KeySpan Energy Co.

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KeySpan Energy Co.

175 East Old Country Road
Hicksville, New York 11801
U.S.A.
(516) 755-6650
Fax: (718) 643-2277
Web site: http://www.keyspanenergy.com

Public Company
Incorporated: 1998 as MarketSpan Corp.
Employees: 8,000
Sales: $3.12 billion
Stock Exchanges: New York
Ticker Symbol: KSE
SICs: 4931 Electric & Other Services Combined; 4932 Gas & Other Services Combined; 6719 Offices of Holding Companies, Not Elsewhere Classified

KeySpan Energy Co. is a holding company formed by the 1998 merger of Brooklyn Union Gas, the nation’s fourth largest natural gas utility, and the nonnuclear electric-generating assets of Long Island Lighting Co. (LILCO). In addition to providing gas and electricity service to millions of New Yorkers, KeySpan was, in 1998, involved in developing energy projects and markets both in the United States and abroad. It also held investments in other energy companies and facilities.

The Predecessor Companies to 1991

Brooklyn Union Gas Co. was providing service in 1991 to nearly 1.1 million customers in New York City’s boroughs of Brooklyn, Queens, and Staten Island, and Long Island’s Nassau and Suffolk counties. Incorporated in 1895 from the merger of seven competing Brooklyn gas-lighting companies, Brooklyn Union Gas traced its roots back to 1824. Originally it lit Brooklyn’s streets with methane obtained from heating coal. By 1952, however, the utility had completely switched over to natural gas. This fuel was so cheap and readily available that Brooklyn Union Gas reduced rates 27 times between 1952 and 1969. Supply problems developed in the 1970s, but the company built liquefied gas storage tanks and constructed a synthetic natural gas plant. It became part-owner in a pipeline, opened in 1992, that transported natural gas from Canada to the northeastern United States.

Long Island Lighting Co. (LILCO) was, in 1991, supplying electric and gas service to about 2.8 million people in Nassau and Suffolk counties and the Rockaway Peninsula in New York City’s borough of Queens. The company was incorporated in 1910 by the merger of four small Suffolk County utilities. As this essentially rural area was drawn into New York City’s orbit, LILCO’s revenues and generating facilities grew greatly. It converted most of its plants from coal to oil in the 1960s and, following the run-up of oil prices in the 1970s, raised its rates 13 times in 12 years to offset its rising costs.

To reduce its dependence on expensive oil, LILCO began construction of a nuclear power plant at Shoreham, Long Island, in 1973. It was completed in 1984 but never began operations because of safety concerns. LILCO sold it to a state-created power authority in 1989 for $1 and the company’s right to raise rates for ten years to pay down $4 billion of its debt of about $5.3 billion for building the facility. The huge debt that LILCO incurred required its electricity rates to rise higher than those of any other utility in the United States outside of Hawaii.

Long Island Lighting: 1991-97

By early 1995, when LILCO requested and received a one-year rate freeze, the utility was in much better shape. In 1994, for the first time in more than 20 years, it registered a positive cash flow, and it ended 1995 with $800 million in cash. These results were achieved in part by reducing its work force and converting some of its power plants to burn gas rather than oil. By the summer of 1996 LILCO had reduced its debt by $1.1 billion since 1994. Even so, the company’s ratio of long-term debt to capital remained a high 62 percent in September 1995, and the utility’s customers continued to chafe at its high rates. LILCO’s autocratic chairman and chief executive officer, William J. Catacosinos, was a frequent public target.

In March 1997 Governor George Pataki announced a long-awaited agreement to cut electric rates on Long Island. It called for a new holding company to absorb both LILCO and Brooklyn Union Gas. The state-owned Long Island Power Authority (LIPA) would buy LILCO’s power lines, its customer services, and its share of an upstate nuclear plant, issuing $7.3 billion in tax-free bonds to purchase about $2.5 billion of the new holding company’s stock and to retire $3.6 billion of its remaining $4.5 billion debt for the abandoned Shoreham plant. Rates would drop by 23 percent over five years in Nassau County and 20 percent in Suffolk County. In addition, Long Island homeowners would receive rebate checks of $100 to $232.

