Exhibit 99.2
Comments for Third Quarter 2005 Earnings Conference Call
Friday, November 4, 2005
10:30AM (EST)
Dial In #: 888-552-7850 International Dial In #: 706-645-9166
Note: Conference Call Host will read the Disclaimer.
Introduction (G. Laskaris)
- - Welcome to KeySpan's Third Quarter 2005 Earnings Conference Call.
- - Our Earnings Press Release is available on the KeySpan web site, if you
have not already received an email or fax copy.
- - Our 10-Q was also filed with the SEC this morning. - The conference call
format today is as follows:
- - Bob Catell, KeySpan's Chairman of the Board and Chief Executive Officer,
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.
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Strategic Overview (R.B. Catell)
Thank you and good morning. I am pleased to report that KeySpan reported strong
results for the third quarter, beating consensus expectations. KeySpan's
quarterly results were driven by the strong performance of the electric services
business, as well as lower financing costs. The performance of the electric
business provided balance to the seasonal nature of the gas distribution
business, which continues to grow and add new customers. And the significant
interest expense savings achieved during the quarter reflects the strength of
KeySpan's financial position, resulting from lower debt levels.
Let me begin with a discussion of our core earnings for the third quarter, which
were $0.13 per share, compared to $0.03 per share last year. Year-to-date 2005
core earnings increased 8% to $1.67 per share, compared to $1.55 per share last
year. These results exclude non-core and special items. We completely divested
our non-core assets during 2004, which included our holdings in Houston
Exploration and KeySpan Canada.
Operating income from core operations in the third quarter of 2005 was $103
million, an increase of 13% over last year. Year-to-date operating income
results were $645 million, up $28 million or 5% over 2004. Again, these results
exclude last year's contribution from Houston Exploration and KeySpan Canada and
special items.
The main driver of these results was the excellent summer performance of the
electric services segment, which benefited from excellent reliability, weather
that was 50% warmer than last year, the added capacity of the 250 megawatt
expansion at the New York City Ravenswood generating station, as well as the
fuel switching capability of our generating units.
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The gas distribution segment recorded a seasonal operating loss due to higher
uncollectibles, resulting from the higher gas prices our industry is
experiencing. However, I am pleased to note that even with these higher gas
prices, we continued to grow through new customer additions and oil-to-gas
conversions in all of our territories, having completed over 28,000
installations year-to-date, which will add $31 million in new gross profit
margin. This puts us well on our way to meet and possibly exceed our goal of $47
million for this year.
We are seeing an improvement in our Energy Services segment, as these companies
were almost break-even for the quarter, due to enhanced profit margins and lower
expenses.
Now I would like to provide an update on several other items:
KeySpan continues to see benefits from several items in the new Energy Bill,
which went into effect last quarter. KeySpan worked very hard to get this
much-needed bill passed:
- - With the projected high energy bills this winter, the increased spending
limit for the Low-Income Home Energy Assistance Program to $5 billion will
allow KeySpan to encourage more low-income customers to apply for
assistance to help with payments of their energy bills, which will also
help to mitigate our uncollectibles.
- - I am very pleased with the favorable decision from the Massachusetts
Commission, where we continue to pursue recovery of uncollectibles. Bob
Fani will give more details on this item.
- - On the gas supply side, our Islander East pipeline project is designed to
provide additional gas to Long Island from Connecticut. It has FERC
approval, but is being held up by a water permit from the Connecticut DEP.
The Energy Bill allowed KeySpan to challenge Connecticut's denial of the
required Clean Water Act permit in Federal Court. We filed our appeal in
Federal Court in August and remain positive that we will ultimately prevail
and build this much needed pipeline in the next year in an environmentally
safe manner. The State of Connecticut has recently filed a motion to
challenge the constitutionality of the provisions of the Energy Act
providing this appeal right and has also filed a motion to dismiss the
Islander East appeal.
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- - In addition, the Bill provides for an expedited approval process in
siting LNG import terminals by the FERC, which should be helpful in
introducing more of this much needed supply source. Regarding our LNG
facility in Providence, Rhode Island, KeySpan applied for a rehearing
of the FERC decision denying our proposal to upgrade this facility to
accommodate marine deliveries. For this upcoming winter, we will
continue to rely on this existing 2 billion-cubic-feet, peak-shaving
storage facility, as an essential part of our New England distribution
system.
