CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
September 30, December 31,
1999 1998
----------------- ----------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and temporary cash investments $ 129,899 $ 942,776
Customer accounts receivable 174,865 320,836
Other accounts receivable 200,519 230,479
Allowance for uncollectible accounts (23,300) (20,026)
Special deposits 90,634 145,684
Gas in storage, at average cost 163,318 145,277
Materials and supplies, at average cost 74,948 74,193
Other 182,096 72,818
----------------- ----------------
992,979 1,912,037
----------------- ----------------
EQUITY INVESTMENTS 325,929 289,193
----------------- ----------------
PROPERTY
Electric 1,337,563 1,109,199
Gas 3,373,802 3,257,726
Other 368,235 345,007
Accumulated depreciation (1,563,592) (1,480,038)
Gas exploration and production, at cost 1,096,583 994,104
Accumulated depletion (500,154) (447,733)
----------------- ----------------
4,112,437 3,778,265
----------------- ----------------
DEFERRED CHARGES
Regulatory assets 313,837 279,524
Goodwill 251,023 254,040
Other 361,675 382,043
----------------- ----------------
926,535 915,607
----------------- ----------------
TOTAL ASSETS $ 6,357,880 $ 6,895,102
================= ================
See accompanying notes to the Condensed Consolidated Financial Statements.
55
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
September 30, December 31,
1999 1998
----------------- ----------------
(Unaudited) (Audited)
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,000 $ 398,000
Current redemption of preferred stock 363,000 -
Accounts payable and accrued expenses 451,845 519,288
Notes payable 103,950 -
Dividends payable 61,461 66,232
Taxes accrued 6,079 69,742
Customer deposits 32,021 29,774
Interest accrued 8,918 19,965
----------------- ----------------
1,028,274 1,103,001
----------------- ----------------
DEFERRED CREDITS AND OTHER LIABILITIES
Regulatory liabilities 29,129 27,854
Deferred federal income tax 197,978 71,549
Operating reserves 494,681 457,459
Other 82,815 75,740
----------------- ----------------
804,603 632,602
----------------- ----------------
CAPITALIZATION
Common stock, $.01 par value, authorized
450,000,000 shares; outstanding 134,214,473
and 144,628,654 shares stated at 2,973,388 2,973,388
Retained Earnings 438,896 474,188
Accumulated foreign currency adjustment 2,502 (952)
Treasury stock purchased (712,888) (423,716)
----------------- ----------------
Total common equity 2,701,898 3,022,908
Preferred stock 84,359 447,973
Long-term debt 1,663,040 1,619,067
----------------- ----------------
TOTAL CAPITALIZATION 4,449,297 5,089,948
----------------- ----------------
MINORITY INTEREST IN SUBSIDIARY COMPANY 75,706 69,551
----------------- ----------------
TOTAL LIABILITIES AND CAPITALIZATION $ 6,357,880 $ 6,895,102
================= ================
See accompanying notes to the Condensed Consolidated Financial Statements.
56
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
--------- ---------- ---------- ---------
REVENUES
Gas Distribution $ 208,572 $ 203,241 $ 1,208,254 $ 629,516
Gas Exploration and Production 42,081 30,545 103,622 42,258
Electric Services 241,259 176,358 606,552 244,723
Electric Distribution - - - 885,693
Energy Related Services 46,557 24,437 124,675 30,823
--------- ---------- ---------- ---------
Total Revenues 538,469 434,581 2,043,103 1,833,013
--------- ---------- ---------- ---------
OPERATING EXPENSES
Purchased gas 62,560 56,305 470,633 247,895
Fuel and purchased power - - - 257,786
Operations and maintenance 298,679 259,895 793,197 581,474
Depreciation, depletion and amortization 63,130 59,202 180,698 147,401
Electric regulatory amortizations - - - (79,875)
Operating taxes 77,317 77,824 258,355 292,704
--------- ---------- ---------- ---------
Total Operating Expenses 501,686 453,226 1,702,883 1,447,385
--------- ---------- ---------- ---------
OPERATING INCOME 36,783 (18,645) 340,220 385,628
--------- ---------- ---------- ---------
OTHER INCOME AND (DEDUCTIONS)
Income from equity investments 4,268 3,315 9,749 3,108
Interest income 1,884 24,769 20,673 41,378
Minority interest (3,035) (750) (5,226) 4 (1,318)
Other 1,317 450 3,183 7,837
--------- ---------- ---------- ---------
Total Other Income 4,434 27,824 28,379 51,005
--------- ---------- ---------- ---------
INCOME BEFORE INTEREST CHARGES AND INCOME TAXES 41,217 9,179 368,599 436,633
--------- ---------- ---------- ---------
INTEREST CHARGES 26,661 30,945 95,001 207,797
--------- ---------- ---------- ---------
INCOME TAXES
Current (23,111) (9,853) (14,886) 133,904
Deferred 28,651 5,743 113,258 (40,601)
--------- ---------- ---------- ---------
Total Income Taxes 5,540 (4,110) 98,372 93,303
--------- ---------- ---------- ---------
NET INCOME 9,016 (17,656) 175,226 135,533
Preferred stock dividend requirements 8,688 8,694 26,067 32,857
--------- ---------- ---------- ---------
EARNINGS FOR COMMON STOCK $ 328 $ (26,350) $ 149,159 $ 102,676
Foreign Currency Adjustment (2,281) 860 3,454 (569)
========= ========== ========== =========
COMPREHENSIVE INCOME $ (1,953) $ (25,490) $ 152,613 $ 102,107
========= ========== ========== =========
AVERAGE COMMON SHARES OUTSTANDING (000) 136,506 157,328 140,079 137,720
BASIC AND DILUTED EARNINGS PER COMMON SHARE $ 0.00 $ (0.17) $ 1.06 $ 0.75
========= ========== ========== =========
See accompanying notes to the Condensed Consolidated Financial Statements.
