SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
Current Report Pursuant
to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported) : December 12, 2002
KEYSPAN CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
New York
(State or Other Jurisdiction of Incorporation)
1-14161 11-3431358
(Commission File Number) (IRS Employer Identification No.)
175 East Old Country Road, Hicksville, New York 11801
One MetroTech Center, Brooklyn, New York 11201
(Address of Principal Executive Offices) (Zip Code)
(516) 755-6650 (Hicksville)
(718) 403-1000 (Brooklyn)
(Registrant's Telephone Number, Including Area Code)
N/A
(Former Name or Former Address, if Changed Since Last Report)
Cautionary Language Concerning Forward-Looking Statements
- ---------------------------------------------------------
Certain statements contained herein are forward-looking statements, which
reflect numerous assumptions and estimates and involve a number of risks and
uncertainties. For these statements, we claim the protection of the safe harbor
for forward-looking statements provided by the Private Securities Litigation
Reform Act of 1995.
There are possible developments that could cause our actual results to
differ materially from those forecast or implied in the forward-looking
statements. You are cautioned not to place undue reliance on these
forward-looking statements, which are current only as of the date of this
filing. We disclaim any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Among the factors that could cause actual results to differ materially are:
general economic conditions, especially in the Northeast United States;
available sources and costs of fuel; volatility of energy prices in a
deregulated market environment as well as in the source of natural gas and fuel
used to generate electricity; potential write-down of our investment in natural
gas properties when natural gas prices are depressed or if we have significant
downward revisions in our estimated proved gas reserves; 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; implementation of new accounting standards; the degree to which we
develop unregulated business ventures, as well as federal and state regulatory
policies affecting our ability to retain and operate those business ventures;
our ability to identify and make complementary acquisitions, as well as the
successful integration of those acquisitions; inflationary trends and interest
rates; and risks detailed from time to time in reports and other documents filed
by us with the Securities and Exchange Commission.
Item 5. Other Events
------------
On December 12, 2002, KeySpan Corporation ("the Company") issued a press
release disclosing, among other things, its expectations for 2003 Company
earnings.
The Company's press release is attached hereto as Exhibit 99.1 and is
incorporated herein by reference.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
-------------------------------------------------------------------
(c) Exhibits
(1) Press Release of the Company dated December 12, 2002.
Item 9. Regulation FD Disclosure
------------------------
In addition, on December 12, 2002 and December 16, 2002, the Company will
hold meetings with members of the financial community and discuss, among other
things, its expectations for 2003 earnings. The slides that will be used at
these meetings can be viewed on the Investor Relations section of the Company's
website: www.keyspanenergy.com. The following is a copy of the script to be used
at these meetings:
2002 KeySpan - Effective Strategic Execution
Financial Community Presentation
December 12 - New York
December 16 - Boston
Cover
Slide 1 - Agenda - MT
Slide 2 - Agenda - Strategy & Execution - RBC
Thank You Mike and Good Morning
It is our pleasure to present the KeySpan story.
Despite all the turmoil in the energy sector, I am glad to report that
KeySpan has not been directly impacted by these issues and...
Slide 3 - KeySpan's has... - RBC
...KeySpan has remained focused on executing our strategy and delivering
value to our investors
Slide 4 - KeySpan's Focused Strategy - RBC
Our strategy remains consistent, viable and focused - "more of same" -
with only some strategic refinements. We are committed to continuing to
grow our core businesses in the Northeast and divesting our non-core
businesses.
o KeySpan's Vision is to be the Premier Energy Company in the Northeast.
o Our strategy continues to remain focused on our two core businesses -
our gas distribution business and our electric generation business.
o In our gas distribution business, we are focused on the customer. We
are well positioned for growth by operating in an excellent
marketplace with strong customer demographics, a low penetration of
natural gas and high gas usage resulting from operating in the colder
Northeast. This business is complemented by our Energy Services
business, which builds on our regulated footprint and delivers a
portfolio of energy products and services to homes and businesses.
o We will enhance this growth by owning strategic gas pipelines, storage
facilities and LNG assets in the Northeast
o Our electric generation business operates in the New York City and
Long Island load pockets. We will continue to grow the earnings from
this core business through the optimization of our existing 6,400 MW
portfolio as well as through the development of new generation and
asset acquisitions.
o To strengthen the focus on core businesses, we will continue to move
to exit businesses that are not aligned with our strategy.
Managing risk is an important component of our strategy...
Slide 5 - Low Risk Profile- RBC
... And KeySpan's earnings have a low risk profile since 85% of our $1
billion in EBIT comes from regulated, contractual and "load pocket"
businesses.
o We have very predictable revenues, and stable earnings and cash flow
streams.
o KeySpan is in a unique position in that we essentially sell a
portfolio of energy products and services to customers with whom we
already have a strong existing relationship.
o KeySpan does not have a large scale trading operation and, therefore,
is not subject to extreme volatility and liquidity problems.
In addition, we have established a formal enterprise wide corporate risk
management group to enhance our risk management.
o We formed an active senior executive Risk Management Committee and
o We hired a chief risk officer
The success of our business is also enhanced by the positive relationships
we have with our constituents...
