Exhibit 99.2
Comments for Third Quarter 2004 Earnings Conference Call
Thursday, November 4, 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: 1267798
Replay will last through November 8, 2004
1. Introduction (G. Laskaris)
Note: Conference Call Host will read the Disclaimer.
- - Welcome to KeySpan's Third Quarter 2004 Earnings Conference Call.
- - I hope you had a chance to see Bob Catell on CNBC early this morning when
he announced third 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.
- - Bob 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 webcast 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. This morning I am pleased to announce that our Board
of Directors has approved a dividend increase of 4 cents per share, effective
February 2005, bringing our annual dividend to $1.82 per share. This builds upon
the Company's long history of paying a dividend to our shareholders. Our
dividend is an important part of the total return to our shareholders and
demonstrates our confidence in our core gas and electric businesses and belief
that our strong financial position and cash flow will support a sustainable
increase in the dividend.
In addition, as part of KeySpan's strategic review of the Energy Services
segment, the Company has decided to begin the process to dispose of a
significant portion of the companies involved in mechanical contracting in the
coming months. As a result of this decision and in accordance with GAAP, KeySpan
recorded a $90 million non-cash after-tax goodwill impairment charge in this
segment. We will monetize these businesses which do not contribute to the growth
of our core gas and electric businesses, and retain those businesses which
support our growth strategy, better positioning KeySpan in the future.
In terms of earnings, third quarter consolidated GAAP results were a loss of
$117 million or 73 cents per share, compared to net income of $11 million or 7
cents per share last year.
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Excluding the impact of the Energy Services impairment charge, as well as the
premiums paid for the redemption of long-term bonds, we had pro-forma
consolidated 3rd quarter results of $0.01 per share or $2.6 million, as compared
to $0.07 per share or $11.1 million for the same period last year, despite 9%
cooler weather.
Excluding the impact of these special items, and despite the cooler than normal
summer weather, I am pleased that KeySpan had solid results, which were in line
with consensus estimates. The performance for the quarter was driven by the
steady growth of our gas and electric businesses as we have remained focused on
executing our strategy of efficiently growing our core operations.
In our electric business, we benefited from the additional capacity of our new
Ravenswood unit and from financial hedges in the energy market during the summer
months. We are extremely pleased with the performance of the new highly
efficient Ravenswood unit which operated every day of the summer "on-peak
period" and reported an availability factor of 98% -- excellent results for a
brand new unit. The effectiveness of KeySpan's risk mitigation strategy was
exhibited this quarter as our program of hedging spark spreads helped to
minimize the impact of a cooler summer. We were able to mitigate risk while
achieving significant capacity payments - resulting in the electric business'
continued strong contribution to KeySpan's results.
The gas distribution segment continued to benefit from customer additions and
oil-to-gas conversions, which were similar to last year's third quarter results,
and are on target to reach our 2004 goal. Also contributing to the improvement
in the gas business was the rate increase in our New England territory achieved
last November, as well as effective expense management.
This quarter also represents the first full quarter where our ownership levels
in our non-core investments in Houston Exploration and KeySpan Canada have
changed to minority positions as we continue our commitment to exit our non-core
businesses.
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During the third quarter, we continued to strengthen our balance sheet with the
redemption of long term bonds, further enhancing our financial position and
reducing interest costs. We continue to remain focused on both capital and
expense efficiency in our businesses and expect core O&M expense levels for 2004
to remain flat compared to last year as a result of cost savings of
approximately $100 million.
Turning now to new projects, we continue to work to improve both the
infrastructure and gas supply to our region. We recently announced the
acquisition of a 21% interest in the Millennium Pipeline project, which will
bring new supplies of natural gas from the Midwest to New York and the
Northeast. This pipeline will transport up to 500,000 dekatherms of natural gas
a day from Corning to Ramapo, New York. This acquisition is part of our strategy
to invest in energy related assets that support our core businesses.
