UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Amendment No. 1 on Form 10Q/A
to Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
-------------------------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---
EXCHANGE ACT OF 1934
For the transition period from to
----------------- --------------------
Commission file number 1-14161
-------
KEYSPAN CORPORATION
--------------------
(Exact name of Registrant as specified in its charter)
New York 11-3431358
- ------------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One MetroTech Center, Brooklyn, New York 11201
175 East Old Country Road, Hicksville, New York 11801
------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(718) 403-1000 (Brooklyn)
(631) 755-6650 (Hicksville)
----------------------------
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding at May 3, 2000
- --------------------------- ---------------------------
$.01 par value 133,876,426
EXPLANATORY NOTE:
The Company hereby amends Part I of its quarterly report on Form 10-Q for
the period ended March 31, 2000 to reflect the inclusion of a new footnote No.
8, which footnote includes summary financial data of KeySpan Gas East
Corporation, a wholly owned subsidiary of the Company, as required by Staff
Accounting Bulletin 53. No other changes to the financial statements set forth
herein have been made.
KEYSPAN CORPORATION AND SUBSIDIARIES
INDEX
-----
Part I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Consolidated Balance Sheet -
March 31, 2000 and December 31, 1999 3
Consolidated Statement of Income -
Three Months Ended March 31, 2000 and 1999 5
Consolidated Statement of Cash Flows -
Three Months Ended March 31, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Signatures 16
2
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
MARCH 31, 2000 December 31, 1999
(Unaudited) (Audited)
- --------------------------------------------------------------- ------------------------ -----------------
ASSETS
CURRENT ASSETS
Cash and temporary cash investments $ 219,338 $ 128,602
Customer accounts receivable 708,183 425,643
Other accounts receivable 263,237 235,156
Allowance for uncollectible accounts (30,893) (20,294)
Special deposits 48,802 60,863
Gas in storage, at average cost 36,397 144,256
Materials and supplies, at average cost 92,367 84,813
Other 73,888 98,914
--------------- ---------------
1,411,319 1,157,953
---------------- ----------------
EQUITY INVESTMENTS AND OTHER 444,542 391,731
---------------- ----------------
PROPERTY
Electric 1,355,217 1,346,851
Gas 3,473,376 3,449,384
Other 389,685 375,657
Accumulated depreciation (1,624,278) (1,589,287)
Gas exploration and production, at cost 1,231,840 1,177,916
Accumulated depletion (541,517) (520,509)
---------------- ----------------
4,284,323 4,240,012
---------------- ----------------
DEFERRED CHARGES
Regulatory assets 322,690 319,167
Goodwill, net of amortizations 332,043 255,778
Other 371,268 366,050
---------------- ----------------
1,026,001 940,995
---------------- ----------------
---------------- ----------------
TOTAL ASSETS $ 7,166,185 $ 6,730,691
================ ================
See accompanying Notes to the Consolidated Financial Statements.
3
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
MARCH 31, 2000 December 31, 1999
(Unaudited) (Audited)
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
Current redemption of preferred stock $ 363,000 $ 363,000
Accounts payable and accrued expenses 614,552 645,347
Notes payable - 208,300
Dividends payable 61,321 61,306
Taxes accrued 154,878 50,437
Customer deposits 30,463 31,769
Interest accrued 32,703 28,093
----------------- -----------------
1,256,917 1,388,252
----------------- -----------------
DEFERRED CREDITS AND OTHER LIABILITIES
Regulatory liabilities 37,649 26,618
Deferred income tax 187,512 186,230
Postretirement benefits and other reserves 500,406 501,603
Other 81,702 66,200
----------------- -----------------
807,269 780,651
----------------- -----------------
CAPITALIZATION
Common stock, $.01 par value, authorized
450,000,000 shares; outstanding 133,876,426 and
133,866,077 shares stated at 2,973,388 2,973,388
Retained earnings 558,055 456,882
Accumulated foreign currency adjustment 7,366 7,714
Treasury stock purchased (722,660) (722,959)
----------------- -----------------
Total common shareholders' equity 2,816,149 2,715,025
Preferred stock 84,339 84,339
Long-term debt 2,109,120 1,682,702
----------------- -----------------
TOTAL CAPITALIZATION 5,009,608 4,482,066
----------------- -----------------
MINORITY INTEREST IN SUBSIDIARY COMPANIES 92,391 79,722
----------------- ----------------
TOTAL LIABILITIES AND CAPITALIZATION $ 7,166,185 $ 6,730,691
================= =================
See accompanying Notes to the Consolidated Financial Statements.
