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): February 1, 2006
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 cost 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 structures; our ability to successfully reduce our
cost structures; implementation of new accounting standards; the degree to which
the 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 filed by us with
the Securities and Exchange Commission.
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Item 1.01 Entry into a Material Definitive Agreement
On December 14, 2005, KeySpan Corporation ("KeySpan" or the "Company")
filed a Form 8-K under Item 8.01 - Other Events disclosing that KeySpan and the
Long Island Power Authority ("LIPA") had announced their intention to (i)
extend, amend and restate the Management Services Agreement, dated as of June
26, 1997 (the "MSA"), pursuant to which KeySpan currently operates and maintains
the electric transmission and distribution system ("T&D System") owned by LIPA
on Long Island; (ii) enter into a new Option and Purchase and Sale Agreement
(the "Option Agreement"), to replace the Generation Purchase Rights Agreement
(as amended, the "GPRA"), pursuant to which LIPA had the option, through
December 15, 2005, to effectively acquire substantially all of the electric
generating facilities owned by KeySpan on Long Island; (iii) enter into a
Settlement Agreement (the "Settlement Agreement") resolving outstanding issues
between the parties ((i), (ii) and (iii) are collectively referred to herein as
the "2006 LIPA Agreements"). Additionally, it was announced that in the event
LIPA exercises its rights under the Option Agreement then the Company and LIPA
will enter into amendments to the Power Supply Agreement ("PSA"), pursuant to
which KeySpan supplies LIPA with electric generating capacity, energy
conservation and ancillary services from our Long Island generating units and
the Energy Management Agreement ("EMA"), pursuant to which KeySpan manages all
aspects of the fuel supply for our Long Island generating facilities as well as
all aspects of the capacity and energy owned by or under contract to LIPA
In our December 14, 2005 Form 8-K, we indicated that the 2006 Agreements
were conditioned upon, among other things, the successful negotiation and
execution of definitive documentation and the receipt of all required
governmental approvals. The parties have completed such negotiations and
definitive agreements were fully executed on February 1, 2006. These agreements
will become effective as of January 1, 2006, following receipt of all necessary
governmental approvals, which are pending. The effectiveness of each of the 2006
LIPA Agreements is conditioned upon all of the 2006 LIPA Agreements becoming
effective.
Below is a summary of each of the 2006 LIPA Agreements:
1. Management Services Agreement
-----------------------------
The MSA is between the Long Island Lighting Company ("LILCO") d/b/a LIPA
and KeySpan Electric Services LLC. The amended and restated MSA provides a five
year extension of the term through December 31, 2013. Under the MSA, KeySpan
will continue to perform day-to-day operation and maintenance services and
capital improvements on LIPA's T&D System, including among other functions, T&D
facility operations, customer service, meter reading, planning, engineering, and
construction, all in accordance with prudent utility practice and policies and
procedures adopted by LIPA.
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In place of the previous compensation structure (whereby KeySpan was
reimbursed for budgeted costs, and earned a management fee and certain
performance and cost-based incentives), KeySpan's compensation for managing the
T&D System under the MSA consists of two components: a minimum compensation
component of $224 million per year and a variable component based on electric
sales. The $224 million component will remain unchanged for three years and then
increase annually by 1.7%, plus inflation. The variable component, which will
comprise no more than 20% of KeySpan's compensation, is based on electric sales
on Long Island exceeding a base amount of 16,558 gigawatt hours, increasing by
1.7% in each year. Above that level, KeySpan will receive approximately 1.34
cents per kilowatt hour for the first contract year, 1.29 cents per kilowatt
hour in the second contract year (plus an annual inflation adjustment), 1.24
cents per kilowatt hour in the third contract year (plus an annual inflation
adjustment), with the per kilowatt hour rate thereafter adjusted annually by
inflation. Subject to certain limitations, KeySpan will be able to retain all
operational efficiencies realized during the term of the MSA.
LIPA will continue to reimburse KeySpan for certain expenditures incurred
in connection with the operation and maintenance of the T&D System, and other
payments made on behalf of LIPA, including: real property and other T&D System
taxes, return postage, capital construction expenditures and storm costs.
The MSA provides for a number of performance metrics measuring various
aspects of KeySpan's performance in the operations and customer service areas.
Poor performance in any metric may subject KeySpan to financial and other
non-cost penalties (such financial penalties not to exceed $7 million in the
aggregate for all performance metrics in any contract year). Subject to certain
limitations, superior performance in certain metrics can be used to offset
underperformance in other metrics. Consistent failure to meet threshold
performance levels for two metrics, System Average Interruption Duration Index
(two out of three consecutive years) and Customer Satisfaction Index (three
consecutive years), will constitute an event of default under the MSA.
Should LIPA sell the T&D System to a private entity during the term of the
MSA, LIPA shall have the right to terminate the MSA, provided that LIPA will be
required to pay KeySpan's reasonable transition costs and a termination fee of
(a) $28 million if the termination date occurs on or before December 31, 2009,
and (b) $20 million if the termination date occurs after December 31, 2009.
A copy of the MSA is attached hereto as Exhibit 10.1 and incorporated
herein by reference. The foregoing description of the MSA is qualified in its
entirety by reference to such Exhibit.