57
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(IN THOUSANDS OF DOLLARS)
THREE Three NINE
MONTHS Months MONTHS Nine Months
ENDED Ended ENDED Ended
SEPTEMBER September SEPTEMBER September
30, 1999 30, 1998 30, 1999 30, 1998
------------- ------------- ------------ -------------
OPERATING ACTIVITIES
Net Income $ 9,016 $ (17,656) $ 175,226 $ 135,533
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES
Depreciation, depletion and amortization
Electric regulatory amortizations 63,130 59,202 180,698 147,401
Deferred income tax - - - (79,875)
Income from equity investments 28,651 5,743 113,258 (40,601)
Dividends from equity investments (4,268) (3,315) (9,749) (3,108)
CHANGES IN ASSETS AND LIABILITIES 2,079 2,078 6,375 2,078
Accounts receivable
Materials and supplies, fuel oil and gas in 9,141 58,973 155,538 141,068
storage (67,249) (52,244) (18,997) 14,614
Accounts payable and accrued expenses 17,207 17,973 (143,858) (71,679)
Interest accrued (6,403) (20,741) (11,050) 35,565
Special deposits 17,743 (101,311) 55,050 (63,723)
Pensions and other post retirement benefits - - - (283,774)
Other (25,911) (75,546) (59,437) (173,344)
----------- ---------- ----------- ----------
Net Cash Provided by (Used in) Operating
Activities 43,136 (126,844) 443,054 (239,845)
----------- ---------- ----------- ----------
INVESTING ACTIVITIES
Capital expenditures (138,307) (114,153) (512,257) (270,088)
Net cash from KeySpan Acquisition - - - 165,168
Net proceeds from LIPA Transaction - - - 2,314,588
Other 21,222 (4,098) 10,015 (21,777)
----------- ---------- ----------- ----------
Net Cash (Used in) Provided by Investing
Activities (117,085) (118,251) (502,242) 2,187,891
----------- ---------- ----------- ----------
FINANCING ACTIVITIES
Proceeds from sale of common stock - 6,536 - 17,604
Treasury stock purchased (166,440) (101,483) (289,172) (101,483)
Issuance of preferred stock - - - 75,000
Notes payable 103,950 - 103,950 -
Issuance of long-term debt 25,523 3,000 40,523 3,000
Payment of long-term debt - - (397,000) (100,000)
Preferred stock dividends paid (8,688) (8,682) (26,067) (34,555)
Common stock dividends paid (57,692) (69,081) (185,375) (213,466)
Other (100) 32 (548) (17,265)
----------- ---------- ----------- ----------
Net Cash (Used in) Financing Activities (103,447) (169,678) (753,689) (371,165)
----------- ---------- ----------- ----------
Net (Decrease) or Increase in Cash and Cash
Equivalents (177,396) (414,773) (812,877) 1,576,881
=========== ========== =========== ==========
Cash and cash equivalents at beginning of period 307,295 2,171,649 942,776 179,995
Net (Decrease or Increase in cash and cash
equivalents $ (177,396) $ (414,773) $ (812,877) $ 1,576,881
----------- ---------- ----------- ----------
Cash and Cash Equivalents at End of Period $ 129,899 $ 1,756,876 $ 129,899 $ 1,756,876
=========== ========== =========== ==========
See accompanying notes to the Condensed Consolidated Financial Statements.
58
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION OF THE COMPANY
KeySpan Corporation, d/b/a KeySpan Energy (the "Company"), a New York
corporation, is the successor to Long Island Lighting Company ("LILCO"), as
a result of the transaction with the Long Island Power Authority
("LIPA")and following the acquisition of KeySpan Energy Corporation
("KSE"). The Company is a "predominately intrastate" public utility holding
company exempt from most of the provisions of the Public Utility Holding
Company Act of 1935, as amended.