Slide 6 - Working with our Constituents- RBC
Over the years, we have developed a strong working relationship with the
regulators and the communities we serve. It is this ability to work with
our constituents that gives KeySpan a unique opportunity to provide energy
solutions in the Northeast resulting in enhanced value to our shareholders.
Some examples include...
o We recently announced the sale of our Jamesport property on Long
Island to New York State -- this preserves existing historic farmland
and creates a public beach. The New York Times wrote an article
earlier this month commending KeySpan for balancing the needs of the
state, local communities and, of course, our shareholders
o Next, Our Ravenswood generation expansion project received approval in
record time because of KeySpan's ability to work with the community
and regulators to create a solution that reduced net air emissions
from the Ravenswood site by 25%.
Management Team
These relationships with our constituents are driven by a strong management
team consisting of experienced leaders with in depth energy industry
knowledge.
Corporate Governance
Given the recent issues related to corporate governance, let me assure you
that KeySpan's Corporate Governance program is based on "best practices"
and already generally conforms to the new corporate governance guidelines.
o all of our Directors, other than myself, are non-employees, and
o all members of key board committees including the Audit, Compensation
& Nominating and Corporate Responsibility and Governance committees
are outside directors
Let's now turn to our accomplishments in 2002
Slide 7 - KeySpan's 2002 Report Card- RBC
o We achieved record gas growth additions
o Installed new generation under long term contracts
o Refined the Energy Services business o Monetized some of our non-core
assets.
o And finally, from a financial perspective,
o we strengthened our balance sheet, and
o we are on target to achieve our 2002 earnings goal of $2.60 - $2.75
per share and
o we maintained our $1.78 dividend, while reducing our payout ratio.
Some of the specifics....first, gas growth
Slide 8 - Gas Growth- RBC
Despite the warmest winter on record, our gas business continued to grow at
record levels converting thousands of customers to gas - and we are near
target to achieve our aggressive goal of a record $65 million in new gross
profit margin for 2002.
o Our fall advertising program is in full swing, which highlights our
free boiler program and the increased home value achieved by upgrading
to natural gas
o Given the public's sensitivity to our nation's reliance on imported
oil, the outlook for the growth of natural gas demand continues to be
extremely favorable
Next, our electric successes...
Slide 9 - Electric Generation- RBC
We installed 160MW of new peaking generation at Glenwood Landing and Port
Jefferson, Long Island during the second quarter in time to meet the Long
Island Power Authority's - LIPA's increasing summer demand requirements on
Long Island - on budget and ahead of schedule
o We are very proud that of the four companies building new peaking
generation on Long Island for the summer, KeySpan was the first to put
its new units into commercial production.
In addition, we started construction on our new 250MW Ravenswood plant, the
first new major plant under construction in the New York City market to
help meet the increasing load demands of the city. This plant is expected
to be on-line in late 2003.
And moving on to the LIPA relationship...
Slide 10 - LIPA Contracts- RBC
We are pleased to have reached agreement with LIPA to extend the Generation
Purchase Right Agreement (GPRA) and the Management Services Agreement
(MSA).
GPRA
o The original GPRA gave LIPA the option to purchase KeySpan's on island
generation during a one year window ending May 27, 2002.
o The extended GPRA established a new option window commencing November
2004 and closing May 2005.
o As part of the extension, KeySpan will work with LIPA to address new
energy supply options for LI such as repowering of our existing plants
- which could provide KeySpan with new earnings opportunities.
In addition,
MSA
o The MSA contract, under which we manage and operate LIPA's T&D system,
has been extended 31 months through December 31, 2008.
These extensions provide stability for our shareholders and for the
dedicated and highly skilled workforce, who deliver the record performance
of LIPA's T&D system and KeySpan's generating facilities.
In terms of our relationship with LIPA, as you know, we recently announced
a problem with the reporting of estimated revenues recorded on their books.
The error was made by KeySpan by over estimating their requirements. It has
no financial impact on KeySpan and had no impact on LIPA's customer bills.
We have taken responsibility and implemented measures to prevent this from
happening again. KeySpan has a track record of providing LIPA with
outstanding service and managing the success of this unique and ongoing
relationship, and we are confident we can put this issue behind us and
maintain a positive working relationship.
And now the performance of our system
Slide 11 - Operational Excellence- RBC
We achieved outstanding summer performance for both the KeySpan generation
facilities and the operation of the LIPA T&D system.
Generation
During a summer where peaks were continually set and broken...
o Our Ravenswood plant had an availability of 97% and our largest unit -
Ravenswood Unit # 3 - "Big Allis" was available 100% of the time to
meet New York City's needs.
o And our Long Island generation responded to Long Island's needs by
being available more than 98% of the time
T&D
o Turning to the operation of LIPA's T&D system, KeySpan continues to
operate the system at the highest performance levels in New York
State.
o Among overhead utilities, KeySpan ranks first in response time where
we have an outage - we restored service to our customers in 71 minutes
as compared to the average of an hour and forty-five minutes.
Changing focus to our non-core assets
Slide 12 - Monetization of Non-Core Assets- RBC
We continue to be focused on our commitment to monetize our non-core
assets.
In 2002, we closed on the sale of Midland Enterprises - we received gross
proceeds of $240 million and retired approximately $135 million in debt.
In addition to this sale, we took an initial step towards further
monetizing our non-core assets by selling to Houston Exploration reserves
from our joint venture with THX for $26.5 million.
