Keyspan analysis

Keyspan analysis

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About Keyspan

Keyspan, a member of the Standard & Poor’s 500 Index, is the largest distributor of natural gas in the Northeast. In New York State, Keyspan is also the largest investor-owned electric generator. Keyspan has select investments along the gas supply chain as well as a dynamic portfolio of energy service companies. Keyspan’s acquisitions of Eastern Enterprises and EnergyNorth made them the largest gas Distribution Company in the northeast. They have 2.5 million gas customers, including customers in the lucrative New England market.
     Keyspan has a solid gas distribution, with 1.7 million customers in New York City and Long Island. They have an additional 800,000 customers in Massachusetts and New Hampshire. Keyspan’s gas utilities are the core drivers of the company and they intend to capitalize on the tremendous growth potential. Keyspan also provides electric service to 1.1 million Long Island Port Authority customers. Keyspan owns and operates over 6,200 megawatts of generating capacity. They plan to add 250 megawatts of electrical generation to New York City by 2003, as well as another 250 to 300 megawatts to Long Island by 2004.
     Keyspan’s Energy Services business provides a full array of energy products to the immense Northeast market. Its energy investments sector includes a solid exploration and production business, as well as other investments that utilize their gas and electric core competencies.
     Keyspan is making investments in new technologies that will benefit its relationship with its customers. Their new technological device is the use of its E-Commerce investment in This is an Internet portal, which helps customers manage their energy needs. The current mission of Keyspan is to become the premier energy and Services Company in the Northeastern United States, providing a full range of products and services. Its priorities are to grow the core regulated business, to build the energy service business, as well as continuing to grow organically.
     The goal of Keyspan is to grow its customer base. They would like to be able to sell new products and services, extend their management over a large base, and provide an economy needed for technology investments.
Financial Position
     Keyspan is financially solid with a +4 billion ‘market cap’, a healthy dividend, yields of 5-6%, and a strong balance sheet. Keyspans 52 week high was 43.63, while its low was 29.10. Its EBIT (Earnings Before Income Taxes) for the year 2000 is 720 million. For 1999 the EBIT was 529 million.

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Internal Environment
     Keyspan strategic initiatives are designed to foster the company’s transition into one of the premier integrated energy companies operating in the Northeastern United States. Expansion of its gas distribution business, particularly on Long Island and New England remains a top priority. Management intends to aggressively take advantage of the trend towards deregulation and more competitive markets to offer an expanded array of energy and management services to an expanding customer base. The year 2000 was a year of tremendous progress for Keyspan as they saw their strategy for growth take hold in both regulated and unregulated businesses. As a result of Keyspan’s solid performance from all their business segments, they acquired higher earnings. Keyspan took a giant step towards becoming the premier energy and Services Company in the northeast when they completed the acquisition of Eastern Enterprises and EnergyNorth on November 8, 2000.      Eastern Enterprises and EnergyNorth were the largest gas companies in Massachusetts and New Hampshire, respectively with Eastern the parent company of Boston Gas, Essex Gas and Colonial Gas. All these former Eastern and EnergyNorth utilities are now doing business as Keyspan Energy delivery in New England. Due to this transaction, approximately 800,000 gas customers were added to Keyspan's customer base, bringing the total number of gas customers to 2.4 million. The primary driver behind the Eastern Enterprises and EnergyNorth acquisitions was the growth opportunity. Keyspan expects the Eastern acquisition to provide them with Synergy savings of approximately $40 million annually, mostly through the elimination of duplicate programs, systems consolidations, personnel reductions and organizational efficiencies. This completion of the Eastern and EnergyNorth transactions has also effectively positioned Keyspan in the energy marketplace, allowing the company to attain the right size and scale to provide shareholder value going forward. Keyspan is now the largest gas distribution company in the Northeast and the fifth largest in the United States, with over 1,1 billion in gross profit margin and more than 21,000 miles of gas mains. The acquisition also added 1,800 experienced employees to Keyspan’s workforce, which now totals more than 13,000 employees across all their companies. These 1,800 new employees have the experience of working with a very large customer base and very cold winters.
Operating Environment
With the recent acquisitions of the New England companies, Keyspan now serves 2.4 million total customers. There is still the potential to grow to 3.6 million customers in coming years because of the new acquisitions. With this new large customer base, Keyspan can grow its energy services and appliances business. Along with the gas distribution customers, Keyspan also has 1.1 million electric customers because of a service agreement with LIPA (Long Island Port Authority). Keyspan owns and operated gas and oil fired electric plants on Long Island and New York City with the total capacity of about 6,200 megawatts. Also in the electric part of the business, there is still room for growth. Keyspan recently filed an application with New York State Public Service Commission to build a new 250 megawatt generating facility at the Ravenswood site (Queens). It will be put into service in 2003.
With the energy services line if business, Keyspan markets consumer products and services to over 300,000 residential, commercial and industrial customers ion New York City, Rhode Island, Pennsylvania, Massachusetts and New Hampshire. Keyspan also has some energy investments. They own 20% interest in the Iroquois’s Gas Transmission System. They also own a 50% interest in the Premier Transco Pipeline and 24.5% interest in Phoenix Natural Gas; both are in Northern Ireland. Lastly, the Gas Exploration and Production line of business for Keyspan is also profitable. Keyspan owns 70% ownership interest in the Houston Exploration Company (an independent natural gas and oil company with offshore and onshore operations). Keyspan is heading to be the premier utility company in the United States. With all the acquisitions and mergers, Keyspan is moving to increase its customer base as well as their supplies and supply lines. Keyspan is not your typical utility. They are taking an extremely pro-active approach to a usually conservative industry.

