UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q
                                  ANNUAL REPORT
                         PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

                  For the quarterly period ended June 30, 2007

[ ]  TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
     EXCHANGE ACT OF 1934

             For the transition period from __________ to _________

                         Commission file number 1-14161

                               KEYSPAN CORPORATION
             (Exact Name of Registrant as Specified in its Charter)

              NEW YORK                                        11-3431358
  (State or Other Jurisdiction of                          (I.R.S. Employer
   Incorporation or Organization)                         Identification No.)
   One MetroTech Center, Brooklyn, New York                      11201
175 East Old Country Road, Hicksville, New York                  11801
  (Address of Principal Executive Offices)                    (Zip Code)

                            (718) 403-1000 (Brooklyn)
                           (516) 755-6650 (Hicksville)
              (Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.
                                                             Yes[X] No[ ]

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated filer or a non-accelerated filer.

Large accelerated filer[X]     Accelerated filer[ ]     Non-accelerated filer[ ]

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Act).
                                                             Yes[ ]  No[X]

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

  Class of Common Stock                           Outstanding at July 11, 2007
---------------------------                       ----------------------------
      $.01 par value                                       175,936,537

<PAGE>


                      KEYSPAN CORPORATION AND SUBSIDIARIES

                                      INDEX
                                      -----

                Part I.   FINANCIAL INFORMATION                      Page No.
                                                                     --------

Item 1. Financial Statements (Unaudited)

         Consolidated Balance Sheet -
         June 30, 2007 and December 31, 2006                             3

         Consolidated Statement of Income -
         Three and Six Months Ended June 30, 2007 and 2006               5
         Consolidated Statement of Cash Flows -
         Six Months Ended June 30, 2007 and 2006                         6

         Notes to Consolidated Financial Statements                      7

Item 2. Management's Discussion and Analysis of Financial
        Condition and Results of Operations                              45

Item 3. Quantitative and Qualitative Disclosures About Market Risk       77

Item 4. Controls and Procedures                                          80

                Part II. OTHER INFORMATION

Item 1. Legal Proceedings                                                81

Item 1A. Risk Factors                                                    81

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds       83

Item 3. Defaults Upon Senior Securities                                  83

Item 4. Submission of Matters to a Vote of Security Holders              83

Item 5. Other Information                                                83

Item 6. Exhibits                                                         83

Signatures                                                               84


                                       2
<PAGE>

<TABLE>
<CAPTION>
                           CONSOLIDATED BALANCE SHEET
                                   (Unaudited)


-------------------------------------------------------------------------------------------------------

(In Millions of Dollars)                                            June 30, 2007    December 31, 2006
-------------------------------------------------------------------------------------------------------

ASSETS
<S>                                                                    <C>                  <C>
Current Assets
    Cash and temporary cash investments                                $    496.5           $    210.9
    Restricted cash                                                           0.5                  7.9
    Accounts receivable                                                   1,032.3                943.7
    Unbilled revenue                                                        273.8                531.2
    Allowance for uncollectible accounts                                    (84.0)               (56.9)
    Gas in storage, at average cost                                         533.6                646.0
    Material and supplies, at average cost                                  133.8                137.1
    Derivative contracts                                                     37.7                 54.1
    Prepayments                                                             115.7                236.2
    Other                                                                    97.6                 76.8
                                                               ----------------------------------------
                                                                          2,637.5              2,787.0
                                                               ----------------------------------------

Equity Investments and Other                                                292.7                269.7
                                                               ----------------------------------------

Property
    Gas                                                                   7,825.7              7,639.4
    Electric                                                              2,606.4              2,575.4
    Other                                                                   428.5                441.5
    Accumulated depreciation                                             (3,258.8)            (3,151.2)
    Gas production and development, at cost                                 188.1                186.9
    Accumulated depletion                                                  (116.4)              (113.7)
                                                               ----------------------------------------
                                                                          7,673.5              7,578.3
                                                               ----------------------------------------

Deferred Charges
    Regulatory assets:
      Miscellaneous assets                                                  923.2                937.5
      Derivative contracts                                                   94.6                196.3
    Goodwill and other intangible assets, net of amortization             1,666.3              1,666.3
    Derivative contracts                                                    101.6                127.3
    Other                                                                   848.5                875.1
                                                               ----------------------------------------
                                                                          3,634.2              3,802.5
                                                               ----------------------------------------

Total Assets                                                           $ 14,237.9           $ 14,437.5
                                                               ========================================
-------------------------------------------------------------------------------------------------------
</TABLE>
        See accompanying Notes to the Consolidated Financial Statements.



                                       3
<PAGE>

<TABLE>
<CAPTION>
                           CONSOLIDATED BALANCE SHEET
                                   (Unaudited)


---------------------------------------------------------------------------------------------------------

(In Millions of Dollars)                                            June 30, 2007      December 31, 2006
---------------------------------------------------------------------------------------------------------
<S>                                                                    <C>                    <C>
LIABILITIES AND CAPITALIZATION
Current Liabilities
    Accounts payable and other liabilities                             $    759.3             $  1,026.0
    Commercial paper                                                        131.5                   85.0
    Current maturities of long-term debt and capital leases                 296.2                    1.2
    Taxes accrued                                                           202.3                  200.8
    Dividends payable                                                        83.5                   83.3
    Customer deposits                                                        36.8                   33.5
    Interest accrued                                                         58.9                   58.5
    Other current liability, derivative contracts                            89.8                  219.7
                                                               ------------------------------------------
                                                                          1,658.3                1,708.0
                                                               ------------------------------------------

Deferred Credits and Other Liabilities
    Regulatory liabilities:
      Miscellaneous liabilities                                              37.2                   43.4
      Removal costs recovered                                               587.5                  556.2
      Derivative accounts                                                    59.3                  120.6
    Asset retirement obligations                                             48.7                   47.3
    Deferred income tax                                                   1,090.7                1,176.4
    Postretirement benefits and other reserves                            1,657.8                1,667.3
    Derivative contracts                                                     88.3                   43.1
    Other                                                                   215.9                  121.6
                                                               ------------------------------------------
                                                                          3,785.4                3,775.9
                                                               ------------------------------------------

Commitments and Contingencies (See Note 6)                                      -                      -

Capitalization
    Common stock 184,864 shares issued,
      175,919 shares outstanding, par value $0.01                         3,995.9                3,994.0
    Retained earnings                                                     1,072.2                  973.7
    Retained earnings - cumulative effect of FIN 48
      implementation (See Note 11)                                           (5.2)                     -
    Accumulated other comprehensive loss                                   (149.2)                (175.3)
    Treasury stock                                                         (258.7)                (273.6)
                                                               ------------------------------------------
        Total common shareholders' equity                                 4,655.0                4,518.8
    Long-term debt and capital leases                                     4,123.1                4,419.1
                                                               ------------------------------------------
Total Capitalization                                                      8,778.1                8,937.9
                                                               ------------------------------------------

Minority Interest in Consolidated Companies                                  16.1                   15.7
                                                               ------------------------------------------
Total Liabilities and Capitalization                                   $ 14,237.9             $ 14,437.5
                                                               ==========================================
---------------------------------------------------------------------------------------------------------
</TABLE>

        See accompanying Notes to the Consolidated Financial Statements.


                                       4
<PAGE>

<TABLE>
<CAPTION>
                        CONSOLIDATED STATEMENT OF INCOME
                                   (Unaudited)

-----------------------------------------------------------------------------------------------------------------------------------
                                                                Three Months Ended June 30,               Six Months Ended June 30,
(In Millions of Dollars, Except Per Share Amounts)              2007                  2006                2007                2006
--------------------------------------------------------------------------------------------  -------------------------------------
<S>                                                         <C>                   <C>                 <C>               <C>
Revenues
     Gas Distribution                                     $   1,011.1            $    873.2         $   3,426.6       $    3,053.3
     Electric Services                                          457.7                 444.2               842.2              869.0
     Energy Services                                             52.4                  50.4               104.9               98.7
     Energy Investments                                           9.2                   9.9                19.2               17.8
                                                     -----------------  --------------------  ------------------ ------------------
Total Revenues                                                1,530.4               1,377.7             4,392.9            4,038.8
                                                     -----------------  --------------------  ------------------ ------------------
Operating Expenses
     Purchased gas for resale                                   649.4                 539.8             2,322.1            2,051.2
     Fuel and purchased power                                   138.1                 115.7               266.3              245.7
     Operations and maintenance                                 411.4                 420.6               842.3              826.7
     Depreciation, depletion and amortization                   104.6                 101.2               216.9              211.4
     Operating taxes                                             98.7                  95.8               221.2              214.0
                                                     -----------------  --------------------  ------------------ ------------------
Total Operating Expenses                                      1,402.2               1,273.1             3,868.8            3,549.0
Income from equity investments                                    4.9                   2.9                 8.5                6.3
Sale of assets                                                    0.3                     -                 0.3                0.5
                                                     -----------------  --------------------  ------------------ ------------------
Operating Income                                                133.4                 107.5               532.9              496.6
                                                     -----------------  --------------------  ------------------ ------------------
Other Income and (Deductions)
     Interest charges                                           (69.6)                (59.4)             (131.1)            (125.6)
     Other                                                       18.3                   6.2                26.4               17.6
                                                     -----------------  --------------------  ------------------ ------------------
Total Other Income and (Deductions)                             (51.3)                (53.2)             (104.7)            (108.0)
                                                     -----------------  --------------------  ------------------ ------------------
Income Taxes
     Current                                                     63.7                 (37.3)              240.9              122.2
     Deferred                                                   (33.8)                 42.2               (78.3)               9.0
                                                     -----------------  --------------------  ------------------ ------------------
Total Income Taxes                                               29.9                   4.9               162.6              131.2
                                                     -----------------  --------------------  ------------------ ------------------
                                                     -----------------  --------------------  ------------------ ------------------
Earnings for Common Stock                                 $      52.2            $     49.4         $     265.6       $      257.4
                                                     =================  ====================  ================== ==================
                                                     -----------------  --------------------  ------------------ ------------------
Basic Earnings Per Share                                  $      0.30            $     0.28         $      1.51       $       1.47
                                                     =================  ====================  ================== ==================
                                                     -----------------  --------------------  ------------------ ------------------
Diluted Earnings Per Share                                $      0.29            $     0.28         $      1.50       $       1.46
                                                     =================  ====================  ================== ==================
Average Common Shares Outstanding (000)                       175,845               174,989             175,733            174,846
Average Common Shares Outstanding - Diluted (000)             177,220               176,121             177,048            175,848
--------------------------------------------------------------------------------------------  -------------------------------------
</TABLE>

        See accompanying Notes to the Consolidated Financial Statements.


                                       5
<PAGE>


<TABLE>
<CAPTION>
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (Unaudited)


------------------------------------------------------------------------------------------------------------
                                                                                  Six Months Ended June 30,
(In Millions of Dollars)                                                           2007               2006
------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>                <C>
Operating Activities
Net income                                                                       $ 265.6            $ 257.4
Adjustments to reconcile net income to net
      cash provided by (used in) operating activities
    Depreciation, depletion and amortization                                       216.9              211.4
    Deferred income tax                                                            (78.3)               9.0
    Income from equity investments                                                  (8.5)              (6.3)
    Dividends from equity investments                                                2.3                6.5
    Amortization of financing fees / interest rate swap                              4.4                4.1
    Amortization of property taxes                                                  52.0               66.7
    Net pension and other postretirement expense/cash payment                       52.2               83.2
Changes in assets and liabilities
    Accounts receivable                                                             69.4              524.3
    Materials and supplies, fuel oil and gas in storage                            168.7               89.6
    Accounts payable and other liabilities                                        (171.6)            (399.0)
    Taxes accrued                                                                   60.6              (15.1)
    Interest accrued                                                                 0.3                2.2
    Environmental payments                                                         (23.5)             (24.8)
    Other                                                                           (4.6)             (19.7)
                                                                      -------------------  -----------------
Net Cash Provided by Operating Activities                                          605.9              789.5
                                                                      -------------------  -----------------
Investing Activities
    Construction expenditures                                                     (246.1)            (247.0)
    Cost of removal                                                                (14.0)             (15.7)
    Derivative margin call                                                          42.7                  -
    Return of investment                                                             7.6                  -
                                                                      -------------------  -----------------
Net Cash Used in Investing Activities                                             (209.8)            (262.7)
                                                                      -------------------  -----------------
Financing Activities
    Common/treasury stock issued                                                    10.4               18.8
    Issuance (payment) of commercial paper                                          46.5             (467.6)
    Payment of long-term debt                                                       (0.6)                 -
    Common stock dividends paid                                                   (166.8)            (162.4)
                                                                      -------------------  -----------------
Net Cash Used in Financing Activities                                             (110.5)            (611.2)
                                                                      -------------------  -----------------
Net Increase (Decrease) in Cash and Cash Equivalents                               285.6              (84.4)
Cash and Cash Equivalents at Beginning of Period                                   210.9              124.5
                                                                      -------------------  -----------------
Cash and Cash Equivalents at End of Period                                       $ 496.5            $  40.1
                                                                      ===================  =================
Interest Paid                                                                    $ 135.5            $ 126.8
Income Tax Paid                                                                  $ 131.6            $ 178.2
------------------------------------------------------------------------------------------------------------
</TABLE>
          Cash equivalents are short-term  marketable  securities purchased with
          maturities  of three  months or less that were  carried  at cost which
          approximates fair value.

        See accompanying Notes to the Consolidated Financial Statements.


                                       6
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

INTRODUCTION TO THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

KeySpan  Corporation  (referred to in the Notes to the  Financial  Statements as
"KeySpan,"  "we," "us" and "our") is a holding  company under the Public Utility
Holding  Company Act of 2005 ("PUHCA  2005").  KeySpan  operates  six  regulated
utilities that distribute  natural gas to approximately 2.6 million customers in
New York City, Long Island,  Massachusetts and New Hampshire, making KeySpan the
fifth largest gas  distribution  company in the United States and the largest in
the Northeast.  We also own,  lease and operate  electric  generating  plants in
Nassau and Suffolk Counties on Long Island and in Queens County in New York City
and are the  largest  electric  generation  operator  in New York  State.  Under
contractual   arrangements,   we  provide  power,   electric   transmission  and
distribution services, billing and other customer services for approximately 1.1
million  electric  customers  of  the  Long  Island  Power  Authority  ("LIPA").
KeySpan's other operating  subsidiaries are primarily involved in gas production
and development;  underground gas storage; liquefied natural gas storage; retail
electric marketing; large energy-system ownership,  installation and management;
service and  maintenance  of energy  systems;  and  engineering  and  consulting
services.  We also  invest and  participate  in the  development  of natural gas
pipelines,  electric generation and other energy-related  projects.  (See Note 2
"Business Segments" for additional information on each operating segment.)

On February 25, 2006,  KeySpan entered into an Agreement and Plan of Merger (the
"Merger   Agreement"),   with  National  Grid  plc,  a  public  limited  company
incorporated  under the laws of England and Wales  ("Parent")  and National Grid
US8, Inc., a New York Corporation  ("Merger Sub"),  pursuant to which Merger Sub
will merge with and into KeySpan (the "Merger"),  with KeySpan continuing as the
surviving  company and thereby becoming an indirect  wholly-owned  subsidiary of
the  Parent.  Pursuant to the Merger  Agreement,  at the  effective  time of the
Merger,  each  outstanding  share of KeySpan  common stock,  par value $0.01 per
share of KeySpan (the  "Shares"),  other than treasury shares and shares held by
the Parent and its  subsidiaries,  shall be canceled and shall be converted into
the right to receive $42.00 in cash,  without  interest.  As contemplated in the
Merger   Agreement,   National  Grid  plc  has  provided  notice  extending  the
termination date of the Merger Agreement through August 25, 2007.

Consummation of the Merger is subject to various closing  conditions,  including
but not limited to the receipt of requisite  regulatory  approvals  from certain
United States federal and state public utility,  antitrust and other  regulatory
authorities.  Specifically,  we filed our application for approval of the Merger
pursuant to the Federal  Power Act in May 2006 and in October 2006 the requisite
approval was obtained from the Federal Energy Regulatory Commission ("FERC"). In
early July 2006,  we cleared  review by the Federal Trade  Commission  under the
Hart-Scott-Rodino  Antitrust Improvement Act ("HSR"),  which provides a one year
period to complete the Merger. In May 2007, we re-filed an application under HSR
and in June 2007 we received  notice that early  termination  of the HSR waiting
period was granted. We also received  notification that the Committee on Foreign
Investment  in the U.S.  has  determined  that  there are no issues of  national
security sufficient to warrant an investigation of the transaction.


                                       7
<PAGE>


In late June  2007,  KeySpan  and  National  Grid plc  reached an  agreement  in
principle  with the  Staff  of the New  York  State  Public  Service  Commission
("NYPSC"),  the New York  State  Consumer  Protection  Board and  certain  other
parties  that  would,  upon NYPSC  approval,  resolve  all issues in the pending
Merger application before the NYPSC. On July 6, 2007, the Merger and Gas Revenue
Requirement  Joint  Proposal  (the "Merger JP") was filed with the NYPSC and the
Administrative Law Judges presiding over the Merger proceeding.

The Merger JP  supersedes  the proposed  ten-year  rate plan  included  with the
merger  application  filed  with the NYPSC on July 20,  2006.  If adopted by the
NYPSC,  the Merger JP would provide for  five-year  rate plans for KeySpan's two
gas distribution  utility companies located in New York, KeySpan Energy Delivery
of New York ("KEDNY") and KeySpan Energy Delivery of Long Island ("KEDLI"), that
would go into effect on January 1, 2008.  The Merger JP provides for no increase
in gas delivery  rates in each of the five years of KEDNY's merger rate plan and
an increase of $60 million in gas delivery  rates in the first year of the KEDLI
merger  rate  plan and no  further  increase  in years  two  through  five.  The
individual  KEDNY  and  KEDLI  rate plan  applications  filed  with the NYPSC on
October 3, 2006 will  supplement  the Merger JP. If the Merger JP is approved by
the NYPSC,  the merger rate plans,  as they may be  supplemented  by KEDNY's and
KEDLI's  individual rate cases, will go into effect on January 1, 2008. For more
information on the Merger JP, see KeySpan's Report on Form 8-K filed on July 12,
2007, incorporated herein by reference.

NYPSC action on the Merger JP is  contemplated  at its August 22, 2007  session,
and,  subject to and upon receipt of NYPSC approval,  it is anticipated that the
Merger would close shortly  thereafter.  We are, however,  unable to predict the
outcome of these  regulatory  proceedings and no assurance can be given that the
Merger will occur or the timing of its completion.

In October 2006,  the State of New Jersey Board of Public  Utilities  approved a
change   of   control   of   KeySpan   Communication   Corp.,   which   provides
telecommunications  services in New Jersey.  KeySpan also sought approval of the
Merger from the New Hampshire  Public Utility  Commission  ("NHPUC") and in July
2007,  the NHPUC issued an Order  providing  final approval of the Merger in New
Hampshire.

On April 6, 2007,  the Attorney  General of the  Commonwealth  of  Massachusetts
filed a petition with the  Massachusetts  Department of  Telecommunications  and
Energy  ("MADTE") to initiate an oversight  investigation  related to the Merger
between KeySpan and National Grid plc. The petition does not  specifically  seek
MADTE  approval of the Merger,  which under current law has been  interpreted as
not being required in connection with mergers of utility holding companies which
only indirectly  affect the ownership of utility  subsidiaries  operating within
the Commonwealth of Massachusetts.  Rather, the petition requests that the MADTE
investigate the impact of the Merger on rates and service quality of the utility
subsidiaries  owned  and  operated  by  KeySpan  and  National  Grid  plc in the


                                       8
<PAGE>


Commonwealth of  Massachusetts.  On April 13, 2007 KeySpan and National Grid plc
filed a response to the  Attorney  General's  petition  agreeing to cooperate in
such a proceeding and  recommending  a proposed  procedural  schedule.  A public
hearing and  procedural  conference  was held on July 12, 2007.  KeySpan  cannot
predict the outcome of this proceeding.

In connection with the Merger,  KeySpan expects to continue to incur significant
expenses,  including  without  limitation,  expenses  for legal  and  consulting
services,  the  vesting  of  performance  shares and stock  options,  as well as
expenses  associated  with change of control  payments  and  "stay-on"  bonuses.
KeySpan is currently in the process of quantifying  the financial  impact of the
aforementioned  items.  (For additional  information on outstanding  performance
shares and stock options see Note 7 "Stock Based Compensation.")

For a  discussion  on the impact of the Merger on KeySpan's  service  agreements
with  LIPA,  see Note 10 to the  Consolidated  Financial  Statements  "2006 LIPA
Settlement."

1. BASIS OF PRESENTATION

In our opinion,  the accompanying  unaudited  Consolidated  Financial Statements
contain all adjustments necessary to present fairly KeySpan's financial position
as of June 30, 2007,  and the results of operations for the three and six months
ended June 30, 2007 and June 30, 2006,  as well as cash flows for the six months
ended June 30, 2007 and June 30, 2006. The accompanying  unaudited  consolidated
financial  statements  should  be  read in  conjunction  with  the  consolidated
financial  statements and notes included in KeySpan's Annual Report on Form 10-K
for the year ended December 31, 2006. The December 31, 2006 financial  statement
information  has  been  derived  from the 2006  audited  consolidated  financial
statements.

Income  from  interim   periods  may  not  be  indicative  of  future   results.
Consolidated  earnings are seasonal in nature  primarily due to the  significant
contributions to earnings of the gas distribution  operations.  As a result,  we
expect to earn most of our annual earnings in the first and fourth quarters.

Basic  earnings per share ("EPS") is calculated by dividing  earnings  available
for  common  stock by the  weighted  average  number of  shares of common  stock
outstanding  during  the  period.  No  dilution  for  any  potentially  dilutive
securities is included.  Diluted EPS assumes the  conversion of all  potentially
dilutive  securities and is calculated by dividing earnings available for common
stock,  as  adjusted,  by the sum of the  weighted  average  number of shares of
common stock outstanding plus all potentially dilutive securities.


                                       9
<PAGE>


Under the requirements of Statement of Financial  Accounting  Standards ("SFAS")
No. 128, "Earnings Per Share" our basic and diluted EPS are as follows:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                                                       Three Months Ended June 30,       Six Months Ended June 30,
(In Millions of Dollars, Except Per Share Amounts)                        2007             2006            2007             2006
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>              <C>              <C>              <C>
Earnings for common stock                                             $    52.2        $    49.4        $   265.6        $   257.4

Weighted average shares outstanding (000)                               175,845          174,989          175,733          174,846
Add dilutive securities:
Options                                                                   1,107            1,038            1,079              933
Performance shares                                                          268               94              236               69
-----------------------------------------------------------------------------------------------------------------------------------
Total weighted average shares outstanding - assuming dilution           177,220          176,121          177,048          175,848
-----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share                                              $    0.30        $    0.28        $    1.51         $   1.47
-----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share                                            $    0.29        $    0.28        $    1.50         $   1.46
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


2. BUSINESS SEGMENTS

We have four reportable segments:  Gas Distribution,  Electric Services,  Energy
Services and Energy Investments.

The Gas  Distribution  segment  consists of six gas  distribution  subsidiaries.
KEDNY  provides  gas  distribution  services to  customers  in the New York City
Boroughs of Brooklyn,  Queens and Staten Island. KEDLI provides gas distribution
services to customers in the Long Island  Counties of Nassau and Suffolk and the
Rockaway   Peninsula  of  Queens   County.   The  remaining   gas   distribution
subsidiaries,  Boston Gas Company,  Colonial Gas Company,  Essex Gas Company and
EnergyNorth  Natural  Gas,  Inc.,  collectively  referred  to as KeySpan  Energy
Delivery New England ("KEDNE"), provide gas distribution service to customers in
Massachusetts and New Hampshire.

The Electric Services segment consists of subsidiaries that operate the electric
transmission and distribution  system owned by LIPA; own and provide capacity to
and  produce  energy  for LIPA from our  generating  facilities  located on Long
Island;  and manage fuel  supplies  for LIPA to fuel our Long Island  generating
facilities.  These services are provided in accordance  with existing  long-term
service  contracts  having  remaining terms that range from one to six years and
power  purchase  agreements  having  remaining  terms  that range from six to 20
years. On February 1, 2006, KeySpan and LIPA agreed to extend, amend and restate
these  contractual  arrangements.  (See Note 10,  "2006 LIPA  Settlement"  for a
further  discussion of these  agreements.)  The Electric  Services  segment also
includes  subsidiaries  that own or lease and  operate  the 2,200 MW  Ravenswood
Facility located in Queens,  New York, and the 250 MW combined-cycle  Ravenswood
Expansion.  Collectively  the Ravenswood  Facility and Ravenswood  Expansion are
referred to as the "Ravenswood Generating Station." All of the energy,  capacity
and ancillary services related to the Ravenswood  Generating Station are sold to
the New York Independent  Systems Operator ("NYISO") energy markets.  To finance
the purchase and/or construction of the Ravenswood  Generating Station,  KeySpan
entered into a leasing  arrangement  for each  facility.  The Electric  Services
segment also conducts retail  marketing of electricity to commercial  customers.
(See Note 6 "Financial  Guarantees and Contingencies" for further details on the
leasing arrangements.)