These sales are consistent with our strategy and commitment to concentrate
on our core businesses. The proceeds from these sales were used to reduce
debt.
At this point, let me briefly review our financial performance,
specifically our balance sheet improvements in 2002.
Slide 13 - Strengthened Balance Sheet- RBC
KeySpan's strong financial profile and solid balance sheet support our
focused strategy. Our solid balance sheet is the foundation for growth from
our core operations.
In 2002, KeySpan took a number of steps to further strengthen our balance
sheet, which have resulted in an improvement to our debt to total
capitalization ratio from 66% to 62%.
We look to further improve this ratio in 2003 and further strengthen
KeySpan's financial profile as Gerry will discuss.
Turning to earnings ...
Slide 14 - Solid Earnings - RBC
By remaining focused on the execution of our strategy, KeySpan has
continued to provide solid earnings growth for our shareholders, driven by
the growth in our core businesses.
o Since KeySpan's first full year of operation after the LILCO
transaction, earnings have grown at an average compound annual growth
of nearly 20%.
o Continued execution of our strategy will enhance these earnings into
the future.
o At this time, we are once again reaffirming our prior 2002 earnings
guidance of $2.60 to $2.75 per share.
Slide 15 - Solid Core Earnings - RBC
Switching over to earnings guidance for 2003, the strength of our core
businesses will again drive our earnings. The breakdown of our guidance
consists of several components.
o Our Core operations, excluding incremental pension and other post
retirement benefit expenses (OPEBs), are expected to increase 6% to
$2.55 to $2.60 per share in 2003 - solid growth in our core business.
o Most companies are facing increased pension and OPEB costs resulting
from the poor performance in the equity markets these past few years
and we are no exception.
o Incremental pension and OPEB expenses are expected at $0.20 to $0.30
per share.
o Our E&P business is also projected to grow -- by approximately $0.15
per share to $0.35 to $0.45 per share
o Putting it all together, after deducting the pension and OPEB
expenses, our earnings guidance for 2003 is $2.65 to $2.80 per share,
a modest increase over 2002.
In a nutshell, we continue to effectively execute our strategy.
At this time, I would like to turn it over to Wally and Bob who will
discuss the drivers of our businesses
Slide 16 - Agenda - WPP
Slide 17 - KeySpan Gas Distribution - Size and Scale - WPP Thanks Bob, and
Good Morning.
Starting with the Gas Distribution business...
... the two key drivers of our success are our size and our growth
potential.
In terms of size and scale:
o We are currently the largest gas company in the Northeast United
States and among the 5 largest in the country.
o We now serve over 2.5 million gas customers as a result of the
integration of 6 gas utilities over the past four years.
But more important than just size is our growth potential:
o We have more than 1 million remaining heating prospects in our region
o And we are quickly converting these prospects to gas as we expect to
add nearly $65 million in new --- profit margins this year.
When you drill down to each region we serve, you will see that we have a
balanced mix of opportunity.
Slide 18 - Gas Distribution: "How We Make Money" - WPP
New York
o In New York, our biggest utility, we have 1.2 million customers
o We have an allowed ROE of 13.25%, with a sharing mechanism above this
level, and have been earning near this level over the past few years.
Long Island
o On Long Island, which is our fastest growing market, we have 500,000
customers and are quickly adding to this total.
o and we have steadily improved our returns to get closer to the 11.1%
ROE cap and have a similar sharing mechanism as NY.
New England
o In our newest territory, we have more than 800,000 customers
throughout Massachusetts and New Hampshire.
o Here, we have an allowed ROE of 7-15%, and have significant
opportunities to improve returns
o Most of the improvement should come from growth
Putting it all together, we expect the EBIT in our Gas business to grow
from $515 million this year to about $580 million in 2003, excluding the
pension increase - almost all of which hits the gas business. The EBIT
contribution can be broken down approximately 40% New York, with the
remaining contribution split almost evenly across Long Island and New
England.
Excluding the pension impact, about half of the 2003 growth is expected
from customer additions and O&M efficiencies, with the remainder coming
from a return to normal weather relative to 2002's record warm weather.
Let's step back a moment and look at our track record...
Slide 19 - Track Record of Growth and Expansion - WPP
Over the past four years, we have made great progress in adding new
customers, while significantly expanding our infrastructure.
On the Growth side:
o We have continued to grow the mature New York business as new margins
have increased 20%,
o We have more than doubled the new margins added since acquiring the
Long Island business,
o And, we have already increased the New England margins by 60% in just
two year's time, and have the opportunity to mirror the success we
have had on Long Island.
So as you can see, the growth stems from all territories - balanced across
each of the specific markets. The key here is the diversity of the growth
by markets.
Expansion
During this time, we have added 5 million feet of new gas mains -- mostly
on Long Island and in New England to support the increased growth in these
regions. This capital investment has significantly improved the gas
infrastructure and created many new sales opportunities by bringing
thousands of potential prospects closer to our gas system.
Let's now look at how we have been able to capitalize on these
opportunities...
Slide 20 - Focus on New and Existing Customers - WPP Our Growth Strategy
focuses on both new and existing customers.