On May 28, 1998, the Company completed two business combinations as a
result of which it (i) became the successor operator of the non-nuclear
electric generating facilities, gas distribution operations and common
plant formerly owned by LILCO and entered into long-term service agreements
to operate the electric transmission and distribution ("T&D") system
acquired by LIPA (the "LIPA Transaction"); and (ii) acquired KSE, the
parent company of The Brooklyn Union Gas Company ("Brooklyn Union")(the
"KeySpan Acquisition").
With the exception of a small portion of Queens County, the Company's
subsidiaries are the only providers of gas distribution services in the New
York City counties of Kings, Richmond and Queens and the Long Island
counties of Nassau and Suffolk. Brooklyn Union provides gas distribution
services to customers in the New York City boroughs of Brooklyn, Queens and
Staten Island, and KeySpan Gas East Corporation d/b/a Brooklyn Union of
Long Island ("Brooklyn Union of Long Island"), a Company subsidiary,
provides gas distribution services to customers in the Long Island counties
of Nassau and Suffolk and the Rockaway Peninsula of Queens County.
In addition, Company subsidiaries operate the electric T&D system owned by
LIPA, own and sell capacity and energy to LIPA from the Company's
generating facilities located on Long Island and manage fuel supplies for
LIPA to fuel the Company's Long Island generating facilities through
long-term service contracts that range from eight to fifteen years.
Moreover, Company subsidiaries own, lease and operate the 2,168 megawatt
Ravenswood electric generation facility, ("Ravenswood Facility") located in
Long Island City, Queens. (See Note 10 "Contractual Obligations and
Contingencies" for a description of the Ravenswood transaction.)
Other Company subsidiaries are involved in gas and oil exploration and
production; wholesale and retail gas and electric marketing; appliance,
heating, ventilation and air conditioning services; large energy-system
ownership, installation and management; and electric infrastructure
construction. Further, certain subsidiaries have investments in natural gas
pipelines and gas distribution facilities; midstream natural gas processing
and gathering facilities and gas storage facilities, domestically and
internationally. (See Note 9 "Business Segments" for additional
information.)
2. BASIS OF PRESENTATION
The financial statements presented herein reflect the results of operations
of the consolidated Company for the three and nine months ended September
30, 1999, as well as for the three months ended September 30, 1998. For
financial reporting purposes, LILCO is deemed the acquiring company
pursuant to a purchase accounting transaction in which KSE was acquired.
Consequently, the financial statements presented herein for the nine months
ended September 30, 1998 reflect the results of operations of the
consolidated Company from May 29, 1998 through September 30, 1998. Periods
prior to May 29, 1998, (i.e., January 1, 1998 through May 28, 1998)reflect
results of operations of LILCO only. Since the acquisition of KSE was
accounted for as a purchase, purchase accounting adjustments, including
goodwill, have been reflected in the financial statements included herein.
In the opinion of the Company, the accompanying unaudited Condensed
Consolidated Financial Statements contain all adjustments necessary to
present fairly the financial position of the Company as of September 30,
1999, and the results of its operations and cash flows for the three and
nine months ended September 30, 1999 and 1998. Certain reclassifications
were made to conform prior period financial statements with the current
period financial statement presentation. Other than as noted, adjustments
were of a normal, recurring nature.
3. REVENUES
The Gas Distribution segment of the Company is influenced by seasonal
weather conditions. Annual gas revenues are substantially realized during
the heating season (November 1 to April 30) as a result of the large
proportion of heating sales, primarily residential, compared with total
sales. Accordingly, results of operations for gas distribution operations
historically are most favorable in the three months ended March 31, with
results of operations being next most favorable in the three months ended
December 31. Results for the quarter ended June 30 are marginally
profitable or unprofitable, and losses are generally incurred in the
quarter ended September 30.
The Company's gas distribution subsidiaries each operate under a utility
tariff that contains a weather normalization adjustment that largely
offsets shortfalls or excesses of firm net revenues (i.e., revenues less
gas costs and revenue taxes) during a heating season due to variations from
normal weather.
Electric Services revenues are derived from billings to LIPA for the
management and operation of LIPA's T&D system, electric generation, and
fuel management. (For a description of the various services agreements with
LIPA, see the Company's Annual Report on Form 10-K for the transition
period ended December 31, 1998.) In addition, electric revenues also
include revenues from the Ravenswood Facility from June 18, 1999 to
September 30, 1999. Revenues from electric generation generally are
unaffected by weather variations since virtually all costs of production
are recovered in fixed fee billings to LIPA and Con Edison, the Company's
electric generation customers.
