Exhibit 99.2
Comments for 2003 Year End & Fourth Quarter Earnings Conference Call
Thursday, February 5, 2004
10:30AM (EST)
Dial In # 888-552-7850 International Dial in #: 706-645-9166
Conference ID #: 4885686
Replay #: 800-642-1687 International Replay #: 706-645-9291
Access Code: 7293456
Replay will last through February 10, 2004
1. Introduction (George Laskaris)
- - Welcome to KeySpan's 2003 Year End Earnings Conference Call.
- - As is our normal conference call format - Bob Catell will open and close
the call with comments on earnings and an update on recent developments.
Robert Fani will provide an operational update on our regulated and
unregulated operations. Gerry Luterman will follow with a discussion of our
financial results. And we will take questions at the end of the call. Also
with us today are Wally Parker, President of our Energy Delivery and
Customer Relationship Group and Steve Zelkowitz, President of our Energy
Assets and Supply Group, as well as other officers and members of our
Finance Team.
- - A copy of the Earnings Press Release is available on our web site if you
have not already received an email or fax copy.
- - An online web cast of this conference call is also available after the call
through our web site -- www.keyspanenergy.com.
And now, our Chairman and CEO, Bob Catell.
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Opening Comments (Robert Catell)
Thanks, George, and good morning. I am pleased to report that KeySpan achieved
solid results in 2003 as we continued to execute on our focused strategy of
growing our core businesses and monetizing our non-core assets. The main drivers
of our results, which exceeded our earnings guidance, were the strong
performance of the gas distribution segment as well as the continued
contribution from the exploration and production operations. We also
aggressively managed expenses and made great progress in the continued execution
of our financial strategy by further enhancing our balance sheet, financial
ratios and liquidity position.
Let me begin with a discussion of our solid earnings. We achieved an increase of
7% in consolidated earnings from continuing operations, less preferred stock
dividends, for the twelve months ended December 31, 2003, of $417.3 million, as
compared to $391.6 million for the same period last year. On an earnings per
share basis, we had year-end results of $2.64 for 2003, as compared to $2.77 for
2002. Current year results reflect the offering of 13.9 million shares of common
equity in January 2003, which considerably strengthened our financial position.
These year-end results exceeded the Company's 2003 earnings guidance of $2.45 to
$2.60 per share, with $2.16 per share coming from core operations and $0.48 per
share from exploration and production operations.
We had a similar increase of 7% in consolidated earnings for the fourth quarter
of 2003 of $156.9 million, as compared to $147.1 million for the same period in
2002. Earnings per share for the fourth quarter of 2003 were $0.98 per share, as
compared to $1.03 per share the year before.
In terms of our performance this year, operating income increased 11% compared
to 2002, driven by the results of our gas distribution and exploration and
production operations. Our gas distribution segment benefited from weather that
was 15% colder than in 2002, as well as from the continued conversions of
customers to natural gas. Through our successful marketing program, we added
more than 57,000 installations, which should add approximately $55 million in
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gross profit margin. We also are very pleased with the level of performance of
our gas distribution system during one of the coldest winters in history as well
the high level of reliability and availability provided by our electric
operations. Our E&P operations benefited from significantly higher realized gas
prices throughout the year.
Operating income in the fourth quarter was up 5% over the same period in 2002.
The main drivers of these results were the Electric Services segment, which
benefited from higher capacity revenues at Ravenswood and earnings related to
our LIPA service agreements, as well as our E&P operations which benefited from
the higher realized gas prices. Operating income in the gas distribution segment
was modestly lower due to the warmer weather experienced in the quarter compared
to the same period in 2002.
During 2003, we made significant progress on several fronts in the execution of
our long-term growth strategy:
- - We received a rate decision from the Massachusetts regulators in that
portion of our New England service territory served by the former Boston
Gas Company. The new rates became effective November 1, 2003, and reflect a
base rate increase of $28 million annually, true-ups on pension and OPEB
expenses including carrying costs, and a performance-based rate plan for up
to 10 years.
- - We managed our O&M expenses for our core businesses, excluding the impact
of pension and OPEBs, by implementing aggressive cost management measures
of $100 million, in order to keep 2003 O&M expenses flat with 2002.
- - Our new 250 MW expansion at our Ravenswood facility is currently in
start-up testing, and successfully achieved synchronization with the
electric grid in late December. This plant will add much-needed generation
to New York City, and commercial operation is expected late in the first
quarter and will contribute to 2004 earnings.