New customers
o In terms of new customers, the `bread-and-butter' of our growth is
still oil-to-gas conversions - we should do more than 20,000
conversions, again in 2002.
o We have had great success with many of our innovative marketing
programs over the years such as our `free boiler' program in Long
Island and New England.
o And we are now very excited about our new `MyQuotes.com' program,
which allows customers to complete the sales process over the
internet. We added more than 400 customers through `MyQuotes' in 2002
and hope to double this amount in 2003.
New Products
o We are now adding new burner tips such as natural gas fireplaces,
Bar-B-Q's and swimming pool heaters, which can increase the annual
margins by 50%. In fact, we added approximately 1,500 swimming pool
heaters this past year.
o And, of course, we are still very excited about distributed
generation. On the commercial side, we added about $1 million in
margins from new DG applications, including cooling and power systems,
in 2002.
Let's now look forward at our opportunity...
Slide 21 - The Opportunity Going Forward... - WPP Overall, our territory
is a little more than 50% saturated.
1. Our mature New York market is nearly 80% penetrated as a result of
decades of aggressive marketing programs. Yet, there is still ample
opportunity to grow as all of the remaining prospects are near the
existing gas mains.
2. On Long Island, we only have a 36% saturation rate as most customers
have historically heated with fuel oil.
3. And in New England, the opportunity exists to double the current base
as the region is only 50% saturated.
Putting it all together, we have over 1 million remaining heating prospects
in our territory.
Slide 22 - Where do the Prospects Reside? - WPP So where do the prospects
reside?
As you know, we categorize our prospects into 3 groups depending on their
proximity to the gas system. Our 1 million prospects are divided evenly
between the 3 groups:
1. `Cooking Only' prospects are low-use customers that use gas for
cooking and can easily be upgraded to gas heating at a low capital
cost, if any, since they already have gas in their home or business.
2. `Near Gas Main' prospects are those who currently do not use gas, but
are `near' a gas main. These prospects are also financially attractive
to KeySpan since they only require a moderate amount of capital.
3. The `Managed Expansion' prospects are those who are far from the
existing gas mains, for instance, towns on the East end of Long
Island. Here, there are significant capital costs for new mains and
services so we need to manage our capital investments by converting
several prospects on each new main.
Fortunately, 2/3's of the 1 million remaining heating prospects are `on' or
`near' the main, which enables us to add a balance from each of the 3
groups of prospects and achieve an aggregate IRR of 15% or better.
So how do we optimize these prospects and even further improve the IRR's?
Slide 23 - Sales Optimization Model - WPP
o We have developed a sophisticated Sales Optimization model which
enables us to identify prospects in each territory and categorize them
by metrics such as customer demographics, capital requirements and
profit potential.
o The development of the Optimization Model is a natural evolution of
our prior innovative marketing programs such as the `Free Boiler' and
`Managed Expansion' programs. The Sales Optimization Model will enable
us to better capitalize on the opportunities we have created over the
past several years by investing heavily in our infrastructure.
o For instance, we have analyzed all of our prospects and have started
to target 27,000 prospects in 18 towns with the highest income levels,
highest historic sales penetration rates and best market potential.
This model will allow us to target neighborhoods with the most profitable
growth opportunities and more efficiently utilize our capital.
Slide 24 - Sales Optimization Model Enhances Capital Efficiency- WPP
o For 2003, we are reducing the growth capital in our gas business from
$200 million to $150 million. We will also keep our maintenance
capital flat due to the continued use of new innovations, such as
trenchless technology and mini-diggers.
o As a result, although we plan to reduce capital expenditures by $50
million, we are only modestly lowering our growth target by $4 million
- maintaining an aggressive level of growth above $60 million.
o As you can see, one of the metrics we use to track our capital
efficiency is the Capex-to-GPM ratio. In 2002, we spent approximately
$3 dollars in growth capital for every one dollar of new profit
margin. For 2003, we are targeting a reduction to $2.50 in capital for
every one dollar in growth.
So that's the gas story. Size...Scale...Growth.... And improved Efficiency
as we go forward.
At this time I would like to turn it over to Bob to discuss our Electric
Services Segment...
Slide 25 - Agenda
Slide 26 - KeySpan Electric Services - WPP
As Bob mentioned earlier, the Electric Services segment is KeySpan's second
core business of our focused strategy -- one of our key businesses
comprising $1.4 billion in gross revenue and a major driver of our earnings
contributing over 25% to our EBIT.
The electric services business, currently serving the New York City and
Long Island areas, has two major components:
o We manage the Transmission & Distribution system for 1.1 million LIPA
customers on Long Island through a management services agreement.
o We own and operate about 6400MW of generating capacity - the largest
investor owned generator in New York State. We provide essentially all
of Long Island's power and approximately 25% of New York City's power.
o And our strategy for growing our generation business - is focused on
the strategic Northeast region and
o consists of maximizing the value of our existing 6400MW portfolio
..... such as repowering these plants and maintaining their high
availability rates
o As well as adding new plants... through either acquisitions
...possibly at discounts from distressed companies ... or new
construction. We are currently looking to build new generation plants
both on Long Island and New York City with 500MW currently in the
construction or planning phase.
Now turning to our electric EBIT forecast and its drivers...
Slide 27 - Electric Services - How We Make Money- WPP
The 2003 EBIT contribution is projected to be in the range of $255 to $265
million, a bit lower than the 2002 EBIT numbers.
