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) : May 5, 2003
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 9. Regulation FD Disclosure
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Beginning May 5, 2003, the Company will give a series of presentations at
the American Gas Association ("AGA") Financial Forum. The slides that will be
used at this AGA Forum can be viewed under the heading "Presentations" 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 this AGA Forum:
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AGA Financial Forum
May 5, 2003 12:45 pm
"Targeting our Top Ten Issues"
Robert B. Catell - Chairman & Chief Executive Officer
Wally Parker - President-- Energy Delivery & Customer Relationship Group
Robert Fani - President --Energy Assets & Supply Group
Gerry Luterman - Executive Vice President & Chief Financial Officer
Michael Taunton - Vice President & Treasurer
Slide 1 - "Top Ten" issues facing KeySpan? (MT)
o Welcome
o Introduce KeySpan Attendees
o Handout - Folder
>> Presentation
>> Update
>> Form 10 Q
>> Fact Sheet
o Note: An online web cast of this presentation is also available and can be
viewed under the heading "Presentations" on the Investor Relations section
of the Company's website: www.keyspanenergy.com.
o Presentation Format - Bob Catell will begin our presentation with a
description of the Company's strategy, risk profile, and corporate
structure. Bob will be followed by Wally Parker, Bob Fani and Gerry
Luterman who will discuss the current issues that KeySpan faces in our
customer focused business segment, our asset and energy management business
segment and our Financials
o Briefly identify the major discussion points:
- - Gas Growth & Regulatory Agreements
- - Energy Services
- - Power Outlook & Update & Energy Management Update
- - Status of Non-Core Assets
- - Financial Strategy
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Now Bob Catell will begin the presentation
Slide 2 - KeySpan's Focused Strategy (RBC)
Thanks Mike.
Our strategy remains consistent, viable and focused - "more of same" - with
only some strategic refinements. We are committed to continuing to grow our
core gas, electric and energy services 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 main 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.
Our strategy and diverse business profile define our focus and includes a
commitment to managing risk...
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Slide 3 - How is KeySpan managing risk? (RBC)
... KeySpan's earnings have a low risk profile since 80% to 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 To complement this profile, we have a number of risk mitigation measures in
place:
On the gas side...
o We have commodity cost passthroughs.
o We have weather normalization clauses in New York and Long Island and in
New England we had a weather derivative in place this past winter.
On the power side of the business ...
o We have long-term contracts with the Long Island Power Authority - some of
them up to 25 years.
o In New York City, our Ravenswood plant is located in a `load pocket' -
requiring 80% of NYC capacity to be generated from within city limits.
On our E&P operations, we hedge approximately 65% to 70% of our gas
production.
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In addition, we have established a formal - enterprise wide risk management
group to enhance our risk management activities.
Putting it all together, a very stable business with predictable earnings
streams.
Also, we have recently restructured our organization to better align our
corporate resources in support of our corporate strategy... Let me
explain...
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Slide 4 - How does the realigned corporate structure support our focused
strategy? (RBC)
o The Company is aligned across two major groupings - the Customer focused
group -composed of Gas Distribution and Energy Services segments -and the
Assets Group - composed of our portfolio of energy assets including the
energy Supply function, as well as the electric services segment.
o The foundation of KeySpan's corporate strategy is the gas distribution
segment which is supported by our asset and energy management activities
o These asset and energy management activities also support our electric and
other businesses o Our energy assets represent the key to optimizing the
value of our current businesses - supporting our Northeast focus
Let me turn it over to Wally Parker, who will discuss the issues we face
within our energy delivery and customer relationship group.
Slide 5 - Customer Transition Slide
Thanks Bob and good afternoon. This afternoon I will touch upon three
issues in our customer focused gas distribution segment - our gas growth
initiatives, status of our regulatory agreements and profitability in our
energy services business.
