,104 399,138
Commitments and Contingencies
SHAREHOLDERS' EQUITY
Common stock, $1.00 par value; Authorized shares 50,000,000; Issued shares
27,173,322 at September 30, 2000; 27,131,090 at December 31, 1999, and
22,649,457 at
September 30, 1999 27,021 27,131 27,183
Capital in excess of par value 240,532 244,449 246,845
Retained earnings 468,970 483,710 466,512
Accumulated other comprehensive (loss) (417) (77) 155
Treasury stock at cost - 16,892 shares at June 30, 2000 and
December 31, 1999; and 10,461 shares at June 30, 1999 (347) (583) (583)
---------------- ---------------- ------------------
TOTAL SHAREHOLDERS' EQUITY 735,759 754,630 740,112
---------------- ---------------- ------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,908,495 $ 2,019,757 $ 1,983,653
================ ================ ==================
The accompanying notes are an integral part of these financial statements.
FS-11
EASTERN'S CONSOLIDATED STATEMENT OF INCOME
NINE MONTHS ENDED
---------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 2000
------------------ ------------------
(dollars in thousands)
REVENUES $660,327 $807,548
OPERATING COSTS AND EXPENSES
Operating Costs 461,066 561,926
Selling, general and administrative expenses 84,658 110,922
Depreciation and amortization 59,790 73,051
------------------ ------------------
603,514 745,899
OPERATING EARNINGS 54,813 61,649
OTHER INCOME (EXPENSES)
Interest income 7,488 2,543
Interest expense (27,062) (35,221)
Other, net 9,115 2,682
------------------ ------------------
EARNINGS BEFORE INCOME TAXES 44,354 31,653
Provision for income taxes 17,449 13,828
------------------ ------------------
NET EARNINGS $ 26,905 $ 17,825
================== ==================
BASIC EARNINGS PER SHARE $ 1.16 $ 0.66
DILUTED EARNINGS PER SHARE $ 1.16 $ 0.65
DIVIDENDS PER SHARE $ 1.26 $ 1.29
The accompanying notes are an integral part of these financial statements.
FS-12
EASTERN'S CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED
-----------------------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 2000
------------------------- -------------------------
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
NET EARNINGS $ 26,905 $ 17,825
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 59,790 73,051
Income taxes and tax credits (7,175) 28
Net gain on sale of assets (2,281) (1,819)
Other changes in assets and liabilities:
Receivables 29,875 61,012
Inventories (5,477) (27,397)
Deferred gas costs 32,391 (20,497)
Accounts payable (9,644) (11,857)
Other 496 6,283
------------------------- -------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 124,880 96,629
------------------------- -------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (46,971) (51,646)
Acquisition of Colonial Gas, net of cash acquired (150,446) -
Investments (7,784) (8,843)
Proceeds on sale of assets 6,697 9,853
Other (2,632) (10,047)
------------------------- -------------------------
NET CASH USED BY INVESTING ACTIVITIES (201,136) (60,683)
------------------------- -------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (28,458) (34,963)
Changes in notes payable (12,835) 5,547
Changes in gas inventory financing (9,359) 5,637
Proceeds from issuance of long-term debt
Repayment of long-term debt and preferred stock (6,442) (23,336)
Other 2,894 5,959
------------------------- -------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (54,200) (41,156)
------------------------- -------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (130,456) (5,210)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 159,836 44,332
------------------------- -------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 29,380 39,122
SHORT-TERM INVESTMENTS 1,338 -
Cash and short-term investments $30,718 $39,122
========================= =========================
The accompanying notes are an integral part of these financial statements.
FS-13
EASTERN'S NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
It is Eastern's opinion that the financial information contained in
this report reflects all adjustments necessary to present a fair statement of
results for the periods reported. All of these adjustments are of a normal
recurring nature. Results for the periods are not necessarily indicative of
results to be expected for the year, due to the seasonal nature of Eastern's
operations. All accounting policies have been applied in a manner consistent
with prior periods. Such financial information is subject to year-end
adjustments and annual audit by independent public accountants.
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, the
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.
These interim financial statements should be read in conjunction with
Eastern's 1999 annual report filed on form 10-K with the Securities and Exchange
Commission.
EARNINGS PER SHARE
Basic earnings per share is based on the weighted average number of
shares outstanding. Diluted earnings per share gives effect to the exercise of
stock options using the treasury stock method, as reflected below:
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------------
1999 2000
- --------------------------------------------------------------------------------
(in thousands)
Weighted average shares 23,120 27,152
Dilutive effect of options 119 264
---------------- ----------------
Adjusted weighted average shares 23,239 27,416
================ ================
COMPREHENSIVE INCOME
The following is a summary of the reclassification adjustments and
the income tax effects for the components of other comprehensive income (loss)
for the nine months ended September 30:
Unrealized
Holding Gains Reclassification
(Losses) on Adjustments
Investments for Gains Other
Arising During Included in Comprehensive
the Period Net Income Income (Loss)
- -------------------------------------------- --- ------------------------ --- --------------------- ------------------------
(in thousands)
NINE MONTHS ENDED SEPTEMBER 30, 1999
Pretax $ 72 $ (552) $ (480)
Income tax benefit (expense) (25) 193 (168)
-------------------- -------------------------- -----------------------
Net change $ 47 $ (359) $ (312)
==================== ========================== =======================
NINE MONTHS ENDED SEPTEMBER 30, 2000
Pretax $ 1,869 $ (1,512) $ 357
Income tax benefit (expense) (654) 529 (125)
-------------------- -------------------------- -----------------------
Net change $ 1,215 $ (983) $ 232
==================== ========================== =======================
FS-14
2. PLANNED MERGER WITH KEYSPAN
On November 4, 1999, Eastern signed a definitive agreement that
provides for the merger of Eastern with a wholly-owned subsidiary of KeySpan,
with Eastern surviving the merger and becoming a wholly-owned subsidiary of
KeySpan. In the merger, holders of Eastern common stock will receive $64.00 per
share, in cash, subject to adjustment.
3. PLANNED MERGER WITH ENERGYNORTH, INC.
Under a definitive agreement signed in 1999, Eastern expects to
acquire EnergyNorth for approximately $203 million in cash simultaneously with
Eastern's merger with KeySpan. If the KeySpan merger is terminated, the
agreement provides for Eastern to acquire EnergyNorth for approximately $78
million in cash and 1.7 million in Eastern shares, subject to a collar
arrangement.
4. BUSINESS SEGMENTS
Eastern's reportable business segment information for revenues and
operating earnings is presented below:
REVENUES NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------
1999 2000
---------------- ----------------
(in thousands)
Natural Gas Distribution $ 452,441 $ 576,084
Marine Transportation 196,799 211,751
Other Services 11,087 19,713
---------------- ----------------
$ 660,327 $ 817,548
================ ================
OPERATING EARNINGS (LOSS) NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------
1999 2000
----------------- ---------------
(in thousands)
Natural Gas Distribution $ 45,942 $ 56,649
Marine Transportation 15,605 11,773
Other Services (3,724) (1,689)
Headquarters (3,010) (5,084)
----------------- ---------------
$ 54,813 $ 61,649
================= ===============
5. INVENTORIES
THE COMPONENTS OF INVENTORIES WERE AS FOLLOWS:
SEPTEMBER 30,
2000
--------------------------
(in thousands)
Supplemental gas supplies $ 85,329
Other materials, supplies and marine fuels 16,623
--------------------------
$ 101,952
==========================
FS-15
6. SUPPLEMENTAL CASH FLOW INFORMATION
THE FOLLOWING ARE SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
1999 2000
--------------- -----------
(in thousands)
Cash paid during the year for:
Interest, net of amounts capitalized $ 17,711 $ 29,094
Income taxes $ 24,523 $ 16,185
FS-16
[THIS PAGE INTENTIONALLY LEFT BLANK]
FS-17
PROSPECTUS
[GRAPHIC_OMITTED]
KEYSPAN CORPORATION
$1,650,000,000
DEBT SECURITIES
- We plan to issue up to $1,650,000,000 of debt securities.