The 2003 projection can be broken down into two categories
1. The first consists of the three contracts we have in place with LIPA
which contribute approximately 40% of the EBIT in this segment - a
solid and predictable earnings stream.
2. The second category contributes the remaining 60% of the EBIT and
includes the Ravenswood plant in NYC and the new peakers installed on
LI in 2002.
o The new peakers are under a 25 year contract to LIPA and will
contribute a steady EBIT stream.
o The two major drivers of Ravenswood's EBIT are the capacity and energy
markets.
First turning to the capacity market
o NYC is a `Load Pocket' - since there is limited generation capacity
and there are significant transmission import constraints, there is an
`In-City Reliability rule' that 80% of the peak capacity requirements
must be provided by in-city generators - the KeySpan Ravenswood plant
provides 25% of NYC's capacity requirement.
o In 2002, we received an average capacity payment of $90/kilowatt-year
-- lower than we originally projected due to a change in the
Independent system operator -- ISO methodology for calculating
capacity, which artificially created excess capacity.
o For 2003, we are assuming capacity payments increasing to
approximately $90-$95/ Kilowatt-year. We are forecasting slightly
higher capacity payments in 2003 since the ISO has corrected its
methodology for calculating capacity and includes the effect of load
growth.
Now turning to the energy, we continue to have significant opportunities in
the high priced New York City market. o In the energy market, the key
drivers are supply / demand balance, transmission constraints, the weather
and the economy.
o In 2002, we experienced an extremely hot summer which produced record
electric demands on both Long Island and NYC, and received an average
annual peak spark spread of about $25/MWH
o For 2003, we are assuming an average peak spark spread in the range of
$20-$25/megawatthour, down a bit from this year -- a softening in
price due to the forecasted return to normal summer weather in 2003.
Consistent with our forecasting style, we are using normal weather
assumptions in determining our EBITs. 2003 earnings projections also
reflect higher NYC property taxes and other costs and a full years earnings
from the new peakers.
Slide 28 - Our Focused Generation Portfolio- WPP
Although some of the factors discussed, such as excess supply, the economy
and weather, may impact profitability going forward, we believe we are
better insulated than most of our competitors due to the relatively low
risk nature of our generation portfolio. We have developed a low risk
generation portfolio with a mix of contractual and load pocket generation
and a conservative hedging strategy.
As shown in the table:
1. 2/3's of KeySpan's current generating portfolio is under long term
contract to LIPA, and therefore, not subject to the vagaries of the
power market.
2. The other 1/3 represents the merchant Ravenswood plant, which is
located in the strategic NYC load pocket with the bulk of its net
revenues coming from capacity payments.
3. In addition, you see that for the component that is least predictable
- energy payments - we plan to hedge 1/2 of the risk through forward
sales of peak electricity from Ravenswood.
4. In terms of our new projects going forward to grow our business ...
there will be continued focus on risk mitigation ... either entering
into PPA's or assets located in load pockets.
So, when you put it all together, you can see that KeySpan has a low risk
generation portfolio, complemented by a prudent hedging strategy.
Now I'd like to specifically comment on the progress of the new generation
projects.
Slide 29 - New Low Risk Generation Projects- RJF
We made significant progress in 2002 to build new power plants.
As Wally discussed earlier, we are currently in the construction or
planning phases for two new plants in NYC and LI.
Ravenswood
The first plant - a 250MW combined cycle installation at our Ravenswood
site is on target and on budget for late 2003 operation.
o Located in NYC load pocket
o This facility received Article X approval in record time in September
2001 o It is the first new major plant under construction in the NYC
market
o Cost of $350 million
o Construction is progressing according to schedule and
o Plant is approximately 40% complete
Spagnoli Road, Long Island
For the second facility, a similar 250MW combined cycle facility planned
for Melville, Long Island, its Article X was deemed complete in the first
quarter of 2002, and Article X approval is expected in 1st quarter 2003.
o Expected operation in 2005
o Continue negotiations with LIPA regarding PPA.
Again, I want to reiterate that these plants fit into our focused, low
risk, Northeast generation strategy
Moving to our Energy Services segment...
Slide 30 - Agenda
Slide 31 - KeySpan Services - RJF
Let me now take a few minutes to discuss our plans for our unregulated
businesses - starting with our core Energy Services segment.
KeySpan Services is the unregulated business segment of KeySpan that
delivers a portfolio of energy-related products, services and solutions to
homes and businesses. It builds upon our regulated footprint and enhances
the value of our customers. Our challenge now - to turn our size and scale
into profitability by increasing margins and reducing costs. We have
refined the business model and expect a positive earnings contribution from
this segment in 2003. In fact, based on the results in October and
November, we expect to be profitable in the 4th quarter of this current
year.
This business segment serves two specific markets:
1) the mass market, which is serviced by Home Energy Services, and
2) the large commercial market serviced by Business Solutions.
Home Energy Services
The mass-market offerings include a mix of annuity-type contracts and
fee-based services covering heating and central cooling system repairs and
installations.
Business Solutions
o In the large commercial market, once again, we have a portfolio of
offerings that include a mix of annuity-based and fee-based services.
o We provide energy solutions that include designing, building,
operating, maintaining and fueling the energy needs of our customers -
with Mechanical contracting and HVAC work being the biggest
contributors.