Prior to the LIPA Transaction, electric revenues were comprised of cycle
billings rendered to residential, commercial and industrial customers and
the accrual of electric revenues for services rendered to customers not
billed at month-end. In addition, LILCO's rate structure provided for a
revenue reconciliation mechanism which eliminated the impact on earnings of
electric sales that were above or below the levels reflected in rates.
4. GAS EXPLORATION AND PRODUCTION
The Houston Exploration Company ("THEC"), a 64% owned subsidiary of the
Company which is engaged in gas and oil exploration and production, uses
the full cost method of accounting for its investment in natural gas and
oil properties. Under the full cost method of accounting, all costs of
acquisition, exploration and development of natural gas and oil reserves
are capitalized into a "full cost pool". To the extent that such
capitalized costs (net of accumulated depreciation, depletion and
amortization) less deferred taxes, exceed the present value (using a 10%
discount rate) of estimated future net cash flows from proved natural gas
and oil reserves and the lower of cost or fair value of unproved
properties, such excess costs are charged to operations.
As of September 30, 1999, THEC estimates, using prices in effect as of such
date, that the ceiling limitation imposed under full cost accounting rules
exceeded actual capitalized costs.
5. GOODWILL
At September 30, 1999, the Company had recorded goodwill in the amount of
$251.0 million, representing the excess of acquisition cost over the fair
value of net assets acquired related to its purchases of certain
investments, including $165.2 million, net of accumulated amortization of
$5.7 million, relating to the KeySpan Acquisition.
Goodwill is being amortized over 15 to 40 years.
6. ENVIRONMENTAL MATTERS
The Company has recorded a liability of approximately $125.2 million
associated with investigation and remedial obligations with respect to 14
of the Company's former manufactured gas plant ("MGP")sites, three of which
are designated as "Class II Sites." Three MGP sites (one Class II Site) are
associated with Brooklyn Union's operations or its predecessors; 11 MGP
sites are associated with the operations of Brooklyn Union of Long Island
or its predecessors (two of which are designated as Class II Sites). With
respect to the Brooklyn Union MGP sites, a total of $47.3 million has been
accrued, representing the best estimate of remedial costs for two sites
that are subject to Administrative Orders on Consent ("AOC's") with the New
York State Department of Environmental Conservation ("DEC") and the minimum
range of an estimate for the investigation and/or remediation of other
sites. Discussions with the DEC are ongoing with regards to investigation
of other sites. With respect to Brooklyn Union of Long Island MGP sites, a
total of $77.9 million has been accrued as a minimum of an estimated range
of costs for the 11 sites that will be investigated/remediated. Two AOC's
were executed on March 31, 1999 for Brooklyn Union of Long Island MGP
sites. One AOC addressed two MGP sites classified as Class II Sites on the
State registry of inactive hazardous waste sites. The other AOC addressed
four other MGP sites. Both AOC's generally require Brooklyn Union of Long
Island to investigate the condition of each site and conduct remediation
activities depending on the results of the investigation. Brooklyn Union of
Long Island also has entered into an AOC with the DEC requiring the Company
to conduct preliminary site assessments for the five other former MGP sites
that are no longer owned by the Company.
Under prior rate orders, the Public Service Commission of the State of New
York ("NYPSC") has allowed recovery of costs related to certain Brooklyn
Union MGP sites. At September 30, 1999, the Company has a total remaining
regulatory asset of approximately $100 million. The Company believes that
current rate plans in effect for both Gas Distribution subsidiaries provide
for recovery of environmental costs attributable to the Gas Distribution
segment.
7. REGULATORY ASSETS AND LIABILITIES
The Company's regulated subsidiaries are subject to the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 71, "Accounting
for the Effects of Certain Types of Regulation". Regulatory assets arise
from the allocation of costs and revenues to accounting periods for utility
ratemaking purposes differently from bases generally applied by
nonregulated companies. Regulatory assets and liabilities are recognized in
accordance with SFAS-71.
The Company's regulatory assets of $313.8 million are primarily comprised
of regulatory tax assets, costs associated with the KeySpan Acquisition,
certain environmental remediation and investigation costs and
postretirement benefits other than pensions. In the opinion of management,
regulatory assets are fully recoverable in rates.
In the event that the provisions of SFAS-71 were no longer applicable, the
Company estimates that the related write-off of net regulatory assets
(regulatory assets less regulatory liabilities) could result in a charge to
net income of approximately $185.1 million, or approximately $1.36 per
share of common stock, which would be classified as an extraordinary item.
60
8. EXTINGUISHMENT OF LONG-TERM DEBT AND FINANCING
In June 1999, the Company extinguished its obligation under a promissory
note to LIPA relating to the 7.30% Debentures due July 15, 1999. The
Company's obligation for these debentures of $411.5 million consisted of
the principal amount of $397.0 million and $14.5 million of interest
accrued and unpaid.