                                       10
<PAGE>


The Energy  Services  segment  includes  companies  that provide  energy-related
services to customers located  primarily within the northeastern  United States.
Subsidiaries in this segment provide residential and small commercial  customers
with  service  and  maintenance  of energy  systems and  appliances,  as well as
operation  and  maintenance,  design,  engineering,  consulting  and fiber optic
services to commercial, institutional and industrial customers.

The Energy  Investments  segment  consists of our gas production and development
investments,  as well as  certain  other  domestic  energy-related  investments.
KeySpan's gas production and  development  activities  include its  wholly-owned
subsidiaries  Seneca  Upshur  Petroleum,  Inc.   ("Seneca-Upshur")  and  KeySpan
Exploration  and  Production,  LLC  ("KeySpan  Exploration").  Seneca-Upshur  is
engaged in gas production and development activities primarily in West Virginia.
KeySpan   Exploration   is  involved  in  a  joint  venture  with  Merit  Energy
Corporation.

This segment is also  engaged in pipeline  development  activities.  KeySpan and
Spectra Energy Corporation each own a 50% interest in the Islander East Pipeline
Company,  LLC  ("Islander  East").  Islander  East was  created  to  pursue  the
authorization  and  construction  of an interstate  pipeline  from  Connecticut,
across Long Island Sound,  to a terminus  near  Shoreham,  Long Island.  Once in
service,  the  pipeline is expected to  transport up to 260,000 DTH daily to the
Long  Island and New York City  energy  markets.  Further,  KeySpan has a 26.25%
interest in the Millennium Pipeline Company LLC, the developer of the Millennium
pipeline  project,  which is expected to have the  capacity to  transport  up to
525,000 DTH of natural  gas a day from  Corning,  New York to Ramapo,  New York,
where it will connect to an existing  pipeline.  Additionally,  subsidiaries  in
this segment hold a 20% equity interest in the Iroquois Gas Transmission  System
LP,  a  pipeline  that  transports   Canadian  gas  supply  to  markets  in  the
northeastern United States. These investments are accounted for under the equity
method.  Accordingly,  equity  income from these  investments  is reflected as a
component of operating income in the Consolidated Statement of Income.

Through its wholly owned subsidiary,  KeySpan LNG, KeySpan owns a 600,000 barrel
liquefied  natural gas  storage and  receiving  facility  in  Providence,  Rhode
Island, the operations of which are fully consolidated.

The  accounting  policies  of the  segments  are the same as those  used for the
preparation of the Consolidated Financial Statements. The segments are strategic
business units that are managed separately because of their different  operating
and regulatory environments.  Operating results of our segments are evaluated by
management on an operating  income basis.  At June 30, 2007, the total assets of
each reportable  segment have not changed  materially from those levels reported
at December 31, 2006. The reportable segment information is as follows:


                                       11
<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
                                         Gas         Electric    Energy      Energy
(In Millions of Dollars)             Distribution    Services    Services  Investments   Eliminations       Consolidated
------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>          <C>         <C>           <C>                <C>          <C>
Three Months Ended June 30, 2007
Unaffiliated revenue                      1,011.1      457.7       52.4          9.2                   -         1,530.4
Intersegment revenue                            -          -        2.5          1.3                (3.8)              -
Operating Income                             61.4       44.3        2.0          5.5                20.2           133.4

Three Months Ended June 30, 2006
Unaffiliated revenue                        873.2      444.2       50.4          9.9                   -         1,377.7
Intersegment revenue                            -          -        2.2          1.3                (3.5)              -
Operating Income                             39.5       62.4        2.0          3.7                (0.1)          107.5

------------------------------------------------------------------------------------------------------------------------
</TABLE>

Eliminating  items  include  intercompany   interest  income  and  expense,  the
elimination  of certain  intercompany  accounts,  as well as  activities  of our
corporate and administrative areas.

Because of the nature of our Electric Services  business,  electric revenues are
derived  from two  large  customers  - the NYISO  and  LIPA.  Electric  Services
revenues from these customers of $398.1 million and $389.1 million for the three
months ended June 30, 2007 and 2006,  respectively,  represent approximately 26%
and 28%, respectively of our consolidated revenues in these periods.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
                                           Gas           Electric      Energy         Energy
(In Millions of Dollars)               Distribution      Services      Services    Investments    Eliminations       Consolidated
----------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>               <C>          <C>              <C>            <C>            <C>
Six Months Ended June 30, 2007
Unaffiliated revenue                     3,426.6           842.2        104.9            19.2              -           4,392.9
Intersegment revenue                           -             3.9          4.7             2.6          (11.2)                -
Operating Income                           464.0            42.8          3.4            10.5           12.2             532.9

Six Months Ended June 30, 2006
Unaffiliated revenue                     3,053.3           869.0         98.7            17.8              -           4,038.8
Intersegment revenue                           -               -          4.7             2.6           (7.3)                -
Operating Income                           376.0           127.3          1.6             6.7          (15.0)            496.6

----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Eliminating  items  include  intercompany   interest  income  and  expense,  the
elimination  of certain  intercompany  accounts,  as well as  activities  of our
corporate and administrative areas.

Because of the nature of our Electric Services  business,  electric revenues are
derived  from two  large  customers  - the NYISO  and  LIPA.  Electric  Services
revenues from these  customers of $736.0  million and $705.9 million for the six
months ended June 30, 2007 and 2006,  respectively,  represent approximately 17%
of our consolidated revenues in both periods.



                                       12
<PAGE>


3. COMPREHENSIVE INCOME

The table below indicates the components of comprehensive income:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                        Three Months Ended June 30,        Six Months Ended June 30,
(In Millions of Dollars)                                                 2007                 2006            2007             2006
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>                  <C>            <C>              <C>
Net Income                                                             $ 52.2               $ 49.4         $ 265.6          $ 257.4
------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax
  Reclassification of (gains) losses included in net income               3.1                 (3.2)            9.6            (38.9)
  Unrealized (losses) gains on derivative financial instruments           5.9                 (5.0)            2.8             40.9
  Unrealized gains (losses) on marketable securities                      0.7                 (0.1)            0.6              0.3
  Accrued underfunded pension and other postretirement obligation           -                    -            13.1                -
------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax                             9.7                 (8.3)           26.1              2.3
------------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income                                                   $ 61.9               $ 41.1         $ 291.7          $ 259.7
------------------------------------------------------------------------------------------------------------------------------------
Related tax (benefit) expense
  Reclassification of (gains) losses included in net income               2.6                 (1.7)            6.8            (20.9)
  Unrealized (losses) gains on derivative financial instruments           2.9                 (2.4)            1.0             22.9
  Unrealized gains (losses) on marketable securities                      0.4                 (0.1)            0.3              0.2
------------------------------------------------------------------------------------------------------------------------------------
Total Tax (Benefit) Expense                                            $  5.9               $ (4.2)        $   8.1          $   2.2
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

4. HEDGING AND DERIVATIVE FINANCIAL INSTRUMENTS

From time to time,  KeySpan  subsidiaries  have  utilized  derivative  financial
instruments,  such as futures, options and swaps, for the purpose of hedging the
cash flow variability  associated with changes in commodity  prices.  KeySpan is
exposed to commodity  price risk primarily  with regard to its gas  distribution
operations,   gas  production  and  development   activities  and  its  electric
generating  facilities at the  Ravenswood  Generating  Station.  As discussed in
greater  detail below,  certain  derivative  financial  instruments  employed by
KeySpan are  accounted  for as  cash-flow  hedges and receive  hedge  accounting
treatment  under SFAS 133  "Accounting  for Derivative  Instruments  and Hedging
Activities,"  as amended by SFAS 149  "Amendment  of Statement 133 on Derivative
Instruments and Hedging  Activities,"  collectively SFAS 133.  However,  KeySpan
also  employs  derivative  financial  instruments  that do not qualify for hedge
accounting  treatment.  Certain derivative financial instruments employed by our
Gas  Distribution  operations are subject to SFAS 71 "Accounting for the Effects
of Certain  Types of  Regulation."  In addition,  with regard to the  Ravenswood
Generating  Station,  our strategy,  for the period April 2007 through September
2007, is to economically hedge up to 37% of the Ravenswood  Generating Station's
on-peak electric capacity. To accomplish this strategy,  KeySpan uses derivative
financial  instruments  that  receive  hedge  accounting  treatment,  as well as
derivative financial instruments that do not receive hedge accounting treatment.
Due to the pending  Merger with  National  Grid plc and the proposed  Merger JP,
KeySpan is currently  considering  alternatives in its risk management  strategy
regarding  the use of  derivative  financial  instruments  associated  with  the
Ravenswood  Generating  Station for periods beyond September 2007.  Accordingly,
only a minor number of derivative financial instruments  outstanding at June 30,
2007 extend beyond  September  2007. For more  information on the Merger JP, see
KeySpan's Report on Form 8-K filed on July 12, 2007.


                                       13
<PAGE>


Commodity  Derivative  Instruments - Hedge  Accounting:  Our Energy  Investments
subsidiary, Seneca-Upshur, utilizes OTC natural gas swaps to hedge the cash flow
variability associated with the forecasted sales of a portion of its natural gas
production.  At June 30, 2007,  Seneca-Upshur  has hedge  positions in place for
approximately  70% of its  estimated  2007 through 2009 gas  production,  net of
gathering  costs.  We use  market  quoted  forward  prices to value  these  swap
positions.  The maximum length of time over which  Seneca-Upshur has hedged such
cash  flow  variability  is  through  December  2009.  The  fair  value of these
derivative  instruments  at June 30, 2007 was a liability of $4.9  million.  The
estimated amount of losses associated with such derivative  instruments that are
reported in accumulated other  comprehensive  income and that are expected to be
reclassified  into  earnings  over  the  next  twelve  months  is $3.2  million.
Ineffectiveness   associated  with  these   outstanding   derivative   financial
instruments  was  immaterial  for the six months  ended June 30,  2007.

Certain derivative  instruments employed by our gas distribution  operations are
not  subject  to SFAS  71 and  thus  are  not  subject  to  deferral  accounting
treatment. KeySpan uses OTC natural gas swaps to hedge the cash-flow variability
of gas purchases associated with certain large-volume gas sales customers. These
gas swaps are  accounted  for as cash-flow  hedges.  KeySpan uses market  quoted
forward  prices to value these swap  positions.  The maximum length of time over
which we have hedged such cash flow  variability  is through July 2008. The fair
value of these  derivative  instruments at June 30, 2007 was a liability of $0.4
million.  The  estimated  amount  of  losses  associated  with  such  derivative
instruments that are reported in accumulated other comprehensive income and that
are expected to be  reclassified  into  earnings  over the next twelve months is
$0.4  million.  Ineffectiveness  associated  with these  outstanding  derivative
financial instruments was immaterial as of June 30, 2007.

As mentioned earlier, the Ravenswood  Generating Station economically hedges the
cash flow  variability  associated  with a portion of electric  energy sales and
fuel  purchases.   KeySpan  employs   financially-settled   electric-power  swap
contracts,  financially-settled oil swap contracts, physical natural gas forward
contracts and OTC natural gas swaps in its hedging strategy.  The maximum length
of  time  over  which  derivative  financial   instruments  that  receive  hedge
accounting treatment are in-place is through December 2008. We use market quoted
forward prices to value the electric-power swap contracts. The fair value of the
electric power derivative  instruments at June 30, 2007 was $2.3 million. We use
market  quoted  forward  prices to value the oil swap  contracts and natural gas
contracts. The fair value of these derivative instruments at June 30, 2007 was a
net  liability of $2.8 million.  These  derivative  instruments  are reported in
accumulated  other  comprehensive  income  and a  majority  of these  derivative
instruments  are expected to be  reclassified  into  earnings in the next twelve
months.  Ineffectiveness  associated with these outstanding derivative financial
instruments was immaterial for the six months ended June 30, 2007.

The above noted derivative  financial  instruments are cash flow hedges that are
accounted for as hedges under SFAS 133 and are not  considered  held for trading
purposes as defined by current accounting literature.  Accordingly, we carry the
fair value of our derivative  instruments on the  Consolidated  Balance Sheet as
either a current or deferred asset or liability, as appropriate,  and record the
effective   portion  of  unrealized   gains  or  losses  in  accumulated   other


                                       14
<PAGE>


comprehensive  income.  Gains and losses are reclassified from accumulated other
comprehensive  income to the Consolidated  Statement of Income in the period the
hedged transaction  affects earnings.  Gains and losses on settled  transactions
are  reflected  as a component  of either  revenue or gas cost  depending on the
hedged transaction. Hedge ineffectiveness results from changes during the period
in the price  differentials  between the index price of the derivative  contract
and the price of the  purchase  or sale for the cash flow that is being  hedged,
and is recorded directly to earnings.

Commodity Derivative Instruments that are not Accounted for as Hedges: The fair
value of the electric power derivative instruments associated with the
Ravenswood Generating Station that do not qualify for hedge accounting treatment
at June 30, 2007 was $9.6 million. We use market quoted forward prices to value
the electric-power swap contracts. The fair value of the natural gas contracts
associated with the Ravenswood Generating Station that do not qualify for hedge
accounting treatment at June 30, 2007 was a liability of $8.3 million. We use
market quoted forward prices to value these natural gas contracts. The maximum
length of time over which derivative financial instruments are in-place is
through December 2008.

KeySpan  also  employs a limited  number of unleaded  gas swaps to hedge a small
portion  of its risk  associated  with  changing  prices for fleet  fuel.  These
financial derivative  instruments do not qualify for hedge accounting treatment.
The  maximum  length of time over which  derivative  financial  instruments  are
in-place  is  through  March  2008.  The fair value of these  contracts  is $0.3
million. We use market quoted forward prices to value these contracts.

Based upon KeySpan's  experience in the New York City electric  capacity  market
and management's assessment that a financial opportunity existed related to this
market,  KeySpan entered into an International  SWAP Dealers  Association Master
Agreement  for a fixed for float  unforced  capacity  financial  swap (the "Swap
Agreement") with Morgan Stanley Capital Group Inc. ("Morgan Stanley") on January
18, 2006 in an effort to enhance  shareholder value. The Swap Agreement involves
a financial  transaction  and is not  intended  to be an  economic  hedge of our
physical  generation  assets or a contract for the physical delivery of capacity
or energy.  However,  the same  market  dynamics  that are  expected  to enhance
KeySpan's physical  generation business are expected to enhance the value of the
financial Swap Agreement.

The Swap Agreement has a three year term that began on May 1, 2006. The notional
quantity was 1,800,000kW (the "Notional  Quantity") of In-City Unforced Capacity
and the fixed price is  $7.57/kW-month  ("Fixed  Price"),  subject to adjustment
upon the occurrence of certain events. Cash settlement occurs on a monthly basis
based on the In-City Unforced Capacity price determined by the relevant New York
Independent   System  Operator   ("NYISO")  Spot  Demand  Curve  Auction  Market
("Floating  Price").  For each monthly  settlement  period, the price difference
equals the Fixed Price minus the Floating  Price.  If such price  difference  is
less than zero,  Morgan  Stanley will pay KeySpan an amount equal to the product
of (a)  the  Notional  Quantity  and  (b)  the  absolute  value  of  such  price
difference.  Conversely,  if such price difference is greater than zero, KeySpan
will pay Morgan  Stanley  an amount  equal to the  product  of (a) the  Notional
Quantity and (b) the absolute value of such price difference.


                                       15
<PAGE>


This derivative instrument does not qualify for hedge accounting treatment under
SFAS 133. At contract  inception,  the initial fair value of the Swap  Agreement
was  fully  reserved  under  the  provision  of EITF 02-3  "Issues  Involved  in
Accounting  for  Derivative  Contracts  Held for Trading  Purposes and Contracts
Involved in Energy  Trading and Risk  Management  Activities,"  due to KeySpan's
assessment  that market prices for the  underlying  capacity were  unobservable.
Accordingly, no fair value was recorded on the Consolidated Balance Sheet at the
inception of the contract. Subsequent changes in fair value have resulted in the
recognition of a $1.0 million liability at June 30, 2007, while the remainder of
the fair value  associated with the contract  remained  reserved under EITF 02-3
guidance.

The NYPSC,  Consolidated  Edison and other load serving  entities  ("LSEs") have
proposed price mitigation  measures for In-City capacity that would apply to the
Ravenswood  Generating  Station.  These price  mitigation  measures  essentially
proposed to reduce the capacity bid price that the Ravenswood Generating Station
could bid into the NYISO energy market.  However,  the FERC found that the NYISO
filing  failed to meet the  burden of proof  required  to support  revisions  to
market rules.  Nevertheless,  on its own motion,  FERC initiated a proceeding to
investigate and consider the justness and  reasonableness of the NYISO's In-City
capacity  market,  including  whether and how market  rules should be revised to
provide  a fair  level of  compensation  that will  attract  and  retain  needed
infrastructure.  The FERC has established a procedure for a "paper hearing" that
would involve our NYISO  proposal to be filed in October 2007.  Comments on that
proposal  will be filed in  November  2007 and reply  comments  will be filed in
December 2007. In connection with this proceeding, in July 2007 KeySpan received
notice that the FERC Office of Enforcement is conducting a formal  investigation
into matters regarding the offering  practices of generating units servicing New
York City's In-City capacity market.  At this time, we are unable to predict the
outcome  of these  proceedings  and what  effect,  if any,  they may have on the
potential revenue that could be realized from physical sales of In-City capacity
or on the Swap Agreement.

Commodity  Derivative  Instruments  -  Regulated  Utilities:  We use  derivative
financial  instruments to reduce the cash flow  variability  associated with the
purchase price for a portion of future natural gas purchases associated with our
Gas  Distribution  operations.  Our strategy is to minimize  fluctuations in gas
sales prices to our regulated  firm gas sales  customers in our New York and New
England service territories.  The accounting for these derivative instruments is
subject to SFAS 71.  Therefore,  the fair value of these derivatives is recorded
as current  or  deferred  assets  and  liabilities,  with  offsetting  positions
recorded as regulatory  assets and regulatory  liabilities  on the  Consolidated
Balance  Sheet.  Gains  or  losses  on the  settlement  of these  contracts  are
initially  deferred and then  refunded to or  collected  from our firm gas sales
customers  consistent  with regulatory  requirements.  At June 30, 2007 the fair
value of these derivative instruments was a liability of $68.2 million.


                                       16
<PAGE>


SFAS 133  establishes  criteria  that  must be  satisfied  in order  for  option
contracts,  forward  contracts  with  optionality  features,  or contracts  that
combine a forward  contract  and a purchase  option  contract to qualify for the
normal  purchases  and  sales  exception.  Certain  contracts  for the  physical
purchase of natural gas  associated  with our  regulated  gas  utilities  do not
qualify for normal  purchases  under SFAS 133. Since these contracts are for the
purchase  of  natural  gas sold to  regulated  firm  gas  sales  customers,  the
accounting  for these  contracts is subject to SFAS 71. At June 30, 2007,  these
derivatives had a net fair value of $71.4 million.

KeySpan has a management  contract with Merrill Lynch  Commodities,  under which
KeySpan  and  Merrill  Lynch  Commodities  will share the  responsibilities  for
managing  KeySpan's  upstream  gas  distribution   assets  associated  with  its
Massachusetts  gas  distribution  subsidiaries,  as well as providing  city-gate
delivered  supply.  This  contract  allows for both  KeySpan and  Merrill  Lynch
Commodities to employ  derivative  instruments to maximize the  profitability of
KeySpan's  portfolio of gas distribution  assets.  Profits associated with these
activities are shared between KeySpan,  Merrill Lynch  Commodities and KeySpan's
Massachusetts ratepayers. The accounting for this contract is subject to SFAS 71
since  the  contract  was  executed  by  KeySpan's  regulated  gas  distribution
utilities.  At June 30, 2007,  KeySpan's  proportionate  share of the fair value
associated with these derivative  instruments  amounted to $15.0 million,  $14.3
million of which has been deferred for future sharing among the alliance members
and Massachusetts ratepayers.  The remaining amount was recorded as a benefit to
revenues.  KeySpan  provides these services  internally for its New York and New
Hampshire gas distribution subsidiaries.

The  table  below  summarizes  the fair  value of all of the  above  outstanding
derivative  instruments  at June 30, 2007 and  December 31, 2006 and the related
line item on the Consolidated  Balance Sheet.  Fair value is the amount at which
derivative  instruments  could be  exchanged  in a current  transaction  between
willing parties, other than in a forced liquidation sale.


                                       17
<PAGE>


------------------------------------------------------------------------------
(In Millions of Dollars)                   June 30, 2007    December 31, 2006
------------------------------------------------------------------------------
Gas Contracts:
  Other current assets                         22.0               30.7
  Other deferred charges                      101.5              127.1
  Regulatory asset                             94.6              196.3
  Other current liability                     (87.9)            (211.7)
  Other deferred liabilities                  (87.1)             (42.1)
  Regulatory liability                        (59.3)            (120.6)

Oil Contracts:
  Other current assets                          1.4                0.3
  Other current liability                      (0.6)              (7.2)
  Other deferred liabilities                      -               (0.5)

Electric Contracts:
  Other current assets                         14.3               23.2
  Other deferred charges                        0.1                0.3
  Other current liability                      (1.4)              (0.8)
  Other deferred liabilities                   (1.1)              (0.6)

------------------------------------------------------------------------------


Weather  Derivatives:  The utility tariffs associated with KEDNE's operations do
not contain weather normalization  adjustments.  As a result,  fluctuations from
normal weather may have a significant positive or negative effect on the results
of these operations.

In 2006, we entered into  heating-degree  day put options to mitigate the effect
of fluctuations from normal weather on KEDNE's financial position and cash flows
for the  2006/2007  winter  heating  season - November  2006 through March 2007.
These put options  would have paid KeySpan  $37,500 per heating  degree day when
the actual  temperature was below 4,159 heating degree days, or approximately 5%
warmer than normal, based on the most recent 20-year average for normal weather.
The maximum  amount  KeySpan would have received on these  purchased put options
was $15 million. The net premium cost for these options was $1.7 million and was
amortized over the heating  season.  Since weather was warmer than normal during
the fourth quarter of 2006,  KeySpan recorded a $9.1 million benefit to earnings
associated with the weather derivative.  However,  weather for the first quarter
of 2007 was colder than normal.  Therefore, for the entire winter heating season
-November 2006 through March 2007 - weather was slightly colder than normal.  As
a result, in the first quarter of 2007 KeySpan reversed the $9.1 million accrual
recorded  in the  fourth  quarter  of 2006.  We  account  for these  derivatives
pursuant to the requirements of EITF 99-2, "Accounting for Weather Derivatives."
In this regard,  such  instruments are accounted for using the "intrinsic  value
method" as set forth in such guidance.

Credit  and  Collateral:  Derivative  contracts  are  primarily  used to  manage
exposure to market risk arising  from  changes in commodity  prices and interest
rates.  In the  event  of  non-performance  by a  counterparty  to a  derivative
contract,  the  desired  impact may not be  achieved.  The risk of  counterparty
non-performance is generally considered a credit risk and is actively managed by
assessing each counterparty credit profile and negotiating appropriate levels of


                                       18
<PAGE>


collateral and credit  support.  In instances where the  counterparties'  credit
quality has declined,  or credit exposure  exceeds certain levels,  we may limit
our  credit  exposure  by  restricting  new  transactions  with  counterparties,
requiring  additional  collateral or credit  support and  negotiating  the early
termination of certain  agreements.  At June 30, 2007, KeySpan has received $0.5
million  from its  counterparties  as  collateral  associated  with  outstanding
derivative contracts.  This amount has been recorded as restricted cash, with an
offsetting position in current liabilities on the Consolidated Balance Sheet.

5. RECENT ACCOUNTING PRONOUNCEMENTS

In February  2007, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of  Financial  Accounting  Standards  ("SFAS") No. 159 "The Fair Value
Option for Financial Assets and Financial  Liabilities."  This Statement permits
entities to choose to measure many financial instruments and certain other items
at fair value that are not currently  required to be measured at fair value. The
objective  is to improve  financial  reporting by  providing  entities  with the
opportunity  to mitigate  volatility  in reported  earnings  caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting  provisions.  This  Statement  requires a  business  entity to report
unrealized  gains and losses on items for which the fair  value  option has been
elected in  earnings at each  subsequent  reporting  date.  An entity may decide
whether to elect the fair value  option for each  eligible  item on its election
date, subject to certain requirements described in the Statement. This Statement
shall be effective as of the beginning of each  reporting  entity's first fiscal
year that begins after  November 15, 2007.  KeySpan is currently  reviewing  the
requirements  of this Statement and, at this point in time, we cannot  determine
the impact,  if any, that this  Statement may have on results of operations  and
financial position.