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- - We have Article X approvals for our proposed 250 MW generating facility in
Melville and for a similar plant in Brookhaven. With our joint venture
partner, American National Power, we submitted a response to LIPA to build
new generation on Long Island at both sites, and a decision is expected by
the end of the 1st Quarter of 2004.
- - We announced our intention to expand our LNG storage and receiving terminal
in Providence, Rhode Island where we are partnering with British Gas to
expand the facility to accept marine LNG deliveries by 2005 and triple
vaporization capability.
- - During the fourth quarter, we further monetized our non-core assets through
the sale of our 24.5% ownership interest in Phoenix Natural Gas, a gas
distribution company in Northern Ireland.
- - The proceeds from this Phoenix sale as well as the partial sale of our
interests in The Houston Exploration Company and KeySpan Canada earlier in
the year were used to reduce our debt levels. These sales, coupled with our
January 2003 equity issuance, further improved the Company's
debt-to-capitalization ratio by approximately 650 basis points.
The record cold weather we are having this January is a great start to the new
year, as our marketing campaign is geared up to add another $55 million in new
gross profit margin to our gas business in 2004.
And we are once again reaffirming our commitment to maintaining the dividend at
the current annual rate of $1.78 per share, currently yielding about 5%.
At this time, I will turn the discussion over to Bob Fani who will review our
operations.
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Operational Update - (Bob Fani)
Thank you, Bob, and good morning.
I would like to start the update on our operations with the gas distribution
business which serves the New York City, Long Island and New England regions
o Although 4th Quarter results were modestly lower than in the previous year,
due to weather that was 10% warmer than in 2002, I am happy to report the
operating income in the Gas Distribution segment exceeded 2002 results by
approximately $43 million, or 8% for the year. These results reflect the
2003 winter weather in the primary heating months of January to March,
which was 10% colder than normal and 35% colder than 2002. For the full
year, weather was approximately 15% colder than in 2002. In addition, these
results benefited the continued additions and conversions of customers to
natural gas. During the year, we continued our aggressive sales efforts and
completed more than 57,000 gas installations. Despite the challenge of
higher gas costs and sluggish economic conditions earlier in the year,
these additions are projected to add $55 million in new gross profit margin
- comprised of $15 million in new gross profit margin in New York City, $16
million on Long Island, and another $24 million in our New England
territory. Further, these operating income results include a gain of $15
million on the sale of 550 acres of property on Long Island.
o In terms of revenues and expenses for the year, net revenues in the gas
distribution segment increased by approximately $115 million or 7% as a
result of new added load and higher customer consumption from the colder
weather. These earnings benefits were offset by higher operating expenses
of approximately $86 million, primarily from higher pension and OPEB costs
and increased O&M associated with the colder weather.
o And as you all know, we experienced very cold weather in January 2004, and
we recently announced we broke sendout records in all three of our service
territories.
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o I would also like to briefly address two other important issues - gas
supply adequacy and customer pricing. In terms of supply, given our
comprehensive portfolio approach between pipeline contracts, storage and
LNG, we have adequate supply availability for this winter and beyond. In
fact our storage levels are currently ahead of plan for the winter season.
And because of this portfolio approach we expect customer heating bills for
the season in NY and LI to be in line with last year, assuming a normal
heating season for the remainder of the winter. In New England, considering
our recent rate increase, we are projecting that our customers will
experience a modest increase of 3%.
Moving to the Electric business...
o The Electric Services segment provides generation to the New York City and
Long Island load pockets and manages the Long Island Power Authority's
transmission and distribution system under long-term contracts. We reported
quarterly operating income of approximately $78 million, which was $16
million or 27% higher than the same period last year, benefiting from both
increased capacity revenues at our Ravenswood generating facility as well
as enhanced performance under the LIPA contracts. However, operating income
for the year was approximately $20 million lower than last year due to
cooler summer weather that resulted in lower energy revenues at Ravenswood,
plus higher operating costs.
o At our Ravenswood plant for the year, capacity revenues increased by $31.5
million, offset by a decrease in energy margins of $34.6 million.
o In terms of the energy margins at Ravenswood, we achieved average peak
spark spreads for the year of approximately $22 per megawatthour compared
to $25 per MWhr in 2002. The lower spark spreads were the result of the
cooler summer we experienced in the Northeast in 2003, which was 27% colder
than 2002, as well as revised New York ISO price mitigation measures. In
addition, peak energy volumes were down approximately 13% due to the
weather.