- The debt securities may be offered as separate series, in
amounts, prices and on terms to be determined at the time of the
sale. When we offer debt securities, we will provide you with a
prospectus supplement or a term sheet describing the terms of the
specific issue of debt securities including the offering price of
the securities.
- We may sell the debt securities to agents, underwriters or
dealers, or may sell them directly to other purchasers.
- You should read this prospectus and the prospectus supplement or
the term sheet relating to the specific issue of debt securities
carefully before you invest.
-------------------------------
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved these securities or determined
if this prospectus is truthful or complete. Any representation to the contrary
is a criminal offense.
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
The date of this prospectus is October 26, 2000.
TABLE OF CONTENTS
Page
About this Prospectus...................................................................................................1
Risk Factors............................................................................................................1
Where You Can Find More Information.....................................................................................1
Forward-Looking Statements..............................................................................................2
KeySpan .............................................................................................................3
Use of Proceeds.........................................................................................................3
Ratio of Earnings to Fixed Charges......................................................................................4
Description of Securities...............................................................................................5
Certain U.S. Federal Income Tax Consequences to Non-U.S. Persons ......................................................16
Plan of Distribution...................................................................................................18
Legal Opinions.........................................................................................................19
Experts ............................................................................................................19
ABOUT THIS PROSPECTUS
As used in this prospectus and any prospectus supplement or term
sheet, except as the context otherwise requires, "we," "us," "our," "our
Company," and "KeySpan" mean KeySpan Corporation, together with its consolidated
subsidiaries.
RISK FACTORS
For each series of debt securities, we will include risk factors, if
appropriate, in the prospectus supplement relating to that series.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any of these documents at
the SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. Our SEC filings are also available to the public
on the SEC's web site at http://www.sec.gov.
-------------------
We filed a registration statement on Form S-3 with the SEC covering
the debt securities. For further information on us and the debt securities, you
should refer to the registration statement and its exhibits. This prospectus
summarizes material provisions of the indenture. Because the prospectus may not
contain all the information that you may find important, you should review the
full text of these documents. We have included copies of these documents in an
exhibit to our registration statement of which this prospectus is a part.
The SEC allows us to "incorporate by reference" the information that
we file with the SEC, which means that we can disclose important information to
you by referring you to those documents. The information incorporated by
reference is considered to be part of this prospectus, and later information
that the we file with the SEC will automatically update and supersede this
information. We incorporate by reference the documents listed below and any
future filings made with the SEC under Sections 13(a), 13(c), 14, or 15(d) of
the Securities Exchange Act of 1934 until all of the securities are sold.
- Our Annual Report on Form 10-K for the fiscal year ended December
31, 1999;
- Our Quarterly Report on Form 10-Q for the quarterly periods ended
March 31, 2000 and June 30, 2000;
- Our Current Reports on Form 8-K January 19, 2000, January 27,
2000, February 1, 2000, March 27, 2000, July 12, 2000, July 26,
2000 and October 6, 2000.
You may request a copy of these filings, or any of our SEC filings,
at no cost, over the Internet at our web site at http://www.keyspanenergy.com or
by writing or telephoning us at the following address:
Investor Relations
KeySpan Corporation
One MetroTech Center
Brooklyn, New York, 11201
(718) 403-3385
You should rely only on the information incorporated by reference or
provided in this prospectus or any supplement or term sheet. We have not
authorized anyone else to provide you with different information. We are not
making an offer of these debt securities in any state where the offer is not
permitted. You should not assume that the information in this prospectus or any
supplement is accurate as of any date other than the date on the front of these
documents.
1
FORWARD-LOOKING STATEMENTS
Some of the information included in this prospectus, any prospectus
supplement or term sheet and the documents we have incorporated by reference
contain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, as amended. Such statements relate to future
events or our future financial performance. We use words such as "anticipate,"
"believe," "expect," "may," "project," "will" or other similar words to identify
forward-looking statements.
Without limiting the foregoing, all statements relating to our
- anticipated capital expenditures,
- future cash flows and borrowings,
- pursuit of potential future acquisition opportunities, and
- sources of funding
are forward-looking statements. These forward-looking statements are based on
numerous assumptions that we believe are reasonable, but they are open to a wide
range of uncertainties and business risks and actual results may differ
materially from those discussed in these statements.
Among the factors that could cause actual results to differ
materially are:
- available sources and costs of fuel;
- volatility of energy prices in a deregulated market environment;
- federal and state regulatory initiatives that increase
competition, threaten cost and investment recovery and impact
rate structure;
- our ability to successfully reduce our cost structures;
- the successful integration of Eastern and EnergyNorth;
- the degree to which we develop unregulated business ventures;
- our ability to identify and make complementary acquisitions, as
well as the successful integration of those acquisitions; and
- inflationary trends and interest rates.
When considering these forward-looking statements, you should keep in
mind the cautionary statements in this document, any prospectus supplement or
term sheet and the documents incorporated by reference. We will not update these
statements unless the securities laws require us to do so.
2
KEYSPAN
KeySpan was formed in connection with a business combination in May 1998
of KeySpan Energy Corporation, the parent of The Brooklyn Union Gas Company, and
certain businesses of the Long Island Lighting Company. Our core business is gas
distribution, conducted by our two regulated gas subsidiaries, The Brooklyn
Union Gas Company d/b/a KeySpan Energy Delivery New York and KeySpan Gas East
Corporation d/b/a KeySpan Energy Delivery Long Island. Together, they distribute
gas to approximately 1.6 million customers.
We are also a major, and growing, generator of electricity. We own and
operate five large generating plants and 42 smaller facilities in Nassau and
Suffolk Counties on Long Island and lease and operate a major facility in Queens
County in New York City. Under contractual arrangements, we provide power,
electric transmission-and-distribution services, billing and other customer
services for approximately one million electric customers of the Long Island
Power Authority. Our other subsidiaries are involved in oil and gas exploration
and production; gas storage; wholesale and retail gas and electric marketing;
appliance service; heating, ventilation and air conditioning installation and
services; large energy-system ownership, installation and management;
telecommunications; energy-related internet activities; and fuel cells. We also
invest in, and participate in the development of, pipelines and other
energy-related projects, domestically and internationally.
In November 1999, KeySpan and Eastern Enterprises announced that they had
signed a definitive merger agreement under which we will acquire all of the
common stock of Eastern for $64.00 per share in cash, subject to adjustment. 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 transaction
will be accounted for as a purchase.