The 2003 EBIT contribution from the services business segment is projected
to be in the range of $10 -$20 million - a significant improvement from a
2002 EBIT loss.
KeySpan Services is a strategic fit for KeySpan ... Let me explain...
Slide 32 - Role of KeySpan Services- RJF
1) KeySpan Services supports our vision and is core to KeySpan's
customer-focused strategy and strong Brand recognition
2) Customer satisfaction is enhanced by providing customers with one
company that they can go to for all of their energy needs. Home Energy
Services has 90% customer satisfaction and 90% service contract
renewal ratings.
3) And, KeySpan Services builds upon the value of our 2.5 million
regulated customers. As gas utility customers are added to our
existing customer base, we have the potential to double the overall
value of a single customer by completing the initial gas installation
and providing an appliance service contract.
This is a critical component of our core strategy - although KeySpan
Services has not yet achieved its financial objectives, it has played a
strategic role in supporting the utility by providing high levels of
service and converting customers to gas.
Going forward, we have refined our operations and identified a number of
growth drivers...
Slide 33 - KeySpan Services - Growth Drivers - RJF
As you may remember, last year, we installed new management in our Energy
Services business - this new team has taken numerous steps in enhancing our
financial controls and refining our operations.
Home Energy Services
o In our Home Energy Services segment, we have shifted our strategy to
lead with services - which provides a more significant margin - as
opposed to leading with the low margin commodity.
o We have also taken significant steps toward reducing overhead
associated with this business. For example:
o We have consolidated our unregulated call center facilities to
effectively utilize our corporate resources in Melville, Long Island,
and
o We have exited the Westchester market.
In terms of growth for Home Energy Services, the key is to build upon the
services we currently offer:
o 200,000 service contracts,
o 25,000 annual on demand service calls, and
o Focusing more on installation services, including the installation of
gas boilers, and central air conditioning. The A/C business provides a
nice balance to our winter-peaking business.
Business Solutions
Moving to Business Solutions:
o We have exited the higher risk general contracting business -
o In addition, we have improved the financial controls of the business
and
o We have integrated the operating areas of the company into 3 hubs to
better serve our 2,000 commercial customers.
o The growth drivers include a 2003 revenue backlog of approximately
$250 million, and
o An enhanced focus on `niche' industries -- we are focusing on the
energy projects of pharmaceutical companies, hospitals and
universities.
In summary...
The operational refinements we have made, combined with the growth
opportunities we have identified, should help us achieve profitability in
2003, and build a viable business that complements our regulated gas
business.
At this point, let me switch gears to energy investments...
Slide 34 - Agenda
Slide 35 - KeySpan Energy Investments- RJF
This segment consists of our E&P, Gas Processing and Pipeline businesses.
1. We own 2/3's of The Houston Exploration Company, which has more than
650 BCFe of proved reserves in the Gulf of Mexico and Texas.
2. In our Canadian gas processing business, we own 14 plants in Western
Canada that process approximately 1Bcf of natural gas per day. This
business has a total book value of approximately $400 million and is
considered non-core and we plan to divest of it.
3. And in our gas pipeline/storage business, which supports our core gas
business, we own 20% of the strategic Iroquois Pipeline, as well as
50% of the proposed Islander East pipeline in a partnership with Duke.
In terms of EBIT contribution in 2003, our valuable E&P business should
provide EBIT in the range of $100 to $120 million - driven primarily by the
favorable gas price environment...
... while our gas processing investment should earn about $25 million in
EBIT and our Pipeline investment should earn about $10 million.
Slide 36 - Houston Exploration Company- RJF
1. As you can see from this next slide, our E&P business will achieve a
record production of 100 BCFe in 2002- double the level of 5 years ago
for an average of 15% growth per year.
2. In terms of reserves -- most of which are natural gas -- we have grown
by about the same 15% per year. 3. We have also maintained a
consistent hedging program and have hedged 65% of both our 2002 and
2003 production.
4. When you put it all together, our E&P business has continued to add
value for our shareholders. In fact, over the past 5 years, the market
cap of Houston Exploration has doubled to about $1 billion.
So when you look at Houston Exploration from a `numbers perspective', you
see a consistent track record of growth and value creation. As we have said
many times, we would be willing to sell Houston Exploration at the right
price, but we continue to feel that we are creating more value by retaining
this business in the near term.
I will now turn it over to Gerry Luterman who will review our financial
profile.
Slide 37 - Agenda
Slide 38 - 2002 Financial Initiatives - GL
Thank You Bob and Good Morning... My objective... to summarize KeySpan's
financial position and ... Financial strategy --- both of which support the
business and growth objectives that my colleagues have presented to you.
Specifically, I will address risk management, balance sheet, cash flow,
dividend, earnings, ... and conclude with our overall financial profile.
In summary, 2002 was a very busy year in which we achieved virtually all of
our financial objectives ... much of which further solidified our financial
position
To recap...
1) We took a number of pre-emptive steps to strengthen our balance sheet
and I will review these with you this morning
2) From an earnings perspective - we continued to achieve core earnings
growth ... while improving cash flow 3) We monetized /some/ not all/
of our non- core assets ... effectively deploying the proceeds to
reduce our debt levels
4) And from a risk management standpoint ... we established a formal
Enterprise- wide Risk Management process
So, lets get started,
Risk . . .Perhaps the signature word of 2002.