4
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS Three Months
ENDED Ended
MARCH 31, 2000 March 31, 1999
- -------------------------------------------------------------- ---------------------- ---------------------
REVENUES
Gas Distribution $ 804,703 $ 718,298
Electric Services 334,404 174,858
Gas Exploration and Production 49,376 26,520
Energy Related Services and Other 128,130 41,432
------------ ----------------
Total Revenues 1,316,613 961,108
------------ ----------------
OPERATING EXPENSES
Purchased gas 412,005 324,269
Purchased fuel 68,493 -
Operations and maintenance 354,605 232,535
Depreciation, depletion and amortization 69,581 58,185
Operating taxes 115,423 103,893
------------ ----------------
Total Operating Expenses 1,020,107 718,882
------------ ----------------
OPERATING INCOME 296,506 242,226
------------ ----------------
OTHER INCOME AND (DEDUCTIONS)
Income from equity investments 7,245 2,972
Interest income 2,591 11,043
Minority interest (3,029) (304)
Other 5,128 3,249
------------ ----------------
Total Other Income 11,935 16,960
------------ ----------------
INCOME BEFORE INTEREST CHARGES
AND INCOME TAXES 308,441 259,186
------------ ----------------
INTEREST CHARGES 44,125 35,886
------------ ----------------
INCOME TAXES
Current 95,633 46,646
Deferred (3,561) 33,433
------------ ----------------
Total Income Taxes 92,072 80,079
------------ ----------------
NET INCOME 172,244 143,221
Preferred stock dividend requirements 8,691 8,689
------------ ----------------
EARNINGS FOR COMMON STOCK $ 163,553 $ 134,532
Foreign currency adjustment (348) 3,310
------------ ----------------
COMPREHENSIVE INCOME $ 163,205 $ 137,842
============ ================
AVERAGE COMMON SHARES OUTSTANDING (000) 133,873 142,981
BASIC AND DILUTED EARNINGS PER COMMON SHARE $ 1.22 $ 0.94
============ ================
See accompanying Notes to the Consolidated Financial Statements.
5
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(IN THOUSANDS OF DOLLARS)
THREE MONTHS Three Months
ENDED Ended
MARCH 31, 2000 March 31, 1999
- ------------------------------------------------------------------------------- -------------------- -------------------
OPERATING ACTIVITIES
Net Income $ 172,244 $ 143,221
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES
Depreciation, depletion and amortization 69,581 58,185
Deferred income tax (3,561) 33,433
Income from equity investments (7,245) (2,972)
Dividends from equity investments 1,863 4,296
CHANGES IN ASSETS AND LIABILITIES
Accounts receivable (215,498) (67,635)
Materials and supplies, fuel oil and gas in storage 101,262 102,612
Accounts payable and accrued expenses 42,769 (85,303)
Interest accrued 4,606 (2,230)
Special deposits 12,061 24,858
Prepayments and other 12,182 (5,279)
--------- --------------
Net Cash Provided by Operating Activities 190,264 203,186
--------- --------------
INVESTING ACTIVITIES
Capital expenditures (111,574) (76,545)
Investments (141,719) (9,786)
Other 7,089 12,438
--------- --------------
Net Cash (Used in) Investing Activities (246,204) (73,893)
--------- --------------
FINANCING ACTIVITIES
Treasury stock purchased - (54,061)
Issuance of notes payable 364,479
Repayment of notes payable (572,779) -
Issuance of long-term debt 430,395 7,000
Payment of long-term debt (4,000) -
Preferred stock dividends paid (8,838) (8,689)
Common stock dividends paid (59,575) (64,360)
Other (3,006) (621)
--------- --------------
Net Cash Provided by (Used in) Financing Activities 146,676 (120,731)
--------- --------------
Net Increase in Cash and Temporary Cash Investments 90,736 8,562
========= ==============
Cash and temporary cash investments at beginning of period $ 128,602 $ 942,776
Net Increase in cash and temporary cash investments 90,736 8,562
--------- --------------
Cash and Temporary Cash Investments at End of Period $ 219,338 $ 951,338
========= ==============
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.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
KeySpan Corporation d/b/a KeySpan Energy (the "Company" or "KeySpan Energy")
is a holding company operating two utilities that distribute natural gas to
approximately 1.6 million customers in New York City and on Long Island,
making it the fourth largest gas-distribution company in the United States.