Eastern owns and operates Boston Gas Company, Colonial Gas Company, Essex
Gas Company, Midland Enterprises Inc., Transgas Inc. and ServicEdge Partners,
Inc. In July 1999, Eastern announced it had entered into an agreement to acquire
EnergyNorth, Inc. owner of New Hampshire's largest natural gas distributor,
EnergyNorth Natural Gas, Inc. EnergyNorth is located across the Massachusetts
border from, but contiguous to, areas served by Eastern's gas distribution
subsidiaries. In connection with our acquisition of Eastern, Eastern has amended
its agreement with EnergyNorth to provide for an all cash acquisition of
EnergyNorth shares at a price per share of $61.13, subject to adjustment. The
restructured EnergyNorth acquisition is expected to close contemporaneously with
the KeySpan/Eastern transaction.
The increased size and scope of our combined organization should enable
KeySpan, Eastern and EnergyNorth 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 our unregulated
businesses. The combined company will serve approximately 2.4 million gas
customers.
The transactions among KeySpan, Eastern and EnergyNorth have already
received all required shareholder approvals, as well as the approval of the New
Hampshire Public Utility Commission. However, it is conditioned upon the
approval of the SEC, which is currently reviewing applications filed by us,
Eastern and EnergyNorth under the Public Utility Holding Company Act. We
anticipate that the transactions can be completed before the end of 2000, but we
are unable to determine when or if the required SEC approvals will be obtained.
We are a holding company with no independent operations or source of
income of our own. We conduct substantially all of our operations through our
subsidiaries and, as a result, we depend on the earnings and cash flow of, and
dividends or distributions from, our subsidiaries to provide the funds necessary
to meet our debt and contractual obligations. Furthermore, a substantial portion
of our consolidated assets, earnings and cash flow is derived from the
operations of our regulated utility subsidiaries, whose legal authority to pay
dividends or make other distributions to us is subject to regulation by the New
York Public Service Commission.
USE OF PROCEEDS
We are issuing the debt securities in order to finance our acquisition of
Eastern and EnergyNorth, by either using the proceeds to finance the acquisition
of Eastern's and EnergyNorth's common stock or for any other proper Company
purpose, including to redeem or replace short term financing instruments, such
as bank loans or commercial paper issued to finance those acquisitions.
3
RATIO OF EARNINGS TO FIXED CHARGES
The following table shows our consolidated ratio of earnings to fixed
charges for the periods indicated.
Twelve Months Ended Nine Months Year Six Months
- --------------------------------------------------------------
Ended Ended Ended
December 31, March 31 December 31 December 31 June 30,
------------------------------------
1996 (a) 1997 (a) 1998(a) 1998 1999 2000
- ------------------------------------------------------------------------------------------------------------------------------------
2.15 2.21 2.44 (b) 3.23 4.14
- --------------
(a) Represents ratio of earnings to fixed charges for our predecessor, Long
Island Lighting Company.
For the nine months ended December 31, 1998, earnings were insufficient to
cover fixed charges by $365.0 million. During the nine months ended
December 31, 1998, we incurred the following special charges (after tax):
charges associated with the transaction with the Long Island Power
Authority of $107.9 million; charges associated with the combination of
Long Island Lighting Company's gas and electric services businesses with
KeySpan Corporation 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 a not-for-profit philanthropic foundation.
4
DESCRIPTION OF SECURITIES
IN THIS DESCRIPTION, "WE," "US," "OUR," "OUR COMPANY," AND "KEYSPAN" MEAN
KEYSPAN CORPORATION AND NOT ANY OF OUR SUBSIDIARIES. CAPITALIZED TERMS USED
BELOW ARE DEFINED UNDER "MATERIAL COVENANTS - DEFINED TERMS."
The debt securities will be issued under an indenture, dated as of
November 1, 2000, between us and The Chase Manhattan Bank, as trustee. The
indenture provides for the issuance from time to time of debt securities in an
unlimited dollar amount and an unlimited number of series.
The following description of the terms of the debt securities summarizes
the material terms that will apply to the debt securities. The description is
not complete, and we refer you to the indenture, a copy of which is an exhibit
to the registration statement of which this prospectus is a part. For your
reference, in several cases below we have noted the section in the indenture
that the paragraph summarizes. Capitalized terms have the meanings assigned to
them in the indenture. The referenced sections of the indenture and the
definitions of capitalized terms are incorporated by reference in the following
summary.
Prospective purchasers of debt securities should be aware that special
U.S. Federal income tax, accounting and other considerations may be applicable
to instruments such as the debt securities. The prospectus supplement or term
sheet relating to an issue of debt securities will describe these
considerations, if they apply.
SPECIFIC TERMS OF EACH SERIES
Each time that we issue a new series of debt securities, the prospectus
supplement or term sheet relating to that new series will specify the particular
amount, price and other terms of those debt securities. These terms may include:
- the title of the debt securities;
- any limit on the total principal amount of the debt securities;
- the date or dates on which the principal of the debt securities
will be payable or their manner of determination;
- the interest rate or rates of the debt securities; the date or
dates from which interest will accrue on the debt securities; and
the interest payment dates and the regular record dates for the
debt securities; or, in each case, their manner of determination;
- the place or places where the principal of and premium and
interest on the debt securities will be paid;
- the period or periods within which, the price or prices at which
and the terms on which any of the debt securities may be
redeemed, in whole or in part at our option, and any remarketing
arrangements;
- the terms on which we would be required to redeem, repay or
purchase debt securities required by any sinking fund, mandatory
redemption or similar provision; and the period or periods within
which, the price or prices at which and the terms and conditions
on which the debt securities will be so redeemed, repaid or
purchased in whole or in part;
- the denomination in which the debt securities will be issued, if
other than denominations of $1,000 and any whole multiple
thereof;
- the portion of the principal amount of the debt securities that
is payable on the declaration of acceleration of the maturity, if
other than their principal amount; these debt securities could
include original issue discount, or OID, debt securities or
indexed debt securities, which are each described below;
- whether and under what circumstances we will pay additional
amounts under any debt securities held by a person who is not a
U.S. person for tax payments, assessments or other governmental
charges and whether we have the
5
option to redeem the debt securities which are affected by the
additional amounts instead of paying the additional amounts;
- the form in which we will issue the debt securities, whether
registered, bearer or both, and any restrictions on the exchange
of one form of debt securities for another and on the offer, sale
and delivery of the debt securities in either form;
- whether the debt securities will be issuable as global
securities;
- whether the amounts of payments of principal of, premium, if any,
and interest, if any, on the debt securities are to be determined
with reference to an index, formula or other method, and if so,
the manner in which such amounts will be determined;
- if the debt securities are issuable in definitive form upon the
satisfaction of certain conditions, the form and terms of such
conditions;
- any trustees, paying agents, transfer agents, registrars,
depositories or similar agents with respect to the debt
securities;
- any additions or deletions to the terms of the debt securities
with respect to the events of default or covenants governing the
debt securities;
- the foreign currency or units of two or more foreign currencies
in which payment of the principal of and premium and interest on
any debt securities will be made, if other than U.S. dollars, and
the holders' right, if any, to elect payment in a foreign
currency or foreign currency unit other than that in which the
debt securities are payable;
- whether and to what extent the debt securities are subject to
defeasance on terms different from those described under
"Defeasance of indenture;" and
- any other terms of the debt securities that are not inconsistent
with the indenture.
