Exhibit 99.2
Comments for Second Quarter 2004 Earnings Conference Call
Thursday, August 5, 2004 @ 10:30 am
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: 8237080
Replay will last through August 10, 2004
1. Introduction (G. Laskaris)
Note: Conference Call Host will read the Disclaimer.
- - Welcome to KeySpan's Second Quarter 2004 Earnings Conference Call. I hope
you had a chance to see Bob Catell on CNBC early this morning when he
announced second quarter earnings results.
- - Please note that our 10-Q was filed this morning with the SEC.
- - A copy of the Earnings Press Release is available on our web site if you
have not already received an email or fax copy.
- - Our conference call format today is as follows:
- - Bob Catell, KeySpan's Chairman of the Board and CEO, will open and close
the call with comments on earnings and an update on recent developments.
- - Robert Fani, KeySpan's President and Chief Operating Officer, will provide
an operational update on our regulated and unregulated operations.
- - Gerry Luterman, Chief Financial Officer and Executive Vice President, 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.
- - 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.
Opening Comments (Bob Catell)
Thank you and good morning. I am pleased to report that KeySpan had a strong
second quarter, ahead of expectations, and significantly exceeding last year's
results. This performance builds upon our solid first quarter earnings and
continues to be driven by the strength of our core gas and electric businesses.
Our gas distribution business continues to grow as we add new customers, while
our electric services business is now cooling New York City and Long Island with
reliable power, helped by the addition to our Ravenswood generating facility.
We continue to execute on our commitment of reducing our ownership interests in
our non-core assets and made significant progress in the quarter. In regard to
KeySpan's transaction with Houston Exploration, I am pleased that we were able
to create a significant amount of additional value for shareholders of both
companies.
We further enhanced KeySpan's financial position as we improved our balance
sheet and liquidity position considerably. We also continue to remain focused on
both capital and expense efficiency throughout our business.
For KeySpan, the second quarter is a transition period as we move from the
winter heating season and prepare for the summer cooling season. Historically, a
significant portion of our profits are made in the 1st and the 4th quarters of
the year. Our strategic New York City and Long Island generation portfolio has
undergone its annual maintenance conditioning and is ready for what we hope will
be a long, hot summer season.
Let me begin with a discussion of our second quarter earnings: On a consolidated
basis for the second quarter, we reported results of $0.28 per share or $44
million, as compared to $0.17 per share or $27 million for the same period last
year. As we will discuss in more detail later, these 2004 results exclude the
impact of the second quarter gains associated with the successful non-core asset
transactions around Houston Exploration and KeySpan Canada. Also excluded was
the non-cash "ceiling test" writedown in KeySpan's E&P subsidiaries. Similarly,
results for the 2nd quarter of 2003 exclude the impact of the initial selldown
of KeySpan Canada.
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In terms of operating income, second quarter results increased $33 million or
24%, led by the solid performance of our gas distribution and electric services
businesses. The gas distribution segment benefited from customer additions and
continued oil to gas conversions, which remain strong throughout our service
territories, as well as from the rate increase in our New England territory. The
electric business benefited from higher net energy margins, resulting, in part,
from the 250 MW addition at our Ravenswood generating facility and warmer
weather during the quarter. In addition, our energy investments segment, led by
Houston Exploration, benefited from both higher natural gas production volumes
and realized gas prices. And finally, we narrowed the loss in Energy Services
for the quarter compared to last year -- an improvement, but still not
acceptable.
In terms of our non-core assets, we reduced our ownership interest in Houston
Exploration from 55% to 23.5% through a transaction where we exchanged 10.8
million shares of our Houston Exploration stock for 100% of Seneca Upshur,
previously a subsidiary of Houston Exploration. The transaction was valued at
$449 million, and represented an important step in restructuring our interest in
Houston Exploration. We intend to grow Seneca Upshur through additional
investments in energy-related assets that support our core businesses and are
consistent with our financial objectives and geographic and risk profile.
We also successfully sold a second tranche of our holdings in KeySpan Canada
through the income trust structure which was initiated last year, further
reducing our ownership level from 61% to 25%. These transactions are consistent
with our commitments regarding our non-core assets.