In  September  2006,  the FASB issued SFAS 157 "Fair Value  Measurements."  This
statement  defines fair value,  establishes a framework for measuring fair value
in generally accepted  accounting  principles and expands disclosures about fair
value.  SFAS 157 expands the disclosures  about the use of fair value to measure
assets and  liabilities  in interim  and annual  periods  subsequent  to initial
recognition. The disclosures focus on the inputs used to measure fair value, the
recurring fair value measurements using significant  unobservable inputs and the
effect of the measurement on earnings (or changes in net assets) for the period.
The  guidance  in SFAS 157 also  applies  for  derivatives  and other  financial
instruments   measured  at  fair  value  under  Statement  133  "Accounting  for
Derivative Instruments and Hedging Activities" at initial recognition and in all
subsequent periods. This Statement is effective for fiscal years beginning after
November 15, 2007,  and interim  periods  within those fiscal years.  KeySpan is
currently  reviewing  the  requirements  of SFAS 157,  and at this point in time
cannot  determine  what  impact,  if any,  SFAS 157 will have on its  results of
operations or financial  position.  This  Statement  will have no impact on cash
flow.


                                       19
<PAGE>


In July 2006, the FASB issued Interpretation No. 48 "Accounting for Uncertainty
in Income Taxes - An Interpretation of FASB Statement No. 109" ("FIN 48"). FIN
48 clarifies the accounting for uncertainty in income taxes recognized in an
entity's financial statements in accordance with FASB Statement No. 109,
"Accounting for Income Taxes" and prescribes a recognition threshold and
measurement attributes for financial statement disclosure of tax positions taken
or expected to be taken on a tax return. KeySpan adopted the provisions of FIN
48 on January 1, 2007. See Note 11, "Adoption of FASB Interpretation Number 48"
for additional details on the impact of this implementation on KeySpan's
financial statements.

6. FINANCIAL GUARANTEES AND CONTINGENCIES

Variable  Interest Entity:  KeySpan has an arrangement with a variable  interest
entity through which it leases a portion of the Ravenswood Facility. We acquired
the Ravenswood Facility,  a 2,200-megawatt  electric generating facility located
in Queens,  New York,  in part,  through  the  variable  interest  entity,  from
Consolidated  Edison on June 18, 1999, for approximately $597 million.  In order
to reduce the initial cash requirements,  we entered into a lease agreement (the
"Master Lease") with a variable  interest,  unaffiliated  financing  entity that
acquired a portion of the facility,  or three steam generating  units,  directly
from  Consolidated  Edison and leased it to our subsidiary,  KeySpan  Ravenswood
LLC. The variable interest  unaffiliated  financing entity acquired the property
for $425 million,  financed with debt of $412.3 million (97% of  capitalization)
and equity of $12.7  million (3% of  capitalization).  KeySpan has no  ownership
interests in the units or the variable  interest entity.  KeySpan has guaranteed
all payment and performance  obligations of KeySpan  Ravenswood,  LLC, under the
Master Lease.  Monthly lease payments  substantially  equal the monthly interest
expense on such debt securities.

The term of the  Master  Lease  extends  through  June 20,  2009.  On all future
semi-annual  payment  dates,  we have the  right to:  (i)  either  purchase  the
facility for the original  acquisition  cost of $425  million,  plus the present
value of the lease  payments  that would  otherwise  have been paid through June
2009; or (ii)  terminate  the Master Lease and dispose of the facility.  In June
2009,  when the Master  Lease  terminates,  we may  purchase  the facility in an
amount  equal to the  original  acquisition  cost,  subject  to  adjustment,  or
surrender the facility to the lessor.  If we elect not to purchase the property,
the Ravenswood  Facility will be sold by the lessor.  We have  guaranteed to the
lessor, as residual value, 84% of the acquisition cost of the property.

We have  classified  the Master Lease as $412.3 million of long-term debt on the
Consolidated  Balance Sheet based on our current status as primary  beneficiary.
Further,  we have an asset  on the  Consolidated  Balance  Sheet  for an  amount
substantially  equal  to the  fair  market  value of the  leased  assets  at the
inception of the lease, less depreciation since that date, or approximately $300
million.  If  KeySpan  Ravenswood  LLC,  was not  able to  fulfill  its  payment
obligations  with respect to the Master Lease payments,  then the maximum amount
KeySpan would be exposed to under its current  guarantees  would be $425 million
plus the present value of the remaining lease payments through June 20, 2009.


                                       20
<PAGE>


Sale/leaseback  Transaction:  KeySpan  also  has  a  leveraged  lease  financing
arrangement associated with the Ravenswood Expansion.  In May 2004, the unit was
acquired  by  a  lessor  from  our  subsidiary,  KeySpan  Ravenswood,  LLC,  and
simultaneously  leased back to that  subsidiary.  All the obligations of KeySpan
Ravenswood,  LLC have been  unconditionally  guaranteed  by KeySpan.  This lease
transaction  qualifies  as an  operating  lease  under SFAS 98  "Accounting  for
Leases:  Sale/Leaseback Transactions Involving Real Estate; Sales-Type Leases of
Real Estate;  Definition  of the Lease Term;  an Initial  Direct Costs of Direct
Financing Leases, an amendment of FASB Statements No.13, 66, 91 and a rescission
of FASB Statement No. 26 and Technical Bulletin No. 79-11."

Asset Retirement  Obligations:  KeySpan has various asset retirement obligations
primarily   associated  with  its  gas  distribution  and  electric   generation
activities.   These  obligations  have  remained  substantially  unchanged  from
December 31, 2006,  except for normal accretion  adjustments and costs incurred.
Generally,  KeySpan's largest asset retirement  obligations relate to: (i) legal
requirements to cut (disconnect from the gas distribution system),  purge (clean
of  natural  gas  and  PCB  contaminants)  and  cap  gas  mains  within  its gas
distribution and transmission system when mains are retired in place; or dispose
of sections of gas main when removed from the pipeline system; (ii) cleaning and
removal  requirements  associated  with storage tanks  containing  waste oil and
other waste  contaminants;  and (iii) legal requirements to remove asbestos upon
major  renovation or demolition of structures and facilities.  At June 30, 2007,
these obligations total $48.7 million.  See KeySpan's Annual Report on Form 10-K
for the year ended  December  31,  2006,  Note 7 to the  Consolidated  Financial
Statements "Contractual Obligations, Financial Guarantees and Contingencies" for
additional information regarding these obligations.

Environmental Matters

New York Sites:  Within the State of New York we have  identified  43 historical
manufactured gas plant ("MGP") sites and related  facilities which were owned or
operated by KeySpan subsidiaries or such companies'  predecessors.  These former
sites, some of which are no longer owned by KeySpan, have been identified to the
Department of  Environmental  Conservation  ("DEC") for inclusion on appropriate
site inventories.  Administrative Orders on Consent ("ACO") or Voluntary Cleanup
Agreements  ("VCA") have been executed with the DEC to address the investigation
and/or remediation activities associated with certain sites and one waterway. In
February  2007,  KeySpan  entered  into an ACO for  fourteen  of these sites and
continues to evaluate how to proceed with respect to  participation in the DEC's
remediation programs for the other sites.


                                       21
<PAGE>


KeySpan has identified 28 of these sites as being associated with the historical
operations of KEDNY. One site has been fully  remediated.  Subject to the issues
described  in  the  preceding   paragraph,   the  remaining  27  sites  will  be
investigated  and, if necessary,  remediated  under the terms and  conditions of
ACOs, VCAs, or Brownfield Cleanup Agreements ("BCA").  Expenditures  incurred to
date by us with respect to KEDNY MGP-related activities total $88.1 million.

The  remaining  15 sites  have  been  identified  as being  associated  with the
historical  operations  of  KEDLI.  One  site has been  fully  investigated  and
requires no further action.  The remaining  sites will be  investigated  and, if
necessary,  remediated  under the terms and  conditions of ACOs,  VCAs, or BCAs.
Expenditures incurred to date by us with respect to KEDLI MGP-related activities
total $70.5 million.

KeySpan  presently   estimates  the  remaining  cost  of  its  KEDNY  and  KEDLI
MGP-related  environmental  remediation activities will be $309.5 million, which
amount has been  accrued by us as a  reasonable  estimate of  probable  cost for
known sites.  However,  remediation costs for each site may be materially higher
than noted,  depending  upon changing  technologies  and  regulatory  standards,
selected end use for each site, and actual environmental conditions encountered.

With respect to remediation  costs, KEDNY and KEDLI rate plans generally provide
for the  recovery  from  customers of  investigation  and  remediation  costs of
certain sites. At June 30, 2007, we have reflected a regulatory  asset of $361.9
million for  KEDNY/KEDLI  MGP sites.  KeySpan has filed  proposed rate plans for
KEDNY and KEDLI with the NYPSC as part of its  application  for  approval of the
KeySpan / National  Grid plc Merger.  Among other  things,  these  filings  seek
recovery of deferred expenses  associated with remediation of MGP sites, as well
as recovery of ongoing remediation expenses.

KeySpan is also responsible for  environmental  obligations  associated with the
Ravenswood  Facility,  purchased  from  Consolidated  Edison in 1999,  including
remediation  activities  associated with its historical  operations and those of
the  MGP  facilities  that  formerly  operated  at  the  site.  KeySpan  is  not
responsible for liabilities arising from disposal of waste at off-site locations
prior  to  the   acquisition   closing  and  any  monetary  fines  arising  from
Consolidated  Edison's  pre-closing conduct. We presently estimate the remaining
environmental  clean up  activities  for this site will be $1.4  million,  which
amount has been accrued by us. Expenditures incurred to date total $3.6 million.

New England Sites: Within the Commonwealth of Massachusetts and the State of New
Hampshire, we are aware of 74 former MGP sites and related facilities within the
existing or former service territories of KEDNE.


                                       22
<PAGE>


Boston Gas Company, Colonial Gas Company and Essex Gas Company may have or share
responsibility under applicable  environmental laws for the remediation of 64 of
these sites.  A subsidiary of National Grid USA,  formerly New England  Electric
System, has assumed responsibility for remediating 11 of these sites, subject to
a  limited   contribution  from  Boston  Gas  Company,  and  has  provided  full
indemnification  to Boston Gas Company  with  respect to eight other  sites.  In
addition,  Boston Gas Company,  Colonial Gas Company, and Essex Gas Company have
assumed  responsibility  for  remediating  three sites each. At this time, it is
uncertain as to whether  Boston Gas  Company,  Colonial Gas Company or Essex Gas
Company have or share  responsibility for remediating any of the other sites. No
notice of  responsibility  has been issued to us for any of these sites from any
governmental environmental authority.

KeySpan  presently  estimates  the  remaining  cost of the  Massachusetts  KEDNE
MGP-related  environmental cleanup activities will be $6.0 million, which amount
has been  accrued by us as a  reasonable  estimate  of  probable  cost for known
sites,  however  remediation  costs for each site may be materially  higher than
noted,  depending upon changing technologies and regulatory standards,  selected
end  use  for  each  site,  and  actual  environmental  conditions  encountered.
Expenditures  incurred  since November 8, 2000,  the  acquisition  date of these
subsidiaries, with respect to these MGP-related activities total $37.5 million.

KeySpan may have or share responsibility under applicable environmental laws for
the  remediation  of 10 MGP sites and  related  facilities  associated  with the
historical  operations of EnergyNorth in New Hampshire.  At four of these sites,
KeySpan has entered into cost sharing  agreements  with other  parties who share
responsibility for remediation of these sites.  EnergyNorth also entered into an
agreement with the United States Environmental Protection Agency ("EPA") for the
contamination  from the Nashua site that was allegedly  commingled with asbestos
at the so-called  Nashua River Asbestos  Site,  adjacent to the Nashua MGP site.
The Nashua River Asbestos Site now has been fully remediated.

KeySpan  presently  estimates  the  remaining  cost of  EnergyNorth  MGP-related
environmental  cleanup  activities will be $23.5 million,  which amount has been
accrued as a  reasonable  estimate of probable  cost for known  sites,  however,
remediation costs for each site may be materially  higher than noted,  depending
upon changing technologies and regulatory  standards,  selected end use for each
site and actual  environmental  conditions  encountered.  Expenditures  incurred
since November 8, 2000, the acquisition date of this subsidiary, with respect to
the MGP-related activities total $24.9 million.

By rate orders, the Massachusetts  Department of  Telecommunications  and Energy
("MADTE") and the New Hampshire Public Utility Commission  ("NHPUC") provide for
the recovery of site  investigation and remediation costs and,  accordingly,  at
June 30, 2007,  we have  reflected a regulatory  asset of $38.5  million for the
KEDNE MGP sites.  Colonial  Gas Company and Essex Gas Company are not subject to


                                       23
<PAGE>


the  provisions  of SFAS 71,  "Accounting  for the  Effects of Certain  Types of
Regulation"  and  therefore  have recorded no regulatory  asset.  However,  rate
orders  currently in effect for these  subsidiaries  provide for the recovery of
investigation and remediation costs.

KeySpan New  England,  LLC Sites:  KeySpan is aware of three  non-utility  sites
associated  with  KeySpan  New  England,  LLC,  a  successor  company to Eastern
Enterprises, for which it may have or share environmental remediation or ongoing
maintenance   responsibility.   These  three  sites,  located  in  Philadelphia,
Pennsylvania;   New  Haven,  Connecticut;  and  Everett,   Massachusetts,   were
associated  with  historical  operations  involving  the  production of coke and
related industrial  processes.  Honeywell  International,  Inc. and Beazer East,
Inc. (both former owners and/or operators of certain  facilities at Everett (the
"Everett  Facility")  together with  KeySpan,  have entered into an ACO with the
Massachusetts  Department of Environmental  Protection for the investigation and
development  of a remedial  response  plan for a portion of that site.  KeySpan,
Honeywell and Beazer East entered into a cost-sharing agreement under which each
company  agreed to pay  one-third  of the costs of  compliance  with the consent
order,  while preserving any claims it may have against the other companies for,
among other things,  reallocation of proportionate  liability.  In 2002,  Beazer
East commenced an action in the U.S. District Court for the Southern District of
New York which sought a judicial  determination  on the  allocation of liability
for the Everett Facility.  A confidential  settlement  agreement was executed on
terms favorable to KeySpan and the Beazer lawsuit has been discontinued.

KeySpan  presently  estimates the remaining  cost of the  environmental  cleanup
activities for these three non-utility sites will be approximately $8.7 million,
which  amount has been accrued as a  reasonable  estimate of probable  costs for
known sites however,  remediation  costs for each site may be materially  higher
than noted,  depending  upon changing  technologies  and  regulatory  standards,
selected end use for each site, and actual environmental conditions encountered.
Expenditures  incurred since November 8, 2000, with respect to these sites total
$24.1 million.

KeySpan  believes  that in the  aggregate,  the accrued  liability for these MGP
sites and related  facilities  identified above are reasonable  estimates of the
probable  cost  for  the  investigation  and  remediation  of  these  sites  and
facilities.  As circumstances  warrant, we periodically  re-evaluate the accrued
liabilities associated with MGP sites and related facilities. We may be required
to investigate and, if necessary, remediate each site previously noted, or other
currently  unknown former sites and related facility sites, the cost of which is
not  presently  determinable  but may be  material  to our  financial  position,
results of operations or cash flows.

See KeySpan's  Annual  Report on Form 10-K for the year ended  December 31, 2006
Note 7, to those Consolidated  Financial  Statements  "Contractual  Obligations,
Financial Guarantees and Contingencies" for further information on environmental
matters.


                                       24
<PAGE>


Legal Matters

From time to time we are subject to various legal proceedings arising out of the
ordinary course of our business.  Except as described  below, we do not consider
any of such  proceedings to be material to our business or likely to result in a
material  adverse  effect on our results of operations,  financial  condition or
cash flows.

On March 20, 2006, a purported class action lawsuit was filed alleging breach of
fiduciary duty against KeySpan and its directors. The complaint, which was filed
in the New York  State  Supreme  Court for the  County of Kings  (the  "Court"),
related to the  execution of the Merger  Agreement  with  National  Grid plc and
alleged that the merger consideration which KeySpan's stockholders would receive
in connection  with the proposed  merger  transaction  was inadequate and unfair
because the transaction value of $42.00 for each share of KeySpan's common stock
outstanding did not provide its stockholders with a meaningful  premium over the
market price of the common stock.  In June 2006, the parties agreed in principle
to settle the case,  the terms of which  provide for,  among other  things,  the
inclusion of additional  disclosures in our 2006 Annual Meeting Proxy  Statement
concerning  the  background  and  principle  events  leading to execution of the
Merger  Agreement,  as well as the payment of plaintiff's  counsel fees of up to
$350,000  following  closing of the  transaction.  In October  2006,  definitive
settlement documents were executed by the parties and submitted to the Court. In
January 2007, the Court issued an order preliminarily  approving the settlement,
authorizing  the  parties  to notify  KeySpan  shareholders  of the  settlement.
Mailing of the notices  began on February 6, 2007.  On June 28,  2007, a written
Decision was issued and a Final Judgment approving the settlement,  awarding the
requested  attorney's fees of $350,000 and dismissing the action with prejudice.
Payment of the attorney's fees in the amount of $350,000 by National Grid plc is
contingent on the closing of the Merger.

Several   lawsuits  have  been  filed  which  allege   damages   resulting  from
contamination associated with the historic operations of former manufactured gas
plants  located  in Bay Shore and  Staten  Island,  New York.  KeySpan  has been
conducting site  investigations  and remediations at these locations pursuant to
Orders on Consent with the DEC.  With respect to Bay Shore,  on July 12, 2006, a
purported  class  action and a separate  complaint  were filed.  On November 27,
2006,  December 28, 2006 and May 24, 2007,  three other  lawsuits  were filed by
property  owners in the Bay Shore area.  In  addition,  on October 31,  2006,  a
lawsuit was filed alleging damages in Staten Island,  New York.  KeySpan intends
to contest  each of these  proceedings  vigorously.  On  February  8,  2007,  we
received a Notice of Intent to File Suit from the Office of the Attorney General
for the State of New York ("AG")  against  KeySpan and four other  companies  in
connection with the cleanup of historical  contamination  found in certain lands
located in  Greenpoint,  Brooklyn  and in an  adjoining  waterway.  KeySpan  has
previously  agreed to remediate  portions of the  properties  referenced in this
notice and will work cooperatively with the DEC and AG to address  environmental
conditions associated with the remainder of the properties. At this time, we are
unable to predict what effect,  if any,  the outcome of these  proceedings  will
have on our financial condition, results of operation and cash flows.


                                       25
<PAGE>


Other  Contingencies:  We derive a  substantial  portion of our  revenues in the
Electric  Services  segment from a series of  agreements  with LIPA  pursuant to
which  we  manage  LIPA's   transmission  and  distribution  system  and  supply
approximately one half of LIPA's customers'  electricity needs. KeySpan and LIPA
have entered into  agreements to extend,  amend,  and restate these  contractual
arrangements.  Further,  following the  announcement  of the proposed  Merger of
KeySpan and National Grid plc,  LIPA,  National Grid plc and KeySpan  engaged in
discussions  concerning the impact of the transaction on LIPA's operations.  See
Note 10 "2006 LIPA  Settlement"  for  further  details of these  agreements  and
discussions.

On May 31, 2007, KeySpan received a Civil Investigative  Demand ("CID") from the
United  States  Department  of  Justice,  Antitrust  Division,   requesting  the
production  of  documents  and  information  relating  to its  investigation  of
competitive issues in the New York City electric energy capacity market. The CID
is a request  for  information  in the course of an  investigation  and does not
constitute the commencement of legal  proceedings,  and no specific  allegations
have been made against  KeySpan.  KeySpan  intends to fully  cooperate with this
investigation.

Financial Guarantees

KeySpan has issued  financial  guarantees in the normal  course of business,  on
behalf of its subsidiaries,  to various third party creditors. At June 30, 2007,
the  following  amounts  would  have to be  paid  by  KeySpan  in the  event  of
non-payment by the primary obligor at the time payment is due:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
                                                               Amount of    Expiration
  Nature of Guarantee (In Millions of Dollars)                  Exposure      Dates
------------------------------------------------------------------------------------------
<S>                                               <C>           <C>        <C>
Guarantees for Subsidiaries
  Medium-Term Notes - KEDLI                       (i)          $   525.0    2008-2010
  Industrial Development Revenue Bonds            (ii)             128.3       2027
  Ravenswood - Master Lease                       (iii)            425.0       2009
  Ravenswood - Sale/leaseback                     (iv)             403.5       2019
  Surety Bonds                                    (v)               66.2    2007-2010
  Commodity Guarantees and Other                  (vi)              95.9    2007-2009
  Letters of Credit                               (vii)             76.6    2007-2010
------------------------------------------------------------------------------------------
                                                               $ 1,720.5
------------------------------------------------------------------------------------------
</TABLE>

The following is a description of KeySpan's outstanding subsidiary guarantees:

     (i)  KeySpan  has fully and  unconditionally  guaranteed  $525  million  to
          holders of Medium-Term  Notes issued by KEDLI.  These notes are due to
          be repaid on January 15, 2008 and February 1, 2010.  KEDLI is required
          to comply with certain financial  covenants under the debt agreements.
          The face value of these  notes is included  in current  maturities  of
          long-term  debt  and  capital  leases,   and  long-term  debt  on  the
          Consolidated Balance Sheet as appropriate.


                                       26
<PAGE>


     (ii) KeySpan  has  fully  and   unconditionally   guaranteed   the  payment
          obligations  of its  subsidiaries  with  regard  to  $128  million  of
          Industrial  Development Revenue Bonds issued through the Nassau County
          and  Suffolk  County  Industrial   Development   Authorities  for  the
          construction of two electric-generation peaking plants on Long Island.
          The face value of these notes are  included in  long-term  debt on the
          Consolidated Balance Sheet.

     (iii) KeySpan has  guaranteed  all payment and  performance  obligations of
          KeySpan  Ravenswood,  LLC, the lessee under the Master Lease. The term
          of the lease has been  extended to June 20, 2009.  The Master Lease is
          classified  as  $412.3  million  long-term  debt  on the  Consolidated
          Balance Sheet.

     (iv) KeySpan has  guaranteed  all payment and  performance  obligations  of
          KeySpan   Ravenswood,   LLC,  the  lessee  under  the   sale/leaseback
          transaction associated with the Ravenswood Expansion, including future
          decommissioning  costs. The initial term of the lease is for 36 years.
          As noted previously, this lease qualifies as an operating lease and is
          not reflected on the Consolidated Balance Sheet.

     (v)  KeySpan  has agreed to  indemnify  the  issuers of various  surety and
          performance bonds associated with certain construction  projects being
          performed  by certain  current and former  subsidiaries.  In the event
          that  the  subsidiaries   fail  to  perform  their  obligations  under
          contracts,  the injured party may demand that the surety make payments
          or provide services under the bond. KeySpan would then be obligated to
          reimburse  the  surety  for any  expenses  or cash  outlays it incurs.
          Although  KeySpan  is not  guaranteeing  any new  bonds for any of the
          former  subsidiaries,  KeySpan's  indemnity  obligation  supports  the
          contractual obligation of these former subsidiaries.  KeySpan has also
          received from a former  subsidiary an indemnity bond issued by a third
          party insurance company,  the purpose of which is to reimburse KeySpan
          in an amount up to $80  million in the event it is required to perform
          under all other indemnity  obligations  previously incurred by KeySpan
          to  support  such  company's   bonded   projects   existing  prior  to
          divestiture.  At June  30,  2007,  the  total  cost to  complete  such
          remaining  bonded  projects is  estimated  to be  approximately  $24.2
          million.

     (vi) KeySpan has  guaranteed  commodity-related  payments for  subsidiaries
          within the Electric Services segment. These guarantees are provided to
          third  parties  to  facilitate  physical  and  financial  transactions
          involved  in the  purchase  of natural  gas,  oil and other  petroleum


                                       27
<PAGE>


          products  for  electric  production  and  marketing  activities.   The
          guarantees cover actual purchases by these subsidiaries that are still
          outstanding as of June 30, 2007.

     (vii) KeySpan has arranged  for stand-by  letters of credit to be issued to
          third  parties  that have  extended  credit to  certain  subsidiaries.
          Certain  vendors  require us to post  letters  of credit to  guarantee
          subsidiary  performance  under our contracts and to ensure  payment to
          our  subsidiary  subcontractors  and vendors  under  those  contracts.
          Certain  of our  vendors  also  require  letters  of  credit to ensure
          reimbursement  for  amounts  they  are  disbursing  on  behalf  of our
          subsidiaries, such as to beneficiaries under our self-funded insurance
          programs.  Such  letters of credit are  generally  issued by a bank or
          similar financial institution. The letters of credit commit the issuer
          to pay specified  amounts to the holder of the letter of credit if the
          holder  demonstrates that we have failed to perform specified actions.
          If this were to occur,  KeySpan  would be  required to  reimburse  the
          issuer of the letter of credit.

To  date,  KeySpan  has not had a claim  made  against  it for any of the  above
guarantees  and we have no reason to  believe  that our  subsidiaries  or former
subsidiaries  will  default on their  current  obligations.  However,  we cannot
predict when or if any  defaults may take place or the impact any such  defaults
may have on our consolidated results of operations,  financial condition or cash
flows.

As noted previously,  KeySpan owns a 26.25% ownership interest in the Millennium
Pipeline Company LLC  ("Millennium"),  the developer of the Millennium  Pipeline
project.  The Millennium Pipeline project is anticipated to have the capacity to
transport  up to 525,000  DTH of  natural  gas a day from  Corning,  New York to
Ramapo,  New York,  interconnecting  with the pipeline  systems of various other
utilities in New York.  Subject to the receipt of certain  remaining permits and
financing,  Millennium  expects  that the first phase of the project  will be in
service by November 2008.