The strength of KeySpan's financial profile is built upon our ability to
manage the risks associated with each of our businesses...
Slide 39 - Managing our Risks- GL
Commodity Risk...
From a commodity standpoint, we have a number of risk mitigation
measures...which are built into the structure of each of our businesses.
More Specifically...
o Gas: We have an automatic gas cost pass through in all utilities
o Electric: The generation is located in the New York "load pocket" and
/ or has long term contracts associated with it
o E&P: Unlike most companies in this space, we hedge about 2\3's of our
production at "favorable" prices
In terms of weather: "Love that Cold Weather"
Gas Business:
o We have weather normalization in New York and Long Island, and
o In New England, we purchased a weather derivative for 60% of the 2003
winter volatility to protect
against the impact of weather
And on the regulatory front...
Slide 40 - Managing our Risks --- Regulatory- GL
Overall, we have benefited from strong relationships in all territories ...
utilizing incentive rate making to benefit our shareholders and customers.
More Specifically... Gas Business...
o Our existing gas rate agreements in New York and Long Island have
expired... with the terms of the prior agreements remaining in place
o In New England...
o the Essex , Colonial and Energy North agreements remain in place and
o in Boston...the rate plan expired in 2002 ...
o for 2003, the 2002 rates remain in effect. We are considering a
possible rate filing in the first half of 2003. which would impact
only the last few months of that year.
Obviously . . .by being able to continue with the existing terms of our
rate agreements, we demonstrate our continued ability to carefully manage
our ongoing costs.
From an electric perspective...
o On Long Island, we have the long-term LIPA contracts which have been
presented
o In New York, we work with the New York ISO and remain subject to their
rules - which have been reasonably supportive given the nature of that
marketplace.
All in all, a reasonably good situation overall.
Now, moving to the balance sheet...
Slide 41 - Balance Sheet Strengthening - GL Our balance sheet continues to
improve...
During 2002, we took a number of steps to strengthen the balance sheet
1) Issued $460 million of `MEDS' convertible equity units.... with
between 80% - 100% of the these units considered equity in calculating
the debt ratio for credit and bank covenants purposes . . .
2) Early renewal and successful renegotiation of our $1.3 Billion credit
facility, which serves as a backup to our commercial paper program.
This facility was over subscribed as 16 banks participated. If you are
present... and I am sure you are... Thank You.
3) Effectively deployed the proceeds from the sale of our non-core assets
-- Midland and the gas portion of the THX Joint Venture - to pay down
debt - as promised, plus we took off $135 million of Midland's debt
from our balance sheet
4) Capitalized on the low interest rate environment by optimizing our mix
of fixed and variable debt. As of September 30, 2002, we had interest
rate swap agreements in which approximately $1.3 billion of fixed rate
debt had been "synthetically" modified to floating rate debt. In early
November 2002, we terminated two of these interest rate swap
agreements ... and received $81 million in cash--including accrued
interest, which was also used... as promised... to pay down debt. This
brought the overall benefit to over $100 million.
5) And we have decreased our debt to capital ratio to approximately 62%
from 66% at year-end 2001
Turning Now to cash flow...
Slide 42 - Cash Flow / Capital Expenditures- GL
During 2003, we are projecting to generate about $1 billion 'plus' in cash
flow from operations - an improvement of $100 million from 2002. Remember
the pension entry is non-cash. This cash flow will more than cover our
ongoing capital expenditures projected to be in the range of $850 million.
o Gas -- $250 million for maintenance
o Gas -- $150 million for growth... down $50 million from last year
o Electric - flat at $90 million
o Energy Investments and Services -- at $50 million and $10 million -
equal to last year
o And E&P - $300 million -- self-funded by the E&P internally generated
cash flows.
o At this time... the only new investments on the horizon are the
continued investments in our new electric generation plants, which
have been on the radar screen for a number of years - $300 million
projected in 2003 for the completion of the 250 MW expansion of
Ravenswood and -- the continuation of the proposed new 250 MW plant on
Long Island.
Turning now to our dividend . . .
Slide 43 - Solid Dividend- GL
We are once again reaffirming our commitment to the $1.78 dividend - which
currently yields in excess of 5%. It goes without saying . . .
o In this volatile and uncertain market ... a secure and sustainable
dividend is an important part of KeySpan's overall return to
shareholders... realizing that about half of our shareholders are
retail and a good portion of our institutional holders are either
value or income fund oriented.
o Over the past few years, the payout ratio has significantly declined
to about the current 65% ... moving towards our stated goal of
approximately 60%, which would trigger "consideration" of raising our
dividend.
So much for dividends, now the tough one...
Let me spend a few minutes addressing our Pension and OPEB situation...
Slide 44 - Pensions \ OPEB's - GL
Given the market's poor performance over the last few years . . . Pensions
and pension accounting have become one of the most difficult and complex
issues impacting business today. Let me now bring you up to date on
KeySpan's situation. Starting with 2002 . . .
2002
In total, we have pension assets of about $1.9 billion...
