SECURITIES AND EXCHANGE COMMISSION
(Release No. 35-27936; 70-10274)
Order Authorizing Maintenance of Certain Guarantees and Reservation of Jurisdiction
January 7 2005
KeySpan Corporation ("KeySpan"), a combination gas and electric registered public utility holding company, Brooklyn, NY, has filed a declaration ("Declaration") with the Securities and Exchange Commission ("Commission") under sections 6(a) and 7 of the Public Utility Holding Company Act of 1935, as amended ("Act") and rule 54 under the Act. The Commission issued a notice of the Declaration on December 16, 2004 (HCAR No. 27926).
KeySpan states that it is a diversified registered public utility holding company. KeySpan directly or indirectly owns seven public utility companies in New York and Massachusetts.1 KeySpan also directly or indirectly owns various nonutility subsidiaries through which KeySpan engages in energy related nonutility activities.
By order dated December 18, 2003 (HCAR No. 27776) ("Financing Order"), the Commission authorized KeySpan and its subsidiaries to engage in a program of external and intrasystem transactions including, among other things, to engage in certain types of credit support arrangements through December 31, 2006 ("Authorization Period"). The Financing Order authorized KeySpan to enter into guarantees ("Guarantees"), performance Guarantees, obtain letters of credit, enter into expense agreements or otherwise provide credit support with respect to the obligations of its subsidiaries as may be appropriate or necessary to enable the subsidiaries to carry on in the ordinary course of their respective businesses in an aggregate principal amount not to exceed $ 4.0 billion outstanding at any one time (excluding obligations exempt under rule 45).
KeySpan plans to divest its nonutility subsidiaries Delta KeySpan, LLC ("Delta KeySpan"), Granite State Plumbing & Heating, LLC ("Granite State") and Northern Peabody, LLC ("Northern Peabody"), WDF, Inc. ("WDF"), and its subsidiaries, Binsky & Snyder, LLC ("Binsky") and its subsidiaries and Binsky and Snyder Service, LLC ("Binsky Service" and, collectively "KSI Nonutilities"), which are owned indirectly by KeySpan Services, Inc. ("KSI"). KeySpan states that the divestiture transactions will involve the continued maintenance of certain existing Guarantees by KeySpan in favor of the KSI Nonutilities that were previously issued in accordance with the Financing Order ("KSI Nonutilities Guarantees"). KeySpan expects to sell these KSI Nonutilities to certain nonaffiliated third parties.
In connection with these proposed divestitures, KeySpan states that the terms of the KSI Nonutilities Guarantees would not change in any respect. No new guarantees and indemnities would be issued in connection with any proposed KSI divestiture transaction. KeySpan states that the KSI Nonutilities Guarantees would remain in place only for an interim period until the completion of a project and the expiration of any associated warranty period in accordance with contractual obligations. KeySpan states that the original aggregate value of the issued KSI Nonutilities Guarantees was approximately $76 million. KeySpan states that the presently outstanding aggregate exposure of the KSI Nonutilities Guarantees has been substantially reduced and as of November 30, 2004 is approximately $23 million.
KeySpan states that each of the KSI Nonutilities Guarantees have varying terms, and in certain cases the term has no date certain but is set to expire upon completion of the associated work project. In any event, KeySpan states that none of the KSI Nonutilities Guarantees, including any associated warranty period, are expected to terminate later than the dates set forth below:
KeySpan requests that the Commission reserve jurisdiction over the proposed maintenance of KSI Nonutilities Guarantees directly related to the proposed divestiture of WDF and its subsidiaries, Binsky and its subsidiaries and Binsky Service. KeySpan states that this reservation of jurisdiction is necessary because it has not presently negotiated agreeable terms with any potential buyer for these subsidiaries, but may do so in the future.
KeySpan asserts that it is in the best interests of KeySpan and its shareholders to maintain the KSI Nonutilities Guarantees in place after the proposed divestiture of the KSI Subsidiaries. KeySpan states that Delta KeySpan, Granite State and Northern Peabody, in the aggregate, have incurred losses before income taxes of approximately $5 million for the year ended December 31, 2003. For the nine months ended September 30, 2004, the aggregate losses attributable to Delta KeySpan, Granite State and Northern Peabody incurred by KeySpan was approximately $300,000. In addition, KeySpan states that in September 2004, KeySpan recorded a non-cash goodwill impairment charge related to these companies of approximately $11 million.
KeySpan states that, based on the historical operating performance and KeySpan's operating projections for Delta KeySpan, Granite State and Northern Peabody, KeySpan reasonably believes that if it were to retain these businesses, the risk of potential future losses, in the aggregate, could exceed KeySpan's exposure from the maintenance of the KSI Nonutilities Guarantees should it be required to perform under them. In addition, based on this operating performance, KeySpan also states that it believes that it is necessary to keep the KSI Nonutilities Guarantees in place for Northern Peabody, Delta KeySpan and Granite State in order to maximize the value received for each company upon divestiture. Moreover, KeySpan states that it also believes that it may be necessary to keep the KSI Nonutilities Guarantees in place in order to maximize the value received for WDF, Binsky and Binsky Service upon divestiture.
KeySpan states that it currently meets all of the conditions of rule 53(a) except for clause (1). At September 30, 2004, KeySpan's "aggregate investment," as defined in rule 53(a)(1), in exempt wholesale generators ("EWGs"), as that term is defined in section 32 of the Act, and foreign utility companies ("FUCOs") as that term is defined in section 33 of the Act, was approximately $ 1,129,251,000. However, KeySpan states that it is authorized under the Financing Order to invest in EWGs and FUCOs up to $3 billion. In addition, KeySpan states that it has complied, and will continue to comply, with the record-keeping requirements of rule 53(a)(2), the limitation under rule 53(a)(3) of affiliate utility company personnel rendering services to KeySpan's EWGs or FUCOs, and the requirements of rule 53(a)(4) concerning the submission of copies of certain filings under the Act to retail rate regulatory commissions. KeySpan states that none of the circumstances described in rule 53(b) has occurred and that the capitalization and earnings attributable to KeySpan's investments in EWGs and FUCOs has not had an adverse impact on KeySpan's financial integrity. KeySpan states that its EWG and FUCO investments have been profitable, in the aggregate, for all quarterly periods from December 31, 2000 through September 30, 2004.
KeySpan states that the fees, commissions and expenses paid or incurred or to be incurred in connection with this Declaration are estimated at $10,000. Other than Commission approval, KeySpan states that no other federal or state regulatory approvals are required for the KSI divestiture transactions.
Due notice of the filing of this Declaration has been given in the manner prescribed in rule 23 under the Act, and no hearing has been requested of, or ordered by, the Commission. On the basis of the facts, it is found that, except as to those matters over which jurisdiction has been reserved, the applicable standards of the Act and rules under the Act are satisfied, and that no adverse findings are necessary.
IT IS ORDERED, under the applicable provisions of the Act and rules under the Act, that, except as to those matters over which jurisdiction has been reserved, the Declaration, as amended, be permitted to become effective immediately, subject to the terms and conditions contained in rule 24 under the Act.
IT IS FURTHER ORDERED, that jurisdiction be reserved over KeySpan's request for the maintenance, for an interim period of time, of certain existing Guarantees previously issued under the Financing Order authority and directly related to the proposed divestiture of WDF and its subsidiaries, Binsky and its subsidiaries and Binsky Service, pending completion of the record.
For the Commission by the Division of Investment Management, pursuant to delegated authority.
Margaret H. McFarland
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