During the period, the Long Island Power Authority continued to evaluate its
options in terms of its future direction in the Long Island energy market, and
we testified at a LIPA hearing last month. One of the options that LIPA is
exploring is the privatization of its transmission and distribution system --
the system that we currently operate on LIPA's behalf under a long term
contract. We have provided input to LIPA to demonstrate that there may be
opportunities for KeySpan that could benefit both Long Island ratepayers and our
investors.
As you know, KeySpan has always been dedicated to strong corporate governance,
and this fact has been recognized by Institutional Shareholder Services, the
independent group which analyzes and ranks companies on corporate governance.
KeySpan is now ranked in the top 10 companies in the S&P 500, with a "corporate
governance quotient" ranking higher than 98.2% of the companies in this index -
a result of which I am very proud.
Another item of which I am proud, is "The New York Ten Award" given by The
Executive Council, which I accepted in honor of KeySpan's employees. This award
recognized ten leaders in the greater New York business community who have most
significantly impacted business innovation through technology. I am delighted
that KeySpan was acknowledged as being innovative and providing value to its
customers.
At this time, I will turn the call over to Bob Fani who will review the results
of 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 a seasonal operating income loss of $24
million for the third quarter, an improvement of 6% over last year. Year to date
results of approximately $391 million were up 5.3% over last year, benefiting
from new load growth and the rate increase in the New England service territory.
Net revenues for 2004 year-to-date increased by approximately $35 million,
benefiting from new customer additions, oil-to-gas conversions, and the New
England rate increase. The year-to-date contribution of this rate increase,
which became effective in the fourth quarter of 2003, was approximately $27
million. We achieved this growth in gas net revenues even though the weather for
the first nine months, measured in heating degree days, was approximately 9%
warmer than last year.
With regard to operations and maintenance expenses, year-to-date results were
down approximately $3 million from last year. In terms of our uncollectible
accounts receivable, bad debt as a percent of receivables continues to remain at
approximately 1%. However, in the 4th quarter we anticipate an increase in the
reserve for uncollectibles, due to higher gas costs.
As we all know, the price of gas and oil are both higher this year compared to
last year. Despite the challenge of higher gas prices, we continue to add new
customers. In the first nine months of the year, we completed more than 31,500
gas installations, which should generate approximately $33 million in new annual
gross profit margin. We expect to be at or near our aggressive annual goal of
$55 million in new gross profit margin by year-end. Specifically, year-to-date,
in New York City, we added $11 million in new gross profit margin, $10 million
on Long Island and $12 million in our New England service territory.
With regards to natural gas supply, KeySpan is prepared to meet the needs of its
customers this winter. We have been filling our gas storage since the end of the
last heating season - with total storage capability of over 80 Bcf -- and we
have reached our storage target levels of 100% in preparation for this heating
season. This is part of our gas hedging strategy to ensure the adequacy of gas
supply and lock in a portion of gas costs before the peak season. With gas
storage and other financial hedges, we are able to lock in prices for about
two-thirds of our customers' winter season gas needs. We expect our customers'
bills to increase this winter by approximately 10%.
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Now, turning to an update on regulatory matters... Under the Boston Gas
Performance Based Rate Plan, approved as part of last year's rate case, the
state regulators in Massachusetts approved in October a base rate increase of
$4.6 million as well as an increase of $7.9 million to recover pension and other
post-retirement costs.
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 to report that operating income for the electric segment is up 9%
over last year's third quarter, from $102 to $111 million. On a year-to-date
basis, operating income is up 17%. This is largely due to the contribution from
the new 250 MW unit at Ravenswood, which performed very reliably this summer,
and also from the financial hedges in place for the energy market this cooling
season. These hedges are part of KeySpan's risk mitigation strategy, and
contributed to locking in spark spreads despite weather, which was 9% cooler
than the third quarter last year.
Net revenues from the entire Ravenswood facility increased $14 million for the
third quarter, reflecting both higher energy margins of $6 million and greater
capacity revenues of $8 million.
