Exhibit 99.2
Comments for First Quarter 2006 Earnings Conference Call
Thursday, May 4, 2006
10:30AM (EST)
Dial In #: 888-552-7850 International Dial In #: 706-645-9166
Introduction (G. Laskaris)
Note: Conference Call Host will read the Disclaimer.
- - Welcome to KeySpan's First Quarter 2006 Earnings Conference Call.
- - A copy of our Earnings Press Release is available on our web site if you
have not already received an email or fax copy. Our 10-Q was also filed
with the SEC this morning.
- - 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.
Strategic Overview (R.B. Catell)
Thank you, George, and good morning. As you know, our major news of the quarter
is our agreement to be acquired by National Grid for $42 a share in an all cash
transaction. This transaction will deliver significant value to shareholders,
customers and employees of both companies. KeySpan will become part of one of
the largest and most efficient energy companies in the world.
As Mike Jesanis, the US CEO of National Grid, and I recently reported at a
hearing on Long Island, this transaction will provide consumers with lower
energy delivery costs, and give us the scale necessary to achieve additional
fuel cost savings. We will provide improved customer service through advanced,
efficient technologies and invest in important infrastructure to ensure reliable
service. In addition it will allow the larger company to become a stronger
advocate for new supply and energy infrastructure and ultimately achieve
additional growth in a complex, competitive environment.
I am pleased with the progress we have made to date in preparing to join two
fine companies and look forward to successfully completing the transaction.
Integration teams have been formed and the process is underway. We filed our
proxy last Friday and are currently working on our Federal and State regulatory
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filings with a goal of filing them the next two months. The major approvals
required include the New York and New Hampshire state agencies, the Federal
Energy Regulatory Commission, the Justice Department for Hart-Scott-Rodino and
of course the shareholders of both companies. We are hoping for an early 2007
closing of the transaction.
In terms of the quarter, earnings were $1.19 per share for 2006, as compared to
$1.45 per share for 2005. These results reflect the impact from the very warm
weather in this quarter on earnings from our gas distribution operations.
Weather was actually 15% warmer than last year. In addition, they reflect the
$0.10 per share dilutive impact of the issuance of 12.1 million shares
associated with the conversion of the MEDs Equity Units in May 2005. Reinforcing
the balanced nature of our portfolio, the strong results of the Electric
Services segment partially mitigated the effect of the warm weather.
I am pleased, however to report, that in spite of one of the warmest first
quarters on record, we were able to grow our gas business with over 9600
installations and $9 million in new gross profit margin. We are on track to meet
our gross profit margin goal of almost $50 million this year in a very cost
efficient manner.
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We continued to maintain our strong financial position and in February, we made
the first quarterly dividend payment based on our increased annual dividend of
$1.86 per share. This dividend is supported by the strong cash flows from our
businesses.
In terms of operating income, results were $389 million in the first quarter,
compared to $439 million for the same quarter last year. The gas segment results
were impacted by the extremely warm weather and the high cost of natural gas.
The electric segment income grew as it benefited from higher realized spark
spreads. In addition, the energy services segment had a lower loss year over
year due to improved profitability.
And now an update on other items:
- - I previously reported that KeySpan and LIPA had reached agreement on the
extension of the Management Services Agreement, modification of the
Generation Purchase Rights Agreement and the resolution of certain
outstanding items. KeySpan and LIPA entered into these modified agreements,
subject to approval by governmental authorities. Following the announcement
of the proposed acquisition, LIPA, National Grid and KeySpan have engaged
in discussions concerning the impact of the transaction on LIPA's
operations.
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- - With respect to our new investments and projects, we continue to move
through the regulatory approval process for our new growth pipeline
projects, Millennium and Islander East, which will further diversify gas
supply in the Northeast and help stabilize prices, an issue that is
currently being highlighted with the high cost of gas. We expect these
projects to come on line in the 2007-2008 timeframe.
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 for the first quarter, I would like to
start with the gas distribution business, which serves our New York City, Long
Island and New England regions.
The fundamentals of the gas segment remained strong, with continued growth in
new gross profit margin in all our territories and our focus on expense
management. For the quarter, however, segment results were impacted by the
extremely warm weather and substantially high gas prices.
For this segment, our first quarter operating income results were $336 million
as compared to $392 million for the same period last year.
Despite the impact from the warm weather and very high gas prices, which are
passed through to our customers, the Company did achieve strong results from
organic growth across all its territories. During the quarter, the Company added
approximately 9,600 gas installations, adding approximately $9 million in new
gross profit margin from new gas equipment additions and conversions, which
exceeded our goal.
In terms of revenues and expenses for the quarter;
Net revenues for the quarter were $46 million lower compared to last year. This
was primarily due to the weather which was 15% warmer while gas prices which
were 32% higher than last year. This combination resulted in lower usage per
customer. The lower net revenue increase includes the following items:
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o $49 million lower firm gas revenues, which was partially offset by
o $7.5 million in new load growth additions from oil to gas conversions and
new construction.
o These results include the positive impact of $25 million from the weather
normalization adjustments for our New York and Long Island service
territories, however it did not fully mitigate the effect of the extremely
warm weather.
Comparative operating income was further impacted by an increase in operating
expenses of $9.5 million, primarily due to an increase of $4.7 million from a
higher provision for uncollectibles due to high gas costs as well as from
employee benefit related costs. Depreciation charges increased by approximately
$2 million, reflecting the continued investments in the gas system.
As a result of our supply planning and storage injection prior to the heating
season, we were able to mitigate the increase in our customer's bills to
approximately 20% for the heating season compared to last year.
