KeySpan Announces Strong Third Quarter Results

KeySpan Corporation (NYSE: KSE) reports consolidated earnings from continuing operations, less preferred stock dividends, of $0.13 per share or $22.6 million for the third quarter of 2005, compared to a loss of $0.19 per share or $30.1 million for the same period last year. These results reflect the strong performance of our core businesses and exceed consensus. The quarterly results of $0.13 per share were significantly improved over core earnings of $0.03 per share in 2004. Last year's core results exclude the impact from non-core operations, asset sales and special items, detailed in a table at the end of this release. These excellent third quarter results were driven by the strong performance of the electric services segment, as well as lower financing costs and efficient expense management.

For the nine month period ended September 30, 2005, KeySpan reported consolidated GAAP earnings from continuing operations, less preferred stock dividends, of $275.0 million or $1.63 per share, compared to $345.0 million or $2.15 per share for the same period last year. Year to date, core operations realized $1.67 per share, compared to $1.55 per share last year, an increase of 8%.

Discontinued operations, representing the mechanical contracting companies disposed of in the first quarter of 2005, reflected a loss of $1.8 million or $0.01 per share for the nine months ended September 30, 2005, compared to a loss of $86.6 million or $0.54 per share last year.

"I am pleased with the excellent performance of our core gas and electric businesses. Third quarter performance was driven by the strong results of our electric business which are up 35% over last year. During this peak summer period, our generation plants had availability well in excess of 95% as we experienced weather which was 50% warmer than last year," said Robert B. Catell, Chairman and Chief Executive Officer. "The organic growth of the gas distribution business continued unabated with the addition of over 28,000 new customers and oil-to-gas conversions year-to-date. We are on target to achieve our new gross profit margin goal of close to $50 million. In addition, the strength of our balance sheet affords us the opportunity to actively pursue new investment opportunities."

Segment Highlights

Results in 2005 and 2004 are reported on an Operating Income basis
as follows:

                                            3rd     3rd    YTD   YTD
Operating Income / (Loss)  ($ millions)    Quarter Quarter 2005  2004
                                            2005    2004
Gas Distribution                           (45.5)  (23.6) 376.8 391.1
Electric Services                          149.6   111.2  266.3 226.3
Energy Investments
     Houston Exploration                       -     9.8      - 130.8
     E&P Ceiling Test Writedown                -       -      - (48.2)
     KeySpan Canada                            -     1.4      -  12.3
     Other Energy Investments                4.7     5.2   16.6  13.4
     Total Energy Investments                4.7    16.4   16.6 108.3
Energy Services
     Energy Services Operations             (1.1)   (4.9)  (6.7)(28.4)
     Goodwill Impairment                       -   (14.4)     - (14.4)
     Total Energy Services                  (1.1)  (19.3)  (6.7)(42.8)
Total Operating Segments                   107.7    84.7  653.0 682.9
Other                                       (4.9)    2.9   (8.3) 14.5
Total Operating Income                     102.8    87.6  644.7 697.4
Total Operating Income excluding
    sold entities and special items        102.8    90.8  644.7 616.9


    --  Operating Income in the Energy Investments segment for 2004
        reflects 100% of KeySpan's interest in Houston Exploration for
        the five months ended May 31, and four months of equity
        earnings for KeySpan's 23.5% interest in Houston Exploration.

    --  Operating Income in the Energy Investments segment for 2004
        reflects 100% of KeySpan's interest in its Canadian
        subsidiaries for the three months ended March 31, and six
        months of equity earnings for KeySpan's 25% interest in its
        Canadian subsidiaries.

Operating income increased by 13% to $102.8 million for the third quarter compared to last year. The main driver of this quarter's results was the electric services business, which benefited from excellent reliability of the generating plants, fuel price spreads, and weather which was 50% warmer than last year. This helped offset the seasonal losses of the gas distribution segment. Year to date, operating income was up 5% or $27.8 million to $644.7 million, compared to $616.9 million for the same period last year. This year-over-year increase was primarily due to the warmer weather, effective maintenance programs and reliable performance of the generation units, as well as the added capacity of 250 MW at the New York City Ravenswood generating station, which went into commercial operation in the second quarter of last year. In addition, the energy services segment improved due to enhanced profit margins and lower expenses. These results exclude non-core operations, asset sales and special items.