Consolidated  Edison,  KEDLI and  Columbia  Transmission  have each entered into
precedent  agreements to purchase capacity on the pipeline.  Upon and subject to
the terms and conditions set forth in Precedent  Agreements,  KeySpan has agreed
to  guarantee  the full and prompt  payment of $15.8  million  (the  "Guaranteed
Amount") of the contingent $60 million financial  obligation that Millennium may
incur for  liquidated  damages  under the Precedent  Agreements to  Consolidated
Edison and KEDLI. The liquidated damages are intended to reimburse  Consolidated
Edison and KEDLI for costs incurred to secure additional  capacity if Millennium
is unable to provide  the  contracted  capacity.  The $15.8  million  guaranteed
amount reflects  KeySpan's  proportionate  share of the $60 million of financial
security  that is  required  to be  provided  to  Consolidated  Edison and KEDLI
pursuant to the Precedent Agreements based on KeySpan's  proportionate ownership
interest in the Millennium  Pipeline project.  This guarantee has been accounted
for  in  accordance   with  FIN  45   "Guarantor's   Accounting  and  Disclosure
Requirements  for  Guarantees,  Including  Indirect  Guarantees of Indebtness of
Others." At June 30, 2007, the fair value of this guarantee was $0.7 million and
is reflected as a component of equity  investments,  and other deferred  credits
and other liabilities on the Consolidated Balance Sheet.


                                       28
<PAGE>


7. STOCK BASED COMPENSATION

From  time to  time,  KeySpan  awards  stock  based  compensation  to  officers,
directors,  consultants and certain other management employees,  primarily under
the Long Term Performance  Incentive  Compensation Plan (the "Incentive  Plan").
The  Incentive  Plan  provides  for  the  award  of  incentive   stock  options,
non-qualified  stock  options,  performance  shares and restricted  shares.  The
purpose of the  Incentive  Plan is to  optimize  KeySpan's  performance  through
incentives  that  directly  link the  participant's  goals to those of KeySpan's
shareholders  and to  attract  and  retain  participants  who  make  significant
contributions to the success of KeySpan.

Under this Plan,  19,250,000  shares were  authorized  for issuance of which the
total shares awarded to date include 16.9 million stock options,  222,143 shares
of restricted  stock, and 891,555  performance  shares.  At June 30, 2007, after
adjusting for  forfeitures,  there are  approximately  3.0 million  shares still
eligible to be granted under the Incentive  Plan.  In addition,  under  previous
plans,  there  were an  additional  1.7  million  shares  authorized  for  which
approximately 1.2 million stock options were awarded.

In 2003,  KeySpan adopted the prospective method of transition of accounting for
stock based  compensation  expense in accordance  with SFAS 148  "Accounting for
Stock-Based Compensation - Transition and Disclosure." Accordingly, compensation
expense has been recognized by employing the fair value  recognition  provisions
of SFAS 123 for grants awarded after January 1, 2003.

In January 2006,  KeySpan adopted SFAS 123 (revised 2004)  "Share-Based  Payment
("SFAS 123R")." The  implementation of this standard required KeySpan to expense
certain  stock  options  that  had  previously  been  accounted  for  under  the
requirements of APB Opinion 25 and related  Interpretations,  i.e. awards issued
prior to January 1, 2003. No  compensation  cost had been  recognized  for these
fixed stock  option plans in the  Consolidated  Financial  Statements  since the
exercise  prices and market  values  were  equal on the grant  dates.  All stock
option  awards  previously  accounted  for  under  APB 25 were  fully  vested by
December 31, 2006.




                                       29
<PAGE>


The following table presents the actual expense for all of KeySpan's stock based
compensation  awards  recorded in the  Consolidated  Statement of Income for the
periods indicated.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
                                                                                                   Six Months Ended
                                                                                             June 30,              June 30,
(In Millions of Dollars)                                                                       2007                  2006
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                                            <C>                   <C>
Performance shares                                                                             $ 3.6                 $ 4.6
Restricted stock                                                                                 1.4                   3.8
Stock options                                                                                    1.4                   3.1
EDSPP discount                                                                                   2.3                   2.7
---------------------------------------------------------------------------------------------------------------------------
Total stock-based compensation included in operations and maintenance expense                    8.7                  14.2
Income tax benefit                                                                              (3.0)                 (5.0)
---------------------------------------------------------------------------------------------------------------------------
Total stock based compensation expense, net of tax                                             $ 5.7                 $ 9.2
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

SFAS 123R  requires  the  benefits  of tax  deductions  in excess of  recognized
compensation  expense to be reported as a financing cash flow, rather than as an
operating  cash flow.  During the six months  ended June 30,  2007 and 2006 cash
received  from stock  options  exercised  was $10.8  million and $18.1  million,
respectively.  The tax benefit  realized for tax  deductions  from stock options
exercised  during the six months  ended June 30, 2007 and 2006 was less than the
recognized  compensation  expense  and  accordingly  there  were no  excess  tax
deductions  reported in the financing  section of the Consolidated  Statement of
Cash Flows.

The following  represents a discussion of the various  awards  granted under our
stock based compensation plans:

Performance shares

Performance  shares were awarded under the Incentive Plan in 2005 based upon the
attainment of overall corporate  performance goals. These performance shares are
measured  over a three  year  period by  comparing  KeySpan's  cumulative  total
shareholder return to the S&P Utilities Group. For actual  performance  achieved
at a threshold level, 50% of the award will be granted;  for actual  performance
achieved at a targeted level, 100% of the award will be granted;  and for actual
performance  achieved at the maximum  level,  150% of the award will be granted.
The 2005 award is being expensed ratably over its remaining performance period.

The 2006 performance share award reflects the new performance condition criteria
under SFAS 123R. In 2006, 315,900  performance shares were granted.  Performance
shares were  granted  with a  three-year  performance  period with a  threshold,


                                       30
<PAGE>


target and maximum performance level. The number of performance shares earned at
the end of the  performance  period  can  range  from  0% to 150% of the  shares
granted  and  will  be  linked  to  two  performance  measures:  the  percentage
improvement in return on invested capital,  or "ROIC," and KeySpan's  cumulative
three-year  total  stockholder  return,  or "TSR,"  relative  to the  cumulative
three-year  TSR for the  Standard  and Poor's  Utilities  Group,  using a matrix
approach that encompasses  both measures.  The ROIC goal will act as the primary
trigger.  If the ROIC goal  performance is below the threshold level, all shares
shall be forfeited without payment. Upon a change of control, performance shares
shall be distributed based upon the greater of the number of performance  shares
awarded  at  target  level or the  number  of  shares  earned  based  on  actual
performance  through the change of control date.  Performance  share awards were
priced at fair value on the date of grant. The unearned  compensation as of June
30, 2007, associated with all of the performance share awards was $8.1 million.

There were no performance  share awards granted during the six months ended June
30, 2007.

Restricted Stock Awards

KeySpan has made certain grants of restricted  stock to officers,  directors and
certain  other  management   employees  under  the  Incentive  Plan.  Awards  of
restricted stock were made in 2002, 2005, 2006 and 2007. These awards may not be
sold or otherwise  transferred  until  certain  restrictions  have  lapsed.  The
unearned stock-based  compensation related to these awards is being amortized to
compensation  expense over the period in which the awards vest. The  share-based
expense for these awards was determined  based on the fair value of the stock at
the date of grant applied to the total number of shares that were anticipated to
fully vest.  Upon a change of control,  all  restricted  stock  awards will vest
immediately.  The unearned  compensation  as of June 30, 2007,  associated  with
restricted stock was $6.1 million.

Employee Discount Stock Purchase Plan

KeySpan's  Employee  Discount  Stock  Purchase  Plan  ("EDSPP")  allows  KeySpan
employees to purchase shares of KeySpan stock at a 10% discount  through payroll
deductions. KeySpan is currently expensing the discount. The number of shares of
common stock  authorized  for issuance  under the EDSPP is 1,750,000  shares and
there are 245,532 shares remaining to be issued.

Stock Options

The stock option  component of the Incentive Plan entitles the  participants  to
purchase  shares of common stock at an exercise price per share which is no less
than the  closing  price of the  common  stock on the date of the  grant.  Stock
options  generally  vest over a  three-to-five  year period and have an exercise


                                       31
<PAGE>


period of ten years.  Upon a change of control,  all stock  options  granted and
outstanding  will vest  immediately.  The value of all stock  option  grants are
estimated on the date of the grant using the Black-Scholes option-pricing model.
There were no stock options granted in 2007 or 2006.

A summary of the status of our fixed stock option plans and changes is presented
below for the six months ended June 30, 2007:


<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
                                                                           Weighted           Aggregate
                                                                            Average        Intrinsic Value
               Fixed Options                             Shares          Exercise Price      (In Millions)
----------------------------------------------------------------------------------------------------------
<S>                                                   <C>                     <C>            <C>
Outstanding at beginning of period                     9,403,104             $ 33.82
Exercised                                               (305,337)            $ 34.47
Forfeited                                                 (7,610)            $ 38.27
----------------------------------------------------------------------------------------------------------
Outstanding at end of period                           9,090,157             $ 33.79        $ 70.8
----------------------------------------------------------------------------------------------------------
Exercisable at end of period                           7,762,938             $ 33.13        $ 65.6
----------------------------------------------------------------------------------------------------------
</TABLE>

The total intrinsic value of the options  exercised  during the six months ended
June 30,  2007  and  2006  was  approximately  $2.1  million  and $4.5  million,
respectively.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                  Options Outstanding                        Range of              Options
Remaining                  at            Weighted Average    Exercise             Exercisable      Weighted Average     Range of
Contractual Life     June 30, 2007        Exercise Price       Price          at June 30, 2007       Exercise Price   Exercise Price
------------------------------------------------------------------------------------------------------------------------------------
<S>                   <C>                      <C>        <C>                   <C>                      <C>         <C>
 1 years                 185,000              $ 32.63         $32.63               185,000              $ 32.63          $32.63
 2 years                 670,108              $ 28.02     $24.73 - $29.38          670,108              $ 28.02      $24.73 - $29.38
 3 years                 381,741              $ 26.98     $21.99 - $27.06          381,741              $ 26.98      $21.99 - $27.06
 4 years                 936,427              $ 22.70     $22.50 - $32.76          936,427              $ 22.70      $22.50 - $32.76
 5 years               1,437,433              $ 39.50         $39.50             1,437,433              $ 39.50          $39.50
 6 years               1,669,525              $ 32.66         $32.66             1,669,525              $ 32.66          $32.66
 7 years               1,118,988              $ 32.40         $32.40               919,708              $ 32.40          $32.40
 8 years               1,370,165              $ 37.54         $37.54               948,405              $ 37.54          $37.54
 9 years               1,320,770              $ 39.25         $39.25               614,591              $ 39.25          $39.25
------------------------------------------------------------------------------------------------------------------------------------
                       9,090,157                                                 7,762,938
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

As of June 30, 2007, there are  approximately 1.3 million options which have not
yet vested. The unearned  compensation cost related to these stock option awards
is $1.8 million which is expected to be recognized over the next two years.

8. POSTRETIREMENT BENEFITS

Pension  Plans:  The  following  information  represents  the  consolidated  net
periodic pension cost for the three and six months ended June 30, 2007 and 2006,
for our noncontributory  defined benefit pension plans which cover substantially
all employees. Benefits are based on years of service and compensation.  Funding
for pensions is in accordance with  requirements of federal law and regulations.


                                       32
<PAGE>


KEDLI and  Boston  Gas  Company  are  subject  to  certain  deferral  accounting
requirements mandated by the NYPSC and the MADTE, respectively for pension costs
and other postretirement benefit costs. Further, KeySpan's electric subsidiaries
are subject to certain "true-up"  provisions in accordance with the LIPA service
agreements.

The calculation of net periodic pension cost is as follows:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                                                Three Months Ended June 30,             Six Months Ended June 30,
(In Millions of Dollars)                                         2007                 2006             2007                  2006
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>                  <C>              <C>                   <C>
Service cost, benefits earned during the period              $    14.8           $     16.0       $     30.5            $     32.1
Interest cost on projected benefit obligation                     39.1                 38.6             79.7                  77.2
Expected return on plan assets                                   (52.0)               (47.0)          (104.1)                (94.0)
Net amortization and deferral                                     13.0                 21.9             28.9                  43.8
-----------------------------------------------------------------------------------------------------------------------------------
Total pension cost                                           $    14.9           $     29.5       $     35.0            $     59.1
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


Other  Postretirement   Benefits:   The  following  information  represents  the
consolidated  net periodic other  postretirement  benefit cost for the three and
six months ended June 30, 2007 and 2006 for our noncontributory  defined benefit
plans  covering  certain  health care and life  insurance  benefits  for retired
employees.  We have been funding a portion of future  benefits  over  employees'
active service lives through Voluntary Employee Beneficiary Association ("VEBA")
trusts. Contributions to VEBA trusts are tax deductible,  subject to limitations
contained in the Internal Revenue Code.

Net  periodic   other   postretirement   benefit  cost  included  the  following
components:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
                                                                Three Months Ended June 30,           Six Months Ended June 30,
(In Millions of Dollars)                                         2007                2006             2007                2006
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>                 <C>              <C>                 <C>
Service cost, benefits earned during the period               $   5.2             $   7.0          $  11.3             $  13.9
Interest cost on accumulated
   postretirement benefit obligation                             18.0                20.1             37.4                40.3
Expected return on plan assets                                   (9.5)               (9.2)           (19.3)              (18.3)
Net amortization and deferral                                    10.0                16.7             22.2                33.3
-------------------------------------------------------------------------------------------------------------------------------
Other postretirement cost                                     $  23.7             $  34.6          $  51.6             $  69.2
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

During the first six months of 2007,  KeySpan  contributed  $28.0 million to its
pension plans. KeySpan anticipates  contributing an additional $103.0 million to
its other  postretirement  benefit plans during the remainder of 2007. Estimated
contribution  levels  are  subject  to change  based on future  market  returns,
interest rates and certain other measurements. Actual contributions,  therefore,
may vary from these levels.


                                       33
<PAGE>


9. COMMERCIAL PAPER

At June 30, 2007, KeySpan had two credit facilities totaling $1.5 billion - $920
million for five years  through  2010,  and $580  million  through  2009,  which
continue to support  KeySpan's  commercial  paper  program  for ongoing  working
capital needs.

The fees for the  facilities  are based on KeySpan's  current credit ratings and
are increased or decreased  based on a downgrading  or upgrading of our ratings.
The current  annual  facility  fee is 0.07% based on our credit  rating of A3 by
Moody's  Investor  Services and A by Standard & Poor's for each  facility.  Both
credit  facilities allow for KeySpan to borrow using several  different types of
loans;  specifically,  Eurodollar  loans, ABR loans, or competitively bid loans.
Eurodollar  loans are based on the Eurodollar rate plus a margin that is tied to
our applicable  credit  ratings.  ABR loans are based on the higher of the Prime
Rate,  the base CD rate plus 1%, or the Federal Funds  Effective Rate plus 0.5%.
Competitive  bid loans are based on bid results  requested  by KeySpan  from the
lenders.  We do not anticipate  borrowing against these facilities;  however, if
the credit rating on our commercial paper program were to be downgraded,  it may
be necessary to do so.

The facilities  contain certain  affirmative and negative  operating  covenants,
including  restrictions on KeySpan's  ability to mortgage,  pledge,  encumber or
otherwise subject its utility property to any lien, as well as certain financial
covenants  that  require us to,  among  other  things,  maintain a  consolidated
indebtedness  to  consolidated  capitalization  ratio of no more than 65% at the
last day of any fiscal quarter. Violation of these covenants could result in the
termination  of the facilities  and the required  repayment of amounts  borrowed
thereunder,  as well as possible cross defaults under other debt agreements.  At
June 30, 2007, KeySpan's consolidated indebtedness was 49.4% of its consolidated
capitalization and KeySpan was in compliance with all covenants.

Subject to certain conditions set forth in the credit facility,  KeySpan has the
right, at any time, to increase the commitments  under the $920 million facility
up to an additional $300 million. In addition,  KeySpan has the right to request
that the termination date be extended for an additional period of 365 days prior
to each  anniversary  of the  closing  date.  This  extension  option,  however,
requires the approval of lenders holding more than 50% of the total  commitments
to such  extension  request.  Under the  agreements,  KeySpan has the ability to
replace  non-consenting  lenders  with  other  pre-approved  banks or  financial
institutions.

At June 30, 2007, we had cash and temporary cash  investments of $496.5 million.
During the first six months of 2007,  we borrowed  $46.5  million of  commercial
paper and, at June 30, 2007, $131.5 million of commercial paper was outstanding.
At June 30,  2007,  KeySpan  had the ability to issue up to an  additional  $1.4
billion, under its commercial paper program.


                                       34
<PAGE>


10. 2006 LIPA SETTLEMENT

LIPA is a corporate municipal instrumentality and a political subdivision of the
State  of New  York.  On May 28,  1998,  certain  of the  Long  Island  Lighting
Company's ("LILCO's") business units were merged with KeySpan and LILCO's common
stock and remaining  assets were acquired by LIPA.  Also effective on that date,
KeySpan and LIPA entered into three major long-term service  agreements that (i)
provide  to LIPA  all  operation,  maintenance  and  construction  services  and
significant  administrative  services  relating  to  the  Long  Island  electric
transmission and distribution  ("T&D") system pursuant to a Management  Services
Agreement (the "1998 MSA"); (ii) supply LIPA with electric generating  capacity,
energy  conversion and ancillary  services from our Long Island generating units
pursuant  to a Power  Supply  Agreement  (the  "1998  PSA") and other  long-term
agreements  through  which we provide  LIPA with  approximately  one half of its
customers' energy needs; and (iii) manage all aspects of the fuel supply for our
Long Island  generating  facilities,  as well as all aspects of the capacity and
energy  owned by or under  contract  to LIPA  pursuant  to an Energy  Management
Agreement  (the "1998 EMA").  We also  purchase  energy,  capacity and ancillary
services in the open market on LIPA's  behalf  under the 1998 EMA. The 1998 MSA,
1998 PSA and 1998 EMA all became  effective on May 28, 1998 and are collectively
referred to as the "1998 LIPA Agreements".

On February 1, 2006,  KeySpan and LIPA  entered into (i) an amended and restated
Management  Services Agreement (the "2006 MSA"),  pursuant to which KeySpan will
continue to operate and  maintain  the electric T&D System owned by LIPA on Long
Island;  (ii) a new Option and  Purchase  and Sale  Agreement  (the "2006 Option
Agreement"),  to replace the Generation  Purchase Rights  Agreement (as amended,
the "GPRA"),  pursuant to which LIPA had the option,  through December 15, 2005,
to acquire  substantially  all of the electric  generating  facilities  owned by
KeySpan on Long Island;  and (iii) a Settlement  Agreement (the "2006 Settlement
Agreement")  resolving outstanding issues between the parties regarding the 1998
LIPA Agreements. The 2006 MSA, the 2006 Option Agreement and the 2006 Settlement
Agreement  are  collectively  referred to herein as the "2006 LIPA  Agreements."
Each of the 2006 LIPA Agreements will become effective retroactive to January 1,
2006, upon all of the 2006 LIPA Agreements  receiving the required  governmental
approvals;  otherwise none of the 2006 LIPA  Agreements  will become  effective.
These agreements will become effective  following approval by the New York State
Comptroller's Office and the New York State Attorney General.

Following the  announcement  of the pending  Merger of KeySpan and National Grid
plc, LIPA,  National Grid plc and KeySpan engaged in discussions  concerning the
impact of the transaction on LIPA's operations.  KeySpan,  National Grid plc and
LIPA have  reached  an  agreement  pursuant  to which  LIPA  agreed to waive its
contractual  right to  terminate  the 1998  LIPA  Agreements  and the 2006  LIPA
Agreements  upon  consummation  of the Merger between  KeySpan and National Grid
plc, in exchange for  enhancements  to certain of the 2006 LIPA  Agreements  and


                                       35
<PAGE>


certain  other  considerations.  The  amended  and  enhanced  agreements  become
effective upon  completion of the Merger  between  KeySpan and National Grid plc
and are subject to approval by the New York State  Attorney  General and the New
York State Comptroller.

2006 Settlement Agreement

Pursuant to the terms of the 2006 Settlement Agreement,  KeySpan and LIPA agreed
to resolve issues that have existed between the parties  relating to the various
1998 LIPA Agreements. In addition to the resolution of these matters,  KeySpan's
entitlement  to utilize  LILCO's  available tax credits and other tax attributes
increase from  approximately  $50 million to approximately  $200 million.  These
credits and  attributes  may be used to satisfy  KeySpan's  previously  incurred
indemnity  obligation to LIPA for any federal  income tax liability that results
from the settlement  with the IRS regarding the audit of LILCO's tax returns for
the years ended  December 31, 1996 through  March 31, 1999. On October 30, 2006,
the IRS  submitted the  settlement  provisions of the concluded IRS audit to the
Joint  Committee on Taxation for  approval.  Key  provisions  of the  settlement
included the resolution of the tax basis of assets transferred to KeySpan at the
time of the  KeySpan/LILCO  merger,  the tax  deductibility  of  certain  merger
related costs and the tax deductibility of certain  environmental  expenditures.
The  settlement  enabled  KeySpan to utilize 100% of the  available tax credits.
(See  KeySpan's  Annual Report on Form 10-K for the year ended December 31, 2006
Note 3 to the Consolidated  Financial  Statements  "Income Taxes" for additional
information of the  settlement.)  In recognition of these items,  as well as for
the  modification  and extension of the 1998 MSA and the amendments to the GPRA,
upon effectiveness of the Settlement Agreement KeySpan will record a contractual
asset in the amount of approximately $160 million,  of which  approximately $110
million will be attributed to the right to utilize such  additional  credits and
attributes and  approximately  $50 million will be amortized over the eight year
term of the 2006 MSA. In order to  compensate  LIPA for the  foregoing,  KeySpan
will pay LIPA $69 million in cash and will settle certain accounts receivable in
the amount of approximately $90 million due from LIPA.

Generation Purchase Rights Agreement and 2006 Option Agreement.

Under an amended GPRA,  LIPA had the right to acquire  certain of KeySpan's Long
Island-based  generating assets formerly owned by LILCO, at fair market value at
the time of the exercise of such right.  LIPA was  initially  required to make a
determination  by May 2005,  but  KeySpan  and LIPA agreed to extend the date by
which LIPA was to make this  determination  to December 15, 2005. As part of the
2006  settlement  between  KeySpan and LIPA,  the parties  entered into the 2006
Option  Agreement  whereby LIPA had the option during the period January 1, 2006
to December 31, 2006 to purchase  only the steam  generating  units at KeySpan's
Far Rockaway  and/or E.F.  Barrett  Generating  Stations  (and  certain  related
assets) at a price  equal to the net book value of each  facility.  In  December
2006,  KeySpan and LIPA entered  into an amendment to the 2006 Option  Agreement
whereby the parties  agreed to extend the expiration of the option period to the
later of (i) December 31, 2007 or (ii) 180 days  following the effective date of


                                       36
<PAGE>


the 2006 Option  Agreement.  Pursuant to the National Grid plc, KeySpan and LIPA
negotiations,  the parties further  amended the 2006 Option  Agreement to extend
the expiration of the option period to May 31, 2008. The 2006 Option  Agreement,
as amended,  replaces the GPRA,  the expiration of which has been stayed pending
effectiveness of the 2006 LIPA  Agreements.  In the event such agreements do not
become   effective  by  reason  of  failure  to  secure  any  of  the  requisite
governmental approvals, the GPRA will be reinstated for a period of 90 days from
the date such  approval  is  denied.  If LIPA were to  exercise  the  option and
purchase  one or both of the  generation  facilities  (i) LIPA and KeySpan  will
enter into an operation  and  maintenance  agreement,  pursuant to which KeySpan
will continue to operate  these  facilities,  through May 28, 2013,  for a fixed
management fee plus  reimbursement  for certain costs; and (ii) the 1998 PSA and
1998 EMA will be amended to reflect  that the  purchased  generating  facilities
would no longer be covered by those agreements.  It is anticipated that the fees
received  pursuant to the operation and  maintenance  agreement  will offset the
reduction in the operation and  maintenance  expense  recovery  component of the
1998 PSA and the reduction in fees under the 1998 EMA.

Management Services Agreements

In place of the previous compensation  structure (whereby KeySpan was reimbursed
for budgeted  costs,  and earned a management  fee and certain  performance  and
cost-based incentives), KeySpan's compensation for managing the T&D System under
the 2006 MSA consists of two  components:  a minimum  compensation  component of
$224 million per year and a variable component based on electric sales. The $224
million  component  remains unchanged for three years and then increase annually
by 1.7%, plus inflation.  The variable  component,  which comprises no more than
20% of KeySpan's  compensation under the 2006 MSA, is based on electric sales on
Long Island exceeding a base amount of 16,558 gigawatt hours, increasing by 1.7%
in each year. Above that level,  KeySpan receives  approximately  1.34 cents per
kilowatt hour for the first contract  year,  1.29 cents per kilowatt hour in the
second  contract  year  (plus an annual  inflation  adjustment),  1.24 cents per
kilowatt hour in the third contract year (plus an annual inflation  adjustment),
with the per  kilowatt  hour rate  thereafter  adjusted  annually by  inflation.
Subject to certain  limitations,  KeySpan retains all  operational  efficiencies
realized during the term of the 2006 MSA.

