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 8, 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 5. Other Events
------------
On December 8, 2003, KeySpan Corporation ("the Company") issued a press
release disclosing, among other things, its expectations for 2004 Company
earnings.
The Company's press release is attached hereto as Exhibit 99.1 and is
incorporated herein by reference.
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Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
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(c) Exhibits
(1) Press Release of the Company dated December 8, 2003.
Item 9. Regulation FD Disclosure
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In addition, on December 8, 2003 and December 9, 2003, the Company will
hold meetings with members of the financial community and discuss, among other
things, its expectations for 2004 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:
2004 Presentation to the Financial Community
"Strategic Execution for Growth"
December 8 - Boston
December 9 - New York
Cover Page
- ----------
Slide 1 - Agenda (G. Laskaris)
- -------------------------------
Good Afternoon and welcome to KeySpan's Annual Presentation to the Financial
Community - "Strategic Execution for Growth". This morning we issued our press
release reporting on our 2004 earnings guidance. If you have not received the
press release, it is currently available on our website.
In terms of our format today - Bob Catell will start with a review of the
corporate strategy. Bob Fani will discuss 2003 accomplishments and expense
reductions. Wally Parker will then provide an update on our energy delivery and
customer operations business, followed by Steve Zelkowitz with a discussion of
our energy asset and supply business. Gerry Luterman will then report on our
financial strategy and then Bob Catell will make some closing remarks.
Please note that the individual segments forecasts for Operating Income
discussed today will be updated early next year, once budgets and allocations
are finalized. However, we expect the total consolidated guidance to remain the
same.
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And now, I will turn it over to Bob Catell...
Slide 2 - KeySpan's Business Profile (R.B. Catell)
Thank you, George, and Good Afternoon. It's our pleasure to update you on the
KeySpan story and the continued execution of our strategy of growth and building
shareholder value.
Over the past several years, KeySpan has grown to become the largest gas
distribution company in the Northeast United States with 2.5 million gas
customers in New York City, Long Island and New England, and the largest
generator of electricity in New York State with 6,400 MW of generation. Our
business profile is concentrated in our core gas distribution and electric
services segments ... making up 78% of our business, and is complemented by our
Energy Services business. The balance of our business profile is made up of our
energy investments which includes our ownership interest in Houston Exploration.
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Slide 3 - KeySpan's Focused Strategy (RBC)
We have positioned ourselves well in great markets with excellent growth
opportunities. We've stayed focused on our basic strategy ... to achieve growth
through our two core businesses ... our gas distribution business and our
electric generation business.
In our gas distribution business, our focus is on the customer. We are well
positioned for organic growth by operating in an excellent marketplace with
strong customer demographics. There is a low penetration of natural gas and high
gas usage resulting from operating in the colder Northeast. We are aggressively
adding new customers and offering selective energy products and services through
our energy services business. We will build or acquire strategically located
assets which support this distribution business - particularly pipeline,
liquefied natural gas and underground storage.
In our second core business--electric generation--which operates in the
capacity-constrained New York City and Long Island electric markets, we seek
growth through the continued optimization of our existing generation assets as
well as through building or acquiring additional strategic generation assets in
the Northeast.
We remain committed to monetizing our non-core assets.
With this focused strategy in mind, we have set up...
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Slide 4 - Framework for Growth (RBC)
....a framework which lays out the roadmap for executing on our strategy of
growing our core businesses.
As you may know, earlier this year, we re-aligned our business segments into two
groups to optimize the execution of our strategy - a customer focused group, and
an energy asset and supply management group.
We have also launched a business review process to increase the efficiency of
our business operations and to reduce expenses which Bob Fani will discuss in
more detail. And,
We have a strong financial position which will support our growth strategy, as
we look to further improve our balance sheet by continuing to monetize our
non-core assets and reduce debt.
We recognize that our growth strategy must be supported by an important
element...
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Slide 5 - Minimizing Business Risk (RBC) ... minimizing our business risk in all
of our businesses.
In our gas distribution business, we have commodity cost pass-throughs, weather
normalization in our New York and Long Island rate structures, and we utilize
weather hedges in New England.
In our electric services business, we have long-term generation contracts on
Long Island. We operate in the capacity-constrained New York City market, and we
hedge the electric sales of our Ravenswood plant to further mitigate risk.
And, in our exploration and production business, we hedge 70% of the production
for the year ahead and beyond in order to mitigate the risk and volatility of
gas prices.
And with regard to our overall operations, we have no material environmental
exposure.
As we continue to measure and monitor risk on an enterprise-wide basis, we are
pleased that 80 to 85% of our operating income comes from our regulated,
contractual and load pocket businesses. This provides for predictable revenues,
stable earnings and strong cash flow streams.
And we believe our strategic framework, risk mitigation measures and our active
involvement in industry issues will allow KeySpan to continue to grow our
businesses and focus on the following objectives...
