Exhibit 99.2
Comments for Third Quarter 2006 Earnings Conference Call
Friday, November 3, 2006
10:30AM (EST)
Dial In #: 800-289-0518 International Dial In #: 913-981-5542
Introduction (G. Laskaris)
Note: Conference Call Host will read the Disclaimer.
- - Welcome to KeySpan's Third 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.
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Strategic Overview (R.B. Catell)
Thank you, George, and good morning. Before I address the financial results, I
would like to provide an update on the progress of our transaction with National
Grid. On October 20th, I am pleased to report we received approval on our
transaction from the Federal Energy Regulatory Commission or FERC. FERC found
our transaction to be consistent with all their rules and policies. In addition
FERC addressed the ownership of generation indicating that "The combination of
the electric generation resources is not likely to harm competition in any
relevant energy market." This order is another step in the process of gaining
regulatory approval for this transaction.
I reported last quarter that we filed with the New York State Public Service
Commission on July 20th, seeking approval of the merger along with a ten year
rate plan. On October 2nd, National Grid and KeySpan filed supplemental
testimony and revised tariffs with the Commission to further support the joint
petition filed in July. These filings set forth more fully the needs of
KeySpan's New York gas utilities for stand alone rate relief absent the
transaction. These revised tariffs will allow the Commission to evaluate our New
York City and Long Island utilities' need for rate relief on a stand alone
basis, so that they can be compared to the benefits of the merger and rate plan
filed in July. The proposed merger will provide gas customers in New York with
over $500 million in savings. Rates would need to increase significantly without
this transaction.
In addition, we filed for approval of the transaction with the New Hampshire
Public Utility Commission. We also filed for and received approval for a change
of control of KeySpan Communications Corp., which operates in New Jersey, with
the State of New Jersey Board of Public Utilities.
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On August 17th our shareholders overwhelmingly approved the transaction.
We have now received all the necessary federal approvals for this transaction.
In the coming months, we will continue to process our applications with the
state commissions in order to receive their approvals for this transaction. We
look forward to closing on the transaction in the middle of 2007.
In terms of the third quarter results, we reported strong earnings of $0.29 per
share for 2006, as compared to $0.13 per share for 2005. These favorable results
are primarily driven by lower operating and maintenance costs. Year-to-date,
earnings were higher at $1.76 per share compared to $1.62 per share. These
results reflect higher operating income in our electric and energy services
segments as well as lower financing and tax expenses resulting from tax
settlements with New York City and the IRS received in the second quarter.
I am pleased to report that despite a warm heating season this year and high gas
prices, we continued to organically grow our gas business as our growth model
for adding new gas customers has continued to perform well. Bob Fani will
discuss the results shortly.
We also continued to maintain our strong financial position which is reflected
by a debt to total capitalization ratio of 48% and strong cash flows. This
financial strength helps support our dividend, which was increased to $1.86 per
share this year.
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And now an update on other items:
- - With respect to our new investments and projects, we continued to make
progress in the regulatory approval process for our new pipeline projects,
Millennium and Islander East, which will further diversify gas supply in
the Northeast and should help stabilize prices.
- - Our Islander East project, which will carry additional gas from Connecticut
to Long Island, recently received a favorable ruling from the Federal
Appeals Court. This project has received all necessary federal approvals
and is being held up by the denial of a water quality permit by the
Connecticut Department of Environmental Protection, or DEP. The Court
ruling found that the Connecticut DEP denial of the water quality
certificate was not supported by the record and was directed to provide
support for their position or approve the permit. We will continue our
efforts to build this project to meet the growing demand for natural gas.
- - In terms of our Millenium project, which will transport gas from upstate to
downstate New York, FERC issued its Final Supplemental Environmental Impact
Statement on October 13th. We expect the Commission to rule on the
certificate application for the project in the near future.
- - Both of these projects are expected in service in 2008.
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- - And we are pleased that the Massachusetts regulators approved an increase
of approximately $9 million for Boston service territory under our current
rate agreement as well as an additional $12 million to cover the gas
commodity cost related to bad debt. Both of these increases were effective
November 1st.
At this time, I will turn the discussion over to Bob Fani who will review our
operations.