Other KeySpan Energy companies market a portfolio of gas-marketing and
energy- related services in the Northeast, own and operate
electric-generation plants in New York City and on Long Island, and provide
operating and customer services to approximately 1.1 million electric
customers of the Long Island Power Authority ("LIPA"). The Company's other
energy activities include: gas exploration and production, primarily through
The Houston Exploration Company ("THEC"); a domestic pipeline and storage
facilities; and international activities, including gas processing in Canada,
and a gas pipeline and local distribution in Northern Ireland. (See Note 2,
"Business Segments" for additional information on each operating segment.)
1. BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited Consolidated
Financial Statements contain all adjustments necessary to present fairly the
financial position of the Company as of March 31, 2000, and the results of
its operations and cash flows for the three months ended March 31, 2000 and
1999. The accompanying financial statements should be read in conjunction
with the consolidated financial statements and notes included in the
Company's 1999 Annual Report on Form 10-K. Income from interim periods may
not be indicative of future results. Certain reclassifications were made to
conform prior period financial statements with the current period financial
statement presentation. Other than as noted, adjustments were of a normal,
recurring nature.
2. BUSINESS SEGMENTS
The Company has six reportable segments: Gas Distribution, Electric Services,
Gas Exploration and Production, Energy Related Services, Energy Related
Investments and Other.
The Gas Distribution segment consists of the Company's two gas distribution
subsidiaries. The Brooklyn Union Gas Company d/b/a KeySpan Energy Delivery
New York ("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 Gas East Corporation d/b/a KeySpan Energy Delivery
Long 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.
7
The Electric Services segment consists of Company subsidiaries that operate
the electric transmission and distribution ("T&D") system owned by LIPA, own
and sell capacity and energy to LIPA from the Company's generating facilities
located on Long Island and manage fuel supplies for LIPA to fuel the
Company's Long Island generating facilities through long-term service
contracts having terms that range from eight to fifteen years. The Electric
Services segment also includes Company subsidiaries that own, lease and
operate the 2,168 megawatt Ravenswood electric generation facility
("Ravenswood Facility"), located in Long Island City, Queens. Currently, the
Company's primary electric generation customers are LIPA, and the New York
Independent System Operator ("NYISO") 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 the Company's 70%
equity interest in THEC, an independent natural gas and oil exploration
company, as well as KeySpan Exploration and Production LLC, the Company's
wholly owned subsidiary engaged in a joint venture with THEC. On March 31,
2000, under a pre- existing credit arrangement, approximately $80 million in
debt owed by THEC to the Company was converted into common equity. Upon such
conversion, the Company's common equity ownership interest in THEC increased
from 64% to approximately 70%.
The Company's Energy Related Services segment primarily includes companies
that provide energy services to customers located within the New York City
tri-state metropolitan area and in Rhode Island through the following five
lines of business: (i) equipment installation of plumbing, heating,
ventilation and air conditioning ("HVAC") equipment; (ii) service and
maintenance of energy systems and appliances for commercial, industrial and
residential customers; (iii) energy sales of gas and electricity, including
transportation and related services, largely to retail customers, including
those served by the Company's two gas distribution subsidiaries, as well as
the Ravenswood Facility; (iv) professional engineering-consulting and design
of energy systems for commercial and industrial customers; and (v)
telecommunications which provide various services to carriers of voice and
data transmission on Long Island and in New York City.
Subsidiaries in the Energy Related Investments segment hold a 20% equity
interest in the Iroquois Gas Transmission System LP, a pipeline that
transports Canadian gas supply to markets in the Northeastern United States;
a 50% interest in the Premier Transco 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 ("GMS")
and the ownership of certain oil producing properties in Alberta Canada.
These subsidiaries are 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.
The Other segment represents primarily, preferred stock dividends,
unallocated administrative expenses and interest income earned on temporary
cash investments.