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Slide 6 - Objectives (RBC)
- - First, we are committed to growing KeySpan's earnings from its core gas,
electric and services businesses by 5 to 6% annually,
- - Second, we will maintain our "A" quality credit ratings,
- - Third, we are committed to monetizing our non-core assets - specifically,
Houston Exploration, KeySpan Canada, and our Northern Ireland investment -
a portion of which we recently sold.
- - All of which should support KeySpan to be able to maintain and possibly
increase our dividend in the future.
Looking specifically at earnings growth...
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Slide 7 - Earnings Guidance (RBC)
....By remaining focused on executing on our strategy and achieving our
objectives, KeySpan is projecting growth in its core earnings by 5 to 6% in
2004, resulting in a contribution of $2.20 to $2.30 per share. Including the
contribution of $0.35 to $0.45 per share from our exploration and production
operations, KeySpan's overall earnings guidance is $2.55 to $2.75 for 2004, up
from $2.45 to $2.60 in 2003.
We are also re-confirming our guidance for 2003. Our core earnings are projected
to be at the low end of the range of $2.15 to $2.20 for 2003, primarily due to
the effect of the cooler summer weather on electric prices and the impact of the
slowdown in the Northeast construction industry on our energy services business.
The earnings for E&P are expected to come in above the range of $0.30 to $0.40
per share because of higher gas prices during the year.
And now, I will turn it over to Bob Fani to discuss the specifics of our
strategic execution in 2003...
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Slide 8 - Agenda (R.J. Fani)
Slide 9 - In 2003 KeySpan has... (RJF)
Thank you, Bob, and Good Afternoon.
As Bob already mentioned, we continue to remain focused on executing on our
strategy of growing our core businesses through 2004 with an increased emphasis
on efficiency - both operating expense and capital.
Let's first turn to our accomplishments in 2003 in our business segments...
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Slide 10 - 2003 Business Execution (RJF)
o We continued to grow our gas business,
o completed and announced new energy-related projects to expand our asset
base,
o continued to provide excellent service,
o monetized non-core assets,
o and initiated a review of our cost structure.
Some of the specifics...first, gas growth...
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Slide 11 - Growth in the Gas Business (RJF)
Despite the challenge of higher gas costs and sluggish economic conditions
through most of the year, we continued to aggressively convert customers to gas
and expect to achieve new gross profit margin of $55-60 million in 2003.
With regards to our utilities, we have strong regulatory relationships and we
continually evaluate the need to file for rate cases. In our New England gas
service territory served by the former Boston Gas Company, we recently received
a decision from the regulators on our rate request which granted us a base rate
increase of $26 million, a 10.2% return on equity with sharing above that level.
Equally significant, we were granted a true-up on pension and OPEB expenses
including carrying charges and a performance based rate plan up to 10 years
which adjusts for inflation annually. We are pleased with the decision, and it
was consistent with our internal forecast.
Next, our progress on implementing the growth of our assets...
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Slide 12 - Asset Growth (RJF)
We are nearing the completion of a new 250 MW generating plant at our Ravenswood
power station. We are currently in start-up mode on this efficient,
state-of-the-art, combined-cycle plant in the next couple of weeks. This plant
is the first base load plant to be installed in the NYC area in over 30 years.
It will serve the NYC load pocket region which is projected to be capacity
deficient this coming summer.
In addition, we announced the expansion of our liquefied natural gas storage and
receiving terminal in Providence, Rhode Island. We are partnering with British
Gas LNG to expand the facility to accept marine LNG deliveries by 2005 and
increase vaporization capability from 150,000 to approximately 500,000 dth/day.
This expansion is consistent with our strategy of supporting our core gas
distribution business, as we seek to increase the reliability of the Northeast
energy supply and create more diversity in supplies. We have initiated this
project, realizing that LNG will play an ever increasing important role in
meeting the energy needs of the United States and in particular, this market
region.
And now turning to the performance of our system...
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Slide 13 - Operational Excellence (RJF)
We continue to achieve outstanding performance for both the KeySpan generation
facilities and the operation of the LIPA T&D system.
Keeping our generators in the best possible operating condition is a priority at
KeySpan, and through an extensive annual maintenance program, our generating
facilities had over 97% availability on Long Island and better than 96% at
Ravenswood during the crucial summer season.
And in terms of providing excellent service to LIPA, KeySpan continues to
operate the Long Island T&D system at the highest performance levels in New York
State. KeySpan ranks first in restoration time when we have an outage - on
average we restored service to our customers in 64 minutes - 40% quicker than
the NYS average.
And just a note on our gas business - we have reached our target storage levels
for both New York and New England, ensuring adequate supply of gas for the
upcoming winter heating season.
Now changing focus to our non-core assets...
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Slide 14 - Monetization of Non-Core Assets (RJF)
We remain committed to the monetization of our non-core assets.
2003 was indeed a very busy year:
We reduced our ownership interest in Houston Exploration from 66% to 56% and
received net proceeds of $79 million, and we continue to analyze ways in which
to monetize the balance in the most tax-efficient manner.
We monetized approximately 39% of our ownership interest in KeySpan Canada -our
gas processing business through an Income Trust - and sold our 20% interest in
Taylor Natural Gas Liquids - receiving net proceeds of approximately $120
million.