At September 30, 1999, the Company had available unsecured bank lines of
credit of $300 million. Borrowings were made during the month of September
1999. The average outstanding daily balance during the month was $40.2
million at a weighted average annualized rate of 5.52%. At September 30,
1999, the Company had $103.9 million in short-term borrowings outstanding
at a weighted average annualized rate of 5.83%.
9. BUSINESS SEGMENTS
The Company has six reportable segments: Gas Distribution, Gas Exploration
and Production, Electric Services, Energy Related Investments, Energy
Related Services and Other.
The Gas Distribution segment consists of Brooklyn Union and Brooklyn Union
of Long Island, providers of gas distribution services in the New York City
counties of Kings, Richmond and Queens and the Long Island counties of
Nassau and Suffolk.
The Gas Exploration and Production segment is engaged in gas and oil
exploration and production, and the development and acquisition of domestic
natural gas and oil properties. This segment consists of our 64% equity
interest in THEC, an independent natural gas and oil exploration company,
as well as KeySpan Exploration and Production LLC, our wholly owned
subsidiary engaged in a joint venture with THEC. The Company is currently
reviewing its strategic alternatives for THEC, which may include the sale
of all or a portion of THEC. (See Management's Discussion and Analysis of
Financial Condition and Results of Operations, "Capital Requirements" for
further information.)
The Electric Services segment consists of subsidiaries that own and operate
oil and gas fired generating plants in Queens and Long Island, and through
long-term contracts, manage the electric T&D system, the fuel and electric
purchases, and the off-system electric sales for LIPA. In addition a
subsidiary provides services in electric infrastructure construction to
Company affiliates and to third parties.
Subsidiaries in the Energy Related Investments segment include a 20% equity
interest in the Iroquois Gas Transmission System LP; a 50% interest in the
Premier Transco Pipeline and a 24.5% interest in Phoenix Natural Gas, both
in Northern Ireland; and investments in certain midstream natural gas
assets in Western Canada owned jointly with Gulf Canada Resources Limited,
through the Gulf Midstream Services Partnership ("GMS"). These subsidiaries
are accounted for under the equity method since the Company's ownership
interests are 50% or less. Accordingly, equity income from these
investments is reflected in Other Income and (Deductions) in the Condensed
Consolidated Income Statement.
The Company's Energy Related Services segment primarily includes KeySpan
Energy Management Inc. ("KEM"), KeySpan Energy Services Inc. ("KES"),
KeySpan Communications Corporation, KeySpan Energy Solutions, LLC
("KESol"), Fritze KeySpan, LLC ("Fritze"), and Delta KeySpan Inc.
("Delta"). KEM owns, designs and/or operates energy systems for commercial
and industrial customers and provides energy-related services to clients
located primarily within the New York City metropolitan area. KES markets
gas and electricity, and arranges transportation and related services,
largely to retail customers, including those served by the Company's two
gas distribution subsidiaries. KeySpan Communications Corporation owns a
300-mile fiber optic network on Long Island and in New York City. KESol,
Fritze and Delta provide various appliance, heating, ventilation and air
conditioning services to customers within the Company's service territory,
New Jersey and Rhode Island. KESol was established in April 1998, Fritze
was acquired in November 1998 and Delta was acquired in September 1999.
The Other segment primarily represents unallocated administrative expenses
of the Company, preferred stock dividends, and earnings from the investment
of cash proceeds from the LIPA Transaction.
The accounting policies of the segments are the same as those used for the
preparation of the Condensed Consolidated Financial Statements. The
Company's segments are strategic business units that are managed separately
because of their different operating and regulatory environments. At
September 30, 1999, the total assets of certain reportable segments have
increased from levels reported at December 31, 1998 as follows: the Gas
Exploration and Production segment's assets increased by $14.5 million due
to our formation of and investment in KeySpan Exploration and Production
LLC; the Electric Services segment's assets increased by $230.0 million due
to the acquisition of the Ravenswood Facility (see Note 10 "Contractual
Obligations and Contingencies" for more details), and $4.9 million due to
the formation of KeySpan Energy Construction; the Energy Related
Investments segment's assets increased by $7.4 million due to the
acquisition by GMS of 37% of Paddle River Gas Plant; and the assets of the
Energy Related Services segment increased by $21.2 million due to the
acquisition of Delta Mechanical of New England, Inc., a heating,
ventilation and air conditioning company in Rhode Island. (See Management's
Discussion and Analysis of Financial Condition and Results of Operations,
"Capital Requirements" for further information on these acquisitions.) The
segment information presented below reflects amounts reported in the
Condensed Consolidated Financial Statements, excluding special charges, for
the three and nine months ended September 30, 1999 and 1998.