8
The accounting policies of the segments are the same as those used for the
preparation of the Consolidated Financial Statements. The Company's segments
are strategic business units that are managed separately because of their
different operating and regulatory environments. At March 31, 2000, the total
assets of each reportable segment have not changed materially from those
levels reported at December 31, 1999, except for the Energy Related Services
segment whose assets increased by approximately $200 million due primarily to
the acquisition of three additional companies that provide energy-related
services and the investment in MyHomeKey.com, Inc. . The segment information
presented below reflects amounts reported in the Consolidated Financial
Statements for the three months ended March 31, 2000 and 1999.
THREE MONTHS ENDED MARCH 31 (In Thousands of Dollars)
- -------------------------------------------------------------------------------------------------------------
Gas Distribution Electric Services
---------------------------- -----------------------------
2000 1999 2000 1999
-------------- -- ------------ ------------- --- ------------
Revenue $ 804,703 $ 718,298 $ 334,404 $ 174,858
-------------- -------------- -------------- ---------------
Purchased Gas / Fuel 374,890 311,254 68,493 -
Operations and Maintenance 111,963 101,549 133,662 92,167
Depreciation & Amortization 27,296 24,254 12,265 9,928
Operating Taxes 75,496 72,453 39,490 28,991
Intercompany Billings 2,597 3,049 10,882 10,645
-------------- ------------- -------------- ---------------
Total Expense 592,242 512,559 264,792 141,731
-------------- -------------- -------------- ---------------
Operating Income $ 212,461 $ 205,739 $ 69,612 $ 33,127
-------------- -------------- -------------- ---------------
Earnings for Common Stock $ 126,779 $ 120,690 $ 42,679 $ 16,585
-------------- -------------- -------------- ---------------
Basic and Diluted Earnings Per
Share $ 0.95 $ 0.84 $ 0.32 $ 0.12
- ------------------------------------------------ ------------------------------------------ ---------------
THREE MONTHS ENDED MARCH 31 In Thousands of Dollars)
- ------------------------------------------------------------------------------------------------------------
Gas Exploration and Production Energy Related Services
---------------------------- -----------------------------
2000 1999 2000 1999
-------------- -- ------------ ------------- --- ------------
Revenue $ 49,376 $ 26,520 $ 126,619 $ 40,834
-------------- -------------- -----------------------------
Purchased Gas - - 37,115 13,015
Operations and Maintenance 11,479 5,959 88,725 30,030
Depreciation, Depletion & Amortization 21,003 17,057 2,186 717
Operating Taxes 538 33 - 3
-------------- -------------- -----------------------------
Total Expense 33,020 23,049 128,026 43,765
-------------- -------------- -----------------------------
Operating Income (Loss) $ 16,356 $ 3,471 $ (1,407) $ (2,931)
-------------- -------------- -----------------------------
Earnings (Loss) for Common Stock $ 5,498 $ 478 $ (1,570) $ (1,637)
-------------- -------------- -----------------------------
Basic and Diluted
Earnings (Loss) Per Share $ 0.04 $ 0.00 $ (0.01) $ (0.01)
- ------------------------------------------------ ---------------------------- -----------------------------
9
THREE MONTHS ENDED MARCH 31 (In Thousands of Dollars)
- -----------------------------------------------------------------------------------------------------------------
Energy Related Investments Other
---------------------------- -----------------------------
2000 1999 2000 1999
-------------- -- ------------ ------------- --- ------------
Revenue $ 1,511 $ 598 $ - $ -
-------------- -------------- ---------------- -----------
Operations and Maintenance 1,657 1,272 7,119 1,558
Depreciation & Amortization 384 384 6,447 5,845
Operating Taxes 5 7 (106) 2,406
Intercompany Billings - - (13,479) (13,694)
-------------- -------------- ----------------- ----------
Total Expense 2,046 1,663 (19) (3,885)
-------------- -------------- ----------------- ----------
Operating (Loss) Income $ (535)$ (1,065) $ 19 $ 3,885
-------------- -------------- -----------------------------
Earnings (Loss) for Common Stock $ 3,647 $ 499 $ (13,480) $ (2,083)
-------------- -------------- -----------------------------
Basic and Diluted
Earnings (Loss) Per Share $ 0.02 $ 0.00 $ (0.10) $ (0.01)
- ------------------------------------------------ ---------------------------- -----------------------------
THREE MONTHS ENDED MARCH 31 (In Thousands of Dollars)
- --------------------------------------------------------------------------------
Consolidated
-------------------------------
2000 1999
--------------------------------
Revenue $ 1,316,613 $ 961,108
--------------------------------
Purchased Gas / Fuel 480,498 324,269
Operations and Maintenance 354,605 232,535
Depreciation, Depletion & Amortization 69,581 58,185
Operating Taxes 115,423 103,893
- --------------- --------------------------------
Total Expense 1,020,107 718,882
--------------------------------
Operating Income $ 296,506 $ 242,226
--------------------------------
Earnings for Common Stock $ 163,553 $ 134,532
--------------------------------
Basic and Diluted Earnings Per Share $ 1.22 $ 0.94
- -------------------------------------------------------------------
3. ENVIRONMENTAL MATTERS
MANUFACTURED GAS PLANT SITES: The Company has identified thirty-four
manufactured gas plant ("MGP") 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 the Company, have been
identified to the New York State Department of Environmental
Conservation ("DEC") for inclusion on appropriate waste site
inventories.