And finally, we announced three weeks ago the sale of our 24.5% interest in
Phoenix Natural Gas, a gas distribution company based in Belfast, Northern
Ireland - for approximately $95 million.
These sales are consistent with our strategy and commitment to concentrate on
our core businesses. The proceeds from these sales were or will be used to
reduce our debt level, as Gerry Luterman will address.
At this point, let me shift gears to the cost management program we initiated
this year.
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Slide 15 - Expense Management (RJF)
In order to continue to remain competitive and provide value to our
shareholders, KeySpan is undertaking a multi-year, enterprise-wide initiative to
further improve operational performance to offset the effect of higher costs.
These include higher costs from the increased focus on corporate governance,
security and risk management.
We will strike a balance between growth and efficiency ... and not compromise on
our safe and reliable service to our customers.
This will be an ongoing process, requiring a stronger than ever focus on
efficiency, technology, innovation and risk management.
This effort will include
o evaluation and streamlining of our business processes,
o the use of technology to reduce costs such as the implementation of
construction tools and techniques in the gas distribution area,
o the use of information based management tools to help grow revenues such as
targeted marketing and sales optimization programs, asset optimization and
portfolio management,
o And utilization of the cost-effective IT structure we have put in place
over the last several years which is aligned with our strategy of growing
our core businesses.
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Through this initiative, in 2004 we are implementing expense reductions of
approximately $100 million which will cover projected increases in costs already
mentioned as well as higher pension, infrastructure, insurance and healthcare
costs, and we do not anticipate any restructuring charges at this time. These
efforts will keep our 2004 O&M budget at the 2003 level.
Also, this year we aligned our company...
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Slide 16 - KeySpan's Structure Supports (RJF)
....across two major business groupings, to support the execution of our growth
and operational efficiency strategy.
Our customer focused group, headed up by Wally Parker is comprised of gas
distribution and energy services;
And the asset and supply management group, managed by Steve Zelkowitz, is
comprised of our portfolio of energy assets and the energy supply function.
Wally and Steve will discuss both the growth drivers and operational
efficiencies of these two businesses.
I will now turn it over to Wally who will discuss the gas distribution and
energy services Group.
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Slide 17 - Agenda (W.P. Parker)
Slide 18 - KeySpan Gas Distribution (WPP)
Thanks, Bob, and Good Afternoon.
Let me start with the Gas Distribution business...
....the two key drivers of our success remain our size and our growth potential.
We are the largest gas distribution company in the Northeast United States ...
and among the fifth largest in the country serving over 2.5 million customers as
a result of the successful integration of six gas utilities in the NYC, Long
Island and New England regions over the past four years. This size allows us to
obtain economies of scale and operational synergies.
But more important than just size is our substantial market opportunities...our
growth potential...
But our growth will be efficient -- our strategic focus for 2004 is on improving
capital and marketing efficiency. Margin contribution at the lowest possible
cost will be the driving factor.
Now turning to our gas operating income forecast and its drivers....
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Slide 19 - Gas Distribution Outlook (WPP)
In 2004, the Operating Income contribution from our gas business is projected to
be in the range of $545 million to $565 million, an increase of approximately 6%
over the original 2003 guidance, assuming normal weather conditions. We are
projecting 2003 year end Operating Income to be higher than original guidance as
a result of the colder than normal winter weather experienced in our service
territories. The 2004 Operating Income contribution can be broken down -
approximately 40% New York, with the remaining contribution split almost evenly
across Long Island and New England.
Through targeted and efficient addition of new customers in 2004, we expect to
add approximately $55 million in new gross profit margin.
This growth will be accomplished in a regulatory framework which provides:
o An allowed return of 13.25% at our largest utility in New York with 1.2
million customers, and
o An allowed ROE of 11.1% on Long Island where we have 500,000 customers, and
o An allowed ROE of 10.2% at the former Boston Gas Company, the largest
utility in New England, where we have more than 800,000 customers
throughout Massachusetts and New Hampshire.
Let's now take a look at our unique organic growth opportunity in both the
residential and business markets.
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Slide 20 - Track Record for Organic Growth - WPP
In our residential market, our territory is only a little more than 50%
saturated with over 1 million additional prospects and $650 million in Gross
Profit Margin potential.
Our mature New York market, which is approximately 80% saturated stands as the
model for growing our LI and New England residential markets which are at 36%
and 53% saturation levels, respectively. We continue to add new customers in all
three regions using the aggressive marketing programs which have a proven track
record of success in New York.
Specifically, since acquiring the Long Island business in 1998, we have more
than doubled the rate of growth and tripled the rate of conversions. And in New
England, in just three years we have increased the growth rate by 60%.
Turning to the business market segment, our territory has a saturation level of
approximately 60% across all of our territories with approximately 150,000
additional prospects and $300 million in gross profit margin potential.
Putting it all together, we have significant long-term opportunity for targeting
profitable organic growth of almost $1 billion in gross profit margin.
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In 2004 we are taking a number of steps to enhance our profitability...