Where Keyspan is Going
     The preceding information has given us a solid definition of who Keyspan is along with Keyspan’s environment. That leaves us with the following question: Where is Keyspan Going? To answer this question we must first take a look at the companies overall strengths.
     In 1998 the company has been looking ahead. It all stared when Brooklyn Union Gas & Long Island Lighting Company merged. After a brief stint being know as Marketspan, they changed their name to what they are know as today – Keyspan. Keyspan’s overall strengths are stronger now than ever before with the intelligent acquisitions of New England Companies, as mention earlier. Keyspan is now the largest gas Distribution Company in the Northeast. With other accolades of being the largest investor owned electric generator in New York State, having more than 4 million customers served as well as having over a $7 billion revenue, one can not assess that Keyspan’s strengths are quite impressive and show no indication of slowing down anytime soon.
     With Keyspan’s short-mid-and long-term success comes an important question. Is Keyspan willing to briefly stay at their current position knowing that in the long run they will be more immense then ever before or just go for it all now and see what the future brings?     Keyspan management is currently targeting 5% to 6% revenue + earning growth annually, which is well above national averages for utility’s. In the year 2000, their gross margin was $1.1 billion. If Keyspan implements their long-term strategies of untapping the New York and New England markets, and is successful, the gross margin will leap to $1.3 billion. The $1.3 comes from the $150 million in New York, $400 million from Long Island, and $750 million from New England. This just goes to show how important mergers and acquisitions have been for Keyspan.
     The direction they seem to be leaning towards now is to slowly improve by acquiring more companies and grow at a slower rate than that they have been growing. Keyspan plans to buy more companies, which will lead to a growing customer base as well as push them further to their vision of being the premier energy company in the northeast. Currently, they believe providing gas and electric services will be sufficient, but with long-term goals, as mentioned before, Keyspan will need other markets in which to absorb revenue.

     It is evident that Keyspan’s strategies have been successful, so why change them? We feel that Keyspan should continue in the direction that they are currently headed. However, Keyspan should not forget that they are a gas and electric company. That is the meat and potatoes of their business. By growing into a home and energy services company, they may be straying away from their key revenue drivers. The majority of Keyspan’s focus should continue to be directed towards aspects such as natural-gas exploration, production, pipeline transportation, distribution and storage. The reason behind this is quite simple.
Due to the rapid economic growth over the last few years, the demand for both energy and natural gas skyrocketed. However, production has not been able to keep pace with that demand. As a result of this imbalance, the prices of both fuels have increased significantly last year. Now, if Keyspan’s only focus was on home services, their earnings may have decreased due to the dramatic cause and effect the demand had on prices, but fortunately this was not the case. Because of their investments in electric generation and gas exploration and production, Keyspan’s earnings actually benefited from this short-term imbalance.
Although the high gas and electric commodity prices added to their earnings this year, it is impeccable that Keyspan understand the concern it creates for their customers who may have difficulty managing the escalating bills. Keyspan must maintain a healthy relationship with these struggling customers by not only helping them find ways to reduce their energy consumption, but also setting up flexible payment options to help them manage their budgets. Now not only does Keyspan increase earnings with the major jump in demand, it also reaffirms the trust between the customer and the company with the help the customer receives with his/her financial difficulty.
If they continue to merge and buy out other companies, continue their investments in other subsidiaries such as electric generation and natural-gas exploration and production, as well as maintain that high level of trust between its customers, Keyspan will be one of the most prestigious companies of our time. It’s not rocket science, just good business.
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