1) Going into 2002, our Pension plans in the aggregate were fully
funded...whereas OPEB's are not fully funded, which is the normal way
of handling this item. We use a combination of cash and insurance
products to fund the OPEB liabilities
2) Our assumptions in 2002 were reasonable and more conservative than
industry average
o Discount Rate - 7% Industry Average - 7.5%
o Asset Return - 8.5% Industry Average - 9.25%
o Compensation increase - 4% - consistent with actual experience
3) We have true-ups for approximately 50% of our Rate Agreements ... and
are fortunate that the plans without the regulatory true-ups are the
better funded ones
4) And lastly, we have incurred an incremental $30 million of non-cash
pension expense into our current 2002 guidance
Looking now at 2003...
1) We obviously have provided some incremental non-cash pension expense
based on the market's continued poor performance... $0.20 to $0.30 per
share
2) We do not need and do not plan to make any changes to our current
assumptions
3) We still have the 50% or so in regulatory true-ups
4) Using these factors, we expect an incremental book expense of $50-$75
million -- on top of the $30 million we built into 2002's guidance
5) However, there will be no required incremental cash funding, although
in 2003 we may choose to infuse some additional cash into the plans
So, the `net-net' pension for 2003...
$50 to $75 million in increased non-cash book expense... no required cash
funding.
Turning now to earnings... in the appendix of your package, we have given
you the detailed assumptions and sensitivities to our internal
forecast...We know you will tear into them and George Laskaris and his
team stand ready to sit with you on them.
Our 2003 earnings guidance...
Slide 45 - 2003 Earnings Guidance - GL
... continues to be built upon the strength of our core business...
>> We expect 6% growth in our core operations... in the $2.55 to $2.60
per share range, excluding incremental pension expense. I should note
that we are absorbing all other O&M expense increases - such as
benefits increases, security costs, and insurance.
>> We are projecting our E & P earnings of $0.35 to $0.45 per share...
with 65% hedged at $3.40 to $4.55/Mcfe >> Wrapping it all together, we
are expecting consolidated earnings per share of $2.65 to $2.80 per
share - an increase as compared to last year - due to the growth in
our core and E&P businesses highlighted in today's presentation,
offset by the non-cash `book' impact of incremental pension and OPEB
expense
Also, probably equally important... From a cash earnings per share
perspective, we are projecting $7.25-to-$7.50 per share, a 6%+ increase
from the 2002 levels.
Stepping back...our solid financial profile underpins our focused
strategy...
Slide 46 - Financial Stability - GL
1. A solid business model focused on our core businesses, which provide
85% of our EBIT and a very predictable revenue stream...
2. A solid balance sheet ...
3. Prudent risk management and a continued low Beta
4. Strong Earnings with stable and improving cash flows given the
regulated nature of our business 5. And lastly, a stable and
"committed to" dividend that provides an attractive yield with a
declining payout ratio.
Let me now turn it over to Bob for some closing comments...
Slide 47 - Agenda
Slide 48 - Differentiating KeySpan - RBC
Thanks, Gerry.
By this time in the presentation, you should have a clear understanding of
how KeySpan is differentiated form other companies within our industry. The
energy industry has been plagued by a number of difficult problems this
past year.
When you look at the track record of KeySpan that we have presented today,
you can see that we score high in each of these areas:
o We have a focused strategy
o We have low-risk business profile
o We have a solid balance sheet
o Our electric business is focused on long-term contracts and Load
Pocket locations
o And, we have always used `Best Practices' Governance policies.
As we look to the future, our focus for 2003 is `more of the same'...
Slide 49 - KeySpan's 2003 Scorecard- RBC
1. We will build upon our record gas growth and look to optimize the mix
of growth and capital expenditures
2. We will continue with our installations of new electric generation by
completing the Ravenswood expansion
3. We will enhance our operations and customer service by the continued
use of new technologies
4. We will continue to monetize our non-core businesses as the market
presents opportunities
5. We expect to achieve profitability in our Energy Services business
6. We will take steps to further strengthen our balance sheet
7. We will achieve our earnings target, continuing to grow our core
businesses, as well as our E&P business and will accelerate the cost
containment programs we have in place to help offset the cost
pressures we face.
8. And, of course, we will maintain our $1.78 dividend
So, when you put it all together...
Slide 50 - KeySpan --- A Compelling Investment - RBC
We believe that KeySpan provides you with a compelling investment
opportunity. As we have highlighted in today's presentation, our strategy
is very focused on our core gas distribution and electric generation
businesses. These businesses have competitive advantages relative to our
peer energy companies... and are well-positioned in very attractive
markets.
o In the past, we have consistently delivered value to our shareholders
and outperformed our peers in every time period.
o In fact, over the past decade, while the Utility sector has provided
only a 3% average return, KeySpan has delivered a solid return of 11%.
We thank you for your support and investment over this time period and we
expect to continue this track record in 2003 and beyond.
Thank you. At this time, we would be happy to take your questions.
Well,if there are no more questions, I would like to once again thank you
for your investment and wish you a happy and healthy holiday season... and
a VERY COLD Winter. As a token of our appreciation, we have a new KeySpan
truck for all of you.
Thank you.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
KEYSPAN CORPORATION
Dated: December 12, 2002 By: /s/Michael J. Taunton
---------------------
Name: Michael J. Taunton
Title: Vice President and
Treasurer
INDEX TO EXHIBITS
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Exhibit No. Exhibit Page
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99.1 Press Release dated December 12, 2002