Moving to the Electric Services 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.
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I am pleased to report operating income of $65 million for the electric segment,
which is up $14 million or 27% over last year.
These results primarily reflect an increase in electric net revenues of $24
million at the Ravenswood plant, benefiting from higher energy margins of $38
million offset by lower capacity revenues of $14 million.
The increase in energy margins benefited from the dual fuel nature of the
Ravenswood plant and our continued hedging strategy of locking in attractive
energy prices in the New York City energy market. The decrease in capacity
revenues resulted from new generating capacity installed in New York City.
Partially offsetting this increase in net revenues was an increase in operating
expenses of $9 million, primarily associated with higher depreciation and
property tax costs.
Consistent with our low risk business model, we expect to lock in spark spreads
for 50% of the energy sales at the Ravenswood plant for the summer months.
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In our January presentation to the investment community we indicated that we
expected the in-city reliability requirement to increase to 82%, starting with
the 2006 summer period. For a short time, the New York ISO approved an increase
to 83% from 80%. In March, however, the Operating Committee of the ISO reversed
its decision and returned the requirement to 80%, based on the discovery of data
inconsistencies in the reliability computer model. KeySpan appealed the decision
to the ISO claiming the revised analysis was hastily prepared and historical
factors justified the use of 83%. The ISO denied KeySpan's appeal and the New
York City reliability requirement remains at 80%.
In addition, earlier in the year, we reported that KeySpan entered into a
contract to financially purchase 1,800 MW of capacity in the New York City
market for three years, paying a fixed price of $7.57 per KW-month, settled
monthly.
We were presented with the opportunity to enter into this transaction by our
counterparty, which was seeking fixed pricing for a three year period. We are
comfortable that average annual capacity prices in the City will settle at a
level above $7.57 per month. I am pleased to report that the results of the
first monthly summer auction are in and the settled price is $12.71 per
kW-month.
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Our generating plants are undergoing their normal maintenance and will be ready
by the summer period for the cooling season.
Turning to Energy Investments...
.... which is comprised of the Company's complementary investments in natural gas
pipelines, storage, and other energy-related projects, as well as our Seneca
Upshur gas exploration and production operations in West Virginia. This segment
reported operating income of $3 million as compared to $6 million for the same
period in 2005. The difference is due, primarily to the reduction in earnings
from our interest in the Premier pipeline company in Ireland, which was sold in
the first quarter of 2005.
And in terms of our proposed pipeline projects, further oral arguments were
heard in April on the constitutional and jurisdictional issues in the Islander
East case. We are hopeful of a positive outcome in this case, possibly as early
as this month. Also, during the quarter, KeySpan increased it ownership interest
in the Millenium Pipeline project from 21% to 26.25%. This pipeline is currently
75% sold, including KeySpan's commitment for 150,000 DTH per day and is
currently under review at FERC.
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Moving now to Energy Services...
which provides energy related services and products to homes and businesses in
the New York City and Boston metropolitan areas. I am pleased with the
performance of this segment. Energy Services met Company expectations, achieving
a minor seasonal operating loss of $0.4 million for the first quarter, compared
to a loss of $2.8 million for the same period last year. This enhanced
performance is due to higher profits in the Home Energy Services Business as
well as lower expenses.
At this point, I will turn it over to Gerry for a more detailed financial review
of our results.
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Financial Update (G. Luterman)
Thanks, Bob, and good morning. The company continued to maintain its strong
financial position consistent with the ongoing execution of our financial
strategy.
Despite the current rising interest rate environment, I am pleased that we were
able to achieve a 6% lower interest expense compared to the first quarter last
year. This is a direct result of the success of KeySpan's refinancing program
over the past several years where we have refinanced some our higher cost debt
at lower rates. This, combined with our interest rate risk mitigation policy,
where 85% of our debt is now fixed, has limited our exposure to rising interest
rates - a nice position to be in.
In addition, we anticipate refinancing two tax exempt bonds for our New York
City utility during the coming summer in order to further reduce our interest
expense. They are $153.5 million 5.5% due January 1, 2021 and $100 million 6.95%
due July 1, 2026.
I am very pleased with the condition of the balance sheet. Our long term debt
stands at $3.9 billion, resulting in a debt to total capitalization of
approximately 49%. All in all, this financial strength translates into our `A'
quality credit ratings providing us with liquidity and excellent access to the
capital markets.
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Turning now to cash flow and capital expenditures.
I am happy to report that cash flow from operations increased approximately $160
million compared to the same period last year, primarily reflecting favorable
working capital requirements. Our gas commodity hedging program which was
designed to reduce price volatility mitigated the need for higher working
capital. Capital expenditures for the quarter are similar to last year, once the
timing impact of certain gas main and service work is removed, and are on target
to achieve our year end goal. This reflects on our continued focus on capital
efficiency - primarily in the gas distribution business.
And lastly, but maybe most importantly, the Company increased its dividend for
the second year in a row, now paying $1.86 per share to its shareholders
starting on February 1st with a yield of around 4.5%. The quarterly dividend of
$0.465 per share is payable to shareholders with a record date April 12th.
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 are well positioned for the upcoming cooling season, with our hedging
strategy underway and our well maintained generating units prepared to provide
reliable power to the tight New York City and Long Island load pockets. We will
work diligently to receive all the regulatory approvals to complete our
transaction with National Grid and create a large, strong, competitive company
for the future.
Thank you, and we would now be glad to take your questions.
(After Q&A)
We look forward to seeing you at the American Gas Association Financial Forum
next week. Thank you for your interest in KeySpan.
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