These new projects, as well as our Millennium pipeline project, which will bring
additional gas supplies from western Canada and the mid-continent, are needed to
increase supplies in the Northeast and help put downward pressure on natural gas
prices in the region. We are hopeful that the hurricanes experienced this past
summer have highlighted the need for diversity in gas supply sources, which
should help move these projects forward.
We also look for other energy investments, including transmission and
generation, pipelines, LNG and storage, to continue to grow KeySpan. In terms of
generation, we await the New York Power Authority's award of a bid for 500
megawatts in New York City. As you know, the strength of our balance sheet will
allow for the continued growth of KeySpan through new investments.
We also continue to work closely with the Long Island Power Authority, as it
reviews a number of strategic options regarding its future direction, including
the privatization of its transmission and distribution system, its option to
purchase KeySpan's Long Island generation, or the continuation of operations as
they exist today. LIPA's generation purchase option will expire on December
15th. We continue to provide excellent and reliable service to LIPA to serve
their customers as we operate under our long-term contracts.
At this time, I will turn the discussion over to Bob Fani who will review our
operations.
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Operational Update - (R.J. Fani)
Thank you, Bob, and good morning. Looking at the operational highlights of our
business, I would like to start with the Electric Services business... the main
driver for the results of this quarter. As you know, this part of the business
provides generation to the New York City and Long Island load pockets and
manages the transmission and distribution system in Long Island under long-term
contracts with LIPA.
I am pleased to report that operating income for the electric segment for the
third quarter is up 35% over last year, from $111 million to $150 million. This
is the result of an increase in electric net revenues of $38 million or 12% over
last year.
Driving our performance for the quarter was the Ravenswood Generating Station.
Net revenues from Ravenswood were up by $39 million or 31% for the third
quarter, reflecting an increase in energy margins of $34 million as well as
increased capacity revenues of $5 million.
The increase in energy margins for the quarter reflects a 56% increase in
realized spark spreads, as well as an 8% increase in the level of megawatt-hours
sold into the New York City market. We believe these favorable results were
driven by the warm summer weather, which was 50% warmer than last year, as well
as the pricing differential between oil and gas fuels used in our Ravenswood
plant. Due to the dual fuel nature of the Ravenswood Station, our three steam
units had the ability to burn residual fuel oil which enjoyed a significant
price advantage over natural gas during the latter part of the summer. The two
hurricanes experienced this past summer contributed to the widening gap between
oil and gas prices.
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On a year-to-date basis, operating income increased $40 million or 18% to $266
million. This was primarily due to the increased energy margins of approximately
$41 million at Ravenswood as well as higher capacity revenues of $15 million due
to the addition of the Ravenswood Expansion. These revenues were offset by the
lease expenses reflecting the financing of the new unit.
In addition to Ravenswood, the results for the LIPA contracts were at the same
level as last year, as they continue to contribute steadily to our results.
Before I leave the Electric Services segment, I'd like to discuss the New York
City capacity market and its outlook for next year. There has been a
considerable amount of discussion concerning the addition of approximately 1,000
megawatts of new generation in New York City planned for 2006 and its impact on
capacity revenues. First, I'd like to say that we believe that overall New York
City represents the best capacity market in the country due to its load pocket
nature and local reliability rules, and we expect it to remain a great market in
the future. However, as we all know, it is difficult to add capacity in
increments to just meet load growth, so there has been some unevenness in
capacity additions in the past and going forward.
Although new generation is projected for New York City next year, there are many
factors that will affect the amount and price of capacity sold into the market.
These include the timing of these new additions, transmission constraints into
New York City, plant outages, and a possible change in reliability rules. In
addition, remember that the New York City load is growing by between 150 to 200
megawatts per year which serves to offset some of the excess capacity.
There are several issues that the New York Independent System Operator and FERC
are currently evaluating in terms of a change in reliability rules. First, some
upstate generators believe that the New York City 80% in-city reliability
requirement is too low, which results in upstate companies subsidizing the
downstate ones. This issue is currently before FERC.