LIPA will  continue to reimburse  KeySpan for certain  expenditures  incurred in
connection  with the  operation  and  maintenance  of the T&D System,  and other
payments made on behalf of LIPA,  including:  real property and other T&D System
taxes, return postage, capital construction expenditures and storm costs.

Upon approval, the 2006 LIPA Agreements will be effective retroactive to January
1, 2006.  KeySpan's  reported  operating income and net income for the three and
six months ended June 30, 2007 and 2006 under the 2006 MSA are substantially the
same as they  would  have been if the terms and  provisions  of the 1998 MSA had


                                       37
<PAGE>


continued  to be applied.  At this point in time,  KeySpan is unable to estimate
what the impact would be to its results of  operations,  financial  position and
cash flows if the 2006 LIPA Agreements do not become fully effective.

11. ADOPTION OF FASB INTERPRETATION NUMBER 48

On July  13,  2006  the  FASB  issued  Interpretation  No.  48  "Accounting  for
Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109" ("FIN
48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in an entity's  financial  statements in accordance with FASB Statement No. 109,
"Accounting  for Income  Taxes"  and  prescribes  a  recognition  threshold  and
measurement attributes for financial statement disclosure of tax positions taken
or  expected  to be  taken on a tax  return.  Under  FIN 48,  the  impact  of an
uncertain income tax position on the income tax return must be recognized at the
largest  amount that is more likely than not to be  sustained  upon audit by the
relevant  taxing  authority.  An  uncertain  income  tax  position  will  not be
recognized  if  it  has  less  than  a  50%   likelihood  of  being   sustained.
Additionally,  FIN 48 provides  guidance on: the  classification of unrecognized
tax benefits; disclosures for interest and penalties; accounting and disclosures
for interim reporting periods; and transition requirements. FIN 48 was effective
for fiscal years beginning after December 15, 2006.

KeySpan adopted the provisions of FIN 48 on January 1, 2007. The total amount of
unrecognized  tax  benefits as of the date of adoption was $79.6  million.  As a
result of the  implementation  of FIN 48, we recognized a $20.5 million increase
in the  liability  for  unrecognized  tax benefits  which was accounted for as a
reduction  in retained  earnings of $5.2 million and an increase to deferred tax
assets of $15.3 million.

Included in the balance of  unrecognized  tax  benefits at January 1, 2007,  are
$55.3 million of tax benefits  that, if  recognized,  would affect the effective
tax rate.

KeySpan recognizes  interest accrued related to unrecognized tax benefits in tax
expense on the Consolidated Statement of Income. During the years ended December
31, 2006, 2005 and 2004, we recognized  approximately $0.9 million, $7.6 million
and $0.4 million in interest, respectively. KeySpan had accrued interest payable
of $8.9 million and $8.0  million at December  31, 2006 and 2005,  respectively.
Upon  adoption  of FIN 48, on January 1, 2007,  KeySpan  increased  its  accrued
interest  payable  to  $24.3  million,   which  is  included  in  the  total  of
unrecognized benefits as of the date of adoption. KeySpan recorded an additional
$2.3  million  and $4.7  million  of accrued  interest  during the three and six
months ended June 30, 2007,  respectively.  We do not anticipate  that the total
amounts of  unrecognized  tax benefits will  significantly  increase or decrease
within the next twelve months.


                                       38
<PAGE>


KeySpan is subject to federal,  state and local income tax.  Through its various
subsidiaries,  KeySpan operates predominately in New York, Massachusetts and New
Hampshire.  The  following  table  summarizes  the open tax years for each major
jurisdiction:


-----------------------------------------------
       Jurisdiction            Open Tax Years
-----------------------------------------------

Federal                          2000 - 2006
New York State                   2000 - 2006
New York City                    2000 - 2006
Massachusetts                    2000 - 2006
New Hampshire                    2003 - 2006
-----------------------------------------------


The Internal Revenue Service has recently commenced the examination of KeySpan's
tax returns for the years ended December 31, 2000 through  December 31, 2004. In
addition,  several of our  subsidiaries  are  currently  under audit by New York
State  and New York City for the tax  years  ended  December  31,  2000  through
December  31,  2005.  Although  the tax years ended  December  31, 2003  through
December  31,  2005 are open in  Massachusetts  and New  Hampshire,  none of our
subsidiaries  in these  states  are  currently  being  audited by the income tax
authorities. At this time, we do not believe that the outcome of any examination
will have a material impact on KeySpan's financial statements.

12. KEYSPAN GAS EAST CORPORATION SUMMARY FINANCIAL INFORMATION

KEDLI is a wholly owned  subsidiary of KeySpan.  KEDLI was formed on May 7, 1998
and on May 28, 1998 acquired  substantially all of the assets related to the gas
distribution  business of LILCO.  KEDLI  provides gas  distribution  services to
customers  in the Long Island  counties  of Nassau and Suffolk and the  Rockaway
peninsula of Queens county.  KEDLI established a program for the issuance,  from
time to time, of up to $600 million  aggregate  principal  amount of Medium-Term
Notes, which will be fully and unconditionally guaranteed by the parent, KeySpan
Corporation.   On  February  1,  2000,  KEDLI  issued  $400  million  of  7.875%
Medium-Term  Notes due 2010.  In January 2001,  KEDLI issued an additional  $125
million of Medium- Term Notes at 6.9% due January 2008. The following  condensed
financial  statements  are required to be disclosed by SEC  regulations  and set
forth those of KEDLI,  KeySpan Corporation as guarantor of the Medium-Term Notes
and our other  subsidiaries on a combined basis.  Additionally,  in 2006,  KEDLI
issued $100  million of Senior  Unsecured  Notes at 5.60% due November 29, 2016.
This debt is not guaranteed by the parent, KeySpan Corporation.


                                       39
<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                               Statement of Income
------------------------------------------------------------------------------------------------------------------------------------
                                                                       Three Months Ended June 30, 2007
(In Millions of Dollars)                        Guarantor          KEDLI        Other Subsidiaries    Eliminations     Consolidated
------------------------------------------------------------------------------------------------------------------------------------
                                             ---------------------------------------------------------------------------------------
<S>                                                 <C>            <C>                  <C>                 <C>            <C>
Revenues                                           $  0.2         $ 276.5              $ 1,253.9          $  (0.2)        $ 1,530.4
                                             ---------------------------------------------------------------------------------------
Operating Expenses
  Purchased gas                                         -           175.1                  474.3                -             649.4
  Fuel and purchased power                              -               -                  138.1                -             138.1
  Operations and maintenance                         (7.3)           36.5                  382.2                -             411.4
  Intercompany expense                                  -             1.5                   (1.3)            (0.2)                -
  Depreciation and amortization                         -            21.2                   83.4                -             104.6
  Operating taxes                                       -            15.6                   83.1                -              98.7
                                             ---------------------------------------------------------------------------------------
Total Operating Expenses                             (7.3)          249.9                1,159.8             (0.2)          1,402.2
                                             ---------------------------------------------------------------------------------------
Income from equity investments                       52.9               -                    4.9            (52.9)              4.9
 Gain on sale of assets                                 -               -                    0.3                -               0.3
                                             ---------------------------------------------------------------------------------------
Operating Income                                     60.4            26.6                   99.3            (52.9)            133.4
                                             ---------------------------------------------------------------------------------------

Interest charges                                    (46.5)          (15.4)                 (23.8)            16.1             (69.6)
Other income and (deductions)                        35.4             1.9                   (2.9)           (16.1)             18.3
                                             ---------------------------------------------------------------------------------------
Total Other Income and (Deductions)                 (11.1)          (13.5)                 (26.7)               -             (51.3)

Income Taxes (Benefit)                               (2.9)            5.6                   27.2                -              29.9
                                             ---------------------------------------------------------------------------------------
Net Income                                         $ 52.2         $   7.5              $    45.4          $ (52.9)        $    52.2
                                             =======================================================================================
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                               Statement of Income
------------------------------------------------------------------------------------------------------------------------------------
                                                                       Three Months Ended June 30, 2006
(In Millions of Dollars)                        Guarantor          KEDLI        Other Subsidiaries    Eliminations     Consolidated
------------------------------------------------------------------------------------------------------------------------------------
                                             ---------------------------------------------------------------------------------------
<S>                                                 <C>            <C>                  <C>                 <C>            <C>
Revenues                                           $  0.2         $ 245.9              $ 1,131.8          $  (0.2)        $ 1,377.7
                                             ---------------------------------------------------------------------------------------
Operating Expenses
  Purchased gas                                         -           153.8                  386.0                -             539.8
  Fuel and purchased power                              -               -                  115.7                -             115.7
  Operations and maintenance                          9.3            34.5                  376.8                -             420.6
  Intercompany expense                                  -             1.4                   (1.4)               -                 -
  Depreciation and amortization                         -            18.7                   82.5                -             101.2
  Operating taxes                                       -            15.3                   80.5                -              95.8
                                             ---------------------------------------------------------------------------------------
Total Operating Expenses                              9.3           223.7                1,040.1                -           1,273.1
                                             ---------------------------------------------------------------------------------------
Income from equity investments                       49.3               -                    2.9            (49.3)              2.9
                                             ---------------------------------------------------------------------------------------
Operating Income (Loss)                              40.2            22.2                   94.6            (49.5)            107.5
                                             ---------------------------------------------------------------------------------------

Interest charges                                    (39.9)          (13.2)                 (14.3)             8.0             (59.4)
Other income and (deductions)                        26.5             0.9                  (13.4)            (7.8)              6.2
                                             ---------------------------------------------------------------------------------------
Total Other Income and (Deductions)                 (13.4)          (12.3)                 (27.7)             0.2             (53.2)

Income Taxes (Benefit)                              (22.6)            5.5                   22.0                -               4.9
                                             ---------------------------------------------------------------------------------------
Net Income                                         $ 49.4         $   4.4              $    44.9          $ (49.3)        $    49.4
                                             =======================================================================================
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       40
<PAGE>


<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                               Statement of Income
-----------------------------------------------------------------------------------------------------------------------------------
                                                                         Six Months Ended June 30, 2007
(In Millions of Dollars)                        Guarantor         KEDLI        Other Subsidiaries    Eliminations     Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
                                          -----------------------------------------------------------------------------------------
<S>                                               <C>            <C>                  <C>                 <C>            <C>
Revenues                                         $   0.3         $ 871.0              $ 3,521.8         $   (0.2)        $ 4,392.9
                                          -----------------------------------------------------------------------------------------
Operating Expenses
  Purchased gas                                        -           569.4                1,752.7                -           2,322.1
  Fuel and purchased power                             -               -                  266.3                -             266.3
  Operations and maintenance                        (5.9)           74.4                  773.8                -             842.3
  Intercompany expense                                 -             2.8                   (2.6)            (0.2)                -
  Depreciation and amortization                        -            49.6                  167.3                -             216.9
  Operating taxes                                      -            34.3                  186.9                -             221.2
                                          -----------------------------------------------------------------------------------------
Total Operating Expenses                            (5.9)          730.5                3,144.4             (0.2)          3,868.8
                                          -----------------------------------------------------------------------------------------
Income from equity investments                     273.1               -                    8.5           (273.1)              8.5
 Gain on sale of assets                                -               -                    0.3                -               0.3
                                          -----------------------------------------------------------------------------------------
Operating Income                                   279.3           140.5                  386.2           (273.1)            532.9
                                          -----------------------------------------------------------------------------------------

Interest charges                                   (87.4)          (28.1)                 (43.5)            27.9            (131.1)
Other income and (deductions)                       66.1             3.7                  (15.5)           (27.9)             26.4
                                          -----------------------------------------------------------------------------------------
Total Other Income and (Deductions)                (21.3)          (24.4)                 (59.0)               -            (104.7)

Income Taxes (Benefit)                              (7.6)           43.5                  126.7                -             162.6
                                          -----------------------------------------------------------------------------------------
Net Income                                       $ 265.6         $  72.6              $   200.5         $ (273.1)        $   265.6
                                          =========================================================================================
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                               Statement of Income
------------------------------------------------------------------------------------------------------------------------------------
                                                                           Six Months Ended June 30, 2006
(In Millions of Dollars)                         Guarantor         KEDLI         Other Subsidiaries    Eliminations     Consolidated
------------------------------------------------------------------------------------------------------------------------------------
                                           -----------------------------------------------------------------------------------------
<S>                                                <C>            <C>                  <C>                <C>              <C>
Revenues                                          $   0.3         $ 789.6              $ 3,249.2         $   (0.3)        $ 4,038.8
                                           -----------------------------------------------------------------------------------------
Operating Expenses
  Purchased gas                                         -           518.7                1,532.5                -           2,051.2
  Fuel and purchased power                              -               -                  245.7                -             245.7
  Operations and maintenance                         17.3            70.9                  738.5                -             826.7
  Intercompany expense                                  -             2.6                   (2.6)               -                 -
  Depreciation and amortization                         -            43.8                  167.6                -             211.4
  Operating taxes                                       -            33.0                  181.1                -             214.0
                                           -----------------------------------------------------------------------------------------
Total Operating Expenses                             17.3           669.0                2,862.8                -           3,549.0
                                           -----------------------------------------------------------------------------------------
Income from equity investments                      265.9               -                    6.3           (265.9)              6.3
 Gain on sale of assets                                 -             0.1                    0.4                -               0.5
                                           -----------------------------------------------------------------------------------------
Operating Income (Loss)                             248.9           120.7                  393.2           (266.2)            496.6
                                           -----------------------------------------------------------------------------------------

Interest charges                                    (79.7)          (27.4)                 (31.0)            12.4            (125.6)
Other income and (deductions)                        59.3             1.0                  (30.6)           (12.1)             17.6
                                           -----------------------------------------------------------------------------------------
Total Other Income and (Deductions)                 (20.4)          (26.4)                 (61.6)             0.3            (108.0)

Income Taxes (Benefit)                              (28.9)           35.4                  124.7                -             131.2
                                           -----------------------------------------------------------------------------------------
Net Income                                        $ 257.4         $  59.0              $   206.9         $ (265.9)        $   257.4
                                           =========================================================================================
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       41
<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet
------------------------------------------------------------------------------------------------------------------------------------
                                                                                June 30, 2007
(In Millions of Dollars)                         Guarantor         KEDLI      Other Subsidiaries     Eliminations       Consolidated
------------------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>             <C>               <C>                  <C>               <C>
ASSETS
Current Assets
   Cash & temporary cash investments            $     0.1       $   227.6         $    268.8          $        -         $    496.5
   Accounts receivable, net                           0.6           197.9              749.8                   -              948.3
   Other current assets                               1.0           234.6              957.1                   -            1,192.7
                                            ----------------------------------------------------------------------------------------
                                                      1.7           660.1            1,975.7                   -            2,637.5
                                            ----------------------------------------------------------------------------------------

                                            ----------------------------------------------------------------------------------------
Equity Investments  and Other                     5,147.7               -              159.3            (5,014.3)             292.7
                                            ----------------------------------------------------------------------------------------
Property
   Gas                                                  -               -            7,825.7                   -            7,825.7
   Electric                                             -         2,252.0              354.4                   -            2,606.4
   Other                                                -             1.3              615.3                   -              616.6
   Accumulated depreciation
    and depletion                                       -          (452.2)          (2,923.0)                  -           (3,375.2)
                                            ----------------------------------------------------------------------------------------
                                                        -         1,801.1            5,872.4                   -            7,673.5
                                            ----------------------------------------------------------------------------------------
Intercompany Accounts Receivable                    964.9           257.0            2,013.8            (3,235.7)                 -
                                            ----------------------------------------------------------------------------------------
Deferred Charges                                  1,959.2           448.8            1,226.2                   -            3,634.2
                                            ----------------------------------------------------------------------------------------
Total Assets                                    $ 8,073.5       $ 3,167.0         $ 11,247.4          $ (8,250.0)        $ 14,237.9
                                            ========================================================================================

LIABILITIES AND CAPITALIZATION
Current Liabilities
   Accounts payable and other liabilities       $    49.8       $    75.5         $    634.0          $        -         $    759.3
   Commercial paper                                 131.5               -                  -                   -              131.5
   Other current liabilities                        356.8           171.0              239.7                   -              767.5
                                            ----------------------------------------------------------------------------------------
                                                    538.1           246.5              873.7                   -            1,658.3
Intercompany Accounts Payable                        11.1           623.2            1,013.7            (1,648.0)                 -
                                            ----------------------------------------------------------------------------------------

Deferred Credits and Other Liabilities
Deferred income tax                                   4.6           420.4              665.7                   -            1,090.7
Postretirement benefits and other reserves        1,067.2           143.4              447.2                   -            1,657.8
Other deferred credits and liabilities              148.0            37.6              851.3                   -            1,036.9
                                            ----------------------------------------------------------------------------------------
                                                  1,219.8           601.4            1,964.2                   -            3,785.4
                                            ----------------------------------------------------------------------------------------
Capitalization
Common shareholders' equity                       4,603.2         1,070.0            3,996.1            (5,014.3)           4,655.0
Long-term debt and capital leases                 1,701.3           625.9            3,383.6            (1,587.7)           4,123.1
                                            ----------------------------------------------------------------------------------------
Total Capitalization                              6,304.5         1,695.9            7,379.7            (6,602.0)           8,778.1
                                            ----------------------------------------------------------------------------------------
Minority Interest in Subsidiary Companies               -               -               16.1                   -               16.1
                                            ----------------------------------------------------------------------------------------
Total Liabilities & Capitalization              $ 8,073.5       $ 3,167.0         $ 11,247.4          $ (8,250.0)        $ 14,237.9
                                            ========================================================================================
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       42
<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet
------------------------------------------------------------------------------------------------------------------------------------
                                                                               December 31, 2006
(In Millions of Dollars)                         Guarantor         KEDLI       Other Subsidiaries      Eliminations     Consolidated
------------------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>            <C>                <C>                <C>               <C>
ASSETS
Current Assets
   Cash & temporary cash investments             $   140.5      $    34.7          $     35.7         $        -         $    210.9
   Accounts receivable, net                            0.5          175.6               710.7                  -              886.8
   Other current assets                                1.5          314.0             1,373.8                  -            1,689.3
                                          ------------------------------------------------------------------------------------------
                                                     142.5          524.3             2,120.2                  -            2,787.0
                                          ------------------------------------------------------------------------------------------

Equity Investments and Other                       4,837.5              -               144.0           (4,711.8)             269.7
                                          ------------------------------------------------------------------------------------------
Property
   Gas                                                   -        2,164.4             5,475.0                  -            7,639.4
   Other                                                 -           32.3             3,171.5                  -            3,203.8
   Accumulated depreciation
    and depletion                                        -         (434.7)           (2,830.2)                 -           (3,264.9)
                                          ------------------------------------------------------------------------------------------
                                                         -        1,762.0             5,816.3                  -            7,578.3
                                          ------------------------------------------------------------------------------------------

Intercompany Accounts Receivable                     969.1           80.8             1,682.9           (2,732.8)                 -

Deferred Charges                                   1,942.3          502.0             1,358.2                  -            3,802.5

                                          ------------------------------------------------------------------------------------------
Total Assets                                     $ 7,891.4      $ 2,869.1          $ 11,121.6         $ (7,444.6)        $ 14,437.5
                                          ==========================================================================================

LIABILITIES AND CAPITALIZATION
Current Liabilities
   Accounts payable and other liabilities        $    57.2      $   118.9          $    849.9         $        -         $  1,026.0
   Commercial paper                                   85.0              -                   -                  -               85.0
   Other current liabilities                         231.8           71.4               293.8                  -              597.0
                                          ------------------------------------------------------------------------------------------
                                                     374.0          190.3             1,143.7                  -            1,708.0
                                          ------------------------------------------------------------------------------------------
Intercompany Accounts Payable                          2.6          319.4               897.0           (1,219.0)                 -
                                          ------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Deferred income tax                                  (24.3)         407.0               793.7                  -            1,176.4
Other deferred credits and liabilities             1,216.1          204.7             1,178.7                  -            2,599.5
                                          ------------------------------------------------------------------------------------------
                                                   1,191.8          611.7             1,972.4                  -            3,775.9
                                          ------------------------------------------------------------------------------------------
Capitalization
Common shareholders' equity                        4,461.2          996.8             3,772.6           (4,711.8)           4,518.8
Long-term debt and capital leases                  1,861.8          750.9             3,320.2           (1,513.8)           4,419.1
                                          ------------------------------------------------------------------------------------------
Total Capitalization                               6,323.0        1,747.7             7,092.8           (6,225.6)           8,937.9
                                          ------------------------------------------------------------------------------------------
Minority Interest in Subsidiary Companies                -              -                15.7                  -               15.7
                                          ------------------------------------------------------------------------------------------
Total Liabilities & Capitalization               $ 7,891.4      $ 2,869.1          $ 11,121.6         $ (7,444.6)        $ 14,437.5
                                          ==========================================================================================
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       43
<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Statement of Cash Flows
------------------------------------------------------------------------------------------------------------------------------------
                                                                                    Six Months Ended June 30, 2007
                                                    --------------------------------------------------------------------------------
(In Millions of Dollars)                                     Guarantor           KEDLI          Other Subsidiaries      Consolidated
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>                <C>                   <C>                   <C>
Operating Activities
Net Cash Provided by Operating Activities                    $   25.7           $ 224.4               $ 355.8               $ 605.9
                                                    --------------------------------------------------------------------------------
Investing Activities
   Construction expenditures                                        -             (42.4)               (203.7)               (246.1)
   Cost of removal                                                  -              (3.9)                (10.1)                (14.0)
   Derivative margin calls                                          -              15.2                  27.5                  42.7
   Return of investment                                             -                 -                   7.6                   7.6
                                                    --------------------------------------------------------------------------------
Net Cash (Used in) Investing Activities                             -             (31.1)               (178.7)               (209.8)
                                                    --------------------------------------------------------------------------------
Financing Activities
   Treasury stock issued                                         10.4                 -                     -                  10.4
   Issuance (payment) of debt, net                               46.5                 -                  (0.6)                 45.9
   Common stock dividends paid                                 (166.8)                -                     -                (166.8)
   Intercompany dividend payments                                 2.0                 -                  (2.0)                    -
   Net intercompany accounts                                    (58.2)             (0.4)                 58.6                     -
                                                                                                                                  -
                                                    --------------------------------------------------------------------------------
Net Cash (Used in) Provided by Financing Activities            (166.1)             (0.4)                 56.0                (110.5)
                                                    --------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents         $ (140.4)          $ 192.9               $ 233.1               $ 285.6
Cash and Cash Equivalents at Beginning of Period                140.5              34.7                  35.7                 210.9
                                                    --------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period                   $    0.1           $ 227.6               $ 268.8               $ 496.5
                                                    ================================================================================
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Statement of Cash Flows
------------------------------------------------------------------------------------------------------------------------------------
                                                                                              Six Months Ended June 30, 2006
                                                        ----------------------------------------------------------------------------
(In Millions of Dollars)                                           Guarantor          KEDLI       Other Subsidiaries    Consolidated
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>               <C>                 <C>              <C>
Operating Activities
Net Cash Provided by (Used in) Operating Activities                 $ (56.0)          $ 263.9              $ 581.6          $ 789.5
                                                        ----------------------------------------------------------------------------
Investing Activities
   Capital expenditures                                                   -             (41.2)              (205.8)          (247.0)
   Cost of removal                                                        -              (3.8)               (11.9)           (15.7)
                                                        ----------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities                       -             (45.0)              (217.7)          (262.7)
                                                        ----------------------------------------------------------------------------
Financing Activities
   Treasury stock issued                                               18.8                 -                    -             18.8
   Payment of debt, net                                              (467.6)                -                    -           (467.6)
   Common and preferred stock dividends paid                         (162.4)                -                    -           (162.4)
   Net intercompany accounts                                          602.2            (219.3)              (382.9)               -
                                                                                                                                  -
                                                        ----------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities                    (9.0)           (219.3)              (382.9)          (611.2)
                                                        ----------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents                $ (65.0)          $  (0.4)             $ (19.0)         $ (84.4)
Cash and Cash Equivalents at Beginning of Period                       79.5               3.5                 41.5            124.5
                                                        ----------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period                          $  14.5           $   3.1              $  22.5          $  40.1
                                                        ============================================================================
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       44
<PAGE>


Item 2. Management's  Discussion and Analysis of Financial Condition and Results
        of Operations

Consolidated Review of Results

The following is a summary of transactions  affecting  comparative  earnings for
the three and six months  ended  June 30,  2007,  compared  to the three and six
months ended June 30, 2006.  Capitalized terms used in the following discussion,
but not  otherwise  defined,  have the same meaning as when used in the Notes to
the  Consolidated  Financial  Statements  included  under Item 1.  References to
"KeySpan,"  "we," "us," and "our" mean KeySpan  Corporation,  together  with its
consolidated subsidiaries.