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o In terms of the capacity market for the year, we realized capacity payments
averaging of $100 per kilowatt-year, an increase of $15 per kW-yr over last
year. This increase is due to a revision to the New York ISO methodology
that was in place in as well as the implementation of the ISO capacity
demand curve and new bid caps in 2003.
o Operating costs were also higher due to increased property taxes, and other
operating costs.
And in terms of operational performance:
o We achieved outstanding performance for both our generating units and the
operation of the LIPA T&D system. Our units had availability of over 96%
during the critical summer months and we continue to operate LIPA's T&D
system at the highest levels in New York State.
o And in terms of 2004, our generating units have set new record winter peaks
and a record for total 24-hour demand for Long Island operations in the
last few weeks, due to the extremely cold weather we experienced in
January.
Moving now to Energy Services...
Which is primarily comprised of the operations of Home Energy Services and
Business Solutions. The Energy Services segment reported a loss for the fourth
quarter and for the year, primarily driven by the performance of the Business
Solutions division. Business Solutions was impacted by the softness in the
construction industry in the Northeast, which delayed the start-up of
engineering and construction projects and lowered margins. The Company has taken
a number of steps to improve the results in this segment going forward. In
addition, Business Solutions finished the year with a backlog of $537 million,
which is approximately in line with last year and represents contracts that have
been awarded to KeySpan. Also, we are starting to see increased bidding activity
which should provide for future opportunities.
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Turning to Energy Investments...
Which includes the Company's gas exploration and production operations --
primarily its 55% ownership of The Houston Exploration Company (NYSE: THX) -- as
well as pipeline and other investments. This segment realized a significant
increase in operating income for the fourth quarter and for the year as compared
to 2002, primarily due to the increase in gas commodity prices realized in the
Company's gas E&P operations. This segment reported operating income of $239
million for the year ended December 31, 2003 as compared to $143 million in
2002. Average realized gas prices for the fourth quarter increased by 13% from
$3.78 per Mcf in 2002 to $4.29 per Mcf in 2003, and for the year increased from
$3.32 per Mcf in `02 to $4.55 per Mcf.
In addition, E&P production totaled approximately 29.0 Bcfe in the quarter,
which was an increase of approximately 10% over the fourth quarter of 2002, and
approximately 109.2 Bcfe for the year, or an increase of 3% over 2002. To
address gas price volatility, consistent with our approach in the past, Houston
Exploration uses hedges for a large portion of its production. At year-end 2003,
THX had hedged approximately 70% of its estimated 2004 production at an
effective floor price of $4.26 per MMBtu and ceiling price of $5.65 per MMBtu.
Also, as Bob mentioned, we are committed to further monetizing our non-core
assets and we continue to seek opportunities which will benefit our
shareholders. With respect to THX, and in anticipation of your questions, we
still continue to evaluate the alternatives we have discussed in the past.
At this point, I will turn it over to Gerry for a more detailed financial review
of our results.
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Financial Update (Gerry Luterman)
Thanks, Bob, and good morning.
As Bob Catell mentioned, 2003 has been a successful year as we strengthened the
balance sheet and improved our financial position... through the continued
execution of our financial strategy. We have enhanced the Company's liquidity
position and improved its debt to capitalization ratio by approximately 650
basis points, from 64.6% to 58.3% at year-end, as calculated under the Company's
credit facility.
We accomplished this balance sheet improvement by starting the year with an
equity offering of 13.9 million shares. And in order to mitigate the dilutive
effect of $0.23 per share from the equity offering, we redeemed $447 million of
high-cost debt, reducing interest expense in 2003 by $15.6 million after-tax, or
$0.10 per share.
Augmenting this, we completed a series of asset sales throughout the year:
specifically, the reduction of our holdings in The Houston Exploration Company
which produced $79 million in proceeds; the sale of our interest in Taylor NGL
and the 39% monetization of KeySpan Canada using a royalty income trust which
yielded $120 million in net proceeds; and finally, the sale of our 24.5%
interest in Phoenix Natural Gas in Belfast, Northern Ireland, which generated
$95 million in cash proceeds. All in all, these transactions resulted in the
cash realization and debt reduction of $360 million.
Also during 2003, we took advantage of record low interest rates by executing
several successful financings, including an issuance of $128 million of
tax-exempt bonds in November which were used to permanently finance generation
projects on Long Island, and an issuance of $300 million of long-term taxable
bonds in April, both which improved our liquidity position. In addition, we
further enhanced our liquidity position by renewing our $1.3 billion corporate
credit facility, with $850 million, or two-thirds, extended for three years
until mid-2006, and the balance for one year.