61
Three Months Ended September 30, 1999 (In Thousands of Dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
Gas Gas Exploration Electric Services Energy Related Energy Related
Distribution and Production Investments Services Other Total
- ------------------------------------------------------------------------------------------------------------------------------------
Revenue $208,572 $ 42,081 $241,259 $ - $ 46,557 $ - $ 538,469
- ------------------------------------------------------------------------------------------------------------------------------------
Cost of Gas 62,560 - - - - - 62,560
Operations
and
Maintenance 106,101 7,532 131,403 1,276 45,325 7,042 298,679
Depreciation
Depletion
&
Amortization 24,630 18,644 12,395 196 993 6,272 63,130
Operating Taxes 41,168 107 36,724 - - (682) 77,317
Intercompany
Billings 2,748 - 11,345 - - (14,093) -
- ------------------------------------------------------------------------------------------------------------------------------------
Total Expense $237,207 $26,283 $191,867 $1,472 $46,318 $(1,461) $501,686
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Income $(28,635) $15,798 $ 49,392 $(1,472) $ 239 $ 1,461 $ 36,783
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings
for
Common Stock $(29,037) $ 5,435 $ 28,164 $ 2,651 $ 286 $(7,171) $ 328
- ------------------------------------------------------------------------------------------------------------------------------------
Basic and
Diluted
EPS $ (0.21) $ 0.04 $ 0.21 $ 0.02 $ 0.00 $(0.06) $ 0.00
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, 1998 (In Thousands of Dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
Gas Gas Exploration Electric Services Energy Related Energy Related
Distribution and Production Investments Services Other Total
- ------------------------------------------------------------------------------------------------------------------------------------
Revenue $203,241 $ 30,545 $ 176,358 $ 89 $ 24,348 $ - $ 434,581
- ------------------------------------------------------------------------------------------------------------------------------------
Cost of Gas 56,305 - - - - - 56,305
Operations
and
Maintenance 101,939 6,994 111,712 1,396 $ 23,938 13,916 259,895
Depreciation
Depletion
&
Amortization 23,647 19,759 9,824 108 426 5,438 59,202
Operating Taxes 38,779 171 30,243 1 349 8,281 77,824
Intercompany
Billings 581 - 12,955 - - (13,536) -
- ------------------------------------------------------------------------------------------------------------------------------------
Total Expense $221,251 $26,924 $164,734 $1,505 $24,713 $14,099 $453,226
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Income $(18,010) $ 3,621 $ 11,624 $(1,416) $ (365) $(14,099) $(18,645)
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings
for
Common Stock $(26,842) $ 1,315 $ 4,380 $ 1,174 $ 77 $ (2,639) $(22,535)(a)
- ------------------------------------------------------------------------------------------------------------------------------------
Basic and
Diluted
EPS $ (0.17) $ 0.01 $ 0.03 $ 0.01 $ 0.00 $ (0.03) $ (0.15)(a)
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Excludes $3.8 million or $0.02 per diluted share of non-recurring charges (net of tax) associated with the LIPA Transaction.
62
Nine Months Ended September 30, 1999 (In Thousands of Dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
Gas Gas Exploration Electric Services Energy Related Energy Related
Distribution and Production Investments Services Other Total
- ------------------------------------------------------------------------------------------------------------------------------------
Revenue $1,208,254 $ 103,622 $ 606,552 $ - $ 124,675 $ - $2,043,103
- ------------------------------------------------------------------------------------------------------------------------------------
Cost of Gas 470,633 - - - - - 470,633
Operations
and
Maintenance 299,700 19,817 334,690 3,945 125,880 9,165 793,197
Depreciation
Depletion
&
Amortization 73,235 53,673 32,660 814 2,465 17,851 180,698
Operating Taxes 159,457 253 94,162 8 3 4,472 258,355
Intercompany
Billings 6,664 - 32,388 - - (39,052) -
- ------------------------------------------------------------------------------------------------------------------------------------
Total Expense $1,009,689 $73,743 $493,900 $4,767 $128,348 $(7,564) $1,702,883
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Income $ 198,565 $29,879 $112,652 $(4,767) $ (3,673) $ 7,564 $ 340,220
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings
for
Common Stock $ 92,873 $ 9,239 $ 59,786 $ 5,401 $ (1,408) $16,732) $ 149,159
- ------------------------------------------------------------------------------------------------------------------------------------
Basic and
Diluted
EPS $ 0.66 $ 0.07 $0.43 $ 0.04 $ (0.01) $ (0.13) $ 1.06
- ------------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 1998 (In Thousands of Dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
Gas Gas Exploration Electric Services Energy Related Energy Related
Distribution and Production Investments Services Other Total
- ------------------------------------------------------------------------------------------------------------------------------------
Revenue $ 629,516 $ 42,258 $1,130,416 $ 117 $ 30,706 $ - $1,833,013
- ------------------------------------------------------------------------------------------------------------------------------------
Cost of Gas 247,895 - - - - - 247,895
Fuel and Purchased
Power - - 257,786 - - - 257,786
Operations
and
Maintenance 196,824 9,132 326,173 1,996 30,639 16,710 581,474
Depreciation
Depletion
&
Amortization 43,169 26,540 69,548 108 588 7,448 147,401
Electric
Regulatory
Amortization - - (79,875) - - - (79,875)
Operating Taxes 89,160 216 193,451 1 517 9,359 292,704
Intercompany
Billings 4,075 - 14,127 - - (18,202) -
- ------------------------------------------------------------------------------------------------------------------------------------
Total Expense $581,123 $35,888 $781,210 $2,105 $31,744 $15,315 $1,447,385
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Income $48,393 $6,370 $349,206 $(1,988) $(1,038) $(15,315) $ 385,628
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings
for
Common Stock $(3,680) $2,343 $118,984 $1,222 $ (240) $ (5,688) $ 112,941(a)
- ------------------------------------------------------------------------------------------------------------------------------------
Basic and
Diluted
EPS $(0.03) $ 0.02 $0.86 $ 0.01 $0.00 $ (0.04) $ 0.82(a)
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Excludes $10.3 million or $0.07 per diluted share of non-recurring charges (net of tax) associated with the LIPA Transaction.