LIPA also won the right to buy LILCO’s power-generating plants after three years. Although the new holding company would run the transmission and distribution system under a contract, after the eighth year the power authority would have the right to reassign the contract to a qualified lower bidder. The authority would set electricity rates. It would, in theory, be free to buy cheaper power elsewhere, but a 15-year contract obligated it to purchase almost all of its power from existing power plants on Long Island. The new holding company would continue to own gas lines and sell gas to customers.

Brooklyn Union Gas: 1991-97

A merger with LILCO made sense to Brooklyn Union Gas because it long had sought LILCO’s gas business in a possible breakup and sale of the company by the state. Some 160,000 LILCO customers were using gas for cooking but not for heating, and two-thirds of Long Island homes did not have gas heat. In addition, as the gas industry in New York became increasingly deregulated, Brooklyn Union Gas had been moving into energy fields other than natural gas, including the sale of electricity. Unregulated subsidiaries of the company—mainly gas exploration, marketing, and cogeneration operations—had been responsible for profits of $12.8 million in fiscal 1995, about 14 percent of the parent company’s total and a tenfold increase over the previous five years. In 1995 the utility formed a joint venture with Houston-based Pennzoil Corp. to sell more than 1.5 billion cubic feet of natural gas per day.

In September 1997, following the adoption of the plan to merge LILCO and Brooklyn Union Gas, the latter company revamped its structure, establishing KeySpan Energy Corp. as a holding company, with Brooklyn Union Gas as its subsidiary. The change was intended to enable KeySpan to propose acquisitions of other companies in a more timely manner than Brooklyn Union Gas, whose dealings were subject to review by the state’s Public Service Commission. KeySpan, in December 1997, sold Gas Energy Inc. and Gas Energy Cogeneration Inc., which had participated in the development, operation, and ownership of cogeneration projects, for $100 million.

One of the parent company’s most dynamic subsidiaries was KeySpan Energy Management Inc., formed in 1996 with the mission of building, maintaining, upgrading, and operating the fuel-powered mechanical systems of large energy users, initially in the tristate New York City metropolitan area but ultimately in 19 eastern states. This unregulated subsidiary, poised to take on the fuel-oil suppliers that had long dominated the Long Island market, had a five-year revenue goal of more than $150 million. Another unregulated KeySpan subsidiary was KeySpan Energy Services Inc., also created in 1996. Its mission was to save commercial clients money in meeting their fuel needs.

Brooklyn Union Gas, in February 1998, announced it would turn over the management of its $500-million-a-year business of buying, transporting, and storing natural gas to a subsidiary of Houston-based Enron Corp. Enron guaranteed Brooklyn Union Gas a higher rate of return because, according to the subsidiary’s chief executive, his company could do a better job than the utility of negotiating gas supply, sale, transport, and storage contracts since it had a staff of 200 on trading floors in Houston.

MarketSpan and KeySpan in 1998

The parts of LILCO not taken over by the state power authority merged with KeySpan, the parent of Brooklyn Union Gas, on May 28, 1998, to form MarketSpan Corp. LILCO shareholders received slightly more shares of stock in the new company for each share of LILCO stock they owned than KeySpan shareholders received for each share of their stock. (LILCO had fiscal 1997 revenue of $3.12 billion compared with KeySpan’s $1.48 billion, but the latter was considered to be in much better financial shape.)

A controversy developed a week later, when the governor and power authority disclosed that LILCO had made $67 million in secret payments to 26 of its executives who automatically succeeded to jobs at MarketSpan. Catacosinos, who became chairman and chief executive officer of the new company, received $42 million. Pataki said the payments were violations of LILCO’s 1997 agreement with the state, which included a no-layoff guarantee and a ban on severance pay, and he called for Catacosinos’ resignation. Public documents indicated, however, that the payments were collectible accrued compensation or benefit payments.

Catacosinos, who was slated to bow out as chief executive anyway in a year, kept his payment and resigned his post on July 31. He was succeeded by Robert Catell, the former president of Brooklyn Union Gas and KeySpan and the president of MarketSpan. Seventeen of the other 25 executives also chose to leave the company rather than relinquish their payments. Twenty-two lawsuits challenging the payments were filed: 21 by stockholders and one by Suffolk County.