Operating income by segment,  as well as consolidated  earnings for common stock
is set forth in the following table for the periods indicated.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
(In Millions of Dollars, Except per Share)
---------------------------------------------------------------------------------------------------------------------------
                                                             Three Months Ended June 30,          Six Months Ended June 30,
                                                                2007             2006                2007             2006
---------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>              <C>                 <C>              <C>
Gas Distribution                                              $ 61.4           $ 39.5             $ 464.0          $ 376.0
Electric Services                                               44.3             62.4                42.8            127.3
Energy Services                                                  2.0              2.0                 3.4              1.6
Energy Investments                                               5.5              3.7                10.5              6.7
Eliminations and other                                          20.2             (0.1)               12.2            (15.0)
---------------------------------------------------------------------------------------------------------------------------
Operating Income                                               133.4            107.5               532.9            496.6
---------------------------------------------------------------------------------------------------------------------------
Other Income and (Deductions)
   Interest charges                                            (69.6)           (59.4)             (131.1)          (125.6)
   Other income and (deductions)                                18.3              6.2                26.4             17.6
---------------------------------------------------------------------------------------------------------------------------
                                                               (51.3)           (53.2)             (104.7)          (108.0)
---------------------------------------------------------------------------------------------------------------------------
Income taxes                                                    29.9              4.9               162.6            131.2
---------------------------------------------------------------------------------------------------------------------------
Earnings for Common Stock                                     $ 52.2           $ 49.4             $ 265.6          $ 257.4
---------------------------------------------------------------------------------------------------------------------------

Basic Earnings per Share                                      $ 0.30           $ 0.28             $  1.51          $  1.47
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

Results of Operations Quarter Ended June 30, 2007 vs 2006

KeySpan's  earnings  for common  stock for the three  months ended June 30, 2007
were $52.2 million,  or $0.30 per share,  compared to $49.4 million or $0.28 per
share realized  during the three months ended June 30, 2006, an increase of $2.8
million,  or $0.02  per  share.  The  favorable  comparative  operating  results
reflect:  (i) an increase in operating  income;  offset by (ii) higher  interest
expense and (iii) an increase in comparative income tax expense due, in part, to
the benefits  recorded in 2006 related to the settlement of certain  outstanding
issues  with the New York  City  Department  of  Taxation  and  Finance  and the
Internal Revenue Service ("IRS").


                                       45
<PAGE>


As indicated in the above table,  operating income  increased $25.9 million,  or
24% for the quarter ended June 30, 2007,  compared to the corresponding  quarter
last year. The Gas Distribution segment realized an increase in operating income
of $21.9  million,  which  was,  for the most  part,  offset  by a  decrease  in
operating income associated with KeySpan's electric operations of $18.1 million.
Operating  income from the Gas Distribution  segment  benefited from load growth
additions and an increase in usage per customer which resulted in an increase to
net gas revenues.  The Electric Services segment results were adversely impacted
by a decrease in electric revenues from KeySpan's  merchant electric  generating
facilities and an increase in operating expenses.

The favorable  operating income variation  reflected in "eliminations and other"
of $20.3 million is primarily  due to a decrease in costs  recorded at KeySpan's
holding  company  level  that are not  allocated  to the  operating  segments  -
primarily  costs related to KeySpan's  pending Merger with National Grid plc and
certain employee benefit costs. (See the discussion under the caption "Review of
Operating Segments" for further details on each segment.)

Other income and (deductions)  reflects interest charges and other miscellaneous
items. For the second quarter of 2007, other income and (deductions)  reflects a
net expense of $51.3 million  compared to a net expense of $53.2 million for the
second quarter of 2006. The favorable variation of $1.9 million is primarily due
to an increase in interest  income on  temporary  cash  investments  and certain
other  investments  amounting  to $12.1  million,  partially  offset  by  higher
interest charges of $10.2 million.

The increase in comparative interest expense year-over-year reflects, in part, a
$6  million  benefit  recorded  in 2006  related  to the  settlement  of certain
outstanding  issues with the New York City  Department  of Taxation and Finance.
During the second  quarter of 2006,  KeySpan  resolved  its dispute with the New
York City  Department  of Taxation  and  Finance  with  respect to income  taxes
relating to the operations of its merchant electric generating facility.  During
the three months ended June 30, 2006, KeySpan reversed a previously  recorded $6
million interest reserve  established in connection with that dispute.  Further,
interest expense in 2007 reflects a higher level of outstanding  long-term debt.
Long-term  debt at June  30,  2007  was  $486  million  higher  than  last  year
reflecting  the November 2006 issuance of $500 million Senior  Unsecured  Notes.
Partially  offsetting  these adverse impacts to comparative  interest expense is
the favorable  impact  associated  with a lower level of outstanding  commercial
paper.  During  the  second  quarter  of  2007,  KeySpan's  average  outstanding
commercial  paper  borrowings  were $91.5 million  compared to $217.9 million in
average outstanding borrowings during the second quarter of 2006.

The  increase in income tax expense of $25.0  million for the second  quarter of
2007 compared to the second  quarter of 2006  reflects,  in part,  the favorable
resolution  reached in June 2006 between  KeySpan and the IRS regarding  certain
issues associated with the Long Island Lighting Company's  ("LILCO") tax returns
for the tax years ending December 31, 1996 through March 31, 1999, and KeySpan's


                                       46
<PAGE>


and The Brooklyn  Union Gas Company's tax returns for the years ended  September
30, 1997  through  December  31, 1998.  In  addition,  as noted  above,  KeySpan
resolved its dispute with the New York City  Department  of Taxation and Finance
with  respect to income  taxes  relating  to its  merchant  electric  generating
facility.  As a result of settling these issues,  KeySpan realized a tax benefit
of $16.4  million  during the three months ended June 30,  2006.  The  remaining
increase  in income tax  expense  generally  reflects a higher  level of pre-tax
income in the second quarter of 2007 compared to the second quarter of 2006.

Results of Operations Six Months Ended June 30, 2007 vs 2006

KeySpan's earnings for common stock for the six months ended June 30, 2007, were
$265.6 million,  or $1.51 per share,  compared to $257.4  million,  or $1.47 per
share,  realized  during the same period last year, an increase of $8.2 million,
or $0.04 per share.  Similar to the  comparison  for the quarter,  the favorable
comparative  operating  results for the period also reflect:  (i) an increase in
operating  income;  offset by (ii) higher interest expense and (iii) an increase
in comparative income tax expense due to tax benefits recorded in 2006.

As indicated in the above table, operating income increased $36.3 million, or 7%
for the six months ended June 30,  2007,  compared to the  corresponding  period
last year. The Gas Distribution segment realized an increase in operating income
of $88.0  million,  which was  substantially  offset by a decrease in  operating
income associated with KeySpan's electric operations of $84.5 million. Operating
income from the Gas Distribution segment benefited from the comparatively colder
winter-heating  season  weather during the first quarter of 2007 compared to the
first quarter of 2006, as well as from load growth  additions  which,  combined,
resulted in an increase  to net gas  revenues  for the first six months of 2007.
The Electric  Services segment results were adversely  impacted by a decrease in
electric  revenues from KeySpan's  merchant electric  generating  facilities and
higher operating  expenses.  Further, an outstanding fixed for floating unforced
capacity  financial swap resulted in lower  operating  income for the six months
ended June 30, 2007, compared to the same period last year.

Operating  income  for the first six  months  of 2007 from  KeySpan's  two other
operating  segments - Energy  Services and Energy  Investments - increased  $1.8
million  and $3.8  million,  respectively,  compared  to the first six months of
2006. The increase in operating income from the Energy Services segment reflects
lower  administrative  and general  expenses,  as well as higher bandwidth sales
associated  with  KeySpan's  fiber  optic  subsidiary,  while  the  increase  in
operating income from the Energy Investments  segment was due to higher revenues
related to KeySpan's Liquefied Natural Gas ("LNG") transportation subsidiary and
higher equity earnings on certain investments.

The operating  income variation  reflected in "eliminations  and other" of $27.2
million is due  primarily to a decrease in costs  residing at KeySpan's  holding
company  level such as costs  associated  with  KeySpan's  pending  Merger  with
National Grid plc, corporate advertising expenses,  sponsorship fees and certain
employee benefit costs that are not allocated to KeySpan's  operating  segments.
(See the discussion under the caption "Review of Operating Segments" for further
details on each segment.)


                                       47
<PAGE>


Other income and (deductions)  reflects interest charges and other miscellaneous
items.  For the six months  ended June 30, 2007,  other income and  (deductions)
reflects a net  expense of $104.7  million  compared  to a net expense of $108.0
million for the same period of 2006. The favorable  variation of $3.3 million is
primarily due to an increase in interest  income on temporary  cash  investments
and certain other  investments  amounting to $8.8 million,  partially  offset by
higher interest charges of $5.5 million.

The increase in comparative interest expense  year-over-year  reflects, in part,
the $6 million  benefit  recorded in 2006 related to the settlement with the New
York City Department of Taxation and Finance as previously  mentioned.  Further,
interest expense in 2007 reflects a higher level of outstanding  long-term debt.
Long-term  debt at June  30,  2007  was  $486  million  higher  than  last  year
reflecting  the November 2006 issuance of $500 million Senior  Unsecured  Notes.
Partially  offsetting  these adverse impacts to comparative  interest expense is
the favorable  impact  associated  with a lower level of outstanding  commercial
paper.  During  the first  six  months of 2007,  KeySpan's  average  outstanding
commercial  paper  borrowings  were $80.8 million  compared to $397.0 million in
average   outstanding   borrowings   during   the  first  six  months  of  2006.
Additionally, regulatory carrying charges were lower year-over-year.

The  increase  in income tax expense of $31.4  million for the six months  ended
June 30, 2007 compared to the six months ended June 30, 2006 reflects,  in part,
an increase in pre-tax  income in 2007.  Further,  as noted  previously,  in the
second  quarter of 2006 KeySpan and the IRS reached a resolution on certain then
outstanding  issues.  Additionally,  KeySpan  resolved its dispute with New York
City Department of Taxation and Finance with respect to income taxes relating to
its merchant electric generating facility. As a result of settling these issues,
KeySpan realized a tax benefit of $16.4 million during the six months ended June
30, 2006.

Consolidated earnings are seasonal in nature due to the significant contribution
to earnings of our gas distribution  operations.  As a result, we expect to earn
most of our annual earnings in the first and fourth quarters of our fiscal year.

Review of Operating Segments
----------------------------

KeySpan  reports its segment  results on an Operating  Income basis.  Management
believes that this Generally Accepted Accounting  Principle (GAAP) based measure
provides a reasonable indication of KeySpan's underlying  performance associated
with its operations. The following is a discussion of financial results achieved
by KeySpan's operating segments presented on an operating income basis.


                                       48
<PAGE>


Gas Distribution

The Brooklyn Union Gas Company,  doing  business as KeySpan Energy  Delivery New
York ("KEDNY")  provides gas  distribution  service to customers in the New York
City Boroughs of Brooklyn,  Staten  Island and a portion of Queens.  KeySpan Gas
East  Corporation,  doing  business  as  KeySpan  Energy  Delivery  Long  Island
("KEDLI")  provides  gas  distribution  service to  customers in the Long Island
Counties of Nassau and Suffolk and the Rockaway Peninsula of Queens County. Four
natural gas  distribution  companies - Boston Gas  Company,  Essex Gas  Company,
Colonial Gas Company and  EnergyNorth  Natural Gas,  Inc.,  each doing  business
under the name  KeySpan  Energy  Delivery  New  England  ("KEDNE"),  provide gas
distribution service to customers in Massachusetts and New Hampshire.

The table below  highlights  certain  significant  financial  data and operating
statistics for the Gas Distribution segment for the periods indicated.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
                                                           Three Months Ended June 30,               Six Months Ended June30,
(In Millions of Dollars)                                     2007                2006                 2007              2006
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>                   <C>                <C>                <C>
Revenues                                                 $ 1,011.1             $ 873.2            $ 3,426.6          $ 3,053.3
Cost of gas                                                  650.7               541.1              2,324.3            2,053.7
Revenue taxes                                                 12.7                10.0                 41.5               36.2
-------------------------------------------------------------------------------------------------------------------------------
Net Revenues                                                 347.7               322.1              1,060.8              963.4
-------------------------------------------------------------------------------------------------------------------------------
Operating Expenses
   Operations and maintenance                                177.5               176.5                368.7              366.9
   Depreciation and amortization                              72.1                69.2                151.9              145.1
   Operating taxes                                            37.4                36.9                 76.9               75.4
-------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses                                     287.0               282.6                597.5              587.4
-------------------------------------------------------------------------------------------------------------------------------
Gain on Sale of Assets                                         0.7                   -                  0.7                  -
-------------------------------------------------------------------------------------------------------------------------------
Operating Income                                         $    61.4             $  39.5            $   464.0          $   376.0
-------------------------------------------------------------------------------------------------------------------------------
Firm gas sales and transportation (MDTH)                    55,484              48,851              205,514            175,755
Transportation - Electric Generation (MDTH)                 13,412              20,709               18,621             27,180
Other Sales (MDTH)                                          45,563              45,539               94,120             97,871
Warmer (Colder) than Normal - New York                        (11%)                18%                  (4%)               14%
Warmer (Colder) than Normal - New England                     (14%)                (6%)                 (5%)                5%
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

     A MDTH is 10,000 therms  (British  Thermal  Units) and reflects the heating
     content of  approximately  one million cubic feet of gas. A therm  reflects
     the  heating  content of  approximately  100 cubic feet of gas.One  billion
     cubic feet (BCF) of gas equals approximately 1,000 MDTH.

Executive Summary

Operating income increased $21.9 million, or 55%, for the second quarter of 2007
compared to the same quarter  last year,  due to an increase in net gas revenues
(revenues less the cost of gas and  associated  revenue taxes) of $25.6 million,
partially offset by an increase in operating expenses.


                                       49
<PAGE>


For the six months ended June 30, 2007, operating income increased $88.0 million
compared to the same period last year, primarily due to an increase in net gas
revenues of $97.4 million, partially offset by an increase in operating
expenses.

Net Revenues

Net gas revenues from our gas distribution  operations  increased $97.4 million,
or 10%,  in the first six months of 2007  compared to the same period last year.
Both the New York and New England based gas  distribution  operations  benefited
from the significantly  colder weather  experienced  throughout the northeastern
United  States  during  the  first  six  months  of 2007  and from  load  growth
additions.  As measured in heating  degree  days,  weather  during the first six
months of 2007 in all of our service  territories was approximately 4%-5% colder
than normal and  approximately  18% and 9% colder than last year in our New York
and New England service territories, respectively.

Net revenues from firm gas customers  (residential,  commercial  and  industrial
customers)  increased  $74.7 million in the first six months of 2007 compared to
the same period last year. The  combination of an increase in usage per customer
due to the comparatively colder  winter-heating  season weather, as well as load
growth  additions  from  oil-to-gas  conversions,  primarily  for space  heating
purposes and new  construction in 2006,  resulted in a beneficial  impact to net
gas revenues of $72.5 million, net of the weather normalization  adjustments and
weather derivatives discussed below. (Approximately 11% of this increase is from
load growth.)

Also  included in net gas revenues is the recovery of property  taxes that added
$5.6  million  to net  revenues  during  the  first six  months  of 2007.  These
revenues, however, do not impact net income since the taxes they are designed to
recover are expensed as amortization  charges on the  Consolidated  Statement of
Income.  Additionally,   we  have  a  management  contract  with  Merrill  Lynch
Commodities  under  which  KeySpan  and  Merrill  Lynch  Commodities  share  the
responsibilities   for  managing   KeySpan's   upstream  gas  contracted  assets
associated  with  its  Massachusetts  gas  distribution  subsidiaries.  KeySpan,
Merrill Lynch Commodities and KeySpan's  Massachusetts gas sales customers share
in the profits  generated  from the  optimization  of these assets.  For the six
months ended June 30, 2007,  KeySpan recognized $5.7 million of operating income
on this  contract,  after sharing with Merrill Lynch  Commodities  and KeySpan's
Massachusetts gas sales customers.

KEDNY and KEDLI  each  operate  under  utility  tariffs  that  contain a weather
normalization  adjustment  that  significantly  offsets  variations  in firm net
revenues due to  fluctuations  in weather.  Since weather was colder than normal
during the first six months of 2007,  KeySpan  refunded $5.3 million to its firm
gas heating sales  customers in 2007.  The New  England-based  gas  distribution
subsidiaries  do not have  weather  normalization  adjustments.  To mitigate the
effect  of  fluctuations  in normal  weather  patterns  on  KEDNE's  results  of
operations and cash flows,  weather  derivatives were in place for the 2006/2007
winter  heating  season - November  2006  through  March 2007.  These  financial


                                       50
<PAGE>


derivatives  afford KeySpan some protection  against warmer than normal weather.
Weather  during the fourth  quarter of 2006 was warmer than normal;  accordingly
KeySpan  recorded a $9.1  million  benefit to earnings in the fourth  quarter of
2006 to reflect the accrual for the weather hedges.  However, as noted,  weather
for the first  quarter of 2007 was colder than normal in  KeySpan's  New England
service  territory.  Therefore,  for the entire winter heating season  -November
2006 through March 2007 - weather was slightly colder than normal.  As a result,
in 2007 KeySpan reversed the $9.1 million accrual recorded in the fourth quarter
of 2006.  (See Note 4 to the  Consolidated  Financial  Statements  "Hedging  and
Derivative Financial Instruments" for further information.)

Firm gas distribution  rates for KEDNY,  KEDLI and KEDNE in 2007, other than for
the recovery of gas costs,  have  remained  substantially  unchanged  from rates
charged in 2006.

In our large-volume  heating and other interruptible  (non-firm) markets,  which
include large apartment houses, government buildings and schools, gas service is
provided  under rates that are  designed to compete  with prices of  alternative
fuel,  including No. 2 and No. 6 grade heating oil. These "dual-fuel"  customers
can consume either natural gas or fuel oil for heating purposes. Net revenues in
these  markets  increased  $22.7  million  during  the first six  months of 2007
compared to the same period last year reflecting higher pricing.

Firm Sales, Transportation and Other Quantities

Firm gas sales and  transportation  quantities for the six months ended June 30,
2007,  increased  17%  compared to the same period in 2006 due  primarily to the
colder weather this year compared to last year during the winter-heating  season
and to customer  additions  and  oil-to-gas  conversions.  Net  revenues are not
affected by customers  opting to purchase  their gas supply from other  sources,
since delivery rates charged to transportation  customers generally are the same
as  delivery  rates  charged to full  sales  service  customers.  Transportation
quantities  related to electric  generation reflect the transportation of gas to
our electric  generating  facilities  located on Long Island.  Net revenues from
these services are not material.

Other sales quantities include on-system  interruptible  quantities,  off-system
sales quantities  (sales made to customers  outside of our service  territories)
and  related  transportation.  As  mentioned  previously,  we have a  management
contract  with Merrill Lynch  Commodities  under which KeySpan and Merrill Lynch
Commodities  share the  responsibilities  for  managing  KeySpan's  upstream gas
contracted   assets   associated  with  its   Massachusetts   gas   distribution
subsidiaries,  as well as providing city-gate delivered supply. KeySpan, Merrill
Lynch  Commodities and KeySpan's  Massachusetts gas sales customers share in the
profits generated from the optimization of these assets.  KeySpan provides these
services  internally  for  its  New  York  and New  Hampshire  gas  distribution
subsidiaries.


                                       51
<PAGE>


Purchased Gas for Resale

The increase in gas costs for the first six months of 2007  compared to the same
period of 2006 of $270.6 million, or 13%, is reflective of an 8% increase in the
quantity of gas purchased due to the comparatively  colder winter heating season
weather and a 5% increase in the price per  dekatherm of gas  purchased for firm
gas  sales  customers.  The  current  gas  rate  structure  of  each  of our gas
distribution  utilities  includes a gas  adjustment  clause,  pursuant  to which
variations  between actual gas costs incurred for resale to firm sales customers
and gas costs  billed to firm sales  customers  are  deferred and refunded to or
collected from customers in a subsequent period.

Operating Expenses

Operating  expenses  during the  second  quarter  of 2007  compared  to the same
quarter  of  2006  increased  $4.4  million,  or 2%  in  total.  Operations  and
maintenance  expense increased slightly - $1.0 million.  Although this variation
is not large, the components are varied. Repair and maintenance costs, corporate
overhead  charges,  insurance and  regulatory  fees  increased  $11.5 million in
total.  In  addition,   the  provision  for  uncollectible  accounts  receivable
increased $1.6 million due to the increase, year-over-year, in net gas revenues.
On the other hand, employee benefit costs,  primarily  postretirement  expenses,
decreased $12.1 million as a result of favorable  asset returns,  an increase in
the discount rate and favorable health care insurance claims experience.

Depreciation  and amortization  charges  increased $2.9 million due mostly to an
increase of $2.2 million for the  amortization  of deferred  property  taxes. As
noted  previously,  the amortization of these deferred taxes does not impact net
income  since we  recovered a similar  amount from our  ratepayers  in revenues.
Finally, operating taxes, primarily property taxes, increased $0.5 million.

For the six months  ended June 30,  2007,  operating  expenses  increased  $10.1
million, or 2% compared to the same period last year. Operations and maintenance
expense  increased  $1.8  million.  Similar to the quarterly  explanation,  this
variation is not large,  but the components are varied.  Repair and  maintenance
costs, corporate overhead charges, insurance and regulatory fees increased $15.2
million  in  total.  Additionally,  the  provision  for  uncollectible  accounts
receivable  increased $3.0 million due to the increase,  year-over-year,  in net
gas  revenues.   On  the  other  hand,   employee   benefit   costs,   primarily
postretirement  expenses  decreased $16.4 million as a result of favorable asset
returns,  an increase in the discount rate and favorable  health care  insurance
claims experience.

Depreciation and amortization charges increased $6.8 million due, in part, to an
increase of $5.6 million for the  amortization  of deferred  property  taxes. As
noted  previously,  the amortization of these deferred taxes does not impact net
income since we recovered a similar amount from our ratepayers in revenues.  The
remaining increase reflects an increase in depreciation  charges of $1.2 million
due  to the  continued  expansion  of  the  gas  distribution  system.  Finally,
operating  taxes,  primarily  property  taxes in KeySpan's  New York  territory,
increased $1.5 million.


                                       52
<PAGE>


Gas Supply and Pricing

KeySpan had  adequate  gas supply  available  to meet its gas load demand in its
service  territories  for the 2006/2007  winter  heating season as KeySpan's gas
storage was 100% full at the start of the winter heating season. The current gas
rate  structure  of  each  of our  gas  distribution  utilities  includes  a gas
adjustment clause,  pursuant to which gas costs are recovered in billed sales to
regulated  firm gas  sales  customers.  Although  KeySpan  is  allowed  to "pass
through" the cost of gas to its customers,  the volatility of natural gas prices
can have an adverse  impact on  customers'  gas bills and  recovery  of customer
accounts  receivable.  High gas  prices  have  led to an  increase  in  customer
conservation   measures  and   attrition.   The   Massachusetts   Department  of
Telecommunications and Energy ("MADTE") order, received in the fourth quarter of
2005,  permitting  Boston  Gas  Company  regulatory  recovery  of the  gas  cost
component of net bad debt  write-offs has helped to mitigate any increase in bad
debt expense.

With KeySpan's continuing strategy of having its storage facilities 100% full at
the start of the heating  season and through the use of  financial  derivatives,
KeySpan  effectively  hedged the price of  approximately  two-thirds  of the gas
supply needed to serve its gas heating  customers  during the  2006/2007  winter
heating season.  This strategy mitigated the volatility of natural gas prices on
customers' winter heating gas bills.  Further,  KeySpan has programs in place to
help customers manage their gas bills, such as balanced billing plans,  deferred
payment  arrangements  and the low income home energy  assistance  program,  the
expansion  of  which  we  supported  through  the  Energy  Policy  Act of  2005.
Management believes that these measures help mitigate the impact of volatile gas
prices on customers' bills.

Other Matters

We remain committed to our ongoing gas system expansion  strategies.  We believe
that  significant  growth  opportunities  exist  on Long  Island  and in our New
England service territories, as well as continued growth in the New York service
territory.  We estimate that on Long Island approximately 37% of the residential
and  multi-family  markets,  and  approximately  60% of the  commercial  market,
currently use natural gas for space  heating.  Further,  we estimate that in our
New  England  service  territories  approximately  50%  of the  residential  and
multi-family  markets,  as well as approximately  60% of the commercial  market,
currently use natural gas for space heating  purposes.  We will continue to seek
growth in all our market segments  through the expansion of our gas distribution
system for new  construction  and to  penetrate  existing  communities  where no
distribution  system  exists,  as well as through the  conversion of residential
homes from oil-to-gas for space heating purposes where natural gas is already in
the home for other uses and the pursuit of opportunities  to grow  multi-family,
industrial and commercial markets.