62
10. CONTRACTUAL OBLIGATIONS AND CONTINGENCIES
The Company acquired the 2,168 megawatt Ravenswood electric generating
facility located in Long Island City, Queens, New York from Consolidated
Edison Company of New York, Inc. ("Con Ed"), on June 18 1999 for
approximately $597 million.
As a means of financing this acquisition, the Company entered into a
lease agreement with a special purpose, unaffiliated financing entity
that acquired a portion of the facility directly from Con Ed and leased
it to a subsidiary of the Company under a ten year lease. The Company has
guaranteed all payment and performance obligations of its subsidiary
under the lease. Another subsidiary of the Company provides all
operating, maintenance and construction services for the facility. The
lease program was established in order for the Company to finance
approximately $425 million of the acquisition cost of the facility. The
lease qualifies as an operating lease for financial reporting purposes
while preserving the Company's ownership of the facility for federal and
state income tax purposes. The balance of the funds needed to acquire the
facility were provided from cash on hand.
The Company will be responsible for environmental obligations relating to
facility operations other than liabilities arising from pre-closing
disposal of waste at off-site locations and any monetary fines arising
from Con Ed's pre-closing conduct. Based on information currently
available for environmental contingencies related to the Ravenswood
acquisition, the Company has accrued $5 million as the minimum liability
to be incurred.
The Company intends to seek regulatory approvals to expand the Ravenswood
Facility through the installation of a gas-fired combined cycle
generation unit with a capacity of approximately 250 megawatts that would
increase electric generation capacity at the plant by 12%. The new
capacity could be operational by 2002 depending upon the timing of
regulatory approvals.
63
11. ACQUISITION OF EASTERN ENTERPRISES
On November 4, 1999, The Company and Eastern Enterprises ("Eastern")
announced that the companies have signed a definitive merger agreement
under which the Company will acquire all of the common stock of Eastern
for $64.00 per share in cash. This represents a premium of 24% over the
Eastern closing price of $51.56 on November 3, 1999, and a 45% premium
over the average of the last 90-day trading period. The Agreement and
Plan of Merger was filed as an exhibit to the Company's Form 8-K filed on
November 5, 1999.
The transaction has a total value of approximately $2.5 billion ($1.7
billion in equity and $0.8 billion in assumed debt and preferred stock).
The transaction will be accounted for as a purchase. The increased size
and scope of the combined organization should enable the combined company
to provide enhanced, cost-effective customer service and to capitalize on
the above-average growth opportunities for natural gas in the Northeast
and provide additional resources to the Company's unregulated businesses.
The combined companies will serve 2.4 million customers.
It is anticipated that the combined company will have assets of $8.8
billion, $4.3 billion in revenues, and EBITDA of approximately $950
million. The Company expects pre-tax annual cost savings will be
approximately $30 million. These cost savings result primarily from the
elimination of duplicate corporate and administrative programs, greater
efficiencies in operations and business processes, and increased
purchasing efficiencies. The Company expects to achieve reductions due to
the merger through a variety of programs which would include hiring
freezes, attrition and separation programs. All union contracts will be
honored.
The Company expects to raise $1.7 billion of initial financing for the
transaction in short term markets which will ultimately be replaced with
long term financing. Going forward, the Company will actively manage its
balance sheet to maintain strong investment grade ratings at each of its
rated entities.
The Company anticipates continuing its current annual dividend of $1.78.