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In addition, changes on the Con Edison transmission system appear to have
adversely impacted import capability into the city. The ISO and FERC are
reviewing these issues and in the next several months will be making some
decisions. We have been analyzing these issues and will address them when we
release our guidance for 2006.
Moving now to the Gas Distribution business which serves our New York City, Long
Island and New England regions...
As anticipated, this segment reported a seasonal operating loss of $46 million
for the third quarter, compared to a loss of $24 million last year. Year-to-date
results of approximately $377 million are lower than last year by $14 million.
Although net revenues increased for the year, these were offset by higher
operating expenses.
o The year-to-date results reflect an increase in net gas revenues of $23
million or 2%, which benefited primarily from new customer additions and
oil-to-gas conversions in all of our service territories, as well as higher
net margins in our large volume heating market. This net revenue increase
was attributed predominantly to the following items:
o A $12 million increase resulting from customer additions and
conversions to natural gas, net of attrition, conservation and the
impact of price elasticity;
o an increase of $17 million in our large volume heating market,
reflecting primarily higher pricing; o an increase of $3.5 million as
a result of the Performance Based Rate Plan for our New England
business that was approved in 2003;
o which were partially offset by $9 million in lower regulatory
incentives, and the loss of $6 million due to leap year 2004.
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This increase in net revenues for the first nine months was offset by an
increase in operating expenses of $38 million or 5%, primarily associated with a
higher provision of uncollectible accounts of $20 million year-to-date -
including $8 million for the quarter - resulting from significantly higher gas
costs and recent collection experience. In addition, property taxes increased $7
million due to the expiration of a 5 year property tax agreement in New York
City.
While we have taken a number of steps to enhance our collection activity, the
higher gas prices we are experiencing have adversely impacted our
uncollectibles. Although we are allowed to pass through the cost of gas to our
customers in all our service territories, we are concerned with high natural gas
prices and the impact on our customers' ability to pay their bills. To mitigate
this, we have programs in place such as balanced billing, deferred payment, and
the Low-Income Home Energy Assistance Program, which we worked to expand through
the Energy Policy Act of 2005.
Related to uncollectibles, on November 1, 2005, the Massachusetts Commission
authorized recovery of under-recovered gas related bad debt expenses for the
period January 1, 2004-December 31, 2004 through the gas cost adjustment factor
and established a mechanism for future recovery of such costs. KeySpan is in the
process of analyzing the impact of this order.
We also anticipate having enough gas supply to meet the gas load demand in our
service territories for this coming heating season. Our gas storage was 100%
full at the start of the winter heating season.
With our strategy of having this gas in storage and the financial derivatives
the company has in place for a major portion of its flowing pipeline gas, we
have hedged the price of approximately two-thirds of the gas supply needed to
serve our customers this heating season, which will help limit bill increases to
our customers to approximately 30-40% over last year. Our hedging program will
mitigate the price impact on our customers' bills this heating season by
approximately $500 million, based on gas prices at September 30th.
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Although we are starting to see a somewhat higher impact from price elasticity
and an increase in bad debt expense, the impact is lower than what is being seen
in our industry due to our hedging and customer programs. We continue to analyze
this, and are encouraged that the higher cost of gas has not slowed our
conversion program since we are currently on track to meet or exceed our 2005
gross profit margin goal of $47 million.
In fact, during the first nine months of 2005, we completed more than 28,000 gas
installations, that will add approximately $31 million in new gross profit
margin. This is comprised of $10 million in New York City, $9 million on Long
Island, and an additional $12 million in our New England territory.
Turning to Energy Investments...this segment includes the Company's Seneca
Upshur exploration and production operations in the Appalachians, as well as
other domestic energy related investments. This segment reported operating
income for the first nine months of 2005 of $17 million -- $3 million higher
than in 2004, excluding last year's results of $95 million associated with our
ownership interest in Houston Exploration and KeySpan Canada, and the E&P
ceiling test write-down.
These results benefited primarily from lower overhead costs, the addition of
Seneca Upshur, which was acquired in June 2004, and higher earnings from our 20%
investment in the Iroquois pipeline.