(section 301)
We may issue debt securities as OID debt securities. OID debt securities
bear no interest or bear interest at below-market rates and are sold at a
discount below their stated principal amount. If we issue OID debt securities,
the prospectus supplement or term sheet will contain the issue price, the rate
at which interest will accrete, and the date from which such interest will
accrete on the OID debt securities.
We may also issue indexed debt securities. Payments of principal of, and
premium and interest on, indexed debt securities are determined with reference
to the rate of exchange between the currency or currency unit in which the debt
security is denominated and any other currency or currency unit specified by us,
to the relationship between two or more currencies or currency units or by other
similar methods or formulas specified in the prospectus supplement or term
sheet.
RANKING
The debt securities will be our unsecured and unsubordinated obligations
and will rank equally with all our other unsecured and unsubordinated debt.
FORM AND DENOMINATION
The prospectus supplement or term sheet will describe the form which the
debt securities will have, including insertions, omissions, substitutions and
other variations permitted by the indenture and any legends required by any
laws, rules or regulations. (section 201)
We will issue debt securities in denominations of $1,000 and whole
multiples thereof, unless the prospectus supplement or term sheet states
otherwise. (section 302)
6
PAYMENT
We will pay principal of and premium and interest on its registered debt
securities at the place and time described in the debt securities. We will pay
installments of interest on any registered debt security to the person in whose
name the registered debt security is registered at the close of business on the
regular record date for these payments. We will pay principal and premium on
registered debt securities only against surrender of these debt securities.
(section 1001) If we issue debt securities in bearer form, the prospectus
supplement or term sheet will describe where and how payment will be made.
MATERIAL COVENANTS
The indenture includes the following material covenants:
LIEN ON ASSETS
If we or any of our Gas Utility Subsidiaries mortgage, pledge or
otherwise subject to any lien the whole or any part of any Property which we now
own or acquire in the future, then we will secure the debt securities to the
same extent and in the same proportion as the debt or other obligation that is
secured by each of those mortgages, pledges or other liens. The debt securities
will remain secured for the same period as the other debt remains secured. This
restriction does not apply, however, to any of the following:
- purchase-money mortgages or liens;
- liens on any property or asset that existed at the time when we
acquired that property or asset;
- any deposit or pledge to secure public or statutory obligations
or contractual obligations to Long Island Power Authority;
- any deposit or pledge with any governmental agency required in
order to qualify us to conduct our business, or any part of our
business, or to entitle us to maintain self-insurance or to
obtain the benefits of any law relating to workmen's
compensation, unemployment insurance, old age pensions or other
social security; - any deposit or pledge with any court, board,
commission or governmental agency as security related to the
proper conduct of any proceeding before it;
- any mortgage, pledge or lien on any property or asset of any of
our affiliates other than Gas Utility Subsidiaries, even if the
affiliate may have acquired that property or asset from us or a
Gas Utility Subsidiary;
- any lien granted over receivables or other monetary or regulatory
assets granted in connection with a securitization arrangement
for those assets to secure our or one of our Gas Utility
Subsidiaries' monetary or regulatory obligations incurred in
relation to such securitization arrangements, so long as the
principal amount of those obligations does not exceed the
aggregate face amount of such receivables or monetary assets;
- liens for taxes, assessments or governmental charges or levies
not yet delinquent or being contested in good faith by us, if we
have made appropriate reserves;
- liens of landlords and liens of mechanics and materialmen
incurred in the ordinary course of business for sums not yet due
or being contested in good faith by us, if we have made
appropriate reserves;
- leases or subleases which we have granted to others in the
ordinary course of business;
- easements, rights-of-way, restrictions and other similar
encumbrances which we have incurred in the ordinary course of
business and which do not interfere with the ordinary conduct of
our business;
- liens incurred in connection with the issuance by a state or a
political subdivision of a state of any securities the interest
on which is exempt from federal income taxes under Section 103 of
the Internal Revenue Code or any other laws or regulations in
effect at the time of the issuance; or
7
- liens for the sole purpose of extending, renewing or replacing
all or a part of the indebtedness secured by any lien referred to
in the foregoing clauses or in this clause.
Notwithstanding the foregoing, we and our Gas Utility Subsidiaries
may create, incur or permit to exist any lien to secure Indebtedness in addition
to those permitted by the preceding sentence, and renew, extend or replace such
liens, PROVIDED that at the time of such creation, incurrence, renewal,
extension or replacement, after giving effect thereto, the aggregate amount of
all such Indebtedness of our company and our Gas Utility Subsidiaries and the
aggregate Attributable Value of all Sales and Leaseback Transactions of our
company and our Gas Utility Subsidiaries at any one time outstanding together
shall not exceed 10% of Consolidated Tangible Assets. As of June 30, 2000,
Consolidated Tangible Assets were $7.1 billion. (section 1007).
SALE AND LEASEBACK TRANSACTIONS
Neither we nor any of our Gas Utility Subsidiaries may enter into any
Sale and Leaseback unless either:
(1) we and our Gas Utility Subsidiaries would be entitled
pursuant to the "--Liens on assets" covenant to create
Indebtedness secured by a lien on the Principal Property to
be leased back in an amount equal to the Attributable Value
of such Sale and Leaseback Transaction without the debt
securities being equally and ratably secured with (or, at
our option, prior to) that Indebtedness; or
(2) we or the relevant subsidiary, within 270 days after the
sale or transfer of the relevant assets shall have been
made, applies, in the case of a sale or transfer for cash,
an amount equal to the net proceeds from the sale or, in
the case of a sale or transfer otherwise than for cash, an
amount equal to the fair market value of the Principal
Property so leased (as determined by any two directors of
our company or the relevant Gas Utility Subsidiary) to:
- the retirement of Indebtedness of our company ranking
prior to or on a parity with the debt securities,
incurred or assumed by us or that Gas Utility
Subsidiary which by its terms matures at, or is
extendible or renewable at the option of the obligor
to, a date more than twelve months after the date of
incurring, assuming or guaranteeing such Indebtedness
or
- the investment in any Principal Property used in the
ordinary course of business.
(section 1008)
LIMITATION ON MERGER, CONSOLIDATION AND SALES OF ASSETS
We may not consolidate with or merge into any other entity or
transfer or lease substantially all of our properties and assets to any person
unless:
- the successor is organized under the laws of the United
States or a state thereof;
- the successor assumes by supplemental indenture the
obligations of its predecessor (that is, all our
obligations under the debt securities and the
indenture); and
- after giving effect to the transaction, there is no
default under the indenture.
The surviving transferee or lessee corporation will be our
successor, and we will be relieved of all obligations under the
debt securities and the indenture. (sections 801 and 802)
DEFINED TERMS
"Attributable Value" means, as to any particular lease under which we
or any of our Gas Utility Subsidiaries is at any time liable as lessee and at
any date as of which the amount thereof is to be determined, the total net
obligations of the lessee for rental payments during the remaining term of the
lease (including any period for which such lease has been extended or may, at
the option of the lessor, be extended) discounted from the respective due dates
thereof to such date at a
8
rate per annum equivalent to the interest rate inherent in such lease (as
determined in good faith by us in accordance with generally accepted financial
practice) compounded semi-annually.