You have heard from Bob Fani about the contributions of our business segments
which increased the Company's operating income in 2003 by $100 million or 11% as
compared to 2002. This reflects the absorption of $100 million in O&M expense
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increases in our core gas and electric businesses, excluding the impact of
pension and OPEBs, in order to keep 2003 O&M expenses flat with 2002 at $1.3
billion. Further, as we discussed in December, we are keeping 2004 O&M expenses
in line with 2003, by absorbing another $100 million of expense increases.
Let me now discuss some specifics of key financial matters for the quarter and
the year:
Turning first to liquidity:
Capital expenditures in 2003 were $1.01 billion as compared to $1.13 billion in
2002 - a decrease of approximately $120 million, which was driven primarily by
the completion of the two new generating units installed on Long Island in 2002.
This optimization of capital expenditures is one of the keys to our financial
and cash flow strategy.
With regards to accounting changes, specifically FASB's FIN 46, the Company has
included the Ravenswood lease on its balance sheet at the end of the fourth
quarter. As a result, a non-cash accounting charge of approximately $38 million,
or $0.23 per share, was recorded at year-end. It should be noted, that although
$388 million in assets and $412 million of debt will now be included on our
balance sheet, we always included it when assessing our capital structure.
Needless to say, its impact is included in our 2004 guidance.
In addition, KeySpan filed a change of tax accounting method with the IRS in the
3rd quarter which allowed us to write-off costs previously capitalized for
income tax purposes. As a result, in October 2003 we received a $192 million
refund from the IRS associated with prior year taxes. We anticipate receiving an
additional $40 million in early 2004, and will use both refunds to reduce
short-term debt levels by approximately 80 basis points.
With regards to our pension and other post-retirement expenses, the impact on
operating income as a result of this increase versus the prior year is
approximately $45 million in operating expenses, slightly below our guidance due
to the successful negotiation of the pension true-up in Boston earlier this
year. This is primarily due to the lower asset returns of 2002, higher health
care costs, and a decline in interest rates, but mitigated by the true-up
mechanisms at Boston Gas, KEDLI and for the LIPA agreements.
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Although our funding balance is currently in excess of ERISA minimum funding
requirements, our pension plans on an actuarial basis are currently underfunded
at approximately 82% as of 12/31/03. In order to optimize future funding
requirements, during 2003 we contributed approximately $125 million on a
voluntary basis to fund our pension and OPEB plans. This represents
approximately the same amount funded in 2002.
Turning to other matters:
For comparison purposes, our average common shares outstanding for the year
ended December 31, 2003 increased by approximately 12% from 141.3 million shares
in 2002 to 158.3 million shares in 2003, driven by the January 2003 equity
issuance and the funding of the employee benefit and dividend reinvestment
plans.
In conclusion, all in all, 2003 was a year in which KeySpan strengthened its
financial position and liquidity, putting into place a strong platform to
support the growth of our low risk business model.
We are once again reaffirming our commitment to maintaining the dividend at the
current annual rate of $1.78 per share, which is currently yielding
approximately 5%. On December 18th the Board declared a quarterly cash dividend
of $0.445 per share, payable February 1st to shareholders of record on January
14th.
With regards to earnings guidance for 2004, it remains at $2.55 to $2.75 per
share as we announced in December. Our guidance includes earnings from
continuing core operations of $2.20 to $2.30 per share, and earnings from E&P
operations of $0.35 to $0.45 per share.
I will now turn it back to Bob for some closing comments.
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5. Closing Comments (Robert Catell)
Thank you, Gerry, for the financial update.
We had a strong finish to 2003 as we continued to grow our core businesses and
exceeded our earnings guidance. We also executed on our financial strategy,
taking a number of steps that enhanced our balance sheet and improved our credit
position, including the monetization of some of our non-core assets.
And we are off to a robust start in 2004 as we remain committed to our strategy
of growing our core gas and electric businesses by 5% to 6% annually. With the
forecasted growth in our core businesses and asset sales, improved efficiency in
our operations, and our enhanced financial position, we expect 2004 to be yet
another year of significant growth in shareholder value as we look forward to
executing our strategy.
Thank you.
(G. Laskaris) - At this time, we would be happy to take your questions or follow
up with you after the call on more detailed questions.
(After Q&A) - Well, if there are no more questions, I would like to thank you
for your interest in KeySpan.
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