10
The Company presently estimates the cost of its MGP-related
environmental cleanup activities will be approximately $121 million;
which amount has been accrued by the Company as its current best
estimate of its aggregate environmental liability for known sites.
The currently-known conditions of the former MGP sites, their period
and magnitude of operation, generally observed cleanup requirements and
costs in the industry, current land use and ownership, and possible
reuse have been considered in establishing contingency reserves. The
Company believes that in the aggregate, the accrued liability for
investigation and remediation of the MGP sites identified above are
reasonable estimates of likely cost within a range of reasonable,
foreseeable costs.
Thirteen of the identified sites are currently the subject of
Administrative Consent Orders ("ACO") with the DEC and two are subject
to the negotiation of an ACO or an agreement under DEC's Voluntary
Clean-up Program. The Company's remaining MGP sites, eight of which
have recently been identified to the DEC, may not become subject to
ACOs 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 ("NYPSC") has allowed recovery of costs related to certain
KeySpan Energy Delivery New York MGP sites. The Company believes that
current rate plans in effect for both Gas Distribution subsidiaries
provide for recovery of environmental costs attributable to the Gas
Distribution segment. At March 31, 2000, the Company had a total
regulatory asset of approximately $96 million. Expenditures incurred to
date by the Company with respect to MGP-related activities total
approximately $18 million.
OTHER: The Company will be responsible for environmental obligations
relating to the Ravenswood Facility operations other than liabilities
arising from pre-closing disposal of waste at off-site locations and
any monetary fines arising from the prior owner's pre-closing conduct.
Based on information currently available for environmental
contingencies related to the Ravenswood Facility acquisition, the
Company has accrued an additional $5 million as the minimum liability
expected to be incurred.
4. ISSUANCE OF LONG-TERM DEBT, REPAYMENT OF NOTES PAYABLE AND
FINANCING
In December 1999, KeySpan Energy Delivery Long Island and the Company
jointly filed a shelf registration statement with the Securities and
Exchange Commission ("SEC") in anticipation of issuing, up to $600
million of Medium Term Notes. On February 1, 2000, 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 the Company
for its costs in extinguishing certain promissory notes to LIPA that
matured in June 1999. The Medium Term Notes are fully and
unconditionally guaranteed by the Company.
11
During the quarter ended March 31, 2000, THEC borrowed an additional $2
million under its Credit Facility and then repaid $4 million of
outstanding borrowings; at March 31, 2000, $179 million remained
outstanding. In addition, during the quarter ended March 31, 2000, a
subsidiary in the Energy Related Investments segment increased its
borrowings under a revolving loan agreement with a financial
institution in Canada by U.S. $28.4 million. At March 31, 2000, U.S.
$114.8 million was outstanding at a weighted average annualized
interest rate of 5.81%.
At December 31, 1999, the Company had $208.3 million of outstanding
commercial paper. Additional commercial paper was issued during the
months of January and February 2000. The average outstanding daily
balance during this period was $241.4 million at a weighted average
annualized interest rate of 6.08%. In February 2000, the Company repaid
the entire outstanding balance. At March 31, 2000, the Company had no
commercial paper outstanding.