Slide 21 - 2004 Strategic Execution (WPP)
In essence, we are shifting from a "market share" perspective to a "maximizing
profitability" approach. We are seeking to optimize the use of our capital
resources by allocating it to the most profitable segments - those prospects
that require a minimum amount of capital and increase GPM the most - those
located closer to our gas mains. Over the past several years we have added over
5 million feet of new gas mains - which has significantly improved the gas
infrastructure and created new sales opportunities by bringing thousands of
potential prospects closer to our system. We will now seek to exploit these new
sales opportunities, allowing us to maximize the return on our gas expansion
program.
We have developed information based management tools, such as our sales
optimization model, that will allow us to better understand our customers needs,
segment the market, and focus attention on the mostly likely customer targets.
And we have launched a business review team to further optimize our marketing
approach including redesigning some of our incentive based compensation plans to
further align our employees' compensation with business profitability.
Now, let's take a closer look at the residential market.
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Slide 22 - Residential Market Potential (WPP)
In our residential market, our prospects are almost evenly divided between three
categories:
o Prospects that currently have gas in the house but are low-use customers.
These are easily convertible to gas heat and require essentially no capital
expenditure.
o Prospects that do not currently use gas, but only require a service
connection, and
o Prospects that are located further from the mains.
In order to improve the cost efficiency of adding new customers, we are
targeting the most profitable customers that require the lowest capital
investment. Approximately $400 million or 60% of the heating potential is either
an existing low use customer or a prospect that is close to the existing
infrastructure.
In targeting these low capital investment prospects, we have utilized our sales
optimization process identifying the most profitable customers. We have launched
a number of successful Customer Care Pilots such as our new call center lead
program, and we have made it easier for our customers to do business with us
on-line. Our on-line conversion program - myquotes.com - has experienced a 66%
increase in gas conversions this year, and we expect further improvements in
2004.
In addition, we have placed an increased emphasis on relationship marketing
which will help cross-sell affiliated services. We continue to strengthen our
relationship with numerous trade allies in order to achieve greater sales.
Now, let's look at the business market...
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Slide 23 - Business Market Assessment (WPP)
In our business market, similar to the residential, our prospects are almost
evenly divided between three categories:
o Low-use customers,
o Prospects close to a gas main, and
o Prospects further from the main.
Again we are targeting the most profitable customers. $220 million or 80% of the
gross profit margin potential is either an existing low use customer or a
prospect relatively close to a gas main.
We have segmented the business markets through our information based tools and
place greater emphasis on those segments with the greatest GPM potential. We
will also sell additional services to existing customers through our
relationship marketing.
In terms of segmentation, we have quantified that over 40% of the potential GPM
is concentrated in 20 business markets out of a total of 420 segments. These 20
most profitable markets are in the service and the retail trade segment
including businesses such as dry cleaners and restaurants.
This revised approach to adding customers will allow us to profitably add gross
profit margin while efficiently utilizing our resources...
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Slide 24 - Capital, Expense & Marketing (WPP)
....resulting in improvements in both our capital and expense efficiency.
o For 2004, we are reducing the growth capital in our gas business by 25%
from $180 million to $135 million. We will also keep our operation and
maintenance expenditures relatively flat due to the use of technology,
process improvements, competitive contracting practices, and improved
modeling to selectively replace components of the distribution system.
o We are also reducing our marketing expenses by over 15% from $68 million to
$57 million.
o Although we are reducing our costs, our growth target for 2004 remains
approximately at the 2003 level.
o As you can see, we are targeting improvements to both our Growth Capex-to GPM
and our marketing expense-to-GPM ratios, metrics we use to track our efficiency.
In 2003, we spent approximately $3 dollars in growth capital for every one
dollar of new profit margin, and in 2004 we are targeting a reduction to $2.50
in capital for every one dollar in growth.
So that's our gas story ... Size and Growth Potential with an increased focus on
efficiency.
I would like to change gears and discuss our other customer-focused business -
Energy Services... Slide 25 - KeySpan Services (WPP)
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KeySpan Services is the unregulated business segment of KeySpan that delivers a
portfolio of energy-related products and services to homes and businesses. It
builds upon our regulated footprint and enhances the value of our customers, as
a critical component of KeySpan's core customer-focused strategy and strong
Brand recognition.
Although Energy Services has not yet achieved its financial objectives, it has
played a strategic role in supporting the core utility by providing high levels
of service with a customer satisfaction rate of over 90% and converting
customers to gas.
We continue to refine the business model and expect a positive, albeit modest,
earnings contribution in 2004. We are expecting a 2003 year-end operating income
loss, primarily driven by the continued slowdown in the construction industry
and the cooler summer weather, as well as closeout costs associated with
unprofitable business operations. The Operating Income contribution for 2004 for
Energy Services is projected to be in the range of breakeven to $10 million.
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Slide 26 - KeySpan Services - Growth Drivers (WPP)
This business segment serves two specific markets, the residential and small
commercial market, which is serviced by Home Energy Services, and the large
commercial market serviced by Business Solutions.