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Slide 6 - Issue # 1 - How has the First Quarter affected gas growth? (WPP)
o As the largest and fastest growing gas business in the Northeast, we
continue to grow at a brisk pace. We have set and achieved aggressive new
growth goals in each of the last three years for converting customers to
natural gas and adding new customers.
o These annual goals challenge us to be efficient in deploying our capital
and resourceful in achieving our targets - all while balancing the
operation of our 20,000 mile `plus' gas infrastructure with achieving
customer conversions -- as we experienced one of the coldest winters in the
past 30 years with weather being approximately 10% colder than normal
across all of our service territories.
o The consistently cold weather, increasing gas prices and the economic
slowdown we are experiencing challenged the sales environment for
conversions, as consumers became sensitive to conversion and fuel costs
o Despite these adverse sales conditions, we continued to successfully
convert customers to gas heat in a cost-effective manner...
o ...In first quarter, we completed approximately 9,500 gas installations,
which will result in approximately $8.5 million in new annual gross profit
margin --keeping us on target to achieving our 2003 gross profit margin
goal of $61 Million.
o Keep in mind -- these sales are cumulative -- so the targeted $61 million
this year will be additive to the new GPM attached last year and so on...
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We expect this growth to continue for a long time into the future given the
low gas heating saturation levels of 36% on Long Island and 50% in New
England.
We have over a million remaining heating prospects in the territories that
we serve and 2/3s of these are either on or near the main requiring no or a
moderate amount of capital.
This growth ties into the execution of our regulatory strategy...
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Slide 8 - Issue # 2 - What is the status of the gas regulatory agreements?
(WPP)
o KeySpan's regulatory strategy -- has been and continues to be --- managing
our existing rate agreements by growing our customer base and controlling
our operating costs.
o Given the nature of our territory, strong regulatory relationships exist
across the three states served
o In Boston, the decision was made to file a rate case due to the extensive
maintenance capital improvements made to that system and the rise in
pension and other O&M expenses.
o We recently filed a 5-year PBR case asking for approximately $60 million in
rate relief.
o The relief supports a 12.1% ROE o In addition, we have requested a weather
normalization clause that is similar in structure to those in New York
o The request does not include an increase for goodwill recovery from the
KeySpan -- Eastern Enterprises acquisition.
Briefly, the remaining regulatory agreements include:
1. New York and Long Island - which expired in 2002 and 2000,
respectively, and are both currently operating under the existing
rate agreement terms.
2. New England -- In addition, the Colonial and Essex utilities are
operating under 10 year agreements through 2008 and 2009 . And in
New Hampshire, we continue operating under the existing rate
agreement terms.
o In our New York and Long Island territories, we continue to evaluate our
regulatory strategy
Continuing along, lets me spend some time on our energy services
business...
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Slide 9 - Issue # 3 - How is Energy Services expected to continue
profitability?(WPP)
Overview...
o KeySpan Services is our non-regulated business unit dedicated to delivering
a portfolio of energy-related products and services to homes and businesses
in the Northeast -- through Home Energy Services -- the "retail arm"
offering a mix of annuity-type service contracts and fee-based services
covering heating and central cooling system repairs and installations and
Business Solutions -- the "commercial arm" serving approximately 2,000
customers with a portfolio of offerings that include a mix of annuity-based
and fee-based services which include designing, building, operating,
maintaining and fueling the energy needs of our commercial customers.
KeySpan Services builds upon our regulated footprint and enhances the value
of our regulated customers.
o Our challenge now - to turn our size and scale into profitability by
increasing margins and reducing costs.
First Quarter Performance...
o The operating loss in the quarter was essentially the same as in 2002 and
reflects the effects of the sluggish economy and general downturn in the
construction industry, which has delayed the commencement of certain
engineering and design, and construction projects. What is encouraging is
Business Solutions maintains a revenue backlog of approximately $250
million for 2003.
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Some of our next steps for this business include...
o We are in the process of exiting the gas commodity business in the
residential and small commercial markets of the New York Metropolitan area.
We recently transferred approximately 60,000 of these commodity customers
to EconEnergy.
o We continue to assess and make changes to our geographical operations and
customer base so as to increase the efficiency of our workforce, reduce
costs, increase flexibility to adjust to changing market conditions and
optimize customer satisfaction.
o We closed out 2002 with a profitable fourth quarter and clearly see 2003 as
a key year to further defining and sustaining profitability, and growth
potential.