"Capital Stock" of any Person means shares, interests, rights to
purchase, warrants, options, participation or other equivalents of or interests
in (however designed) equity of such Person, including any preferred stock, but
excluding any debt securities convertible into such equity.
"Consolidated Tangible Assets" means, as of the date of any
determination thererof, the total of all assets which would appear on a
consolidated balance sheet of our company and our subsidiaries, prepared in
accordance with U.S. generally accepted accounting principles or U.S. GAAP, at
their net book values (after deducting related depreciation, depletion and
amortization which, in accordance with U.S. GAAP, should be set aside in
connection with the business conducted), but excluding goodwill, trade names,
trademarks, patents, unamortized debt discount and all other intangible assets
all as determined in accordance with U.S. GAAP.
"Gas Utility Subsidiaries" means the following subsidiaries of our
Company engaged in the distribution and sale at retail of natural gas: The
Brooklyn Union Gas Company d/b/a KeySpan Energy Delivery New York, KeySpan Gas
East Corporation d/b/a KeySpan Energy Delivery Long Island, Boston Gas Company,
Colonial Gas Company, Essex Gas Company, and EnergyNorth Natural Gas, Inc.; and
any other subsidiary of our Company engaged in such activity, provided such
subsidiary would be, at any particular time, a "significant subsidiary" of the
Company within the meaning of Rule 1-02 of Regulation S-X promulgated by the
Commission.
"Indebtedness" means, with respect to any Person (without
duplication):
(1) any liability of that Person:
- for borrowed money or under any reimbursement
obligation relating to a letter of credit or similar
instrument;
- evidenced by a bond, note, debenture or similar
instrument;
- to pay the deferred purchase price of property or
services, except trade accounts payable arising in the
ordinary course of business; or
- for the payment of money relating to any obligations
under any capital lease of real or personal property
which has been recorded as a capitalized lease
obligation.
(2) any liability of others described in the preceding
clause (1) that the Person has guaranteed or that is otherwise its
legal liability or which is secured by a lien on that Person's
Property;
(3) any amendment, supplement, modification, deferral,
renewal, extension or refunding of any liability of the types
referred to in clauses (1) or (2) above; and
(4) in the case of any of our subsidiaries, the aggregate
preference in respect of amounts payable on the issued and
outstanding shares of preferred stock of any such subsidiary in the
event of any voluntary or involuntary liquidation, dissolution or
winding up (excluding any such preference attributable to such shares
of preferred stock that are owned by such Person or any of its
subsidiaries).
"Person" means any individual, firm, corporation, partnership,
association, joint venture, tribunal, limited liability company, trust,
government or political subdivision or agency or instrumentality thereof, or any
other entity or organization.
"Principal Property" means the real estate, fixtures, pipelines,
mains, meters, pipes, valves, compressors and other related personal property
primarily used in connection with the transportation, distribution or retail
sale of gas by the Gas Utility Subsidiaries.
9
"Property" means any asset, revenue or any other property, including
capital stock, whether tangible or intangible, real or personal, including,
without limitation, any right to receive income.
"Sale and Leaseback Transaction" means any transaction or series of
related transactions relating to Principal Property now owned or hereafter
acquired whereby we or one of our Gas Utility Subsidiaries transfers the
Principal Property to a Person and we or one of our Gas Utility Subsidiaries
leases it from that Person for a period, including renewals, in excess of three
years.
"Significant Subsidiary" has the meaning specified , as of the date
of the indenture, in Rule 1-02 of Regulation S- X promulgated under the
Securities Act.
REGISTRATION OF TRANSFER AND EXCHANGE
All debt securities issued upon any registration of transfer or
exchange of debt securities will be valid obligations of ours, evidencing the
same debt and entitled to the same rights under the indenture as the debt
securities surrendered in the registration of transfer or exchange.
REGISTRATION OF TRANSFER
Holders of registered debt securities may present their securities for
registration of transfer at the office of one or more security registrars
designated and maintained by us. (section 305)
We will not be required to register the transfer of or exchange debt
securities under the following conditions:
- We will not be required to register the transfer of or exchange any
debt securities during a period of 15 days before any selection of
those debt securities to be redeemed.
- We will not be required to register the transfer of or exchange any
debt securities selected for redemption, in whole or in part, except
the unredeemed portion of any debt securities being redeemed in part.
- We will not be required to register the transfer of or exchange debt
securities of any holder who has exercised an option to require the
repurchase of those debt securities prior to their stated maturity
date, except the portion not being repurchased.
(section 305)
EXCHANGE
At your option, you may exchange your registered debt securities of
any series (except a global security, as set forth below) for an equal principal
amount of other registered debt securities of the same series having authorized
denominations upon surrender to our designated agent.
We may at any time exchange debt securities issued as one or more
global securities for an equal principal amount of debt securities of the same
series in definitive registered form. In this case we will deliver to the
holders new debt securities in definitive registered form in the same aggregate
principal amount as the global securities being exchanged.
The depositary of the global securities may also decide at any time
to surrender one or more global securities in exchange for debt securities of
the same series in definitive registered form, in which case we will deliver the
new debt securities in definitive form to the persons specified by the
depositary, in an aggregate principal amount equal to, and in exchange for, each
person's beneficial interest in the global securities. (section 305)
Notwithstanding the above, we will not be required to exchange any
debt securities if, as a result of the exchange, we would suffer adverse
consequences under any United States law or regulation. (section 305)
10
GLOBAL SECURITIES
If we decide to issue debt securities in the form of one or more
global securities, then we will register the global securities in the name of
the depositary for the global securities or the nominee of the depositary and
the global securities will be delivered by the trustee to the depositary for
credit to the accounts of the holders of beneficial interests in the debt
securities.
The prospectus supplement or term sheet will describe the specific
terms of the depositary arrangement for debt securities of a series that are
issued in global form. None of our company, the trustee, any paying agent or the
security registrar will have any responsibility or liability for any aspect of
the records relating to or payments made on account of beneficial ownership
interests in a global debt security or for maintaining, supervising or reviewing
any records relating to these beneficial ownership interests.
DEFEASANCE OF INDENTURE
We can terminate all of our obligations under the indenture with
respect to the debt securities, other than the obligation to pay interest on and
the principal of the debt securities and certain other obligations, at any time
by:
- depositing money or U.S. government obligations with the trustee in an
amount sufficient to pay the principal of and interest on the debt
securities to their maturity; and
- complying with certain other conditions, including delivery to the
trustee of an opinion of counsel to the effect that holders of debt
securities will not recognize income, gain or loss for federal income
tax purposes as a result of our defeasance.
In addition, we can terminate all of our obligations under the
indenture with respect to the debt securities, including the obligation to pay
interest on and the principal of the debt securities, at any time by:
- depositing money or U.S. government obligations with the trustee in an
amount sufficient to pay the principal of and interest on the debt
securities to their maturity, and
- complying with certain other conditions, including delivery to the
trustee of an opinion of counsel stating that there has been a ruling
by the Internal Revenue Service, or a change in the federal tax law
since the date of the indenture, to the effect that holders of debt
securities will not recognize income, gain or loss for federal income
tax purposes as a result of our defeasance.
