April 11, 2006
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A INFORMATION
(Rule 14a-101)
Proxy Statement Pursuant to Section 14(a) of
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KeySpan Corporation
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The following letter from Robert B. Catell, Chairman and Chief Executive Officer
is being distributed to all KeySpan shareholders as part of the 2005 KeySpan
Annual Report. The Annual Report is being mailed on or about April 11, 2006.
Dear Fellow Shareholder,
For KeySpan, 2005 was a year defined by strong operational and financial
performance in an increasingly complex environment. It was this performance -
and indeed our sustained performance over the last eight years - that set the
stage for us to take a bold, exciting and decisive step into the future on
February 27, 2006.
On that date, KeySpan announced a definitive agreement with National Grid in
which National Grid will acquire all the outstanding shares of KeySpan for $7.3
billion in cash or $42 per share. While both companies' boards unanimously
approved the agreement, shareholder and certain other regulatory approvals are
necessary to achieve a targeted completion date of early 2007. Upon approval,
KeySpan will become a wholly owned subsidiary of National Grid. As a
shareholder, you will be receiving materials in the near future concerning this
transaction.
At a time when energy costs and industry consolidation are defining the future
of our industry, this agreement provides a premium return on your investment. It
provides the platform that will create a stronger company that can better
compete and win in a progressive, deregulated marketplace - one where size,
scale and balance are important strategic differentiators for long-term,
sustainable growth. Upon approval, KeySpan will join with National Grid to
establish the third largest energy delivery company in terms of customers in the
United States.
As part of this larger company, we'll have access to greater resources to better
tackle the tough issues - like high-priced, volatile energy markets and the
ability to meet customers' demand for energy through enhanced supply, natural
gas pipelines and infrastructure. And because National Grid's U.S. business is
focused on the Northeast, where our combined service areas are contiguous in
many places, there are many opportunities to achieve economies of scale and
reduce costs for customers.
In short, KeySpan will become an important part of one of the most efficient,
reliable and growth-focused energy delivery companies in the world.
BUILDING THE PLATFORM
KeySpan's excellent financial performance, core expertise in gas and electric
operations, and our strong record in customer and community service all played a
large role in why National Grid found KeySpan so valuable and attractive. And it
provides the foundation for what promises to be a fruitful relationship for the
new, combined company and its customers and shareholders.
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In 2005, we delivered solid core earnings per share of $2.37, in line with
analysts' estimates and an increase of 5 percent as compared to 2004. We reduced
our debt-to-capitalization ratio from more than 53 percent to less than 51
percent, further improving our balance sheet. And in December, your board
approved an annual dividend increase of four cents to $1.86 per share, the
second consecutive year we were able to raise the dividend. KeySpan shareholders
will continue to receive quarterly dividend payments until completion of the
transaction.
Despite the challenge of higher gas commodity prices, which resulted in
increased uncollectible accounts and less usage per customer, KeySpan's gas
business completed 46,000 gas installations in 2005, adding almost $50 million
in new gross profit margin. Net revenues were higher than 2004 by $48 million.
Overall, KeySpan realized another year of organic growth, which helped offset
the impact of higher costs.
The electric business also performed exceptionally. The Ravenswood facility and
all of the Long Island generating units were close to 100 percent available and
operating at top performance during the very hot summer. This combination of
availability and efficiency helped earn $342 million in operating income, 18
percent higher than 2004.
And our new, enhanced agreement with the Long Island Power Authority (LIPA) was
a case study in managing complexity. With no archetype to follow, we had to
produce our own working, flexible model for this unique relationship - one that
would provide benefit for shareholders, employees and Long Island consumers. We
worked in partnership with LIPA to diligently achieve these objectives and
create certainty in our Long Island electric operations through 2013. Now, we
look forward to bringing the benefits of our combined company to LIPA and all
its customers.
We bring these strengths - and more - to the table. Combining with National
Grid, of course, also gives us a myriad of benefits that we wouldn't have on our
own. It gives us the opportunity to lower risk and compete as a stronger player
in the midst of a changing marketplace. And it allows us to drive growth to new
heights, as part of a bigger company that will have the scale and resources
necessary to enhance customer service and grow in today's complex environment.
AN IDEAL COMBINATION
Beyond the numbers, it's also an excellent fit for both companies. Both National
Grid and KeySpan are dedicated to supply diversity and delivering energy in the
most efficient, cost-effective way to customers. Both look to achieve
outstanding operational performance in the most economical manner possible. Both
have a substantial commitment to the local communities we serve, the natural
environment we operate in, and the principles of sound fiscal and corporate
accountability. And both boast a core of excellent employees who are
technological leaders.
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AN EXCITING FUTURE
Clearly, this is a bold step for KeySpan. But one that I feel is both necessary
and evolutionary. And while employees may naturally feel some uncertainty, both
companies are committed to achieve any staff reductions sensitively - through
attrition and voluntary programs. Overall, I see much upside potential for our
excellent employees to develop their talents and expand their opportunities as
part of a global company.
Upon completion of the transaction, I will become executive chairman of National
Grid's U.S.A. operation for two years. I will also serve as deputy chairman on
National Grid's 14-member board in the United Kingdom, where one member of
KeySpan's current board will join me, ensuring a strong role in the combined
company. I especially look forward to working with Mike Jesanis, who will serve
as president and chief executive officer of the combined company, and Steve
Holliday, chief executive designate of National Grid plc. I have come to better
know these two talented and experienced men over the last several months - and I
assure you we share a common philosophy and vision.
I've enjoyed a highly satisfying 48 years in this business; the last eight have
been especially fulfilling. My thanks to our loyal shareholders who've invested
their hard-earned dollars with us, and to our employees, who've made our success
possible. I also want to thank KeySpan's board of directors; they were
instrumental in making KeySpan the company we are today - and making us part of
the company we will be tomorrow.
As I conclude this letter, I'm confident and excited about the future. The
KeySpan Corporation is poised to build on our successful history as a vital part
of a larger, stronger company that can lay claim to the title we've relentlessly
pursued since KeySpan was formed: the premier energy company in the Northeast.
/s/Robert B. Catell
Robert B. Catell
Chairman and Chief
Chairman and Chief Executive Officer
March 21, 2006
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Additional Information and Where to Find It
- -------------------------------------------
KeySpan intends to file with the Securities and Exchange Commission (the "SEC")
a proxy statement and other relevant documents in connection with the proposed
acquisition of KeySpan by National Grid. Investors and security holders of
KeySpan are advised to read the proxy statement and other relevant documents
when they become available, as they will contain important information about the
transaction. Investors and security holders may obtain a free copy of the proxy
statement and other documents filed by KeySpan with the SEC, when they become
available, at the SEC's web site at http:/www.sec.gov.
KeySpan and its directors, executive officers and other members of its
management and employees may be deemed to be participants in the solicitation of
proxies from its security holders in connection with the proposed acquisition.
Information concerning the interests of KeySpan's participants in the
solicitation is set forth in KeySpan's most recent proxy statement and Annual
Report on Form 10-K (filed with the SEC on March 30, 2005 and February 28, 2006,
respectively) and will be set forth in the proxy statement relating to the
acquisition when it becomes available.
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