Let me now turn it over to Bob Fani to discuss our asset and Energy supply
group...
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Slide 10 -- Asset and Energy Supply Segment Transition Slide
Thanks Wally and good afternoon. This afternoon I will touch upon four
issues in our asset and energy supply segment - the summer outlook for
power, management of our gas supply, new generation projects, and the
monetization of our non-core assets.
Slide 11 - Issue # 4 - What is the summer outlook for power? (RJF)
KeySpan is very fortunate to own and operate 6,400 MW of generation in the
desirable NYC and Long Island markets - two regions that have severe
transmission limitations and no or limited excess generation.
o The 2003 summer outlook for electric power in New York remains tight.
o In the near term - the summer of 2003, the NYISO has projected that reserve
margins in N.Y.C. will only be met through the use of special case
resources (i.e. load management, small back-up generators). Without these
the NYC region would be capacity short. So in this market we are expecting
to max out on capacity prices for the summer.
o On Long Island, some excess capacity is projected - however since all our
generation on LI is under long term contracts, this has no effect on
KeySpan
o In addition, the NYISO has recently proposed a revision to the capacity
pricing in New York - the use of a Demand curve - to limit the volatility
of pricing and incent new generation to be built.
Now turning to summer preparedness...
o We are ready for the cooling season - as we have taken a number of steps to
prepare for the summer.
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o As part of our annual maintenance program we recently completed a major
overhaul of the largest unit (972 MW's) at Ravenswood, which was planned
and is normally performed every 5 to 6 years.
o In addition, at our Northport facility on Long Island, the last oil-fired
boiler was converted to dual fuel technology so as to increase the
efficiency of the plant and decrease its emissions.
From a power outlook standpoint - our 2003 forecast assumes...
o ...capacity payments of approximately $90-$95/ Kilowatt-year.
o And from an energy perspective, for 2003, we are assuming an average peak
spark spread in the range of $20-$25/megawatthour.
o In addition, for your information, we have provided sensitivities around
these assumptions.
Now I'd like to move to a quick discussion on the management of our gas
supply and the two contracts we recently awarded.
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Slide 12 - Issue # 5 - Gas Supply Management (RJF)
o This past winter was one of the coldest in past 30 years in the Northeast -
as new gas sendout records were established in all three of our gas
territories. In spite of this, KeySpan had adequate supply to meet the
growing requirements of our customers.
o This all starts with planning well before the winter cold weather hits - we
evaluate the needs of the gas distribution utilities and our generating
plants, enter into gas supply and transmission contracts, fill storage as
well as hedge the gas portfolio.
o As in the past we have made the decision to seek assistance in managing our
gas supply portfolio in order to obtain the benefits that wholesale energy
companies bring to the table.
o On April 1st - we awarded two contracts.... Coral for the New York City and
Long Island service operations and Entergy Koch for our New England
operations - both have been hired for a period of 3 years.
o They will assist us in the development of our gas market strategy, managing
our gas assets and performing gas nominating and scheduling requirements
for the portfolio
o In selected these awards, we evaluated items such as credit worthiness -
which is extremely important these days, pricing, the capability to handle
our portfolio and their position in the markets, among others.
Let me now shift to an update on our generation projects...
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Slide 13 - Issue # 6 - How are plans for new electric generation
progressing? (RJF)
We are uniquely positioned to build new generation in our region - We
understand the markets, have good relationships with the communities and
the regulators and know the construction industry.
o In 2002 we installed 160MW of peaking capacity on LI under 25 year
contracts.
o Late this year we expect to have our 250MW Ravenswood expansion project in
operation. The facility is currently under construction and is over 50%
complete - on budget and on schedule.
o This plant is needed in 2004 to meet the growing power needs of capacity
short NYC market.
o And on Long Island we are planning a similar plant. The Administrative Law
Judges have recommended approval of this plant to the siting board and the
siting board will be reviewing our project this week.
o The new plant is expected to be operational by 2005.
o We continue negotiations with LIPA regarding a PPA.
o Our Northeast focused portfolio continues to expand from the 4,000 MW level
in 1998 ...to our current 6,400 MW's... to our forecasted 2003 level of
approximately 6,600 MW's
o In addition, we continue to seek opportunities to:
- re-power our existing plants through the use of new technology to
increase the efficiency of those plants and
- acquire or build new generation in strategic Northeast Load Pockets
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Let me now shift to an update on our non-core assets...