(sections 402-404)
PAYMENTS OF UNCLAIMED MONEYS
Moneys deposited with the trustee or any paying agent for the payment
of principal of or premium and interest on any debenture that remains unclaimed
for two years will be repaid to us at our request, unless the law requires
otherwise. If this happens and you want to claim these moneys, you must look to
us and not to the trustee or paying agent. (section 409)
EVENTS OF DEFAULT, NOTICES, AND WAIVER
EVENTS OF DEFAULT
An "event of default" regarding any series of debt securities is any
one of the following events:
- default for 30 days in the payment of any interest installment when
due and payable;
- default in the payment of principal or premium when due at its
stated maturity, by declaration, when called for redemption or otherwise;
11
- - default in the performance of any covenant in the debt securities or
in the indenture by us for 60 days after notice to us by the trustee
or by holders of 25% in principal amount of the outstanding debt
securities of that series;
- - acceleration of debt securities of another series or any other
indebtedness of ours or one of our Significant Subsidiaries for
borrowed money, in an aggregate principal amount exceeding $25
million under the terms of the instrument or instruments under which
the indebtedness is issued or secured, if the acceleration is not
annulled within 30 days after written notice as provided in the
indenture;
- a final, non-appealable judgment or order for the payment of money in
excess of $25 million rendered against us or one of our Significant
Subsidiaries that is not paid or discharged within 60 days following
entry of such judgment or order;
- certain events of bankruptcy, insolvency and reorganization involving
us; and
- any other event of default of that series that is specified in the
prospectus supplement or term sheet.
(section 501)
A default regarding a single series of debt securities will not
necessarily constitute a default regarding any other series.
If an event of default for any series of debt securities occurs and
is continuing (other than an event of default involving the bankruptcy,
insolvency or reorganization of our company), either the trustee or the holders
of 25% in principal amount of the outstanding debt securities of that series may
declare the principal (or, in the case of (a) OID debt securities, a lesser
amount as provided in those OID debt securities or (b) indexed debt securities,
an amount determined by the terms of those indexed debt securities), of all the
debt securities of that series, together with any accrued interest on the debt
securities, to be immediately due and payable by notice in writing to us. If it
is the holders of debt securities who give notice of that declaration of
acceleration to us, then they must also give notice to the trustee. (section
502)
If an event of default occurs which involves the bankruptcy,
insolvency or reorganization of our company, as set forth above, then all unpaid
principal amounts (or, if the debt securities are (a) OID debt securities, then
the portion of the principal amount that is specified in those OID debt
securities or (b) indexed debt securities, an amount determined by the terms of
those indexed debt securities) and accrued interest on all debt securities of
each series will immediately become due and payable, without any action by the
trustee or any holder of debt securities. (section 502)
In order for holders of debt securities to initiate proceedings for a
remedy under the indenture, 25% in principal amount must first give notice to us
as provided above, must request that the trustee initiate a proceeding in its
own name and must offer the trustee a reasonable indemnity against costs and
liabilities. If the trustee still refuses for 60 days to initiate the
proceeding, and no inconsistent direction has been given to the trustee by
holders of a majority of the debt securities of the same series, the holders may
initiate a proceeding as long as they do not adversely affect the rights of any
other holders of that series. (section 507)
The holders of a majority in principal amount of the outstanding debt
securities of a series may rescind a declaration of acceleration if all events
of default, besides the failure to pay principal or interest due solely because
of the declaration of acceleration, have been cured or waived. (section 502)
If we default on the payment of any installment of interest and fail
to cure the default within 30 days, or if we default on the payment of principal
when it becomes due, then the trustee may require us to pay all amounts due to
the trustee, with interest on the overdue principal or interest payments, in
addition to the expenses of collection. (section 503)
A judgment for money damages by courts in the United States,
including a money judgment based on an obligation expressed in a foreign
currency, will ordinarily be rendered only in U.S. dollars. New York statutory
law provides that a court shall render a judgment or decree in the foreign
currency of the underlying obligation and that the judgment or decree shall be
converted into U.S. dollars at the exchange rate prevailing on the date of entry
of the judgment or decree. The indenture requires us to pay additional amounts
necessary to protect holders if a court requires a conversion to be made on a
date other than a judgment date.
12
NOTICES
The trustee is required to give notice to holders of a series of debt
securities of a default, which remains uncured or has not been waived, that is
known to the trustee within 90 days after the default has occurred. In the event
of a default in the performance of any covenant in the debt securities or the
indenture which results under the indenture in notice to us by the trustee after
90 days, the trustee shall not give notice to the holders of debt securities
until 60 days after the giving of notice to us. The trustee may not withhold the
notice in the case of a default in the payment of principal of and premium or
interest on any of the debt securities. (section 602)
WAIVER
The holders of a majority in principal amount of the outstanding debt
securities of a series may waive any past default or event of default except a
default in the payment of principal of or premium or interest on the debt
securities of that series or a default relating to a provision that cannot be
amended without the consent of each affected holder. (section 513)
REPORTS
We are required to file an officer's certificate with the trustee
every year confirming that we are complying with all conditions and covenants in
the indenture. (section 1005)
We must also file with the trustee copies of our annual reports and
the information and other documents which we may be required to file with the
SEC under Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as
amended. These documents must be filed with the trustee within 15 days after
they are required to be filed with the SEC. If we are not required to file the
information, documents or reports under either of these Sections, then we must
file with the trustee and the SEC, in accordance with the rules and regulations
of the SEC, the supplementary and periodic information, documents and reports
which may be required by Section 13 of the Exchange Act, in respect of a debt
security listed and registered on a national securities exchange, as may be
required by the rules and regulations of the SEC.
Within 30 days of filing the information, documents or reports
referred to above with the trustee, we must mail to the holders of the debt
securities any summaries of the information, documents or reports which are
required to be sent to the holders by the rules and regulations of the SEC.
(section 704)
RIGHTS AND DUTIES OF THE TRUSTEE
The holders of a majority in principal amount of outstanding debt
securities of any series may direct the time, method and place of conducting any
proceeding for any remedy available to the trustee or exercising any trust or
other power conferred on the trustee. The trustee may decline to follow that
direction if it would involve the trustee in personal liability or would be
illegal. (section 512) During a default, the trustee is required to exercise the
standard of care and skill that a prudent man would exercise under the
circumstances in the conduct of his own affairs. (section 601) The trustee is
not obligated to exercise any of its rights or powers under the indenture at the
request or direction of any of the holders of debt securities unless those
holders have offered to the trustee reasonable security or indemnity. (section
603)
The trustee is entitled, in the absence of bad faith on its part, to
rely on an officer's certificate before taking action under the indenture.
(section 603)
SUPPLEMENTAL INDENTURES
SUPPLEMENTAL INDENTURES NOT REQUIRING CONSENT OF HOLDERS
Without the consent of any holders of debt securities, we and the
trustee may supplement the indenture, among other things, to:
- pledge property to the trustee as security for the debt securities;
13
- reflect that another entity has succeeded us and assumed the covenants
and obligations of us under the debt securities and the indenture;
- cure any ambiguity or inconsistency in the indenture or in the debt
securities or make any other provisions necessary or desirable, as
long as the interests of the holders of the debt securities are not
adversely affected in any material respect;
- issue and establish the form and terms of any series of debt
securities as provided in the indenture;
- add to our covenants further covenants for the benefit of the holders
of debt securities (and if the covenants are for the benefit of less
than all series of debt securities, stating which series are entitled
to benefit);
- add any additional event of default (and if the new event of default
applies to fewer than all series of debt securities, stating to which
series it applies);
- change the trustee or provide for an additional trustee;
- provide additional provisions for bearer debt securities so long as
the action does not adversely affect the interests of holders of any
debt securities in any material respect; or
- modify the indenture in order to continue its qualification under the
Trust Indenture Act of 1939 or as may be necessary or desirable in
accordance with amendments to that Act.