First, the Home Energy Services market includes a mix of annuity-type service
contracts and fee-based contracts covering heating and central cooling system
repairs and installations.
As you may recall, we have been pursuing a goal of 200,000 service contracts,
which we have now reached and exceeded, and the key will be placing a greater
emphasis on signing up more customers for premium service - that is - both
heating and air conditioning service. These contracts have risen from 7% of the
total contract base in early 2003 to approximately 12% now and we expect further
increases in 2004. And, in terms of installations, we have expanded into new
products such as fireplace installations which are up 40% versus a year ago and
the residential conversion market remains strong. Overall, our year-end
projection is to achieve a record level of 17,000 installations.
Second, Business Solutions includes our engineering services division which
provides design, planning and engineering services and our Mechanical
Contracting Division which builds, operates and maintains heating, air
conditioning and ventilation systems.
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The growth drivers in this business include a revenue backlog of approximately
$525 million and a continued focus on niche markets such as pharmaceuticals,
universities and hospitals. We also expect to see benefits from the recent
acquisition of the BR+A engineering company in New England through increased
business opportunities with our mechanical contracting operations.
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Slide 27 - Refinement of KeySpan Services (WPP)
I want to now focus on what we are doing to improve profitability in this
segment.
We have undertaken a comprehensive review and evaluation of the KeySpan Services
business to identify and implement actions that will drive profitability
improvements and sustained value.
In 2004 we will reap the benefits of streamlining our workforce this past year,
resulting in an expected reduction in O&M expenses of $10 million.
We are expanding our use of information based tools that allow us to better
understand the various sectors and customers.
We have become more flexible in shifting to better-funded markets such as the
Public Works sector as the need arises, by taking advantage of opportunities and
focusing more on profitability.
We will focus on reducing the cost of doing business, such as increasing the
amount of fabrication conducted offsite where it's cheaper versus onsite.
We have enhanced our internal bidding review process, which should result in
higher margins. We expect to start to see the benefits of these enhancements in
2004.
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Slide 28 - New York Downstate Construction... (WPP)
In addition, a major forecaster of construction activity, F. W. Dodge, is
projecting an increase in construction spending, as shown, for the downstate New
York region. We should start to see the effect of this in the results of
Business Solutions.
I will now turn it over to Steve to discuss the Energy Asset and Supply Group.
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Slide 29 - Agenda (S.L. Zelkowitz)
Slide 30 - Energy Asset & Supply Business (SLZ)
Thanks, Wally, and Good Afternoon.
KeySpan's asset and supply business is focused on the Northeast United States
markets - the location of our service area or as we refer to it - the Northeast
Energy Hub. Through our assets, which include physical and contractual assets
and equity investments, we seek to optimize the operation of our assets and
maximize returns in our core businesses.
In this segment we manage a portfolio of assets, which includes electric
generation, pipeline, LNG, and storage as well as contracts for physical
pipeline capacity and storage contracts to meet the needs of our customers.
This portfolio also includes some non-core assets outside the Northeast region
which we are committed to monetizing, including our exploration and production
operations based in Houston and our gas processing business located in western
Canada.
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Slide 31 - Focus on Growth (SLZ)
Focusing on growth, we have begun a transformation of the management of the
physical assets and contracts in this business segment. We will evaluate and
manage these assets as an integrated portfolio to improve operating
efficiencies, take advantage of synergies, identify opportunities and maximize
profitability.
In addition, we will look to acquire and/ or build new assets to further enhance
the growth in this segment with projects in the electric generation, pipeline,
storage and LNG areas.
And we will remain involved in the regulatory and political arenas to promote
flexibility in operating our assets and enhancing value.... such as our
continued involvement regarding the operation and market issues surrounding the
electric market in New York State.
Turning first to our Electric Services segment...
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Slide 32 - KeySpan Electric Services (SLZ)
....which is KeySpan's second core business -- a key business providing
approximately $1.4 billion in gross revenue, a major driver of our earnings,
contributing approximately 25% to our Operating income.
The electric services business, currently serving the New York City and Long
Island areas, has two major components:
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. Once
our new Ravenswood plant goes into commercial operation, the size of our
generation portfolio will grow by 250 MW.
o On Long Island, we have contracts to manage the Transmission & Distribution
system for LIPA's 1.1 million customers, and to provide 4,200 MW of
generation from our portfolio. We also manage the fuel for this generation.
o Our strategy for growing our generation business is focused on adding
generation in the strategic Northeast region and maximizing the value of
the existing portfolio. This entails maintaining high availability rates
and the opportunity for repowering of existing plants, increasing their
capacity and efficiency.
In terms of our electric Operating Income forecast and its drivers...
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Slide 33 - Electric Services - Earnings Guidance (SLZ)
The 2004 Operating Income contribution from this segment is projected to be in
the range of $305 to $325 million, an increase of approximately 12% over the
original 2003 guidance, assuming normal weather conditions. We are projecting
2003 year end operating income to be lower than original guidance, due to the
impact of cooler than normal summer conditions and a maintenance outage of one
of the Ravenswood generating units in early 2003.