Slide 14 - Issue #7 - What progress as been made in monetizing non-core
assets? (RJF)
In maintaining our focus on our core business strategy, as many of you
know, we have identified a handful of businesses as non-core
o We have categorized Houston Exploration, our Canadian Gas processing
business and our Ireland investments as non-core assets, with a total
remaining book value of approximately $1.2 Billion.
o We made a commitment to divest our non-core assets and are making
significant progress toward achieving that goal.
1. We sold EnergyNorth Propane in 2001 and...
2. in July 2002 we sold the Midland barge business.
3. In October 2002, we sold reserves from our joint venture with
THX.
4. In February 2003, we reduced our ownership interest in Houston
Exploration to 56% from 66%.
5. In addition, we recently sold our 20% interest in Taylor NGL,
and...
6. ...we have started the process of monetizing KeySpan Canada.
o The proceeds from these sales were used to further strengthen our balance
sheet.
Looking specifically at the larger of our remaining non-core investments -
Houston Exploration...
o We continue to evaluate our options with respect to our remaining interest
in Houston Exploration...
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o In the meantime, we have increased its value to our shareholders doubling
production reserves, cash flow and market value over the last 5 years
So, clearly, we have been prudent in balancing the need to divest our
non-core assets while at the same time enhancing their value.
In terms of our remaining non-core assets, we continue to assess
monetization opportunities that will provide the greatest benefit to our
shareholders.
At this point, Gerry Luterman will discuss some of our financial issues...
Slide 15 - Financial Update
Thanks Bob and good afternoon. This afternoon I will touch upon how the
Company is executing its financial strategy, discuss cash flows and capital
expenditures and reaffirm our 2003 earnings outlook.
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Slide 16 - Issue # 8 - How are we executing our financial strategy? (GL)
One of the underlying elements of our financial strategy is the strength of
our balance sheet, which provides additional financial flexibility to fund
future growth.
o KeySpan is an `A' rated company - supported by its low risk profile
o In maintaining this rating - it was important that we further strengthen
our balance sheet to reduce our debt to total capitalization ratio.
This past year the Company has been focused on improving its financial
profile through a number of initiatives.
Specifically in 2002...
o We sold some of our previously identified non-core assets and used the
proceeds from those transactions to strengthen our balance sheet by paying
down debt
o In addition, we issued $460 million of publicly traded equity units - again
using the proceeds to pay down debt. An incremental benefit to these units
is that the Rating Agencies will give us approximately 80% equity credit
immediately.
We continue executing these financial initiatives in 2003...
o In January, we issued approximately 14 million shares of new equity raising
net proceeds of approximately $473 million
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o We used these proceeds to retire approximately $450 million of long term,
high interest rate debt with coupon rates ranging from 6.9% to 8.2%.
Assuming the current interest rate environment - the retirement of this
debt is worth about $35 million (pre-tax) in annual interest rate savings
to the Company.
o In February, we reduced our ownership interest in Houston Exploration,
raising net proceeds of approximately $80 million, which were used to pay
down commercial paper and increase our liquidity.
o In April, we issued an additional $300 million in new debt to further
improve our liquidity by locking in very favorable interest rates on a
longer-term basis
Slide 17 - Issue # 8 - Strengthening our Balance Sheet - Continued
o As a result of these initiatives, our GAAP debt to-to-total capitalization
as of December 31, 2002 was 67%. From a Credit Facility calculation,
including 100% of our off balance Ravenswood lease as debt and the 80%
equity credit of the MED's unit, our debt to cap ratio was approximately
65%. Our first quarter initiatives - the equity issuance and the Houston
Exploration ownership reduction -- further reduced our debt to total
capitalization ratio to approximately 57%.
o Clearly, we are taking the necessary steps in strengthening our balance
sheet, and will continue to do so in a manner that supports our credit
rating and enhances our financial flexibility to fund future growth.