(section 901)
SUPPLEMENTAL INDENTURES REQUIRING CONSENT OF HOLDERS
With the consent of the holders of at least a majority in principal
amount of the series of the debt securities that would be affected by a
modification of the indenture, the indenture permits us and the trustee to
supplement the indenture or modify in any way the terms of the indenture or the
rights of the holders of the debt securities. However, without the consent of
each holder of all of the debt securities affected by that modification, we and
the trustee may not:
- reduce the principal of or premium on or change the stated final
maturity of any debt security;
- reduce the rate of or change the time for payment of interest on any
debt security (or, in the case of OID debt securities, reduce the rate
of accretion of the OID);
- change any of our obligations to pay additional amounts under the
indenture;
- reduce or alter the method of computation of any amount payable upon
redemption, repayment or purchase of any debt security by us (or the
time when the redemption, repayment or purchase may be made);
- make the principal or interest on any debt security payable in a
currency other than that stated in the debt security or change the
place of payment;
- reduce the amount of principal due on an OID debt security upon
acceleration of maturity or provable in bankruptcy or reduce the
amount payable under the terms of an indexed debt security upon
acceleration of maturity or provable in bankruptcy;
- impair any right of repayment or purchase at the option of any holder
of debt securities;
- modify the right of any holder of debt securities to receive or sue
for payment of the principal or interest on a debt security that would
be due and payable at the maturity thereof or upon redemption; or
- reduce the principal amount of the outstanding debt securities of any
series required to supplement the indenture or to waive any of its
provisions.
14
(section 902)
A supplemental indenture which modifies or eliminates a provision
intended to benefit the holders of one series of debt securities will not affect
the rights under the indenture of holders of other series of debt securities.
REDEMPTION
The specific terms of any redemption of a series of debt securities
will be contained in the prospectus supplement or term sheet for that series.
Generally, we must send notice of redemption to the holders at least 30 days but
not more than 60 days prior to the redemption date. The notice will specify:
- the principal amount being redeemed;
- the redemption date;
- the redemption price;
- the place or places of payment;
- the CUSIP number of the debt securities being redeemed;
- whether the redemption is pursuant to a sinking fund;
- that on the redemption date, interest (or, in the case of OID debt
securities, original issue discount) will cease to accrue; and
- if bearer debt securities are being redeemed, that those bearer debt
securities must be accompanied by all coupons maturing after the
redemption date or the amount of the missing coupons will be deducted
from the redemption price, or indemnity must be furnished, and whether
those bearer debt securities may be exchanged for registered debt
securities not being redeemed.
(section 1104)
On or before any redemption date, we will deposit an amount of money
with the trustee or with a paying agent sufficient to pay the redemption price.
(section 1103)
If less than all the debt securities are being redeemed, the trustee
shall select the debt securities to be redeemed using a method it considers
fair. (section 1103) After the redemption date, holders of debt securities which
were redeemed will have no rights with respect to the debt securities except the
right to receive the redemption price and any unpaid interest to the redemption
date. (section 1106)
CONCERNING THE TRUSTEE
We have customary banking relationships with the trustee, The Chase
Manhattan Bank. Among other services, The Chase Manhattan Bank provides us with
cash management and credit services, including payroll account, lockbox, foreign
exchange and investment custody account services. The Chase Manhattan Bank also
serves or has served as administrative agent and trustee with respect to other
issuances of debt by us and our subsidiaries and is a member of a syndicate of
banks which is party to several credit facilities with us in a total amount of
$2 billion. In addition, Chase Securities Inc., an affiliate of The Chase
Manhattan Bank, acts as a placement agent for our commercial paper program.
15
GOVERNING LAW
The laws of the State of New York govern the indenture and will govern
the debt securities. (section 112)
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. PERSONS
The following is a summary of certain U.S. federal income tax
considerations for beneficial owners of the debt securities that are
"non-U.S. persons" under the Internal Revenue Code of 1986, as amended.
Under the Internal Revenue Code, a "non-U.S. person" means a person that is
not any of the following:
- a citizen or resident of the United States;
- a corporation or partnership created or organized in or under the laws
of the United States or any political subdivision thereof;
- an estate the income of which is subject to U.S. federal income
taxation regardless of its source; or
- a trust which is either subject to the supervision of a court within
the United States and the control of one or more U.S. persons or has a
valid election in effect under applicable U.S. Treasury regulations to
be treated as a U.S. person.
This summary is based on current law which is subject to change (perhaps
retroactively), is for general purposes only and should not be considered tax
advice. This summary does not represent a detailed description of the federal
income tax consequences to you in light of your particular circumstances. In
addition, it does not represent a detailed description of the U.S. federal
income tax consequences applicable to you if you are subject to special
treatment under the U.S. federal income tax laws (including if you are a
"controlled foreign corporation," "passive foreign investment company" or
"foreign personal holding company"). We cannot assure you that a change in law
will not alter significantly the tax considerations that we describe in this
summary.
YOU SHOULD CONSULT YOUR OWN TAX ADVISOR CONCERNING THE PARTICULAR U.S.
FEDERAL INCOME TAX CONSEQUENCES TO YOU OF THE OWNERSHIP OF THE DEBT SECURITIES,
AS WELL AS THE CONSEQUENCES TO YOU ARISING UNDER THE LAWS OF ANY OTHER TAXING
JURISDICTION.
U.S. FEDERAL WITHHOLDING TAX
The 30% U.S. federal withholding tax will not apply to any payment of
principal or interest (including original issue discount) on a particular series
of debt securities provided that:
- you do not actually (or constructively) own 10% or more of the total
combined voting power of all classes of our voting stock within the
meaning of the Internal Revenue Code and the U.S. Treasury
Regulations;
- you are not a controlled foreign corporation that is related to us
through stock ownership;
- you are not a bank whose receipt of interest on the debt securities is
described in the Internal Revenue Code; and
- (a) you provide your name and address on an IRS Form W-8, and certify,
under penalty of perjury, that you are not a U.S. person or (b) a
financial institution holding the debt securities on your behalf
certifies, under penalty of perjury, that it has received an IRS Form
W-8 from the beneficial owner and provides us with a copy.
If you cannot satisfy the requirements described above, payments of
premium, and interest (including original issue discount) made to you will be
subject to the 30% U.S. federal withholding tax, unless you provide us with a
properly executed:
- IRS Form 1001 or successor form claiming an exemption from withholding
under the benefit of a tax treaty or
16
- IRS Form 4224 or successor form stating that interest paid on the debt
security is not subject to withholding tax because it is effectively
connected with your conduct of a trade or business in the United
States.
Under new Treasury regulations applicable to payment made after December
31, 2000, revised Form W-8s will generally replace IRS Form 1001 and IRS Form
4224. The 30% U.S. federal withholding tax will not apply to any gain or income
that you realize on the sale, exchange, retirement or other disposition of the
debt security.