In connection with the Company's anticipated purchase of Eastern
Enterprises (See Note 5, "Acquisition of Eastern Enterprises") and the
anticipated issuance of long-term debt securities to finance the
acquisition, the Company entered into forward interest rate lock
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 April 30, 2000, the Company has entered into
seven forward interest rate lock agreements with an aggregate notional
amount of $500 million. The interest lock rates range from 7.172% to
7.780%. Under an interest rate lock agreement, the Company agrees to
pay or receive an amount equal to the difference between the net
present value of the cash flows for a notional principal amount of
indebtedness based on the existing yield of a hedging instrument at the
date of the agreement and at the date the agreement is settled. Gains
and losses on interest rate lock agreements will be deferred and
amortized over the life of the underlying debt to be issued. The
notional amounts of the agreements are not exchanged. The Company has
entered into interest rate lock agreements with more than one major
financial institution in order to minimize counterparty credit risk.
5. ACQUISITION OF EASTERN ENTERPRISES
On November 4, 1999, the Company and Eastern Enterprises ("Eastern")
announced that the companies had signed a definitive merger agreement
under which the Company will acquire all of the common stock of Eastern
for $64.00 per share in cash. The Agreement and Plan of Merger is
included as an exhibit to the Company's Form 8-K filed on November 5,
1999.
The transaction has a total value of approximately $2.5 billion and
will be accounted for as a purchase. The increased size and scope of
the combined organization should enable the
12
Company to provide enhanced, cost-effective customer service and to
capitalize on the above-average growth opportunities for natural gas in
the Northeast.
In connection with the merger, Eastern has amended its merger agreement
with EnergyNorth, Inc. ("EnergyNorth") to provide for an all cash
acquisition by Eastern of EnergyNorth shares at a price per share of
$61.13. The restructured EnergyNorth merger is expected to close
contemporaneously with the KeySpan/Eastern transaction. This
transaction has a total value of approximately $250 million.
It is anticipated that the combined company will have assets of $8.8
billion, $4.3 billion in revenues, and earnings before interest, taxes,
depreciation and amortization ("EBITDA") of approximately $950 million.
The combined companies will serve approximately 2.4 million customers.
The Company expects pre-tax annual cost savings will 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. The Company expects to achieve the majority of
the reductions through a variety of programs which would include hiring
freezes, attrition and separation programs. The Company expects to
issue approximately $2.0 billion of long-term debt to acquire the
combined common stock of Eastern and EnergyNorth. The Company
anticipates issuing several different maturities of long-term debt to
balance its current capital structure and maturity structure.
Following the closing of these transactions, the Company will become
subject to regulation of the SEC as a registered holding company under
the Utility Holding Company Act of 1935, as amended.
The merger is conditioned upon the approval of the SEC. Shareholders of
both Eastern and EnergyNorth, as well as the New Hampshire Utility
Commission (with respect to Eastern's acquisition of EnergyNorth) have
approved the transactions. The Company anticipates that the transaction
will be consummated in the third or fourth quarter of 2000, but is
unable to determine when or if the required approval will be obtained.
Eastern owns and operates Boston Gas Company, Colonial Gas Company,
Essex Gas Company, Midland Enterprises Inc. ("Midland"), Transgas Inc.
("Transgas"), and ServicEdge Partners, Inc. ("ServicEdge").
6. NEW YORK STATE INDEPENDENT SYSTEM OPERATOR ("NYISO") ISSUES
The Company currently realizes revenues from its 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
13
to be generated due to the unexpected loss of a major facility. Due to
the increase in the market-clearing price of certain ancillary services
in February 2000, the NYISO has imposed a bid cap on these services
retroactive to March 1, 2000. Further, the NYISO has asked the Federal
Energy Regulatory Commission ("FERC") to review the pricing of certain
ancillary services, implement bid caps for these services and initiate
an Alternative Dispute Resolution process designed at arriving at a
settlement that would involve the payment of refunds of so- called
alleged "excess payments" received by sellers into the ancillary
services market, including the Ravenswood Facility and LIPA during the
period January 29 through February 29, 2000. Other market participants,
including buyers of ancillary services and electric utilities as load
serving entities ("LSEs") have also filed petitions with and intervened
in the various pending FERC proceedings and have proposed alternative
remedies, including refunds back to the inception of the NYISO in
November 1999 and the revocation of the authority of the Ravenswood
Facility to charge market-based prices for ancillary services. In
addition, one LSE has petitioned the FERC to suspend the use of
market-based pricing in the energy market until alleged problems with
the operations of the NYISO are resolved.