We have also made progress on several other projects:
- - Our new Ravenswood generating unit achieved commercial operation in May,
and we secured financing with a leveraged lease agreement of approximately
$385 million, which Gerry will describe in greater detail.
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- - The proposed upgrade of our LNG facility in Rhode Island to receive marine
deliveries and to triple its vaporization capability continues to move
forward. At the end of April, we filed our application with FERC for
operation in winter 2006. We are pleased with the high level of support we
continue to receive for this project.
- - We have also made progress on the proposed Islander East pipeline project,
in which we are in partnership with Duke Energy to bring a new supply of
gas through Connecticut to Long Island. In May, the U.S. Department of
Commerce granted the coastal zone management authorization that we were
seeking. We are continuing to work through the process to receive the Clean
Water Act authorization, which is the final permit required for
construction of this critical Northeast supply source.
All of these steps are further evidence of the effective execution of our
strategy.
At this time, I will turn the call over to Bob Fani who will review our
operations.
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Operational Update (Bob Fani)
Thanks, Bob, and good morning.
Looking at the operational highlights of our businesses, let's start with the
gas distribution business which serves our New York City, Long Island and New
England regions.
Our Gas Distribution segment reported operating income of $35 million for the
second quarter, an increase of 11% over the same period last year. Year to date
results of approximately $415 million were up 4% over last year. These results
benefited from new load growth and the rate increase in the New England service
territory.
Net revenues for 2004 year-to-date increased by approximately $32 million,
benefiting from new customer additions, oil-to-gas conversions, and the New
England rate increase. The contribution of this rate increase, which became
effective last November, was $20.7 million. We achieved this growth even though
the weather for the first six months was approximately 7% warmer than last year.
The increase in net revenues for the same six months was partially offset by an
increase in operating expenses of $14 million or 3%, primarily due to higher
employee benefit costs, specifically pension and other postretirement benefits
and employee severance costs.
During the quarter we continued our aggressive sales program despite the
challenge of higher gas prices.
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In the first half of the year we have completed more than 20,000 gas
installations, which result in approximately $20 million in new annual gross
profit margin. We have established an aggressive annual goal of $55 million in
new gross profit margin and expect to be at or near that target despite the high
gas price environment. Specifically, in New York City, we added $6.5 million in
new gross profit margin, $7.2 million on Long Island and $6.7 million in our New
England service territory.
In preparation for the next heating season, we are currently above plan levels
with regards to storage levels for natural gas.
Moving now to the Electric Business...which 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... I am pleased
with the results of the electric segment which reported operating income of
approximately $68 million for the quarter, an increase of $16 million or 30%. On
a year to date basis, operating income is up 25%. These positive results were
due to the addition of the 250 MW facility at Ravenswood, which began commercial
operation in May, and warmer weather.
Net revenues from Ravenswood increased $25 million for the second quarter
reflecting both higher energy margins of $17.5 million and greater capacity
revenues of $7.5 million.
The increase in energy margins reflects an increase in energy sales of 652,000
Mwhrs or 65%, as well as an almost doubling of spark spreads compared to last
year. The increase in energy sales is primarily due to the operation of the new
250 MW combined cycle generating plant at the Ravenswood facility, as well as
the 70% warmer weather in the second quarter compared to last year, but only
4.5% warmer than normal. Although this weather impact appears to be a
substantial increase, we must remember it occurred in the shoulder months of the
cooling season, and that last year was cooler than normal.
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The increase in capacity revenues for both the quarter and year-to-date reflects
both the Ravenswood addition as well as the revision to the NY ISO's capacity
market procurement design which became effective May 2003. Under this new
methodology, seasonal generator price caps were established where the price caps
in the summer are higher than those in the winter. Since this revised capacity
market did not take place until late in the second quarter of 2003, Ravenswood's
effective price cap for the quarter was higher than the effective price cap in
the second quarter of 2003.
These increases in revenue were offset by a modest increase in operating
expenses of 2% in the second quarter of 2004 due to higher property taxes
associated with the LIPA contracts, and partially offset by the O&M reduction of
recording the Ravenswood facility lease on the balance sheet as debt at the
close of last year.