U.S. FEDERAL ESTATE TAX
Your estate will not be subject to U.S. federal estate tax on debt
securities of a series beneficially owned by you at the time of your death,
provided that:
- you do not own 10% or more of the total combined voting power of all
classes of our voting stock (within the meaning of the Internal
Revenue Code and the U.S. Treasury Regulations) and
- interest on that debt security would not have been, if received at the
time of your death, effectively connected with the conduct by you of a
trade or business in the United States.
U.S. FEDERAL INCOME TAX
If you are engaged in a trade or business in the United States and
interest on the debt securities is effectively connected with the conduct of
that trade or business (although exempt from the 30% withholding tax), you will
be subject to U.S. federal income tax on that interest on a net income basis in
the same manner as if you were a U.S. person as defined under the Internal
Revenue Code. In addition, if you are a foreign corporation, you may be subject
to a branch profits tax equal to 30% (or lower applicable treaty rate) of your
earnings and profits for the taxable year, subject to adjustments that are
effectively connected with the conduct by you of a trade or business in the
United States. For this purpose, interest on debt securities will be included in
earnings and profits.
Any gain or income realized on the disposition of a debt security
generally will not be subject to U.S. federal income tax unless:
- that gain or income is effectively connected with the conduct of a
trade or business in the United States by you, or
- you are an individual who is present in the United States for 183 days
or more in the taxable year of that disposition, and certain other
conditions are met.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, you will not be required to provide information reporting and
backup withholding regarding payments that we make to you provided that we do
not have actual knowledge that you are a U.S. person and we have received from
you the statement described above under "U.S. Federal Withholding Tax."
In addition, you will not be required to pay backup withholding and
provide information reporting regarding the proceeds of the sale of a debt
security within the United States or conducted through certain U.S.-related
financial intermediaries, if the payor receives the statement described above
and does not have actual knowledge that you are a U.S. person, as defined under
the Internal Revenue Code, or you otherwise establish an exemption.
U.S. Treasury Regulations were recently issued that generally modify the
information reporting and backup withholding rules applicable to certain
payments made after December 31, 2000. In general, the new U.S. Treasury
Regulations would not significantly alter the present rules discussed above,
except in certain special situations.
Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against your U.S. federal income tax liability provided the
required information is furnished to the IRS.
17
PLAN OF DISTRIBUTION
We may sell the debt securities as follows:
- through underwriters or dealers; or
- through agents; or
- directly to purchasers.
The prospectus supplement or term sheet for each series of debt securities
will describe that offering, including:
- the name or names of any underwriters, dealers or agents;
- the purchase price and the proceeds to us from that sale;
- any underwriting discounts and other items constituting underwriters'
compensation;
- any initial public offering price and any discounts or concessions
allowed or reallowed or paid to dealers; and
- any securities exchanges on which the debt securities of that series
may be listed.
UNDERWRITERS
Unless otherwise set forth in the prospectus supplement or term sheet, the
obligations of the underwriters to purchase debt securities will be subject to
certain conditions. The underwriters will be obligated to purchase all the debt
securities of a series if any are purchased.
The debt securities will be acquired by the underwriters for their own
account and may be resold by them from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices determined at the time of sale. Underwriters may be deemed to
have received compensation from us in the form of underwriting discounts or
commissions and may also receive commissions from the purchasers of debt
securities for whom they may act as agent. Underwriters may also sell debt
securities to or through dealers. These dealers may receive compensation in the
form of discounts, concessions or commissions from the underwriters and/or
commissions from the purchasers for whom they may act as agent. Any initial
public offering price and any discounts or concessions allowed or reallowed or
paid to dealers may be changed from time to time.
We may authorize underwriters to solicit offers by certain types of
institutions to purchase debt securities from us at the public offering price
stated in the prospectus supplement or term sheet required by delayed delivery
contracts providing for payment and delivery on a specified date in the future.
If we sell debt securities under these delayed delivery contracts, the
prospectus supplement or term sheet will state that as well as the conditions to
which these delayed delivery contracts will be subject and the commissions
payable for that solicitation.
AGENTS
We may also sell debt securities through agents designated by us from time
to time. We will name any agents involved in the offer or sale of the debt
securities and will list commissions payable by us to these agents in the
prospectus supplement or term sheet. These agents will be acting on a best
efforts basis to solicit purchases for the period of their appointment, unless
we state otherwise in the prospectus supplement or term sheet.
DIRECT SALES
We may sell debt securities directly to purchasers. In this case, we will
not engage underwriters or agents in the offer and sale of debt securities.
18
REMARKETING TRANSACTIONS
We may also sell debt securities that we have purchased, redeemed or
repaid through one or more remarketing firms acting as principals for their own
accounts or as our agents. The applicable prospectus supplement or term sheet
will identify any remarketing firms and describe the terms of our agreement with
them and their compensation. Remarketing firms may be deemed to be underwriters
of the debt securities under the Securities Act of 1933, as amended.
INDEMNIFICATION
We may indemnify underwriters, dealers or agents who participate in the
distribution of debt securities against certain liabilities, including
liabilities under the Securities Act, and agree to contribute to payments which
these underwriters, dealers or agents may be required to make.
NO ASSURANCE OF LIQUIDITY
Each series of debt securities will be a new issue of securities with no
established trading market. Any underwriters that purchase debt securities from
us may make a market in these debt securities. The underwriters will not be
obligated, however, to make a market in the debt securities and may discontinue
market-making at any time without notice to holders of debt securities. We
cannot assure you that there will be liquidity in the trading market for any
debt securities of any series.
LEGAL OPINIONS
The validity of the debt securities offered by us in this prospectus will
be passed upon for us by Steven L. Zelkowitz, Senior Vice President and General
Counsel of KeySpan. Mr. Zelkowitz is the beneficial owner of or has the option
to acquire approximately 277,400 shares of our common stock. Certain legal
matters will be passed upon for any agents or underwriters by Simpson Thacher &
Bartlett, New York, New York, or other counsel identified in the prospectus
supplement or term sheet. Simpson Thacher & Bartlett also acts as counsel for us
from time to time.
EXPERTS
Arthur Andersen LLP, independent accountants, audited the financial
statements for the nine months ended December 31, 1998 and the twelve months
ended December 31, 1999, and related schedules incorporated by reference in this
prospectus. Arthur Andersen LLP, also audited the financial statements for
Eastern Enterprises for the twelve months ended December 31, 1998 and December
31, 1999, and related schedules incorporated by reference in this prospectus.
These financial statements and schedules are incorporated by reference herein in
reliance upon the authority of Arthur Andersen LLP, as experts in accounting and
auditing in giving the reports.
Ernst & Young LLP, independent auditors, have audited the income statement
and statement of cash flows, and the related financial statement schedule of
Long Island Lighting Company for the twelve months ended March 31, 1998 included
in our Annual Report on Form 10-K, as amended, for the twelve months ended
December 31, 1999, as set forth in their report, which is incorporated herein by
reference. These financial statements and schedule are incorporated herein by
reference in reliance upon Ernst & Young LLP's report, given on their authority
as experts in accounting and auditing.
19
[GRAPHIC_OMITTED]
20