Our 2004 earnings projection assumes the placement of the Ravenswood lease on
the balance sheet at 12/31/03, and will result in an increase in operating
income of $18 million, comprised of a decrease in operating expenses of $30
million and increase of $30 million in interest expense in order to reflect the
transfer of the lease debt service from an operating expense to interest
expense, offset in part by an increase in depreciation expense of approximately
$12 million. The overall impact to net income is to reduce earnings by
approximately 4 cents per share.
The 2004 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 one third of the operating income in this segment
- these contracts are like an annuity providing a solid and predictable
earnings stream. In addition to the capacity charges and fees earned under
these contracts, KeySpan also has the ability to earn up to $16.5 million
per year in performance-based incentives, and we have been earning at or
near this level for the past several years.
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For our generation contract with LIPA, we recently filed a request with FERC for
a modest increase in the capacity charges under this contract.
2. The second category contributes the remaining two-thirds of Operating
Income and includes the Ravenswood plant in NYC, both the original plant
and the new 250MW addition. The two earnings drivers are the capacity and
energy markets.
o In terms of the capacity market, we are very fortunate to own and operate
plants in the capacity constrained New York City load pocket - which, due
to limited transmission capability into the city, operates under a FERC
approved reliability rule that requires that 80% of peak capacity
requirements must be provided by in-city generators.
o In 2003, we are projecting capacity payments at the high end of the range
$90 to $95 per kW-year, due to the implementation of the ISO capacity
demand curve and seasonal bid caps.
o For 2004, we are assuming capacity payments in the $95 to $105 per kW-year
range. This assumes that our new Ravenswood plant will be entitled to
capacity market revenues in the second quarter.
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Now turning to the energy market, we continue to have opportunities in the high
priced New York City energy market.
o The key drivers continue to be supply / demand balance, transmission
constraints, the weather, the economy and ISO price mitigation measures.
o In 2003, our energy margins were impacted due to cooler weather and a unit
outage, resulting in average peak spark spreads at the low end of the $20
to $25 per MW-hr range.
o For 2004, we are projecting average peak spark spreads in the $20 to $25
per MW-hr range, assuming normal summer weather conditions.
Shifting now to the consistency of these earnings...
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Slide 34 - Focused Generation Strategy (SLZ)
In keeping with KeySpan's profile of minimizing risk, we have developed a low
risk generation portfolio that includes a mix of contractual and load pocket
generation and a conservative hedging strategy which helps to better insulate
our earnings. It is a portfolio that is highly dependent on reliable capacity
charges.
As shown in the graph:
1. 2/3's of KeySpan's current generation portfolio is under long term contract
to LIPA, under which we receive guaranteed capacity payments for the entire
Long Island fleet.
2. The other 1/3 represents the merchant Ravenswood plant, with two-thirds of
its net revenues coming from capacity payments.
3. In addition, for the component that is least predictable - energy payments
- which makes up about one third of our net revenues - we plan to continue
to hedge 1/2 of the risk through financial hedges of peak electricity from
Ravenswood, and
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
adding assets located in load pockets.
So, when you put it all together, you can see that KeySpan has a generation
portfolio that minimizes risk, complemented by a prudent hedging strategy.
Now I'd like to specifically comment on the progress of the new generation
projects we are working on for growing this business.
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Slide 35 - New Low Risk Generation Projects (SLZ)
Bob Fani already commented on the 250 MW Ravenswood addition which is currently
in start-up mode.
In addition, we recently responded to LIPA's request for proposals for new base
load generation on Long Island. The proposal includes a 50/50 joint venture with
American National Power to build two 250 MW combined cycle generators - the
first is planned for Melville, in the center of Long Island, and is expected to
be operational in 2006. The second is planned further east in Brookhaven and
could enter service one year later. Both plants have received all required
regulatory approvals and are currently planned to be constructed under a turnkey
contract with no construction risk for KeySpan or its partner. We are waiting a
decision from LIPA - expected in the first quarter of 2004. These projects
provide the fastest approach to ensure Long Island has adequate base load power
to meet the needs of its customers.
Again, I want to reiterate that these plants fit into our focused, Northeast
generation strategy.
Moving to our Energy Investments segment...
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Slide 36 - Core Energy Investments (SLZ)
First, our core energy investments...
In our gas pipeline/storage business, which supports our core gas business, we
own 20% of the strategic Iroquois pipeline, which provides essential supply into
the Northeast and has solid FERC-regulated returns on the investment. We are
also in a partnership with Duke on the proposed Islander East pipeline which
supports our strategy of increasing gas supply to Long Island.
In addition, last year we made a strategic acquisition of Algonquin LNG - a 2Bcf
FERC regulated LNG storage facility in Rhode Island. As Bob discussed, we
recently announced plans to upgrade this facility to accept marine deliveries
and triple vaporization capacity which will help both strengthen and diversify
gas supply in the New England region and add to our profitability in this
segment. It is expected in-service in 2005.
Second, our non-core investments...
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Slide 37 - Non-Core Energy Investments (SLZ)
This segment consists primarily of our E&P and gas processing businesses.