Adding to Ravenswood's results, our performance under our contracts with LIPA
continues as planned. Speaking of LIPA, we have entered into a settlement
agreement which was filed with the Federal Energy Regulatory Commission, on
revised electric generation rates. The settlement agreement reflects rates that
will produce a return on equity of 9.5% and a revenue decrease of approximately
$4 million or 1% in 2004 as compared to rates charged in 2003. This settlement
provides our shareholders with stable earnings for the next five years, and the
revenue reduction will have a minimal impact on earnings, since it is virtually
all related to rate allowances for true-up items such as property taxes, pension
and OPEBs. This filing is subject to FERC's approval.
During the second quarter, we completed the annual maintenance preparation on
our generation portfolio, and the plants are available for the demands of summer
and its air conditioning load. Weather, however, for the month of July has been
cooler than normal.
In addition, in the forward market at Ravenswood, we have hedges in place for
approximately 50% of our on-peak summer output, consistent with our hedging
strategy goal. These hedges are at values in line with our internal forecast.
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Turning now to the Energy Services segment, which is comprised of the operations
of Home Energy Services and Business Solutions. This segment reported an
operating loss of $4.9 million for the quarter, an improvement of $5.5 million
over the prior year. Business Solutions reported an improved quarter, largely
due to slightly better business conditions, improved project profit margins and
cost reduction measures. Total backlog increased 35% to $635 million compared to
$469 million last year, due to recent project awards and the BR+A acquisition
completed in the third quarter of 2003. These results are below expectations. We
are still undergoing significant evaluation and review of this segment and the
performance of its components, and will take appropriate action.
And, moving to our Energy Investments segment...which includes the Company's gas
exploration and production operations as well as our portfolio of other
energy-related investments.
It should be noted that KeySpan's E&P operations now consist of our 23.5%
ownership interest in Houston Exploration, our continued ownership of the
exploration and production joint venture with Houston Exploration, and our 100%
ownership interest in the newly acquired Seneca-Upshur.
The exploration and production operations reported income from operations of $60
million, an increase of approximately $9 million in the second quarter, due to
an 18% increase in both production volumes and average realized gas prices.
These positive results were offset by the non-cash ceiling test charge of $48.2
million in KeySpan's remaining exploration and production subsidiaries to
recognize the reduced valuation of its proved reserves. Since Houston
Exploration is now accounted for on the equity method of accounting, its
reserves were not included in the ceiling test.
To address gas price volatility, Houston Exploration has hedged for the year
approximately 70% of its 2004 production volumes.
Our other energy investments in this segment include our remaining 25% ownership
interest in KeySpan Canada, our 20% interest in the Iroquois pipeline, our LNG
facility in Rhode Island and our 50% interest in the Northern Ireland Premier
pipeline. Operating income for these investments declined by $4 million, as
expected, reflecting our reduced ownership interest in KeySpan Canada.
I will now turn it over to Gerry for a financial review of our results for the
quarter and year-to-date.
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Earnings Results (Gerry Luterman)
Thanks, Bob, and good morning.
This quarter, the Company continued to strengthen its financial position through
its excellent operational performance, the reduction of its ownership interest
in non-core businesses, as well as certain other financial accomplishments.
First, let's discuss the changes to our non-core assets:
During the quarter, we sold an additional 36% of our ownership interest in the
KeySpan Canada gas processing business through the Canadian Income Fund set up
last year, reducing our holdings from 61% to 25%. This deal closed on April 1st
at a 26% premium to the first tranche and yielded net proceeds of approximately
$135 million and an after-tax gain of $10 million or $0.06 per share. In July,
the KeySpan Facilities Income Fund acquired the midstream asset of Chevron
Canada Midstream Inc, through the issuance of additional shares in the Income
Trust, further diluting KeySpan's ownership of KeySpan Canada to its current
level of 17.4%
This was followed in June 2004, when we exchanged 10.8 million of our shares of
Houston Exploration common stock for all the shares of Seneca-Upshur Petroleum,
Inc. a wholly-owned subsidiary of THX. Seneca Upshur's assets consist of
long-lived Appalachian producing assets with reserves of 50 Bcf, valued at $60
million and $389 million in cash. This transaction reduced our interest in THX
from 55% to 23.5% and resulted in a gain of $150 million. Due to the reduction
of ownership in both the Company's exploration & production and Canadian
operations, these businesses will now be reported on the equity method of
accounting rather than on a consolidated basis. Due to this change, a $44
million deferred tax provision was recorded in connection with KeySpan's
remaining investment in Houston Exploration. Including this deferred tax
provision, KeySpan's recorded a gain of $106 million or $0.66 per share.