The increase in energy margins reflects an increase in energy sales of 322,000
megawatt-hours or 17%, as compared to the third quarter of last year despite the
cooler weather. This increase in energy sales is primarily due to the operation
of the new extremely efficient 250 MW combined cycle generating plant at
Ravenswood. In addition, spark spreads we realized - the selling price of energy
less the cost of the fuel - remained essentially the same as last year. We were
able to realize flat spark spreads - despite the cooler weather and lower spark
spreads in the physical energy market -- due to our hedging strategy where we
hedge 50% of the summer output of Ravenswood. The gains associated with our
hedging program increased by approximately $13 million this quarter compared to
last year.
The increase in capacity revenues for the quarter reflects the impact of the
Ravenswood addition in the capacity-tight New York City market.
These results also demonstrate the effectiveness of KeySpan's risk mitigation
strategy, where the majority of our net revenues from our Long Island and
Ravenswood generation come from the capacity market, and our hedging program
reduces our exposure to the energy market.
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These increases in revenues were offset by an increase in operating expenses of
6% in the third quarter of 2004, due to higher O&M from an increase in
maintenance costs, as well as both higher depreciation and property taxes
recoverable from LIPA.
In addition to Ravenswood, the LIPA contracts performed at the same level as
last year, as they continue to contribute steadily to our results.
Turning now to the Energy Services segment, which is comprised of the operations
of Home Energy Services and Business Solutions. This segment reported a loss in
income from operations of $21 million for the quarter, as compared to a loss of
$16 million last year. These results were further impacted by the goodwill
impairment charge of $122 million in this segment. This segment has experienced
lower operating profits and cash flows than originally projected as a result of
an extremely competitive market and poor economic conditions in the Northeast
construction industry. As Bob discussed, as part of the strategic assessment, we
have decided to dispose of a significant portion of the companies involved in
mechanical contracting. We anticipate disposing of these mechanical contracting
companies in the coming months.
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.
In terms of our E&P operations, we reduced our ownership in Houston Exploration
from 55% down to a minority interest of 23.5% in the second quarter. Thus,
KeySpan's E&P operations currently consist of this minority ownership interest
in Houston, our continued ownership of the exploration and production joint
venture with Houston Exploration, and our 100% ownership interest in
Seneca-Upshur, which we recently acquired in the THX share exchange transaction.
The exploration and production operations reported income from operations of $12
million for the quarter, compared to $51 million in third quarter last year,
reflecting KeySpan's reduced ownership in Houston Exploration. To address gas
price volatility, Houston Exploration has hedged approximately 70% of its 2004
production volumes. In addition, Seneca Upshur has hedged approximately 85% of
gas production through 2007.
Our other energy investments in this segment include our remaining 17.4%
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.
We are proud to be able to announce to our shareholders an increase in our
annual dividend of 4 cents per share, effective February 1st, 2005, bringing our
total to $1.82 per share. Needless to say.... this sustainable increase is the
result of our strong financial position and cash flows. We recognize that the
dividend is an important part of the total return to our income-oriented
shareholders, enhanced by the government's tax cut.
In summary, this quarter the Company continued to strengthen its financial
position through its excellent operational performance and the reduction of its
outstanding long-term debt. This was accomplished, as Bob mentioned, despite the
reduction of ownership in both the E&P and Canadian operations to minority
positions. Please note ... these businesses will now be reported on the equity
method of accounting rather than on a consolidated basis, and this quarter
represents the first full quarter of equity accounting for both businesses.
Looking at our credit ratios, at the end of the third quarter, our
debt-to-total-capitalization ratio, as calculated under our credit facilities,
was 52.6%, virtually the same as the end of the second quarter. On a GAAP basis,
it was 56.8%.
As committed, a reduction of 400 basis points to this ratio resulted from the
$758 million bond redemption we completed in August. This, however, was offset
by the increase in commercial paper due to seasonal working capital needs,
primarily higher priced gas being put into storage, as well as the impairment
charge in the Energy Services segment presented earlier.