Company Perspectives:

It is not just enough to provide the best possible service at the lowest cost to our customers. At KeySpan Energy, we have a strong commitment to the communities we serve, from Staten Island to Montauk, and beyond. As part of this commitment, our companies seek to establish a legacy of Environmental Excellence throughout the Northeast.

Meanwhile, Catell was addressing the complaints of shareholders unhappy because MarketSpan’s stock price had fallen from $37.625 a share on the day of its inception to as low as $26.50 in July. Calling the company’s stock price “greatly undervalued,” he announced August 3 that the company would buy back as much as a tenth of its 158 million shares, using some of the approximately $2 billion it had collected from LIPA from selling part of the former LILCO. The company had spent about $450 million for this purpose when it announced, in October, that it would spend up to $500 million more in a second stock buyback of about 12 percent of its shares.

The same institutional investors who had been demanding a company buyback of stock to raise the price also were calling for MarketSpan to be sold to another company. Their chief concern was that, in the rapidly consolidating energy business, MarketSpan would only have two choices: to sell out or to construct its own energy empire by acquisition, an alternative that might depress its stock price further. One securities analyst ventured the opinion that eventually MarketSpan probably would be sold, even if it made acquisitions beforehand, but that short-term, the company had not yet determined its strategy.

MarketSpan announced in August 1998 that its KeySpan Energy Development Corp. unit would join Duke Energy Corp. and the Williams Cos. in developing the Cross Bay Pipeline project, which would transport gas from interstate pipelines in New Jersey to New York City and Long Island. This decision was in keeping with Catell’s intention to expand MarketSpan’s natural gas business, which he said had long been neglected by LILCO. Fewer than 30 percent of all Long Island homes were being heated with gas, compared with 80 percent in Brooklyn Union Gas’s territory. Two months later the company agreed to acquire, for $189 million, a half-interest in Gulf Canada Resource Ltd.’s gas processing, storage, and transport business in western Canada.

MarketSpan Corp. changed its name to KeySpan Energy Co. in September 1998. One month later it announced a third-quarter loss of $26.4 million. A company spokesman said the loss was due to cuts in rates before “synergy” savings were achieved from the merger of LILCO and Brooklyn Union Gas. In the second quarter of 1998 the company had net income of $37.25 million on total revenues of $582.6 million.

In late 1998 KeySpan Energy was operating five steam power plants and 42 smaller facilities with an aggregate-rated generating capacity of 3,978 megawatts to generate electricity to its customers under a contract with LIPA and was managing the transmission and distribution of this energy under the same contract to more than one million customers. Brooklyn Union Gas was providing natural gas service to 1.57 million customers.

KeySpan Energy Management was designing and operating energy systems and providing a broad range of energy-related services to large commercial and industrial businesses in the New York City metropolitan area, including design, construction, and engineering. KeySpan Energy Services was marketing natural gas and electricity services to customers throughout the Northeast. KeySpan Energy was providing service and maintenance for heating equipment, water heaters, central air conditioners, and gas appliances.

KeySpan International Ltd. was involved in gas distribution and cogeneration activities in selected developing gas markets in Europe and Latin America. KeySpan Energy Development Corp. was identifying and developing investment opportunities and strategic partnerships and alliances in unregulated energy areas, both domestically and internationally.

In addition to its joint venture with Enron, KeySpan had a 64 percent interest in Houston Exploration Co., which held offshore oil and gas properties in the Gulf of Mexico and onshore properties in Texas and West Virginia. KeySpan also held a 52 percent interest in Honeoye Storage Corp., which owned an underground gas storage facility in Ontario County, New York, and a gas storage facility in Steuben, Mew York. KeySpan owned the North East Transmission Co., the second largest equity holder in the 375-mile-long Iroquois pipeline, which was transporting natural gas from Canada to the northeastern United States.

Principal Subsidiaries

The Brooklyn Union Gas Company; Honeoye Storage Corp. (52%); Houston Exploration Co. (64%); KeySpan Energy Development Corp.; KeySpan Energy Management Inc.; KeySpan Energy Services Inc.; KeySpan International Ltd.; North East Transmission Co., Inc.