Unseasonably warm weather reduced energy demand in the Northeast, lowered prices and cut into KeySpan’s fourth quarter earnings. The company reported slightly lower earnings, excluding special items, of $99 million, or 71 cents per share, down from $100.9 million, or 75 cents per share, a year earlier. Wall Street analysts had expected earnings of 73-78 cents per share, with a consensus estimate of 75 cents. Including special items, earnings fell to $34.4 million, or 25 cents per share, from $58.9 million, or 44 cents per share.

KeySpan also said it has agreed to sell its Midland Enterprises barge operation to privately-held Ingram Industries for $230 million. Ingram will also assume $135 million of Midland debt. KeySpan said it took a charge of $30.4 million, or 22 cents per share, in the fourth quarter from the Midland deal. The sale of Midland was mandated by the Securities and Exchange Commission as part of KeySpan’s November 2000 acquisition of Eastern Enterprises.

For the year consolidated earnings, including all special charges and discontinued operations, were $213.1 million, or $1.54 per share, compared to $282.7 million or $2.10 per share in 2000. Diluted earnings per share for the year ended 2001 were $1.52 per share.

“Our cost-containment programs continue to provide substantial savings and operational efficiencies,” said CEO Robert B. Catell said. “Specifically, we have realized significant gas sales growth in each of our territories. In addition, we are moving forward with our focused generation strategy as evidenced by our progress in building new generation plants in our region. Our announced divestiture of Midland Enterprises is a major step toward exiting our non-core businesses and enhancing our Northeast focus.”

As a result of the precipitous decline in gas prices, the company’s exploration and production operations recorded a non-cash after-tax impairment charge of $31.4 million, or $0.23 per share to write-down the carrying value of its investments in proved gas reserves. The non-cash write-down, in conformity with SEC rules for exploration and production companies which use the full cost accounting method, impacts KeySpan’s interest in Houston Exploration, as well as KeySpan Exploration and Production LLC, a wholly-owned subsidiary engaged in a joint venture with Houston Exploration.

Gas exploration and production operations, primarily the company’s 67% ownership of Houston Exploration, contributed annual EBIT of $160.7 million compared to $111.7 million last year. These annual results reflect a 25% increase in natural gas commodity prices and a 17% increase in production volumes. KeySpan’s gas exploration and production operations recorded EBIT of $24.4 million in the fourth quarter, compared to EBIT of $51.0 million in last year’s fourth quarter, primarily due to lower gas commodity prices. Given the volatility of the gas commodity market, THX has hedged 60% of 2002 production at a weighted average floor price of $3.44 per MMBtu.

KeySpan’s gas distribution segment serving New York City, Long Island and New England recorded annual EBIT of $492.4 million, compared to $409 million in the prior year. The 20% EBIT improvement reflects the contributions of its newly acquired New England gas distribution companies, as well as continued gas-sales growth in all markets as conversions to natural gas continue at a brisk pace in all our territories. During 2001, KeySpan completed more than 50,000 gas installations that will add $61.7 million in new gross profit margin — more than a 13% increase over the prior year’s record level. KeySpan’s gas distribution segment recorded EBIT of $173.8 million in the fourth quarter, compared to EBIT of $187.3 million in last year’s fourth quarter, primarily due to significantly warmer weather throughout the Northeast.

KeySpan reaffirmed its prior 2002 earnings forecast of $2.70 to $2.85 per share, consisting of $2.40 to $2.45 per share primarily from core operations and $0.30 to $0.40 per share from E&P operations. “At this time, we are reaffirming our commitment to 8% growth in our core operations,” company officials said in a statement. “However, the current low gas price environment has resulted in an E&P write-down, which required us to recognize 2002 hedging gains in 2001. Therefore, at this time, our current 2002 E&P earnings projection is approximately $0.20 per share below our prior guidance, although our cash flow should not be impacted. This projection could change significantly during the year due to market conditions.”

Catell said, “Natural gas is the fuel of choice for homeowners throughout the Northeast, and with our strong customer relationships, conversions from oil to gas should continue to result in strong profit margin growth. Our plans to construct 650 MW of new power plants on Long Island and in New York City, of which 285 MW are under long-term contract, are moving ahead. We are looking at other opportunities to acquire generating plants in the attractive Northeast market. Also, development of new pipeline capacity to serve New York and Connecticut has received preliminary regulatory approval and would enable KeySpan to tap into new gas basins in the Canadian Atlantic. Finally, we are strongly committed to maintaining our dividend of $1.78 per share.”

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