In order to serve the  anticipated  market  requirements in our New York service
territories,  KeySpan and Spectra Energy  Corporation  each have a 50% ownership
interest in Islander East  Pipeline  Company,  LLC  ("Islander  East").  Once in
service,  the  pipeline  is expected to have the  capacity  to  transport  up to


                                       53
<PAGE>


260,000 DTH of natural gas to the Long Island and New York City energy  markets,
enough  natural gas to heat 600,000  homes.  In  addition,  KeySpan has a 26.25%
interest in the Millennium Pipeline  development project which is anticipated to
transport  up to 525,000 DTH of natural gas a day to a point of  interconnection
with the Algonquin  pipeline in Ramapo, New York. KEDLI has executed a Precedent
Agreement for 175,000 DTH of natural gas per day of transportation capacity from
the Millennium Pipeline system,  increasing to 200,000 DTH in the second year of
the pipeline  being in service.  These  pipeline  projects will allow KeySpan to
diversify the geographic sources of its gas supply. See the discussion under the
caption "Energy Investments" for additional information regarding these pipeline
projects.

Electric Services

The Electric Services segment primarily consists of subsidiaries that own, lease
and  operate  oil and  gas-fired  electric  generating  plants in the Borough of
Queens  (including  the  "Ravenswood  Generating  Station"  which  comprises the
Ravenswood  Facility and  Ravenswood  Expansion)  and the counties of Nassau and
Suffolk on Long Island.  In  addition,  through  long-term  contracts of varying
lengths,  we (i)  provide  to the  Long  Island  Power  Authority  ("LIPA")  all
operation,  maintenance and construction services and significant administrative
services  relating to the Long Island  electric  transmission  and  distribution
("T&D")  system  pursuant to a Management  Services  Agreement (the "1998 MSA");
(ii)  supply LIPA with  electric  generating  capacity,  energy  conversion  and
ancillary  services from our Long Island  generating  units  pursuant to a Power
Supply  Agreement  (the "1998  PSA");  and (iii)  manage all aspects of the fuel
supply for our Long Island generating facilities,  as well as all aspects of the
capacity  and energy  owned by or under  contract to LIPA  pursuant to an Energy
Management  Agreement (the "1998 EMA").  The 1998 MSA, 1998 PSA and 1998 EMA all
became effective on May 28, 1998, and are collectively referred to herein as the
"1998 LIPA Agreements."

On February 1, 2006,  KeySpan and LIPA  entered into (i) an amended and restated
Management  Services Agreement (the "2006 MSA"),  pursuant to which KeySpan will
continue to operate and  maintain  the electric T&D System owned by LIPA on Long
Island  through  2013;  (ii) a new Option and Purchase and Sale  Agreement  (the
"2006 Option  Agreement"),  to replace the Generation  Purchase Rights Agreement
(the "GPRA"),  pursuant to which LIPA had the option, through December 15, 2005,
to acquire  substantially  all of the electric  generating  facilities  owned by
KeySpan on Long Island;  and (iii) a Settlement  Agreement (the "2006 Settlement
Agreement")  resolving outstanding issues between the parties regarding the 1998
LIPA Agreements. The 2006 MSA, the 2006 Option Agreement and the 2006 Settlement
Agreement  are  collectively  referred to herein as the "2006 LIPA  Agreements."
These agreements will become effective  following approval by the New York State
Comptroller's  Office and the New York State  Attorney  General.  (For a further
discussion on these LIPA  agreements see Note 10 to the  Consolidated  Financial
Statements "2006 LIPA Settlement").  The Electric Services segment also provides
retail marketing of electricity to commercial customers.


                                       54
<PAGE>


Following the  announcement  of the pending  Merger of KeySpan and National Grid
plc, LIPA,  National Grid plc and KeySpan engaged in discussions  concerning the
impact of the transaction on LIPA's operations.  KeySpan,  National Grid plc and
LIPA have  reached  an  agreement  pursuant  to which  LIPA  agreed to waive its
contractual  right to  terminate  the 1998  LIPA  Agreements  and the 2006  LIPA
Agreements  upon  consummation  of the Merger between  KeySpan and National Grid
plc, in exchange for  enhancements  to certain of the 2006 LIPA  Agreements  and
certain  other  considerations.  The  amended  and  enhanced  agreements  become
effective upon  completion of the Merger  between  KeySpan and National Grid plc
and are subject to approval by the New York State  Attorney  General and the New
York State Comptroller.

Selected  financial data for the Electric  Services  segment is set forth in the
table below for the periods indicated.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
                                                      Three Months Ended June 30,                 Six Months Ended June 30,
(In Millions of Dollars)                                2007               2006                    2007                2006
------------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>                <C>                     <C>                  <C>
Revenues                                        $       443.2       $      426.5           $       841.5         $      851.3
Purchased fuel                                          137.9              115.5                   270.2                245.5
------------------------------------------------------------------------------------------------------------------------------
Net Revenues from Operations                            305.3              311.0                   571.3                605.8
Derivative Financial Instrument                          14.5               17.7                     4.6                 17.7
------------------------------------------------------------------------------------------------------------------------------
Net Electric Revenues                                   319.8              328.7                   575.9                623.5
------------------------------------------------------------------------------------------------------------------------------
Operating Expenses
   Operations and maintenance                           199.8              195.2                   385.2                350.5
   Depreciation                                          25.4               25.1                    50.5                 52.2
   Operating taxes                                       50.3               46.0                    97.4                 93.5
------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses                                275.5              266.3                   533.1                496.2
------------------------------------------------------------------------------------------------------------------------------
Operating Income                                $        44.3       $       62.4            $       42.8         $      127.3
------------------------------------------------------------------------------------------------------------------------------
Electric sales (MWH)*                               1,102,021          1,080,775               1,980,330            1,887,452
Capacity(MW)*                                           2,450              2,450                   2,450                2,450
Cooling degree days                                       323                276                     323                  276
------------------------------------------------------------------------------------------------------------------------------
</TABLE>

          *Reflects the operations of the Ravenswood Generating Station only.

Executive Summary

Operating  income  decreased  $18.1 million,  or 29%, for the three months ended
June 30,  2007,  compared to the same  quarter  last year,  due,  in part,  to a
decrease in net revenues from the Ravenswood  Generating Station of $7.6 million
primarily  resulting from the  comparative  impact  associated  with  derivative
financial  instruments.  Further,  an  outstanding  fixed for floating  unforced
capacity  financial swap resulted in lower comparative  operating income of $3.2
million.  The remaining  decrease in operating  income reflects higher operating
expenses.

For the six  months  ended  June 30,  2007,  operating  income  decreased  $84.5
million,  or 66%,  compared  to the same  period  last year,  due in part,  to a
decrease in net revenues from the Ravenswood Generating Station of $61.0 million
primarily  resulting from the  comparative  impact  associated  with  derivative
financial  instruments.  Although  KeySpan's hedging strategies during the first
six months of 2007 were  consistent  with past KeySpan  policy to hedge the cash
flow  variability  associated  with a portion of forecasted  fuel  purchases and
electric energy sales  associated with the Ravenswood  Generating  Station,  the


                                       55
<PAGE>


results from these strategies were significantly lower year-over-year.  Further,
an outstanding fixed for floating  unforced capacity  financial swap resulted in
lower comparative  operating income of $13.1 million.  The remaining decrease in
operating income reflects higher operating expenses.

Net Revenues

Total electric net revenues realized during the second quarter of 2007 were $8.9
million,  or 3%,  lower than such  revenues  realized  during the  corresponding
quarter last year.

Net revenues from the Ravenswood  Generating  Station decreased $7.6 million for
the three  months  ended June 30,  2007,  compared to the same quarter last year
due,  in  part,  to lower  capacity  margins  of $3.9  million  as a  result  of
additional  capacity  installed  in New York City  last  year.  Further,  energy
margins  decreased  $3.7 million in the second  quarter of 2007  compared to the
second quarter of 2006.

The decrease in energy margins associated with the Ravenswood Generating Station
was due to the comparative  impact of KeySpan's  hedging  activities.  We employ
derivative financial instruments to economically hedge the cash flow variability
for a portion of  forecasted  purchases  of natural gas and fuel oil consumed at
the  Ravenswood  Generating  Station,  as well as for a  portion  of  forecasted
electric  energy  sales.  For the  second  quarter  of 2007,  KeySpan's  hedging
strategies,  which are reflected in net electric revenues, resulted in a gain of
$1.4 million  compared to hedging gains of $7.1 million realized during the same
period last year,  resulting in a net comparative  reduction in operating income
of $5.7 million.

Offsetting,  to some  extent,  the  adverse  impact of the  comparative  hedging
results,  was an increase  in physical  "spark-spreads"  (the  selling  price of
electricity less the cost of fuel, exclusive of hedging gains or losses),  which
resulted in a benefit of $2.0 million to energy  margins for the second  quarter
2007  compared  to the same  quarter  of 2006.  (See Note 4 to the  Consolidated
Financial Statements "Hedging and Derivative Financial  Instruments" for further
information on KeySpan's hedging strategy.)

The rules and  regulations  for  capacity,  energy sales and the sale of certain
ancillary  services to the New York Independent System Operator ("NYISO") energy
markets  continue  to evolve  and there are  several  matters  pending  with the
Federal Energy  Regulatory  Commission  ("FERC").  See the discussion  under the
caption  "Market and Credit Risk  Management  Activities" for further details on
these matters.

KeySpan has an  International  SWAP Dealers  Association  Master Agreement for a
fixed for floating unforced capacity  financial swap with Morgan Stanley Capital
Group Inc. ("Swap  Agreement").  This agreement has a three year term that began
on May 1, 2006. For the second quarter of 2007, KeySpan realized a gain of $14.5
million from this derivative  financial  instrument  compared to a gain of $17.7


                                       56
<PAGE>


million  realized  last year.  This  financial  swap is  anticipated  to produce
operating  income in the summer  months of May  through  October  and  operating
losses  in the  winter  months of  November  through  April.  Since the swap was
entered  into in May 2006,  results  for the three  months  ended June 30,  2006
contain only the positive  contribution  associated  with May and June 2006. For
the three months ended June 30, 2007,  earnings from this derivative  instrument
included a loss in April 2007.

Net revenues  for the second  quarter of 2007 from the service  agreements  with
LIPA,  including  the power  purchase  agreements  associated  with two electric
peaking facilities, increased $0.4 million compared to the same quarter of 2006,
reflecting  an increase in  variable  revenues  which are a function of electric
generation  associated with KeySpan's Long Island based  generating  facilities.
(For a description of the LIPA  Agreements and power  purchase  agreements,  see
KeySpan's  2006 Annual Report on Form 10-K for the year ended  December 31, 2006
Item 7. Management's  Discussion and Analysis of Financial Condition and Results
of Operations under the caption "Electric Services - Revenue Mechanisms.")

Revenues associated with KeySpan's electric marketing  activities increased $1.5
million  during the second  quarter of 2007  compared to second  quarter of 2006
mainly attributable to favorable pricing.

Total electric net revenues  realized  during the six months ended June 30, 2007
were $47.6  million,  or 8%, lower than such revenues  realized  during the same
period of 2006.

Net revenues from the Ravenswood  Generating Station decreased $61.0 million for
the six months ended June 30, 2007  compared to the same period last year mainly
due to  lower  energy  margins  of  $46.8  million.  Further,  capacity  margins
decreased $14.2 million as a result of additional capacity installed in New York
City last year.

The decrease in energy margins associated with the Ravenswood Generating Station
was due to the  comparative  impact of KeySpan's  hedging  activities.  As noted
previously, we employ derivative financial instruments to economically hedge the
cash flow  variability for a portion of forecasted  purchases of natural gas and
fuel oil consumed at the Ravenswood Generating Station, as well as for a portion
of forecasted electric energy sales. For the first six months of 2007, KeySpan's
hedging strategies  resulted in a gain of $9.0 million compared to hedging gains
of $62.8 million  realized during the same period last year,  resulting in a net
comparative reduction in operating income of $53.8 million. Due to the dual-fuel
capability  of the  Ravenswood  Generating  Station  and the impact that the two
hurricanes  in the summer of 2005 in the Gulf Coast of the United  States had on
oil and gas prices,  KeySpan was able to "lock-in"  very  favorable fuel pricing
and  resultant  electric  energy  margins  during the later part of 2005 for the
early part of 2006.

Offsetting,  to some  extent,  the  adverse  impact of the  comparative  hedging
results,  was an increase  in physical  "spark-spreads"  (the  selling  price of
electricity less the cost of fuel, exclusive of hedging gains or losses),  which
resulted in a benefit of $7.0 million to energy margins for the first six months
of 2007 compared to the same period of 2006.


                                       57
<PAGE>


Net revenues for the first six months of 2007 from the service  agreements  with
LIPA,  including  the power  purchase  agreements  associated  with two electric
peaking facilities, increased $24.5 million compared to the same period of 2006.
The increase is due, in part, to recovery of operations and maintenance  charges
billed to LIPA of approximately $14.0 million. These recoveries had no impact on
operating  income since actual expenses  increased by a like amount.  Therefore,
only  approximately  $10.5 million of the increase in net revenues resulted in a
benefit to operating income. This increase in net revenues from the LIPA service
agreements  was  driven by higher  capacity  revenues,  which are  predominately
timing in nature,  as well as from  higher  off-system  electric  energy  sales,
emission  credit sales and variable  revenues,  which are a function of electric
generation.

As  noted,  KeySpan  has a Swap  Agreement  for a fixed  for  floating  unforced
capacity  financial swap with Morgan  Stanley  Capital Group Inc. This agreement
has a three  year term that  began on May 1,  2006.  For the first six months of
2007,  KeySpan  realized a gain of $4.6 million from this  derivative  financial
instrument  compared to a gain of $17.7 million realized last year. As mentioned
previously,  this financial swap is anticipated to produce  operating  income in
the summer  months of May  through  October and  operating  losses in the winter
months of November  through April.  Since the swap was entered into in May 2006,
results for the first six months of 2006 contain only the positive  contribution
associated  with May and June 2006.  For the first six months of 2007,  earnings
from this derivative  instrument  included losses for the period January through
April.

Revenues associated with KeySpan's electric marketing  activities increased $2.0
million in the first six months of 2007  compared  to same period of 2006 mainly
attributable to favorable pricing.

Operating Expenses

For the three months  ended June 30, 2007,  operating  expenses  increased  $9.2
million, or 3%, compared to the same quarter of 2006. Operations and maintenance
expenses  increased $4.6 million mainly due to an increase in overhaul costs and
outage work performed on our Long Island based electric generating units.

Operating  taxes,  principally  property  taxes,  increased  $4.3 million in the
second  quarter of 2007  compared to the same  quarter of 2006.  These taxes are
primarily  associated with KeySpan's Long Island based electric generating units
and are fully recoverable from LIPA.

For the six months  ended June 30,  2007,  operating  expenses  increased  $36.9
million compared to the same period of 2006. Operations and maintenance expenses
increased $34.7 million  reflecting,  in part, a $14.0 million increase in costs
recovered  from  LIPA.  As noted  previously,  this  increase  had no  impact on
operating income since revenues  increased by a similar amount.  Therefore,  the
operations and  maintenance  expenses that actually  impacted  operating  income


                                       58
<PAGE>


increased  approximately  $20.7  million.  These expenses  reflect,  in part, an
increase in overhaul  costs and  non-outage  maintenance  work  performed on the
Ravenswood  Generating  Station and our Long Island  based  electric  generating
units  amounting  to $12.8  million.  The  remaining  increase was mainly due to
higher general and  administrative  costs and the timing of maintenance  work on
LIPA's transmission and distribution system.

Operating taxes, principally property taxes, increased $3.9 million in the first
six months of 2007 compared to the same period of 2006. Comparative depreciation
charges  decreased  $1.7  million  year-over-year.  These  costs  are  primarily
associated  with KeySpan's Long Island based electric  generating  units and are
fully recoverable from LIPA.

Other Matters

In 2003,  the New  York  State  Board  on  Electric  Generation  Siting  and the
Environment  issued  an  opinion  and  order  which  granted  a  certificate  of
environmental  capability  and public need for a 250 MW combined  cycle electric
generating facility in Melville, Long Island, which is final and non-appealable.
Also in 2003,  LIPA  issued a Request for  Proposal  ("RFP")  seeking  bids from
developers to either build and operate a Long Island generating facility, and/or
a new cable that will link Long Island to power from a non-Long Island source of
between  250 to 600 MW of  electricity  by no  later  than the  summer  of 2007.
KeySpan  filed a proposal in response  to LIPA's  RFP.  In 2004,  LIPA  selected
proposals submitted by two other bidders in response to the RFP. KeySpan remains
committed  to the  Melville  project and the  benefits to Long  Island's  energy
future that this project would  supply.  The project has received New York State
Article X approval by having met all  operational and  environmental  permitting
requirements.  Further, the project is strategically  located in close proximity
to both the high  voltage  power  transmission  grid and the high  pressure  gas
distribution  network. In addition,  given the intense public pressure to reduce
emissions  from  existing  generating  facilities,  development  of the Melville
project is possible as a means to "virtually  re-power"  older,  less  efficient
generating units. Specifically, KeySpan believes that it would be able to reduce
emissions on Long Island in a cost  effective  manner by developing the Melville
project and retiring an older, less efficient generating facility. Additionally,
in August 2006, the New York Independent  System Operator ("NYISO") included the
Melville  project in its  Reliability  Report as one of the market  solutions to
help address the long-term  reliability  of New York State's  electric  grid. At
June 30, 2007, total  capitalized  costs associated with the siting,  permitting
and procurement of equipment for the Melville facility were $64.8 million.

Energy Services

The Energy  Services  segment  includes  companies  that provide  energy-related
services to customers located  primarily within the Northeastern  United States.
Subsidiaries in this segment provide residential and small commercial  customers
with  service  and  maintenance  of energy  systems and  appliances,  as well as
operation  and  maintenance,  design,  engineering,  consulting  and fiber optic
services to commercial,  institutional and industrial customers.


                                       59
<PAGE>


The table below highlights  selected financial  information  associated with the
Energy Services segment.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
                                              Three Months Ended June 30,                  Six Months Ended June 30,
(In Millions of Dollars)                     2007                    2006                 2007                    2006
-----------------------------------------------------------------------------------------------------------------------
<S>                                         <C>                     <C>                 <C>                     <C>
Revenues                                   $ 54.9                  $ 52.6              $ 109.6                 $ 103.4
Operating expenses                           52.9                    50.6                106.2                   101.8
-----------------------------------------------------------------------------------------------------------------------
Operating Income                           $  2.0                  $  2.0              $   3.4                 $   1.6
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

The Energy Services  segment posted an operating  profit of $2.0 million for the
quarter  ended  June 30,  2007,  even  with last  year.  KeySpan's  fiber  optic
operations  realized a benefit to operating income from an increase in bandwidth
sales and the successful  completion of certain projects.  In addition,  general
and  administrative  expenses were lower in 2007 compared to 2006 as a result of
the implementation of cost containment  measures.  These benefits to comparative
operating  income  were  completely  offset by a  reduction  in  earnings  under
long-term energy service and energy supply contracts.

For the six months ended June 30, 2007 operating  income in the Energy  Services
segment increased $1.8 million. KeySpan's fiber optic operations realized higher
operating  income of $0.9 million  year-over-year  from an increase in bandwidth
sales and the successful  completion of certain projects.  In addition,  general
and  administrative  expenses  were $1.6 million lower in 2007 compared to 2006.
However,  earnings under  long-term  energy service and energy supply  contracts
decreased $0.7 million year-over-year.

Energy Investments

The Energy  Investments  segment  consists of our gas production and development
investments,  as well as  certain  other  domestic  energy-related  investments.
KeySpan's gas production and  development  activities  include its  wholly-owned
subsidiaries  Seneca  Upshur  Petroleum,  Inc.   ("Seneca-Upshur")  and  KeySpan
Exploration  and  Production,  LLC  ("KeySpan  Exploration").  Seneca-Upshur  is
engaged in gas production and development activities primarily in West Virginia.
KeySpan   Exploration   is  involved  in  a  joint  venture  with  Merit  Energy
Corporation, an independent oil and gas producer.

This segment is also  engaged in pipeline  development  activities.  KeySpan and
Spectra Energy  Corporation  each own a 50% interest in Islander East.  Islander
East was created to pursue the  authorization  and construction of an interstate
pipeline  from  Connecticut,  across  Long  Island  Sound,  to a  terminus  near
Shoreham, Long Island. Further,  KeySpan has a 26.25% interest in the Millennium
Pipeline Company LLC, the developer of the Millennium  pipeline project which is
expected to have the  capacity to  transport  up to 525,000 DTH of natural gas a
day from  Corning,  New York to Ramapo,  New York,  where it will  connect to an
existing pipeline. Additionally,  subsidiaries in this segment hold a 20% equity
interest in the Iroquois Gas Transmission  System LP, a pipeline that transports


                                       60
<PAGE>


Canadian  gas  supply  to  markets  in the  northeastern  United  States.  These
investments   are  accounted   for  under  the  equity  method  of   accounting.
Accordingly, equity income from these investments is reflected as a component of
operating income in the Consolidated Statement of Income.

KeySpan also owns a 600,000  barrel  liquefied  natural gas ("LNG")  storage and
receiving  facility  in  Providence,  Rhode  Island,  through  its wholly  owned
subsidiary KeySpan LNG, the operations of which are fully consolidated.

Selected financial data for these energy-related investments is set forth in the
following table for the periods indicated.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
                                                      Three Months Ended June 30,             Six Months Ended June 30,
(In Millions of Dollars)                                2007                2006                2007                2006
-------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>                 <C>                 <C>                 <C>
Revenues                                              $ 10.5              $ 11.2              $ 21.8              $ 20.4
Less: Operation and maintenance expense                  6.4                 7.4                12.8                14.0
      Other operating expenses                           3.5                 3.0                 7.0                 6.2
Add:  Equity earnings                                    4.9                 2.9                 8.5                 6.3
      Sale of assets                                       -                   -                   -                 0.2
-------------------------------------------------------------------------------------------------------------------------
Operating Income                                      $  5.5              $  3.7              $ 10.5              $  6.7
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

As  indicated in the above table,  operating  income for the Energy  Investments
segment  increased  $1.8 million in the second  quarter of 2007  compared to the
corresponding  quarter  of 2006  due to  generally  higher  earnings  on  equity
investments.

For the six months ended June 30, 2007,  operating income increased $3.8 million
compared to the same period in 2006  reflecting an increase in operating  income
from a KeySpan  subsidiary  engaged in the  transportation  of liquefied natural
gas, lower general and administrative  expenses and generally higher earnings on
equity investments.

Other Matters

In order to serve the  anticipated  market  requirements in our New York service
territories,  KeySpan and Spectra Energy  Corporation  each have a 50% ownership
interest in Islander East Pipeline Company, LLC ("Islander East"). Islander East
was  created to pursue  the  authorization  and  construction  of an  interstate
pipeline  from  Connecticut,  across  Long  Island  Sound,  to a  terminus  near
Shoreham, Long Island.  Applications for all necessary regulatory authorizations
were filed in 2000 and 2001. Islander East has received a final certificate from
the FERC and all  necessary  permits  from the State of New  York.  The State of
Connecticut denied Islander East's request for a consistency determination under
the Coastal Zone  Management  Act ("CZMA")  and  application  for a permit under
Section  401 of the  Clean  Water  Act.  Islander  East  appealed  the  State of
Connecticut's determination on the CZMA issue to the United States Department of


                                       61
<PAGE>


Commerce which overrode Connecticut's denial and granted the CZMA authorization.
The determination of the Secretary of Commerce was appealed to the United States
District  Court for the District of Columbia by the State of  Connecticut  and a
decision from that court is pending. Following an appeal filed by Islander East,
the Second  Circuit Court of Appeals ruled on October 5, 2006 that,  among other
things, the Connecticut  Department of Environmental  Protection ("CTDEP") acted
arbitrarily and  capriciously  in denying the Clean Water Act permit.  The Court
remanded the matter to CTDEP to either  provide  sufficient  evidence to support
the  denial  or  otherwise  take any  action  necessary  in  furtherance  of the
development  of the project.  In December  2006, the CTDEP issued an order again
denying the Clean Water Act permit. Islander East filed a motion for review with
the Second  Circuit  Court of Appeals.  Oral argument was conducted on April 10,
2007.   Subject  to  obtaining  final  permits  and  financing,   Islander  East
anticipates  that this  pipeline will be in service in late 2008. As of June 30,
2007,   KeySpan's  total  capitalized  costs  associated  with  the  siting  and
permitting of the Islander East pipeline were approximately $32.2 million.