Now, let's move on to two important financial parameters
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Slide 18 - Issue # 9 - Improving Cash Flows and Controlling Capital
Expenditures (GL)
We all know the importance of controlling capital expenditures - using
capital efficiently. The benefits of lower capital expenditures result in
reduced funding requirements and improved cash flow. And, the benefits from
increased cash from operations are also important.
We're off to a terrific start in 2003.
In the first quarter, capital spending is down compared to last year. We
anticipate this reduction to continue through the remainder of the year.
We also improved cash flow from operations. The improvement is
predominantly attributable to higher collections of outstanding winter
receivables associated with our gas distribution operations, which were
significantly higher than last year, higher gas prices in our E&P
operations and the effect of interest rate swaps.
So what does 2003 look like from an earnings perspective...
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Slide 19 - Issue #10 - What is the 2003 earnings outlook? (GL)
o The key driver of KeySpan is the growth from our core operations - defined
for this purpose as all continuing operations other than Exploration and
Production.
o Our first quarter results are on target with our year-end forecast
o In the first quarter -- on a consolidated basis -- we earned $1.54 per
share from continuing operations. These results- include the impact of the
January equity issuance and the gain associated with the partial sell-down
of our exploration and production operations - and were in line with our
internal forecast.
- The main driver of the quarterly earnings was the continued solid
performance of the gas business unit during this record cold winter.
- In addition, this performance was further enhanced by the increase in
the gas commodity prices realized by gas exploration and production
operations.
So, for the full year...which continues to be built upon the strength of
our core business...
>> We expect 6% growth in our core operations, excluding incremental
pension & OPEB expenses. I should note that we are absorbing all other
O&M expense increases - such as benefits increases, security costs,
and insurance.
>> We are also projecting growth in our E & P earnings ... with 67% of
2003 hedged at $3.42 to $4.55/Mcfe
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>> Wrapping it all together, we are expecting consolidated earnings per
share of $2.45 to $2.60 per share -- including the effects of the
recent equity issuance and the increased pension and OPEB expenses. --
supported by the growth in our core and E&P businesses highlighted in
today's presentation.
o Our solid financial profile underpins our focused strategy...
o I think this is an important statement about KeySpan in today's volatile
environment - it illustrates our ability to execute on our promises ---
providing investors with the confidence they need in today's market.
Bob will now conclude the presentation highlighting KeySpan's key
qualities...
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Slide 20 - KeySpan - Executing on our Strategy (RBC)
So putting it all together, why invest with KeySpan?...
o KeySpan is a compelling investment supported by our low risk profile - as
we offer investors an excellent total return, comprised of growth from our
core operations and a solid dividend --
o This return is supported by the low risk profile of our regulated \
contractual gas and electric businesses.
o The earnings growth from our core operations will be achieved by
capitalizing on gas growth opportunities and new electric generation
opportunities.
o As was presented today, we continue to execute our financial strategy to
ensure financial flexibility in funding future growth
o We are committed to our $1.78 dividend -- an important part of the KeySpan
story.
o In addition, we will further strengthen our strategic focus through cost
containment measures... and by divesting our non-core assets.
o Our `A' debt rating - enhanced by the sale of our non-core assets and the
recent financial initiatives--the equity issuance, the reduction in THX
ownership, the pay down of long-term debt and recent monetization of some
non-core assets - illustrates our commitment to maintaining strong credit
quality.
o Overall - Solid growth and low risk enhances the nature of KeySpan as an
investment - an investment combining a very unique and attractive mix of
growth and stability
Thank you. At this time, we would be happy to answer any of your
questions.
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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: May 5, 2003 By: /s/Theresa Balog
----------------
Name: Theresa Balog
Title: Vice President & Controller
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