Although we have identified these businesses as non-core and are seeking to
monetize them, we continue to increase the value of these businesses, while they
contribute to earnings.
1. We own 56% of The Houston Exploration Company, which has more than 700 BCFe
of proved reserves in the Gulf of Mexico and Texas. In order to reduce the
volatility of the natural gas commodity market, we have a policy to hedge
approximately 70% of production. Our remaining investment has a forecasted
total book value of approximately $720 million, made up of about $500
million in equity and 220 million in debt.
2. Our other non-core energy investment is the KeySpan Canada gas processing
business of which we own approximately 61%, consisting of 14 plants in
Western Canada that process approximately 1Bcf of natural gas per day. The
forecasted total book value for our remaining interest in this processing
fee-based business is approximately $240 million, made up of about $160
million in equity and $80 million in debt.
In terms of operating income in 2004, our E&P business should contribute in the
range of $180 to $200 million. We are projecting 2003 year end operating income
to significantly exceed original guidance - driven primarily by the favorable
gas price environment.
The remainder of our energy investments are projected to earn about $40 to $50
million in operating income in 2004, an increase over 2003 guidance. We expect
2003 projected year-end to be at the high end of the original guidance.
I will now turn it over to Gerry Luterman who will review our financial profile.
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Slide 38 - Agenda
Slide 39- 2003 Financial Accomplishments (G. Luterman)
Thanks, Steve, and Good Afternoon. Today, my goal as CFO is to summarize
KeySpan's financial position and strategy - both of which are intended to
support our business and growth objectives.
First, I would like to review our accomplishments in 2003, which was a very busy
year ... a year in which we took a number of pre-emptive steps to strengthen our
balance sheet and improve our financial position.
We started the year off quickly with KeySpan's equity issuance of 13.9 million
shares in January, which was used to redeem high coupon debt and help strengthen
the balance sheet, and minimizing the dilution. In addition, the partial sales
of Houston Exploration on a tax-free basis and KeySpan Canada, as well as the
sale of our ownership interest of Taylor Natural Gas Liquids, generated net
proceeds of $200 million, which were used to further reduce debt levels. In
fact, asset sales of non-core assets over the last two years have realized net
cash proceeds and reduced debt by approximately $1 billion. We also took
advantage of record-low interest rates in April to issue long-term 10 & 30 year
bonds to term out commercial paper, and in November we issued tax-exempt 23 year
bonds to permanently finance the peaking generation units installed on Long
Island last year, again reducing our outstanding commercial paper.
41
We also renewed our $1.3 billion credit facility which backs up our commercial
paper program, reducing our liquidity risk by extending $850 million of the
facility for 3 years with the balance outstanding for one year.
And most recently, we have announced the sale of our interest in Phoenix Natural
Gas in Northern Ireland, from which we anticipate receiving proceeds in
mid-December of approximately $95 million resulting in an overall gain of better
than $20 million.
Overall, these financial accomplishments allowed us to improve debt-to-cap ratio
by approximately 700 basis points (on a credit facility basis) - an important
platform as we head into 2004...
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Slide 40 - 2004 Financial Focus (GL)
.... and one which we will remain focused on, as we continue to place a strong
emphasis on maintaining our "A" quality credit rating. In achieving this goal,
we will continue to focus our efforts on monetizing our non-core assets -
similar to what we did in 2003 - and use the proceeds to mainly reduce debt
levels.
And, as discussed by my colleagues, our expense management programs and growth
initiatives will further help improve the profitability of our core businesses
while improving our cash flow and capital generating position.
You know, ladies and gentlemen... one of the keys to increased profitability is
the efficient use of capital... such as the efforts discussed by Wally Parker.
As this program takes hold... these initiatives will position KeySpan to be able
to generate sufficient cash flow from core operations to fund and/or increase
its dividend, as well as to undertake other investment opportunities.
Now, let's take a closer look at the balance sheet...
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Slide 41- Balance Sheet Strengthening (GL)
Our debt-to-capitalization ratio improved significantly in 2003 as I already
discussed - an improvement of approximately 700 basis points from 64.7% to 58%
from a credit facility perspective, and from 67% to 62% in terms of GAAP.
We expect further improvements in our balance sheet throughout 2004 as we
continue to improve our cash flows. And, given that we would be able to monetize
all our non-core assets in 2004, our debt to capitalization ratio should drop to
the low-to-mid 50% range for both the credit facility and GAAP - which is our
goal and consistent with our credit profile.
In addition, we have minimal borrowing planned in 2004. We currently have a
well-balanced debt portfolio of approximately 80% fixed rate debt, with no
re-financing risk since we do not have any large maturities until mid-2005.
In terms of other financial metrics...
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Slide 42 - Improving Core Cash Flow (GL)
....Our net cash flow from core operations, given normal weather and before
working capital, is projected to improve about 5 to 6% to $850 million in 2004,
more than covering both our core capital expenditure program - growth and
maintenance - and our current dividend in 2004.
This is encouraging, as our 2004 cash flow coverage continues to improve from
4.3 to 4.5 times, once again reflecting our strengthening financial position and
capital efficiency.
