KeySpan Corp. (KSE) revealed that it will be taking a $30 million after-tax second quarter charge, or 22 cents per share, against earnings to tie up some recently discovered loose ends on several construction projects of its Roy Kay Companies subsidiary, which it purchased last year. CEO Robert Catell also said the recent declines in gas and power prices have forced a downward revision in full-year results for the company.
“The special charge reflects the recently discovered cost to KeySpan to complete the work on certain Roy Kay construction projects. The charge also reflects unanticipated costs to correct inaccuracies on the books of these companies on several construction projects as well as inaccuracies related to their overall financial and operational performance. The performance of the former owners of the Roy Kay Cos. was not commensurate with the high standards demanded by KeySpan. As a result we have terminated their employment and installed new management in their place. KeySpan and Roy Kay are engaged in litigation relating to the termination of the former owners and other matters relating to the acquisition of these companies. Let me assure you we intend to pursue all available legal remedies to recover the damages we have incurred as a result of their activities.” Catell added that of the nine HVAC companies KeySpan acquired in the past two years, the other eight are “performing at or near expectations,” and the company does intend to report a profit in its energy services business this year. Over the past two years, KSE has invested $400 million to grow its HVAC business.
On the commodity price situation, Catell acknowledged the company will have to reduce its earnings estimate for the rest of 2001. “We expect to report earnings of 16 cents per share for the second quarter excluding the special energy services charge of 22 cents per share. We are essentially on target for the first six months of this year with our internal projections. However, due to the significant decline in commodity prices this past month or so, it has recently become necessary to reduce our internal earnings forecasts and revise our guidance for this year from approximately $2.70/share to a range of between $2.50 to $2.60/share excluding the special charge.”
Catell said the lower earnings expectations resulted primarily from lower gas prices projected by KeySpan’s gas exploration and production operations, as well as the lower New York City electricity prices. “The local electric market has become more competitive as a result of the additional capacity that is available and the mild summer weather we have experienced.” He said Houston Exploration, KeySpan’s E&P unit, has hedged 70% of its production this year at $4/Mcf, and KeySpan has sold forward up to 50% of its peak electric summer generating capacity.
“We are confident that our hedging strategy and the forward sales of electricity will mitigate any further reduction to earnings and we will continue to deliver strong earnings growth,” added Catell.
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