The Company is opposing the relief requested by the NYISO and the LSEs
and believes that the ultimate resolution of this issue will not have a
material effect on its consolidated financial position.
7. NEW FINANCIAL ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of SFAS No. 133." SFAS No.
137 defers the effective date of SFAS No. 133 to fiscal years beginning
after July 15, 2000. The Company will therefore, adopt SFAS No. 133 in
the first quarter of fiscal year 2001. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for
hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. All of
the Company's derivative financial instruments, except for certain
interest rate swaps, are cash-flow hedges. As a result, implementation
of SFAS No. 133 when adopted, is not expected to have a material effect
on the Company's net income, but could have a significant effect on
comprehensive income because of fluctuations in the market value of the
derivatives employed for hedging certain risks. Under SFAS No. 133,
periodic changes in market value are recorded as comprehensive income,
subject to effectiveness, and then included in net income to match the
underlying transactions.
8. KEYSPAN GAS EAST CORPORATION SUMMARY FINANCIAL DATA
KeySpan Gas East Corporation d/b/a/ KeySpan Energy Delivery Long
Island is a wholly owned subsidiary of KeySpan Corporation. KeySpan
Energy Delivery Long Island was formed on May 7, 1998 and on May 28,
1998 acquired all of the assets related to the gas distribution
business of the Long Island Lighting Company ("LILCO"). KeySpan
Energy Delivery Long Island has established a program for the
issuance, from time to time, of up to $600 million aggregate
principal amount of Medium-Term Notes, which will be fully and
unconditionally guaranteed by the Company. (See Note 4 "Issuance of
Long-Term Debt, Repayment of Notes Payable and Financing.") On
February 1, 2000, KeySpan Energy Delivery Long Island issued $400
million of 7.875% Medium Term Notes due 2010.
14
The following represents summarized balance sheet data for KeySpan
Energy Delivery Long Island.
(IN THOUSANDS OF DOLLARS)
- -------------------------------------- -----------------------------------------
March 31, 2000 December 31, 1999
- -------------------------------------- -----------------------------------------
Current assets $ 342,241 $ 358,415
Noncurrent assets 1,346,735 1,327,692
Current liabilities 139,884 548,331
Noncurrent liabilities
including long-term debt 852,385 484,702
Net assets (1) $ 696,707 $ 653,074
- -------------------------------------- -----------------------------------------
(1) Net Assets reflect total assets less current and noncurrent liabilities.
Intercompany accounts receivable are included in current assets and long-term
intercompany accounts payable are included in noncurrent liabilities.
Certain common assets which were previously part of LILCO's
operations prior to May 28, 1998 have been transferred to other
subsidiaries of the Company (e.g. common plant, inventory, etc.).
Since May 28, 1998, KeySpan Energy Delivery Long Island has been
charged by affiliated companies for the use of these assets,
resulting in an operating expense of $2.6 million for the three
months ended March 31, 2000.
The following represents summarized income statement data for KeySpan
Energy Delivery Long Island.
(IN THOUSANDS OF DOLLARS)
- ------------------------------ -------------------------------------------------
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
- ------------------------------ -------------------------------------------------
Revenues $298,660 $268,302
Operating Income (1) $76,885 $78,989
Net Income $43,633 $42,930
- ------------------------------ -------------------------------------------------
(1) Operating income is defined as revenues less cost of gas and operating
expenses. Operating expenses include the following expenses: operations and
maintenance, depreciation and amortization and operating taxes.
15
KEYSPAN CORPORATION AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf of the undersigned
there unto duly authorized.
KEYSPAN CORPORATION
(Registrant)
Date: January 10, 2001 /s/ Gerald Luterman
----------------------
Gerald Luterman
Senior Vice President and
Chief Financial Officer
Date: January 10, 2001 /s/ Ronald S. Jendras
------------------------
Ronald S. Jendras
Vice President, Controller
and Chief Accounting Officer
16