Now looking closer at our cash flows and capital expenditures...
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Slide 43 - Cash Flow / Capital Expenditures (GL)
....For cash flows, we are projecting to generate about $825 to $875 million from
core operations in 2004 - an improvement of approximately 5% from 2003, before
working capital. This cash flow will cover our on-going capital expenditures
which are projected to be approximately $485 million - down by $50 million or
10% from 2003 projected levels.
o Specifically, our gas maintenance capex is projected at $215 million, similar
to 2003 despite the increasing age of our system, due to our ability to operate
and manage more efficiently.
o Our gas growth capex at $135 million is down 25% from 2003 due to our gas
optimization program. o Our Electric Maintenance is projected at $100
million, again similar to 2003, as we keep our plants in very good
condition given our past maintenance programs.
o Energy investments and services are each down approximately $5 million from
2003 levels.
As I already mentioned we have enough net cash flow to cover our dividend and
capex in 2004. We have broken out separately our investment projects since these
will most likely be project financed and include investments in new generation
projects, our Islander East pipeline project and our Algonquin LNG marine
conversion project. Assuming the mid-point of our free cash flow range, we are
projecting enough cash flow to fund half of these investments as well.
We have not included the cash flow or capital expenditures from our E&P
operations since its cash flow from operations is used to fund capex with no
infusions from KeySpan -- cash flow neutral to KeySpan. In addition, Houston
Exploration reports on this segment separately.
Turning to our dividend...
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Slide 44 - Solid Dividend (GL)
....Our current dividend of $1.78 yields approximately 5%, which is higher than
the S&P Utilities as well as the S&P 500. We are committed to our dividend,
recognizing it as an important part of KeySpan's overall return to shareholders.
As discussed, we are improving our financial position to allow for sustainable
dividend growth in the future.
And now I would like to discuss KeySpan's earnings growth...
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Slide 45 - 2004 Earnings Guidance (GL)
By remaining focused on our strategy of growing our core businesses in an
efficient manner, we continue to provide solid earnings growth for our
shareholders.
In terms of our 2004 earnings guidance, we expect earnings growth in our core
operations of 5 to 6% from 2003 levels, for an earnings per share contribution
of $2.20 to $2.30. This assumes we are absorbing all other O&M expense increases
such as pension, benefits, corporate governance, security and insurance costs.
And our E&P operations are projected to earn $0.35 to $0.45 per share ... with
approximately 70% of 2004 production already hedged at weighted average floor
and ceiling prices of $4.25 to $5.70 per Mcfe.
So, on a consolidated basis, we are expecting earnings per share of $2.55 to
$2.75.
In addition, our core cash earnings per share are projected to be $5.15 to $5.45
in 2004, an improvement of 3% over 2003. A solid return for our shareholders, as
KeySpan continues to strengthen its financial position...
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Slide 46 - Financial Strength (GL)
....which is composed of several aspects, all of which support the growth
strategy of our core businesses.
First, our solid balance sheet - which supports our "A / A3" rating and
continued advantageous access to the capital markets,
Second, our improving coverage ratios - which result from active debt portfolio
management and disciplined efficiency in cash flows,
Third, our efficient use of capital for higher margin growth in our gas and
electric businesses,
Fourth, our strong earnings and cash flows, resulting from the regulated
low-risk nature of our core businesses, managed for increased efficiencies,
And lastly, our solid dividend - which we know is an important part of our
shareholders investment, and which we seek to grow over time...
....All contributing to the success of KeySpan's growth strategy and positioning
us well for the future.
And now I would like to turn it back to Bob Catell for closing remarks...
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Slide 47 - Agenda (R.B. Catell)
Slide 48 - Maximizing Shareholder Value (RBC)
Thanks, Gerry, for the update.
By this time, you have heard about all the aspects of KeySpan's strategy for
growing its businesses, as we seek to maximize shareholder value.
In executing our focused core business strategy, KeySpan clearly has diversified
growth opportunities in the gas and electric markets, and the Company is
committed to improving operational efficiency, while continuing to improve its
balance sheet and liquidity position.
As we continue to minimize business risks with prudent measures, we remain
dedicated to strong corporate governance, with an independent Board of Directors
with myself as the only Company representative.
In addition, KeySpan continues its commitment to the community it serves, and
its strong regulatory relationships involvement, and active involvement in
industry issues, in order to maximize its growth potential.
And KeySpan reiterates its strong commitment to its dividend - which, along with
our 5% to 6% earnings growth, provides an impressive, relatively low risk, total
return of 10 to 11% to our shareholders - as we continue to strive towards
maximizing shareholder value as the premier energy company in the Northeast.
Thank you.
And we would be glad to answer any of your questions at this time.
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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: December 8, 2003 By: /s/Gerald Luterman
------------------
Name: Gerald Luterman
Title: Executive Vice President and
Chief Financial Officer
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INDEX TO EXHIBITS
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Exhibit No. Exhibit Page
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99.1 Press Release dated December 8, 2003 53
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