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2. Option Agreement
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The Option Agreement is between KeySpan Generation LLC (as seller) and Long
LILCO d/b/a LIPA (as buyer). The Option Agreement grants LIPA the option during
the period January 1, 2006 to December 31, 2006 to purchase only KeySpan's Far
Rockaway and/or E.F. Barrett Generating Stations (and certain related assets) at
a price equal to the net book value of each facility. The Option Agreement
replaces the GPRA, the expiration of which has been stayed pending effectiveness
of the Option Agreement and the MSA. In the event such agreements do not become
effective by reason of failure to secure requisite regulatory approvals, the
GPRA will be reinstated for a period of 90 days. If LIPA were to exercise the
option and purchase one or both of the generation facilities (i) LIPA and
KeySpan will enter into an operation and maintenance agreement, pursuant to
which KeySpan will continue to operate these facilities for a fixed management
fee plus reimbursement for certain costs; and (ii) the existing PSA and EMA
between LIPA and KeySpan will be amended to reflect that the purchased
generating facilities would no longer be covered by those agreements. It is
anticipated that the fees received pursuant to the operation and maintenance
agreement will offset the reduction in the operation and maintenance expense
recovery component of the PSA and the reduction in fees under the EMA.
It is also contemplated that to the extent any emission credits
attributable to the acquired facilities are not needed to satisfy the operating
requirements of such plants, such excess emissions credits will be pooled and
applied pro rata to satisfy the operating requirements of KeySpan's generating
facilities subject to the PSA. Thereafter, any remaining credits attributable to
the acquired plants may be sold by LIPA, who shall retain 100% of the net
proceeds.
A copy of the Option Agreement and related exhibits are attached hereto as
Exhibit 10.2 and incorporated herein by reference. The foregoing description of
the Option Agreement is qualified in its entirety by reference to such Exhibit.
3. Settlement Agreement
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The Settlement Agreement is among KeySpan, KeySpan Generation LLC, KeySpan
Electric Services LLC, KeySpan Energy Trading Services LLC and. The Settlement
Agreement resolves issues that have existed between the parties relating to
various agreements, including the MSA, EMA, GPRA, PSA and the Merger Agreement
between KeySpan and LIPA.
Pursuant to the terms of the Settlement Agreement, KeySpan and LIPA agreed
to resolve issues that have existed between the parties relating to the various
agreements effective in June 1998. In addition to the resolution of these
matters, KeySpan's entitlement to utilize LILCO's available tax credits and
other tax attributes will increase from approximately $50 million to
approximately $200 million. These credits and attributes may be used to satisfy
KeySpan's previously incurred indemnity obligation to LIPA for any federal
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income tax liability that may result from the settlement of a pending IRS audit
for LILCO's tax year ended March 31, 1999. In recognition of these items, as
well as for the modification and extension of the MSA and the elimination of the
GPRA, upon effectiveness of the Settlement Agreement KeySpan will record a
contractual asset in the amount of approximately $160 million, of which
approximately $110 million will be attributed to the right to utilize such
additional credits and attributes and approximately $50 million will be
amortized over the eight year term of the MSA. In order to compensate LIPA for
the foregoing, KeySpan will pay LIPA $69 million in cash and will settle certain
accounts receivable in the amount of approximately $90 million due from LIPA. A
copy of the Settlement Agreement is attached hereto as Exhibit 10.3 and
incorporated herein by reference. The foregoing description of this Settlement
Agreement is qualified in its entirety by reference to such Exhibit.
As previously indicated, the effectiveness of the 2006 LIPA Agreements are
conditioned upon the receipt of all governmental approvals which are pending.
The effectiveness of each of the 2006 LIPA Agreements is also conditioned upon
all of the 2006 LIPA Agreements becoming effective.
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Item 9.01. Financial Statements and Exhibits.
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Exhibits
10.1 Management Services Agreement dated as of January 1, 2006
between the Long Island Lighting Company ("LILCO") d/b/a
LIPA and KeySpan Electric Services LLC
10.2 Option Agreement dated as of January 1, 2006 between the
Long Island Lighting Company ("LILCO") d/b/a LIPA and
KeySpan Electric Services LLC
10.3 Settlement Agreement dated as of January 1, 2006 among
KeySpan, KeySpan Generation LLC, KeySpan Electric Services
LLC, KeySpan Energy Trading Services LLC and LIPA
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INDEX TO EXHIBITS
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Exhibit No. Exhibit
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10.1 Management Services Agreement dated as of January 1, 2006
between the Long Island Lighting Company ("LILCO") d/b/a
LIPA and KeySpan Electric Services LLC
10.2 Option Agreement dated as of January 1, 2006 between the
Long Island Lighting Company ("LILCO") d/b/a LIPA and
KeySpan Electric Services LLC
10.3 Settlement Agreement dated as of January 1, 2006 among
KeySpan, KeySpan Generation LLC, KeySpan Electric Services
LLC, KeySpan Energy Trading Services LLC and LIPA
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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: February 7, 2006 By: /s/ John J. Bishar, Jr.
-----------------------
Name: John J. Bishar, Jr.
Title: Executive Vice President, General
Counsel, Chief Governance Officer
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