Moving now to Energy Services... which provides energy related services and
products to homes and businesses, and is primarily comprised of Home Energy
Services and two engineering companies. This segment reported improved
performance with an operating loss of $1 million for the third quarter, compared
to a loss of $5 million last year. For the year to date period, performance also
improved from a loss of $28 million to a loss of $7 million. This improvement is
attributable to increased profitability and contract sales, lower operating
costs at Home Energy Services and lower administrative costs. With regards to
the two engineering companies, contracted backlog has increased by 7%, and Home
Energy Services is ahead of target for its business drivers. These results
exclude the 2004 goodwill impairment charge associated with continuing
operations.
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I will now turn it over to Gerry for a financial review of the Company's
results.
Financial Update (G. Luterman)
Thanks, Bob, and good morning. Bringing this all together... KeySpan has
achieved a strong quarter with GAAP results of $0.13 per share compared to a
loss of $0.19 last year. On a "core apples-to-apples" basis, which excludes last
year's non-core and special items, such as earnings from Houston Exploration and
Canada, debt redemption premiums, etc., we reported results of $0.13 per share
compared to $0.03 last year - clearly a significant improvement. As you already
heard, our core Electric business was the driver of these results, augmented by
strong expense management.
The accomplishments this quarter, indeed for the year so far, continue to be
backed by the strength of our financial position. We have a focused financial
strategy and continue to execute on it. Our financial strength and liquidity
support our `A' quality credit ratings and continued access to low-cost working
capital through our commercial paper program.
Through our strategy of reducing outstanding debt levels, KeySpan has
accomplished ongoing interest expense savings. For the third quarter, interest
expense decreased $21 million or 24% from last year, and for year-to-date, we
accomplished a decrease of $61 million or 23%. KeySpan's long-term debt level is
currently $3.9 billion, down from $4.4 billion at year-end 2004 - a reduction of
approximately $500 million or 11%.
Our debt-to-total-capitalization ratio remains strong at 49.1% at quarter-end,
down from 57.4% at the end of last year. We continue to project our year-end
capitalization to be approximately 49%. This provides an excellent platform for
investments to continue to grow this Company.
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In terms of accessing the capital markets, KeySpan successfully closed this week
on the issuance of $137 million tax-exempt bonds in two transactions for the gas
utility in New York. $82 million was priced at a fixed rate of 4.7%, and the
balance was variable rate. Proceeds will be used on December 1st to retire
callable outstanding notes with an average coupon rate of 6.3%. We are also
planning to convert $50 million of 5.6% fixed-rate tax-exempt bonds to variable
rate on December 1st. These three transactions are expected to produce pre-tax
interest savings of approximately $4 million next year.
In terms of capital expenditures, we saw a decrease of $187 million or 34%
year-to-date. The gas distribution segment decreased by $24 million, due to more
efficient repair and maintenance processes and increased recovery of costs
associated with municipal construction projects. In addition, the sales and
deconsolidation of Houston Exploration and KeySpan Canada last year contributed
to this decline.
Turning now to our dividend, KeySpan made a quarterly payment to its
shareholders on November 1st at the increased level of $0.455 per share. KeySpan
continues to be committed to the dividend, which today stands at over 5%.
In conclusion, our strong year-to-date core results of $1.67 versus $1.55 per
share last year - up 8% -- continues to confirm that the Company is on track to
hit its 2005 earnings goal.
I will now turn it back to Bob for some closing comments.
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Closing Comments (R.B. Catell)
Thank you, Gerry, for the financial update. We remain focused on running our
low-risk businesses with the most efficient use of our expense and capital
resources. I am pleased to state that our year-to-date performance puts the
Company in a position to accomplish our goals for 2005, and that we are
reconfirming our earnings guidance of $2.30 to $2.40 per share. Our strategy
continues to successfully produce growth in our core businesses, and our
commitment to the dividend gives shareholders a solid yield of 5% in addition to
the earnings growth of 4 to 5%.
Please note that KeySpan will be announcing our 2006 earnings guidance in
January at our Annual Update to the Financial Community.
Thank you, and we would now be glad to take your questions.
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