KeySpan Corp. plans to sell or spin off its remaining 55% stake in The Houston Exploration Co. this year, said Robert Catell, CEO of KeySpan, the largest gas distributor in the Northeast. The company has been reducing its stakes in various non-core businesses, with an eye toward cutting debt to 50% of its market capitalization by the end of the year and acquiring power and gas assets.

“We are continuing to assess our options with respect to the monetization of our remaining non-core assets, as exemplified by the recent 36% monetization of KeySpan Canada,” said Catell. “The growth of our core businesses and the dividend yield will continue to provide value to our shareholders.”

KeySpan last year cut its stake in Houston Exploration from about 66%. And on April 1, it completed the sale of an additional 36% of its ownership interest in KeySpan Canada, reducing its holdings to 25%. KeySpan’s interest was monetized through a Canadian income trust and yielded net proceeds of $140 million. A pre-tax gain of $20 million is expected to be reflected in second quarter results.

KeySpan’s first quarter results exceeded expectations and last year’s results. Consolidated earnings from continuing operations rose 8% to $246.2 million, or $1.54 per share, compared to $222.8 million, or $1.42 per share in 1Q2003. The results exclude last year’s first quarter gain from the partial sale of the Houston Exploration. Including this gain, first quarter 2003 results were $241.8 million or $1.54 per share.

Operating income for the quarter was up 7% over last year. The solid performance of the gas distribution business was the main driver, benefiting from new gas load growth and the recently approved Boston Gas rate increase. In addition, the electric services and gas exploration and production segments contributed to these positive results through lower electric generation maintenance costs and higher natural gas production levels and prices.

“Our gas distribution system performed very reliably during one of the coldest January months on record,” said Catell. “We are off to a strong start in achieving our 2004 goal of adding $55 million in gross profit margin as gas conversions, and new customer additions are already 20% ahead of last year. In our electric operations, we have prepared our generation portfolio to meet the demands of the upcoming summer cooling season. And we begin the summer with the addition of our new 250 MW unit at the Ravenswood site, the first new major baseload plant in New York City in over 30 years.”

The gas distribution segment, which serves New York City, Long Island and New England, reported operating income of $380 million, exceeding 2003 results by $15 million, or 4%. KeySpan completed more than 10,300 gas installations during the quarter, which should add $10.5 million in new gross profit margin in the future. The rate increase for the former Boston Gas, which became effective last November, contributed $11 million to net margins. And weather for the quarter was 7% colder than normal, but 2% warmer than last year.

The company’s electric services segment, which owns the New York City and Long Island load pockets and manages Long Island Power Authority’s transmission and distribution system, reported a 19% increase in operating income to $47 million. KeySpan’s energy investments segment, which includes exploration and production operations as well as pipeline and other investments, realized a 14% increase in operating income due to higher production volumes and a slight increase in gas commodity prices.

Houston Exploration reported a 7% decrease in earnings to $39.7 million, or $1.25/share. Excluding special items, per share income would have been up 5% year-over-year. First quarter 2004 earnings were ahead of the latest consensus estimates by 8 cents/share. Cash from operations totaled $121 million, $6 million higher than the first quarter of 2003. And Houston Exploration’s production rates set a new record, with volumes averaging 332 MMcfe/d, up 15%. Realized natural gas prices on hedged production averaged $4.99/Mcf and prices averaged $5.43/Mcf on unhedged volumes, compared to $4.93/Mcf and $6.36/Mcf, respectively during 1Q2003. Crude oil prices averaged $32.50/bbl versus $31.57/bb.

At the end of the first quarter, KeySpan’s debt to total capitalization ratio, as calculated by the company’s credit facilities, improved to 56.1%, as compared to 58.2% at year end 2003. On a GAAP basis, the debt to total capitalization ratio was 59.8% at the end of the quarter, as compared to 61.9% at year-end.

KeySpan’s 2004 earnings guidance remains at $2.55 to $2.75 per share, as announced in December 2003.

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