Eastern will continue to pay its dividend at the annual rate of $1.72.
Upon completion of the transaction Mr. Robert B. Catell will remain
chairman and CEO of the combined company and Mr. J. Atwood Ives,
currently chairman and CEO of Eastern, will retire from active management
at Eastern and will join the Company's board of directors. The Company's
corporate headquarters will remain in New York and a headquarters in
Boston will serve the New England operations.
The merger is conditioned, among other things, upon the approval of
Eastern shareholders, the Securities and Exchange Commission and the New
Hampshire Public Utility Commission. The Company anticipates that the
transaction can be completed in 9 to 12 months but is unable to determine
when or if all required approvals will be obtained.
In connection with the merger, Eastern has amended its merger agreement
with EnergyNorth, Inc. ("EnergyNorth") to provide for an all cash
acquisition of EnergyNorth shares at a price per share of $61.13. The
restructured EnergyNorth merger is expected to close contemporaneously
with the KeySpan/Eastern Enterprises transaction.
Following the announcement that the Company has entered into an agreement
to purchase Eastern Enterprises, Standard & Poor's Rating Services placed
the Company's and certain of its subsidiaries', as well as Eastern's
corporate credit, senior unsecured debt, and preferred stock on CreditWatch
with negative implications. Similarly, Moody's Investors Service also
placed the Company's and certain of its subsidiaries', as well as Eastern's
corporate credit, senior unsecured debt, commercial paper and preferred
stock on review for possible downgrade.
Eastern Enterprises owns and operates Boston Gas Company, Colonial Gas
Company, Essex Gas Company, Midland Enterprises Inc. ("Midland"),
Transgas Inc. ("Transgas"), and ServicEdge Partners, Inc. ("ServicEdge")
Upon completion of the pending merger with EnergyNorth, Inc., Eastern
will serve over 800,000 natural gas customers in Massachusetts and New
Hampshire. Midland, headquartered in Cincinnati, Ohio, is the leading
carrier of coal and a major carrier of other dry bulk cargoes on the
nation's inland waterways. Transgas is the nation's largest over-the-road
transporter of liquefied natural gas. ServicEdge is the largest
unregulated provider of residential HVAC equipment installation and
service to customers in Massachusetts.
12. NEW FINANCIAL ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of SFAS No. 133." SFAS No.
137 defers the effective date of SFAS No. 133 from fiscal years beginning
after July 15, 1999 to fiscal years beginning after July 15, 2000. The
Company will therefore, adopt SFAS No. 133 in the first quarter of fiscal
year 2001. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments and for hedging activities. It requires that
an entity recognize all derivatives as either assets or liabilities in
the statement of financial position and measure those instruments at fair
value. The Company does not expect any material earnings effect from
adoption of this statement.
NOTE 13. KEYSPAN GAS EAST CORPORATION SUMMARY FINANCIAL DATA
KeySpan Gas East Corporation d/b/a Brooklyn Union of Long Island, is a wholly
owned subsidiary of KeySpan Corporation. KeySpan Gas East acquired substantially
all of the assets related to the gas distribution business of LILCO immediately
prior to the LIPA Transaction. KeySpan Gas East provides gas distribution
services to customers in the Long Island counties of Nassau and Suffolk and the
Rockaway peninsula of Queens county. KeySpan Gas East is proposing to issue
securities which will be fully and unconditionally guaranteed by its parent,
KeySpan Corporation.
The following represents summarized financial data for KeySpan Gas East.
(IN THOUSANDS OF DOLLARS)
September 30, 1999 December 31, 1998
- -------------------------- --------------------- --------------------
Total current assets 214,147 256,186
Total noncurrent assets 1,338,952 1,330,661
Total current liabilities 514,803 505,784
Total noncurrent liabilities
including long-term debt 399,388 467,736
Net Assets (1) 638,908 613,327
- -------------------------- --------------------- --------------------
(IN THOUSANDS OF DOLLARS)
Nine Months Nine Months
Ended Ended
September 30, September 30,
1999 1998 (2)
- ------------------ --------------- ---------------
Revenues 441,228 448,426
Operating Income (3) 76,241 78,671
Net Income 25,578 26,339
- ------------------ --------------- ---------------
(1) Net Assets reflect total assets less current and noncurrent liabilities.
Intercompany accounts receivable are included in current assets and
long-term intercompany accounts payable are included in non-current
liabilities.
(2) For the period January 1, 1998 through May 28, 1998 (the period prior to
the LIPA Transaction), certain income and expense items, common to both
LILCO's gas and electric operations, were allocated to its gas and electric
operations consistent with the methodology utilized by the NYPSC to
establish rates.
(3) Operating income is defined as revenues less cost of gas and operating
expenses. Operating expenses include the following expenses: operations
and maintenance, depreciation and amortization and operating taxes.
64