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KeySpan on the Block; Bidders Said To Be Circling

KeySpan Corp., the fifth largest U.S. natural gas distributor and the largest in the Northeast, last week confirmed, but would not comment on, its potential sale. However, at least two major Northeast utility players were said to be interested in the company.

Friday the New York Times reported that the power and gas company was up for sale and had received offers of more than $6.5 billion, with Consolidated Edison Inc. and National Grid PLC seen as lead bidders.

Trading in KeySpan shares was halted temporarily Friday after the Times report. The company ended up closing $4.57 higher Friday at $40.75, besting its previous close of $36.18 by a wide margin. The stock's 52-week range is $32.66-$41.03.

"We have been pursuing a successful strategy that is working well to serve our customers and deliver shareholder value, and we are well positioned to continue doing so as an independent company," said KeySpan CEO Robert Catell. "However, as our industry has evolved, we believe it is appropriate to explore all alternatives that may be in the best interests of all our stakeholders, particularly the customers we serve."

Announcement of the deal came one day after National Grid said it would buy the Rhode Island gas business of New England Gas Co. from Southern Union Co. (see related story).

Fitch Ratings placed KeySpan's rating under review with "evolving" status. KeySpan has an "A-minus" overall rating with Fitch. Standard & Poor's Ratings Services placed its "A/A-1" corporate credit rating on KeySpan on CreditWatch with "developing" implications."

"We will resolve the CreditWatch listing when we have more clarity on the strategic combination that the company elects and the manner in which it is funded," said S&P analyst Dimitri Nikas.

KeySpan, with headquarters in Brooklyn and Long Island, NY, and New England, is a member of the Standard & Poor's 500 Index and is the fifth largest natural gas distributor in the United States and the largest in the Northeast. The company has regulated gas utilities in New York, Massachusetts and New Hampshire that serve 2.6 million customers.

KeySpan also is the largest electric generator in New York State, with about 6,600 MW of capacity that provides power to 1.1 million customers of the Long Island Power Authority (LIPA) as well as about 25% of the electricity needs of New York City. KeySpan operates LIPA's transmission and distribution system under contract. In January LIPA's board of trustees approved a ratepayer protection plan that, among other things, restructures the authority's management services agreement with KeySpan.

Also last month, Standard & Poor's rating service said that KeySpan's (A/Stable/A-) rating was not immediately affected by a three-year deal involving 1,800 MW of notional generation capacity at a $7.57/kW-month strike price that KeySpan made with Morgan Stanley Capital Group.

Earlier in the year, in a Jan. 5 industry report card, S&P said that KeySpan's business profile "remains above average." However, "any future expansion of unregulated merchant generation fleet without long-term contracts could increase business risk, necessitating a commensurately strong financial profile to preserve current ratings. Nevertheless, debt leverage has improved and we expect that the company's financial profile will consequently benefit in 2006."

KeySpan also has investments in pipeline transportation, distribution, storage and production. Recently, the company has wrangled with FERC over its proposed LNG project, conversion of a Providence, RI, storage terminal for LNG importation (see NGI, Jan. 20).

KeySpan was formed in May 1998 by the merger of KeySpan Energy Corp., the parent of Brooklyn Union Gas, and certain businesses of the Long Island Lighting Co. On Nov. 8, 2000 KeySpan acquired Eastern Enterprises, a Massachusetts business trust and parent of several Massachusetts and New Hampshire gas utilities, including Boston Gas.

Potential suitor Consolidated Edison Inc.'s Consolidated Edison Co. of New York Inc. provides power, gas and steam to customers throughout New York's five boroughs and neighboring areas in Westchester County. In 1999 the company merged with Orange and Rockland Utilities and expanded service to include Orange and Rockland counties in New York as well as parts of New Jersey and Pennsylvania. Con Edison now serves more than 3.4 million electric customers and more than 1.1 million gas customers. A spokesman said the company would not comment on speculation that it might acquire KeySpan.

UK-based National Grid's existing U.S. assets provide power and gas transmission and distribution to nearly four million customers across 29,000 square miles of Massachusetts, New Hampshire, New York and Rhode Island. A National Grid spokeswoman also said the company would not comment.

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