Building on this, we continued to strengthen the balance sheet and financial
position by lowering debt levels. At the end of the second quarter, our
debt-to-total-capitalization ratio, as calculated by our credit facilities,
improved to 52.7%, as compared to 56.1% at March 30, 2004, an improvement of
over 300 basis points. On a GAAP basis, the debt to total cap ratio was 56.7% at
the end of the quarter, as compared to 59.8% at the end of the first quarter. I
would like to further note that we are in the process of undertaking a bond
redemption that should close this month, which will bring our debt-to-cap ratio
down by 400 basis points.
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In terms of free cash flow - an important measure of our financial performance -
we continue to see improvements. On a consolidated basis for the first half of
the year, our free cash flow from operations less capex increased by
approximately $229 million to approximately $373 million in 2004, compared to
$144 million last year.... with $205 million of this increase associated with
our core operations. This was primarily due to higher cash earnings and higher
cash flow from exploration and production activities.
We have decreased capital expenditures by $14 million or 3% in the first half of
2004 as compared to 2003. Excluding our E&P operations, capex decreased by
approximately $10 million, to $287 million in 2004 year-to-date from $296
million in 2003 for the first half of the year.
In terms of making significant progress on other quarterly financial items:
- - As Bob mentioned, we have closed on the financing of the new Ravenswood
generating unit, by replacing outstanding commercial paper with the
proceeds from a sale/leaseback transaction. We closed on both the debt and
equity components associated with the lease at the end of May. This
transaction was accounted for as an operating lease in accordance with SFAS
98 with an initial 36-year term. This structure is very efficient, with a
4.5% financing cost to the corporation. As part of this financing, we
recorded a pre-tax gain of $12.6 million, or $0.05 per share after tax, on
the settlement of the Treasury lock associated with this transaction.
- - During the quarter, KeySpan closed on a credit facility of $640 million for
5 years. This facility replaced an existing $450 million, 1-year facility
which expired in June, and allowed the Company to reduce bank commitments
by $190 million in its existing 3-year, $850 million facility due in June
2006. As a result, the Company has $660 million committed for 2 years, and
another $640 million committed for 5 years. The new credit facility is
provided by a syndicate of 16 banks and was oversubscribed. We are very
pleased with the reception we received, significantly reducing liquidity
risk associated with the commercial paper program.
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- - As noted earlier, we will be redeeming approximately $760 million of
outstanding bonds this month, as part of KeySpan's financial strategy to
further strengthen the balance sheet. These bonds are largely the $700
million medium-term notes maturing in November next year, and associated
with the Eastern Enterprise transaction consummated in 2000.
Looking at other financial statement items:
We are once again reaffirming our commitment to our dividend of $1.78 per share,
currently yielding to our shareholders approximately 5%. In this context, our
Board declared a quarterly cash dividend of $0.445 per share, paid on August 1st
to shareholders of record as of July 16th.
Finally, our earnings guidance for 2004 remains at $2.55 to $2.75 per share, as
we announced in December 2003, excluding the special items for E&P and the
Canadian assets. Earnings from continuing core operations are forecasted to be
in the range of $2.20 to $2.30 per share. Despite our reduced ownership in
Houston Exploration, earnings from exploration and production operations are
forecasted in the range of $0.35 to $0.45 per share, due to both higher
production volumes and realized gas prices.
I will now turn it back to Bob for some closing comments.
Closing Comments (Bob Catell)
Thank you, Gerry, for the financial update.
With half of the year behind us, we continue to focus on growing our core
businesses in the Northeast. We are adding new customers through our gas
conversion program throughout our service areas, and the new addition to
Ravenswood is contributing to earnings. We will continue to strengthen our
financial position and maintain our `A' quality credit rating, supported by
strong operational performance of our segments and the disposition of our
non-core businesses. The reinvestment and growth in our core businesses, in
addition to our 5% dividend yield, will continue to provide excellent value to
our shareholders.
Thank you.
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