Key Operating Income Drivers by Segment

  • Our Gas Distribution segment, which serves New York City, Long Island and New England, reported an expected seasonal operating income loss of $45.5 million for the third quarter, compared to a loss of $23.6 million last year. Year-to-date results of $376.8 million were down $14.3 million or 4% over the same period last year. These results were impacted by a higher provision for uncollectible accounts of $8 million for the quarter and $20 million year-to-date, due to substantially higher gas costs and collection experience. These results also reflect weather which was 1.6% warmer than last year in New York and 2.3% colder than last year in New England. During the first nine months of 2005, KeySpan completed more than 28,000 gas installations, which will add over $31 million in new gross profit margin. The Company has played a proactive role in hedging gas supply through gas storage, financial hedges, and long-term transportation contracts, which should help mitigate the pricing impact on customer bills by approximately $500 million.
  • The Electric Services segment owns and operates generation in the New York City and Long Island "load pockets" and also manages the Long Island Power Authority's transmission and distribution system under long-term contracts. This segment reported operating income of $149.6 million for the third quarter, an increase of $38.4 million or 35% over the similar period last year. This result was driven by both weather which was 50% warmer than last year, as well as higher energy margins, which benefited from the price differential between the oil and gas fuels used at the Ravenswood Generating Station. Year-to-date operating income of $266.3 million was up $40 million over last year, primarily resulting from increased revenues of $56.3 million due to the warmer summer weather in the third quarter and the added generation capacity at Ravenswood.
  • The Energy Investments segment is comprised of the Company's Seneca Upshur gas exploration and production operations in West Virginia, as well as complementary investments in natural gas pipelines, storage, and other energy-related projects. The operating income for the first nine months of this year increased by $3.2 million, from $13.4 million to $16.6 million. These results were primarily driven by Seneca Upshur operating income and higher earnings from our investment in the Iroquois pipeline.
  • The Energy Services segment includes companies that provide energy related services to homes and businesses in the New York City and Boston metropolitan areas. This segment reported an operating loss of $1.1 million for the third quarter of 2005, a substantial improvement over the loss of $4.9 million last year. Year-to-date, performance also improved from a loss of $28.4 million to a loss of $6.7 million. The improved performance primarily reflects an increase in gross profit margin and lower operating expenses. These results exclude the 2004 goodwill impairment charge associated with continuing operations.

Financial Update

As a result of the strengthening of the balance sheet, the Company achieved quarterly interest expense savings of $21 million, which was 24% lower than the same period last year. KeySpan successfully decreased the level of long-term debt outstanding at the end of the third quarter of 2005 to $3.9 billion, as compared to $4.4 billion at the end of last year, a reduction of approximately $500 million or 11%. This brings the Company's debt-to-total-capitalization ratio to 49.1%, as compared to 57.4% at the end of 2004, clearly reinforcing its credit rating and low business risk profile.

The Company declared a quarterly common stock dividend of $0.455 per share, paid on November 1, 2005, to shareholders of record as of October 12, 2005. This is the Company's 30th consecutive quarter of paying a dividend, building upon its long-standing commitment of dividend payments to its shareholders. The annual dividend rate of $1.82 per share, increased in the first quarter of 2005, provides a yield to shareholders currently of over 5%.

2005 Earnings Outlook

KeySpan's 2005 earnings guidance remains at $2.30 to $2.40 per share, as announced in December 2004, excluding special items. This guidance includes the dilutive effect of the conversion of the MEDS Equity Units in May 2005. The Company's earnings forecast may vary significantly during the year due to, among other things, changing energy market conditions and weather.

"The strength and balance of KeySpan's businesses once again allowed us to achieve a solid performance in this quarter," said Mr. Catell. "Our electric business performed admirably, and we are delighted with the continued growth in the gas business despite higher gas prices. We are confident that 2005 will be another successful year for the Company."


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