Operational Update - (R.J. Fani) Thank you, Bob, and good morning.
In terms of operating income, results for the third quarter increased by 32% to
$136 million, compared to $103 million last year. The primary driver of these
results was lower operating expenses in the gas distribution segment. Lower
electric results reflect lower earnings at Ravenswood due to increased
competition, partially offset by higher LIPA revenues and the gain on the
financial capacity swap which became effective in the second quarter.
Year-to-date operating income results decreased $12 million to $632 million
compared to $645 million in 2005, driven predominantly by the extremely warm
weather experienced in the first quarter which impacted our gas distribution
segment and lower results in our Energy Investments segment. This was partially
offset by the electric segment, which benefited from the gain on the capacity
swap. I am also pleased to report that Energy Services benefited from increased
profitability for both quarter and year-to- date periods.
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Looking now at the details behind the individual business segments, I would like
to start with the gas distribution business, which as you know serves our New
York City, Long Island and New England regions.
As anticipated, this segment reported a normal seasonal operating loss of
approximately $11 million for the third quarter, an improvement of $35 million
as compared to the loss of $46 million last year. The quarter benefited from
lower operating expenses of $31 million, primarily from a lower provision for
uncollectibles of $16 million, and a lower depreciation expense of $11 million,
primarily from a one time adjustment.
Year-to-date results of $365 million were $12 million or 3% lower than last
year. These results continue to reflect the extremely warm weather experienced
in our primary heating season, which was 15% warmer than last year as well as
the impact of a high gas price environment.
However, I am pleased to note that even with the impact of weather and higher
gas prices, we continued to achieve strong organic growth as we added customers
in all of our service territories. For the first nine months of the year we
completed approximately 30,000 gas installations, that will add approximately
$30 million in new gross profit margin from new gas equipment additions and
conversions. This puts us on target to achieve our year end goal of
approximately $50 million in new gross profit margin.
This continued growth reflects the strong fundamentals of the gas business with
opportunities across all our service territories.
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In terms of the details of revenues and expenses for the nine month period; Net
revenues were $29 million lower compared to last year, due to the warm first
quarter and gas prices which were 20% higher than last year, resulting in lower
usage per customer. The lower net revenue includes the following items:
o $44 million lower firm gas revenues, as the favorable impact of load growth
additions was more than offset by declining usage per customer,
o which was partially offset by $15 million in higher net revenues in our
large volume heating and interruptible markets.
o These results include the positive impact of $25 million from the weather
normalization adjustments for our New York and Long Island service
territories.
The decrease in net revenues was partially offset by a decrease in operating
expenses of $17 million, primarily associated with a lower provision for
uncollectibles of $14 million (resulting from the Boston Gas order received last
year which allows us to recover the gas cost component of bad debt expense) and
a lower depreciation expense of $8 million, primarily from a one time
adjustment.
We 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 heating season. As in the past, with our strategy of
having this gas in storage and the financial derivatives we have in place for a
major portion of our pipeline gas, we have hedged the price of approximately two
thirds of our gas supply, which should help limit the bill increases to our
customers to less than 5%, based on a normal winter.
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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.
For this segment, third quarter operating income decreased by $5 million to $144
million, compared to $149 million last year. These results primarily reflect the
anticipated decrease in net revenues of $50 million from the Ravenswood
generating plant as a result of lower energy and capacity margins, primarily due
to additional capacity installed in New York City in 2006. Capacity revenues
were down $27 million and energy margins were lower by $23 million. The decrease
in energy margins reflects a 10% decrease in realized spark spreads, which
includes our hedging activity, and a 27% decrease in the level of energy sold
due to increased competition and weather, which was 25% cooler than last year.
In addition, operating expenses increased $4 million, primarily associated with
higher employee benefit expenses.
Offsetting this decrease was a net increase in LIPA revenues of $24 million,
which are primarily timing in nature as well as a gain of $27 million recognized
from the capacity swap
On a year-to-date basis, operating income increased $5 million to $271 million
compared to $266 million for the same period last year, primarily due to the $44
million gain from the capacity swap. In addition, we realized higher net
revenues of $5 million from the LIPA contracts and $4 million associated with
our electric marketing activities. Operating expenses also decreased by $4
million due to lower overhaul costs at Ravenswood.