The redemption of these outstanding bonds is part of KeySpan's financial
strategy to further strengthen the balance sheet and reduce interest expense.
These bonds were largely issued in 2000 as part of our financing of the
acquisition of Eastern Enterprises. Cash interest savings as a result of this
redemption are estimated to be approximately $14 million for 2004 and $55
million for 2005.
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Regarding Energy Services, KeySpan management has decided to monetize certain
business within the Business Solutions division that were performing below par,
and in that context, conducted an interim goodwill evaluation of the carrying
value recorded in that segment. As a result of this decision and evaluation, we
recorded a non-cash goodwill impairment charge of $122 million pre-tax, or $90
million after-tax. As actual transactions are incurred, the difference between
book and actual proceeds realized will be reflected in our future results.
Continuing further, in terms of maintaining our financial flexibility, in
October we filed a shelf registration statement with the SEC, authorizing the
potential sale of up to $3 billion in debt securities, preferred and common
stock, and other securities in the future. Please note... that nothing is
pending at this time, except for the MEDS remarketing next year, which you are
all familiar with.
Now looking at free cash flow, we have continued to improve as committed to you
at the beginning of the year. On a consolidated basis for the first nine months,
our free cash flow from operations less capex increased by approximately $180
million to $220 million, with most of this increase associated with our core
operations; half of which is due to the completion of the construction of the
Ravenswood expansion. Please note that this does not include the gains from the
sales of our non-core assets.
Regarding our risk mitigation program and KeySpan's low risk profile... as you
know, our New York and Long Island gas territories have a weather normalization
adjustment that significantly offsets variations in firm net revenues due to
weather. Our New England territory, however, does not have this clause, and
therefore to cover this exposure we mitigate the effect of weather with the use
of a weather derivative for November through March 2005. Another example of risk
mitigation is in our electric business, where we have a low-risk revenue profile
with a high level of our net revenues coming from secure capacity payments and
we hedge our exposure in the energy market. This hedging strategy allowed us to
reduce the volatility of our net energy revenues this summer as we experienced
summer weather that was cooler than normal. From a financial perspective, both
these programs help to reduce the volatility of our net revenues and cash flows.
Looking at other financial statement items:
A dividend paid on November 1st of $0.445 per share. This current dividend level
is yielding our shareholders approximately 4.5%. This will be the last dividend
at this level. As Bob indicated, the annual dividend rate will be increased to
$1.82 per share, or $0.455 per share quarterly, beginning February 1, 2005.
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Finally, our earnings guidance for 2004 remains at $2.55 to $2.75 per share, as
we announced in December 2003, excluding special items. 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, mainly due to higher 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.
Our announcement to increase the dividend marks an important step of providing
added value to our shareholders. This increase will be supported by the strong
cash flow from the growth of our gas and electric businesses, which will
continue to improve our strong financial position. And in this quarter we showed
the effectiveness of KeySpan's overall risk mitigation strategy through our
proven hedging strategies in our electric businesses, which mitigated the effect
of the cooler summer weather.
As we head into the heating season, we are prepared to serve the gas needs of
our customers and remain focused on growing our business with additional gross
profit margin. While we have a GPM goal of $55 million to meet, we will be
adding load efficiently - keeping our focus on expenses and capital. These are
important components of our growth strategy which, in addition to our
sustainable dividend yield, will continue to deliver shareholder value.
Finally, I would like to give an update on the succession planning process at
KeySpan: Yesterday the Board of Directors approved an extension of my contract
as Chairman and CEO through July 2006. Also approved was the nomination of Bob
Fani to join the Board at its first meeting in 2005. Bob Fani and I have
developed a plan that enables me to focus on strategic development while he
continues his responsibility for the execution of the Company's strategy.
Together, we will continue to work to grow the Company, along with the rest of
our experienced management team here at KeySpan.
Thank you, and now I invite your questions.
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