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Offsetting this increase were lower net revenues of $52 million at the
Ravenswood plant reflecting lower capacity revenues of $61 million, partially
offset by increased energy margins of $10 million. The increase in energy
margins, which was primarily realized in the first quarter, 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.
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 $5 million for the third quarter, similar to last
year. For the nine month period, operating income was $11 million compared $17
million last year. The primary driver of these results is reduced earnings from
our interest in the Iroquois Pipeline System, due to the benefit of a positive
court settlement in 2005 relating to a defaulted supply contract.
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 very pleased with the
performance of this segment which is ahead of Company expectations for the
quarter and year-to-date. Higher operating income for the third quarter of $3
million, compares to a loss of $1 million last year. Year-to-date results are
similar with operating income of $5 million compared to a loss of $7 million
last year. This enhanced performance reflects higher gross profit and operating
margin in the engineering division and appliance service businesses as well as
lower expenses.
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At this point, I will turn it over to Gerry for a more detailed financial review
of our results.
Financial Update (G. Luterman)
Thanks, Bob, and good morning. The company's financial performance and position
continues to remain very strong.
In this context, during this quarter, we continued to strengthen our financial
position and balance sheet. Our long term debt stands at $3.9 billion, resulting
in a debt to total capitalization of approximately 48%, compared to 49% for the
same period last year, supporting our `A' quality credit ratings. This provides
us with liquidity and excellent access to the capital markets.
Even though interest rates are on the rise, I am pleased to report that we were
able to maintain interest expense flat at $67 million compared to the similar
period last year. This is a direct result of the success of KeySpan's
refinancing program over the past several years where we have replaced some of
our higher cost debt at lower rates. We currently have approximately 90% of our
debt at fixed rates, limiting our exposure to the potential of rising interest
rates.
Along these lines, we should note KeySpan plans to issue $500 million in new
fixed rate debt at the New York City and Long Island gas utility level in the
fourth quarter to basically replace short term floating debt. This will be used
for general working capital needs. These securities, which will be issued in the
Private Placement Market, where they commanded a very high level of attraction,
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have been priced at a very favorable rate of 5.55% with 10 year maturities.
These securities will not be registered under the securities laws. This issuance
will further strengthen our fixed to floating position discussed earlier.
It should be noted that our 3 and 9 month results of $0.29 per share and $1.76
per share, respectively, include the normal costs associated with the
acquisition and ongoing integration efforts which on a year-to-date basis amount
to approximately $20 million pre tax of external costs.
Turning now to cash flow and capital expenditures.
I am pleased to report that cash flow from operations for the first nine months
increased by approximately $436 million compared to the same period last year.
This reflects the favorable working capital performance primarily driven by the
receipt of customer payments associated with this year's winter season and lower
gas prices than last year. In addition, our income tax payments were $74 million
lower than last year, primarily due to more favorable UNICAP requirements.
Capital expenditures of $378 million for the year-to-date period are similar to
last year's value of $372 million. This small increase reflects an increase in
the gas distribution segment, due to the timing of capital main and service
work, as well as upgrade work to our New York LNG facility. We remain on target
to achieve the same level of capital expense as last year of approximately $550
million, as we continue our focus on capital efficiency.
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And lastly, but importantly, the Company's Board of Directors declared a
quarterly common stock dividend of $0.465 per share, which was paid on August 1,
2006, to shareholders of record at the close of business on July 12, 2006. This
dividend currently provides a yield to our shareholders of approximately 4.5%
I will now turn it back to Bob for some closing comments
Closing Comments (R.B. Catell)
Thank you, Gerry, for the financial update.
We remain focused on the organic growth in our service territories and running
our low risk businesses with the most efficient use of our expense and capital
resources. We are extremely pleased with the reliability of both our gas and
electric businesses as they continue to meet the gas and electric peak demands
of our customers. We are pleased with recent approvals received on our
transaction with National Grid and will work diligently with the state
regulators to receive the remaining approvals required to complete our
transaction. We look forward to becoming part of the National Grid family in
mid-2007.
Thank you, and we would now be glad to take your questions.
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