As  noted,  KeySpan  also owns a 26.25%  ownership  interest  in the  Millennium
Pipeline  Company LLC, the developer of the  Millennium  Pipeline  project.  The
other partners in the Millennium  Pipeline are Columbia Gas  Transmission  Corp.
("Columbia  Transmission"),  a unit of  NiSource  Incorporated  and  DTE  Energy
Company.  The Millennium Pipeline project is anticipated to have the capacity to
transport  up to 525,000  DTH of  natural  gas a day from  Corning,  New York to
Ramapo,  New York,  interconnecting  with the pipeline  systems of various other
utilities in New York.  The project  received a FERC  certificate  to construct,
acquire and operate the facilities in 2002,  subject to certain  conditions.  On
August 1, 2005, the project filed an  application to amend the FERC  certificate
requesting, among other things, authority to phase in over time the construction
of the proposed pipeline system, approval of a reduction in capacity and maximum
allowable operating pressure, minor route modifications, the addition of certain
facilities and the acquisition of certain facilities from Columbia Transmission.
In December  2006,  the FERC issued an order  granting the amended  certificate.
Additionally,  Consolidated  Edison,  KEDLI and Columbia  Transmission have each
entered into amended precedent  agreements to purchase capacity on the pipeline.
KEDLI has agreed to purchase  175,000 DTH per day from the  Millennium  Pipeline
system,  increasing  to 200,000 DTH in the second year of the pipeline  being in
service.  This will provide  KEDLI with new,  competitively  priced  supplies of
natural gas from Canada and other North American  supply basins.  The conditions
in the precedent  agreements are subject to, among other things,  the receipt of
necessary   regulatory   approvals  and  financing.   Millennium  has  commenced
construction of the project and is in the process of finalizing  agreements with
lenders to provide financing for the construction of the balance of the project,
as well  as  finalizing  certain  agreements  pertaining  to the  completion  of
construction of the project.  Subject to the final  negotiation and execution of
these agreements, Millennium expects that the first phase of the project will be
in service by November  2008. As of June 30, 2007,  KeySpan's  investment in the
Millennium Pipeline project was $28.7 million


                                       62
<PAGE>


In 2005, KeySpan LNG entered into a precedent agreement with BG LNG Services, a
subsidiary of British Gas, to provide liquefied natural gas terminalling
service. KeySpan LNG proposed to upgrade the liquefied natural gas facility to
accept marine deliveries and to triple vaporization (or regasification) capacity
to provide these services. In June 2005, the FERC denied KeySpan LNG's
application to expand the facility citing concerns that the proposed upgraded
facility would not meet current federal new construction and safety standards.
KeySpan sought a rehearing with FERC, and on January 20, 2006, the FERC denied
such request, although the order provided that KeySpan LNG could file an
amendment to its original application addressing a revised expansion project
which would differ substantially from that originally proposed by KeySpan. Any
amended application would need to include a detailed analysis of the new project
scope, including upgrades to the existing facilities and alternative plans for
any service disruptions that may be necessary during construction of a new
expanded project. KeySpan has filed a petition for judicial review of the FERC
order with the United States Circuit Court for the District of Columbia. The
Court is expected to issue a decision affirming or vacating the FERC orders by
the third or fourth quarter of 2007.

In addition to the  proceeding at FERC,  KeySpan LNG also is involved in seeking
other required  regulatory  approvals and the  resolution of certain  litigation
regarding  such  approvals.  In  February  2005,  KeySpan LNG filed an action in
Federal District Court in Rhode Island seeking a declaratory judgment that it is
not  required to obtain a "Category B Assent" from the State of Rhode Island and
an injunction  preventing the Rhode Island Coastal Resources  Management Council
("CRMC") from enforcing the Category B assent  requirements.  In April 2005, the
Rhode  Island  Attorney  General  also filed on behalf of the state a  complaint
against  KeySpan LNG in Rhode Island State Superior Court raising  substantially
the same issues as the federal court action.  KeySpan LNG removed that action to
federal court and moved for summary  judgment.  The Court stayed the  litigation
pending  resolution of the FERC appeal process  discussed  above. An unfavorable
outcome  to the FERC  litigation  would  mean  that  KeySpan  would be unable to
construct the proposed  upgrade.  Similarly,  if the FERC litigation is resolved
favorably but the Rhode Island  litigation is not,  KeySpan could be required to
obtain a permit  under Rhode  Island  State law. If the Rhode  Island  State law
permit were denied,  an appeal would lie only with the Rhode Island State court.
Accordingly,  an  unfavorable  outcome  to the  Rhode  Island  litigation  could
similarly  have a material  impact on  KeySpan's  ability  to  proceed  with the
proposed upgrade.

Pursuant to a letter  agreement  with BG LNG Services  extending the term of the
current precedent agreement referenced above, BG LNG Services reimbursed KeySpan
LNG $7.6  million  for a portion of its  development  costs.  If the  project is
placed into service,  BG LNG Services may elect to have this contribution  count
as a  contribution  reducing BG LNG Services  cost of service for the Project or
return to BG LNG  Services in full on the service  commencement  date,  in which
case such  costs  will be  included  in the cost of  service  under the  service
agreement.  As of June 30,  2007,  our  investment  in this  project  was  $11.5
million.


                                       63
<PAGE>


Allocated Costs

We are subject to the  jurisdiction of the FERC under the Public Utility Holding
Company Act of 2005 ("PUHCA  2005").  As part of the  regulatory  provisions  of
PUHCA 2005, the FERC regulates  various  transactions  among affiliates within a
holding company  system.  In accordance  with  regulations  under PUHCA 2005 and
regulations  and policies of the New York State Public Service  Commission,  the
Massachusetts  Department of Telecommunications and Energy and the New Hampshire
Public Utility Commission,  we established  service companies that provide:  (i)
traditional  corporate  and  administrative  services;  (ii)  gas  and  electric
transmission  and  distribution  system  planning,  marketing,  and  gas  supply
planning  and  procurement;  and (iii)  engineering  and  surveying  services to
subsidiaries.  The operating  income  variation as reflected in "elimination and
other" of $20.3 million for the three months ended June 30, 2007 compared to the
same quarter last year,  reflects,  in part,  lower legal and  consulting  costs
incurred this year associated  with KeySpan's  pending Merger with National Grid
plc of approximately $8.0 million. Additionally,  employee benefit costs and the
timing  of  service  company  allocations  resulted  in  a  favorable  variation
year-over-year  of $17.8  million.  These  costs,  other  than  service  company
allocations,  reside at KeySpan's holding company level and are not allocated to
KeySpan's operating segments. During the second quarter of 2006, KeySpan entered
into confidential  settlement  agreements with certain of its insurance carriers
for  recovery  of  environmental   costs  associated  with   investigation   and
remediation of gas plant sites and non-utility  sites.  KeySpan  recorded a $5.5
million  benefit in its  Consolidated  Statement  of Income for the three months
ended June 30, 2006 associated with these settlement agreements.

The operating  income variation as reflected in "elimination and other" of $27.2
million for the first six months of 2007  compared to the same period last year,
reflects,  in  part,  lower  legal  and  consulting  costs  incurred  this  year
associated with KeySpan's pending Merger with National Grid plc of approximately
$8.0  million,  as  previously  noted.  Additionally,  employee  benefit  costs,
corporate  advertising  and  sponsorship  fees, as well as the timing of service
company allocations  resulted in a favorable  variation  year-over-year of $24.7
million.  As noted above, in 2006 KeySpan recorded a $5.5 million benefit in its
Consolidated  Statement of Income associated with settlement agreements with its
insurance carriers for recovery of certain environmental costs.

Liquidity

Cash flow from operations  decreased  $183.6 million during the first six months
of 2007  compared to the same  period of 2006  primarily  reflecting  changes in
working capital requirements.  The variation in working capital requirements was
primarily driven by the favorable impact of receipt of customer  payments during
the early part of 2006  associated  with the 2005 fourth  quarter winter heating
season,  partially offset by the adverse impact of cash payments for natural gas
purchases.  Outstanding  accounts  receivable balances associated with KeySpan's
gas  distribution  activities  at December  31, 2005 were high due to strong gas
sales in 2005 and  unusually  high natural gas prices.  The  collection of these
accounts receivables  generated  significant cash flow in 2006. Also as a result
of the unusually high natural gas prices in 2005,  comparative  accounts payable
balances  associated with natural gas purchases were also high at December 2005.
Payment  of these  outstanding  payable  balances  during the early part of 2006
offset some of the cash benefits from the  collection  of  outstanding  accounts
receivables previously noted.


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<PAGE>


At June 30, 2007, we had cash and temporary cash  investments of $496.5 million.
During the first six months of 2007,  we borrowed  $46.5  million of  commercial
paper  and at June  30,  2007,  Keyspan  had  $131.5  million  commercial  paper
outstanding  at which  time the  average  interest  rate was  5.49%.  We had the
ability to borrow up to an additional  $1.4 billion at June 30, 2007,  under the
terms of our credit facility.  The majority of KeySpan's cash and temporary cash
investments  balance  at June 30,  2007,  resides  with its New York  based  gas
distribution  utilities. As dictated by New York State Public Service Commission
("NYPSC")  policy,  KeySpan is  prohibited  from using excess  utility funds for
general  corporate  purposes,  i.e. this cash can only be used for KeySpan's New
York based gas distribution operations. As a result, during the six months ended
June 30, 2007,  KeySpan needed to borrow  commercial  paper for working  capital
requirements not associated with its New York based gas distribution utilities.

KeySpan has two credit  facilities  which total $1.5  billion - $920 million for
five years  through  2010,  and $580 million  through  2009 - which  continue to
support KeySpan's commercial paper program for ongoing working capital needs.

The fees for the  facilities  are based on KeySpan's  current credit ratings and
are increased or decreased  based on a downgrading  or upgrading of our ratings.
The current  annual  facility  fee is 0.07% based on our credit  rating of A3 by
Moody's  Investor  Services and A by Standard & Poor's for each  facility.  Both
credit  facilities allow for KeySpan to borrow using several  different types of
loans;  specifically,  Eurodollar  loans, ABR loans, or competitively bid loans.
Eurodollar  loans are based on the Eurodollar rate plus a margin that is tied to
our applicable  credit  ratings.  ABR loans are based on the higher of the Prime
Rate,  the base CD rate plus 1%, or the Federal Funds  Effective Rate plus 0.5%.
Competitive  bid loans are based on bid results  requested  by KeySpan  from the
lenders.  We do not anticipate  borrowing against these facilities;  however, if
the credit rating on our commercial paper program were to be downgraded,  it may
be necessary to do so.

The facilities  contain certain  affirmative and negative  operating  covenants,
including  restrictions on KeySpan's  ability to mortgage,  pledge,  encumber or
otherwise subject its utility property to any lien, as well as certain financial
covenants  that  require us to,  among  other  things,  maintain a  consolidated
indebtedness to consolidated  capitalization ratio of no more than 65% as of the
last day of any fiscal quarter. Violation of these covenants could result in the
termination  of the facilities  and the required  repayment of amounts  borrowed
thereunder,  as well as possible cross defaults under other debt agreements.  At
June 30, 2007, KeySpan's consolidated indebtedness was 49.4% of its consolidated
capitalization and KeySpan was in compliance with all covenants.

Subject to certain conditions set forth in the credit facility,  KeySpan has the
right, at any time, to increase the commitments  under the $920 million facility
up to an additional $300 million. In addition,  KeySpan has the right to request
that the termination date be extended for an additional period of 365 days prior
to each  anniversary  of the  closing  date.  This  extension  option,  however,


                                       65
<PAGE>


requires the approval of lenders holding more than 50% of the total  commitments
to such  extension  request.  Under the  agreements,  KeySpan has the ability to
replace  non-consenting  lenders  with  other  pre-approved  banks or  financial
institutions.  Subject to compliance with the foregoing  conditions,  KeySpan is
currently able to issue up to $1.5 billion of commercial paper.

A substantial  portion of consolidated  revenues are derived from the operations
of businesses within the Electric  Services segment,  that are largely dependent
upon two large customers - LIPA and the NYISO.  Accordingly,  our cash flows are
dependent upon the timely payment of amounts owed to us by these counterparties.
(See Note 10 to the Consolidated Financial Statements "2006 LIPA Settlement" for
information  regarding the recent settlement  between KeySpan and LIPA regarding
the current contractual agreements.)

We  satisfy  our  seasonal  working  capital   requirements   primarily  through
internally generated funds and the issuance of commercial paper. We believe that
these  sources of funds are  sufficient  to meet our  seasonal  working  capital
needs.

Capital Expenditures and Financing

Construction Expenditures

The table below sets forth our  construction  expenditures by operating  segment
for the periods indicated:

------------------------------------------------------------------------
                                              Six Months Ended June 30,
(In Millions of Dollars)                       2007               2006
------------------------------------------------------------------------
Gas Distribution                             $ 192.2            $ 184.9
Electric Services                               38.8               42.9
Energy Investments                              12.8               12.8
Energy Services and other                        2.3                6.4
------------------------------------------------------------------------
                                             $ 246.1            $ 247.0
------------------------------------------------------------------------

Construction  expenditures related to the Gas Distribution segment are primarily
for  the  renewal,   replacement  and  expansion  of  the  distribution  system.
Construction  expenditures  for the Electric  Services  segment reflect costs to
maintain our generating facilities.  KeySpan anticipates incurring approximately
the same amount of construction expenditures in 2007 as it incurred in 2006.

Financing

KeySpan did not engage in any financing  activities  during the first six months
of 2007, other than commercial paper borrowings as noted earlier.  At this point
in time, KeySpan does not anticipate engaging in any financing activities in the
next twelve months,  except for the potential  refinancing of maturing long-term
debt.


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<PAGE>


The following table  represents the ratings of KeySpan's  long-term debt at June
30, 2007. In 2004 Standard & Poor's  reaffirmed its ratings on KeySpan's and its
subsidiaries' long-term debt. Further in 2005, Fitch Ratings revised its ratings
on KeySpan's and its subsidiaries'  long-term debt to positive outlook.  Moody's
Investor Services,  however,  continues to maintain its negative outlook ratings
on KeySpan's and its subsidiaries' long-term debt.

--------------------------------------------------------------------------------
                           Moody's Investor        Standard
                               Services            & Poor's       FitchRatings
--------------------------------------------------------------------------------
KeySpan Corporation               A3                   A               A-
KEDNY                             N/A                  A+              A+
KEDLI                             A2                   A+              A
Boston Gas                        A2                   A              N/A
Colonial Gas                      A2                   A+             N/A
KeySpan Generation                A3                   A              N/A
--------------------------------------------------------------------------------

Off-Balance Sheet Arrangements

Guarantees

KeySpan had a number of financial  guarantees with its  subsidiaries at June 30,
2007.  KeySpan has fully and  unconditionally  guaranteed:  (i) $525  million of
medium-term notes issued by KEDLI;  (ii) the obligations of KeySpan  Ravenswood,
LLC, which is the lessee under the $425 million Master Lease associated with the
Ravenswood  Facility  and the  lessee  under  the  $385  million  sale/leaseback
transaction for the Ravenswood  Expansion including future decommission costs of
$19 million;  and (iii) the payment  obligations of our subsidiaries  related to
$128 million of  tax-exempt  bonds issued  through the Nassau County and Suffolk
County   Industrial   Development   Authorities  for  the  construction  of  two
electric-generation  peaking  facilities on Long Island.  The medium-term notes,
the Master Lease and the  tax-exempt  bonds are  reflected  on the  Consolidated
Balance Sheet; the sale/leaseback obligation is not recorded on the Consolidated
Balance  Sheet.  Further,  KeySpan has  guaranteed:  (i) up to $66.2  million of
surety bonds  associated  with certain  construction  projects  currently  being
performed by former subsidiaries; (ii) certain supply contracts, margin accounts
and purchase  orders for certain  subsidiaries  in an aggregate  amount of $95.9
million;  and (iii)  $76.6  million  of  subsidiary  letters  of  credit.  These
guarantees  are  not  recorded  on the  Consolidated  Balance  Sheet.  KeySpan's
guarantees  on  certain  performance  bonds  relating  to  current  construction
projects of the  discontinued  mechanical  contracting  companies will remain in
place  throughout  the  construction  period  for these  projects.  KeySpan  has
received an indemnity bond issued by a third party to offset potential  exposure
related to a significant portion of the continuing  guarantee.  At this time, we
have no reason to believe  that our  subsidiaries  or former  subsidiaries  will
default on their current obligations.  However, we cannot predict when or if any
defaults may take place or the impact such defaults may have on our consolidated
results of operations, financial condition or cash flows.


                                       67
<PAGE>


As noted previously,  KeySpan owns a 26.25% ownership interest in the Millennium
Pipeline Company LLC  ("Millennium"),  the developer of the Millennium  Pipeline
project.  The other  partners in the  Millennium  Pipeline  project are Columbia
Transmission  and  DTE  Energy  Company.  The  Millennium  Pipeline  project  is
anticipated to have the capacity to transport up to 525,000 DTH of natural gas a
day from  Corning,  New  York to  Ramapo,  New  York,  interconnecting  with the
pipeline systems of various other utilities in New York.  Subject to the receipt
of certain  remaining permits and financing,  Millennium  expects that the first
phase of the project will be in service by November 2008.

Consolidated  Edison,  KEDLI and  Columbia  Transmission  have each entered into
precedent  agreements to purchase capacity on the pipeline.  Upon and subject to
the terms and conditions set forth in Precedent  Agreements,  KeySpan has agreed
to  guarantee  the full and prompt  payment of $15.8  million  (the  "Guaranteed
Amount") of the contingent $60 million financial  obligation that Millennium may
incur for  liquidated  damages  under the Precedent  Agreements to  Consolidated
Edison and KEDLI. The liquidated damages are intended to reimburse  Consolidated
Edison and KEDLI for costs incurred to secure additional  capacity if Millennium
is unable to provide the contracted  capacity.  The guaranteed  amount  reflects
KeySpan's  proportionate  share of the $60 million of financial security that is
required  to be  provided  to  Consolidated  Edison  and KEDLI  pursuant  to the
Precedent Agreements based on KeySpan's  proportionate ownership interest in the
Millennium  Pipeline  project.  At June  30,  2007,  the  fair  value  of  these
guarantees was $0.7 million and has been recorded as a deferred liability and as
an increase to the  Millennium  investment  on  KeySpan's  Consolidated  Balance
Sheet.  (See  Note  6  to  the  Consolidated  Financial  Statements,  "Financial
Guarantees and Contingencies"  for additional  information  regarding  KeySpan's
guarantees.)

Contractual Obligations

KeySpan has certain contractual obligations related to its outstanding long-term
debt,  outstanding  credit facility  borrowings,  outstanding  commercial  paper
borrowings,  operating and capital  leases,  and demand charges  associated with
certain  commodity  purchases.  These  obligations,   which  were  disclosed  in
KeySpan's  Annual Report on Form 10-K for the year ended December 31, 2006, have
remained  substantially  unchanged  since  December  31, 2006.  (For  additional
details regarding these obligations see KeySpan's Annual Report on Form 10-K for
the year ended December 31, 2006, Item 7 Management's Discussion and Analysis of
Financial  Condition  and Results of  Operations,  as well as Note 6  "Long-Term
Debt"  and  Note  7   "Contractual   Obligations,   Financial   Guarantees   and
Contingencies" to those Consolidated Financial Statements.)

In addition to the above, in January 2007 KeySpan adopted the provisions of FASB
Interpretation  No.  48  "Accounting  for  Uncertainty  in  Income  Taxes  -  An
Interpretation of FASB Statement No. 109" ("FIN 48"). At June 30, 2007,  KeySpan
had a liability for unrecognized  tax benefits of $84.3 million,  which includes
accrued interest payable of $29.0 million.  At this point in time, we are unable
to determine the timing of future tax payments.  For  additional  details on the
implementation  of FIN 48 see Note 11 to the Consolidated  Financial  Statements
"Adoption of FASB Interpretation Number 48".

Discussions of Critical Accounting Policies and Assumptions

In preparing our financial  statements,  the  application of certain  accounting
policies  requires   difficult,   subjective  and/or  complex   judgments.   The
circumstances  that make these judgments  difficult,  subjective  and/or complex
have to do with the need to make estimates  about the impact of matters that are
inherently  uncertain.  Actual effects on our financial  position and results of
operations  may vary  significantly  from expected  results if the judgments and
assumptions underlying the estimates prove to be inaccurate.


                                       68
<PAGE>


Below is a discussion of KeySpan's critical  accounting policies and assumptions
at  June  30,  2007.  For a more  detailed  discussion  of  these  policies  and
assumptions see KeySpan's Annual Report on Form 10-K for the year ended December
31, 2006, Item 7.  Management's  Discussion and Analysis of Financial  Condition
and Results of  Operations  "Discussion  of  Critical  Accounting  Policies  and
Assumptions."

Valuation of Goodwill

KeySpan records  goodwill on purchase  transactions,  representing the excess of
acquisition  cost over the fair value of net  assets  acquired.  In testing  for
goodwill impairment under Statement of Financial  Accounting  Standards ("SFAS")
142 "Goodwill and Other Intangible Assets,"  significant reliance is placed upon
a  number  of  estimates   regarding  future   performance  that  require  broad
assumptions and significant  judgment by management.  A change in the fair value
of our  investments  could cause a significant  change in the carrying  value of
goodwill.  The assumptions used to measure the fair value of our investments are
the  same  as  those  used  by  us  to  prepare  annual  operating  segment  and
consolidated  earnings and cash flow forecasts.  In addition,  these assumptions
are used to set annual budgetary guidelines.  At June 30, 2007, KeySpan had $1.7
billion  of  recorded  goodwill  and has  concluded  that the fair  value of the
business units that have recorded goodwill exceed their carrying value.

Accounting for the Effects of Rate Regulation on Gas Distribution Operations

The financial  statements of the Gas Distribution segment reflect the ratemaking
policies and orders of the New York Public Service Commission ("NYPSC"), the New
Hampshire  Public  Utilities   Commission   ("NHPUC"),   and  the  Massachusetts
Department of Telecommunications and Energy ("MADTE").

Four of our six regulated gas utilities  (KEDNY,  KEDLI,  Boston Gas Company and
EnergyNorth  Natural  Gas,  Inc.)  are  subject  to the  provisions  of SFAS 71,
"Accounting  for the Effects of Certain  Types of  Regulation."  This  statement
recognizes the actions of regulators,  through the ratemaking process, to create
future economic benefits and obligations affecting rate-regulated companies.

In  separate  orders  issued by the MADTE  relating  to the  Eastern  Enterprise
acquisition  in 2000,  the base rates  charged by Colonial Gas Company and Essex
Gas  Company  have been  frozen at their  current  levels for a ten-year  period
ending  2009.  Due to the length of these base rate  freezes,  the  Colonial and
Essex Gas Companies had previously discontinued the application of SFAS 71.


                                       69
<PAGE>


As is further  discussed  under the caption  "Regulation  and Rate  Matters," in
October 2003 the MADTE rendered its decision on the Boston Gas Company base rate
case and  Performance  Based Rate Plan proposal  submitted to the MADTE in April
2003.  The rate plans  previously in effect for KEDNY and KEDLI have expired and
the rates established in those plans remain in effect.  EnergyNorth  Natural Gas
Inc.'s  base  rates  continue  as  set by  the  NHPUC  in  1993.  The  continued
application  of SFAS 71 to  record  the  activities  of  these  subsidiaries  is
contingent  upon the actions of regulators  with regard to future rate plans. As
part of its  application for approval of the KeySpan / National Grid plc Merger,
KeySpan has filed  proposed  rate plans for KEDNY and KEDLI with the NYPSC.  The
ultimate  resolution of any future rate plans could have a significant impact on
the application of SFAS 71 to these entities and, accordingly,  on our financial
position,  results of operations and cash flows.  However,  management  believes
that currently available facts support the continued  application of SFAS 71 and
that all regulatory assets and liabilities are recoverable or refundable through
the regulatory environment.

Pension and Other Postretirement Benefits

KeySpan participates in both non-contributory  defined benefit pension plans, as
well   as   other   post-retirement   benefit   ("OPEB")   plans   (collectively
"postretirement plans").  KeySpan's reported costs of providing pension and OPEB
benefits  are  dependent  upon  numerous  factors  resulting  from  actual  plan
experience  and  assumptions  of  future  experience.  Pension  and  OPEB  costs
(collectively   "postretirement   costs")  are   impacted  by  actual   employee
demographics,  the level of  contributions  made to the plans,  earnings on plan
assets,  and health care cost trends.  Changes made to the  provisions  of these
plans may also impact current and future  postretirement  costs.  Postretirement
costs  may  also  be   significantly   affected  by  changes  in  key  actuarial
assumptions,  including  anticipated  rates of  return  on plan  assets  and the
discount  rates  used  in  determining  the  postretirement  costs  and  benefit
obligations. Actual results that differ from our assumptions are accumulated and
amortized over ten years.

Historically, we have funded our qualified pension plans in excess of the amount
required to satisfy minimum ERISA funding requirements. At June 30, 2007, we had
a funding  credit balance in excess of the ERISA minimum  funding  requirements.
Although we have  presently  exceeded  ERISA funding  requirements,  our pension
plans, on an actuarial basis,  are currently  underfunded.  Therefore,  for 2007
KeySpan expects to contribute a total of $131 million to its funded and unfunded
post-retirement  plans.  Future funding  requirements  are heavily  dependent on
actual return on plan assets and prevailing interest rates. (In addition to Item
7  Management's  Discussion  and Analysis of Financial  Condition and Results of
Operations in KeySpan's  Annual Report on Form 10-K for the year ended  December
31,  2006,  see  also  Note  4  of  those  Consolidated   Financial  Statements,
"Postretirement Benefits.")

Valuation of Derivative Instruments

We employ derivative instruments to hedge a portion of our exposure to commodity
price risk and interest rate risk, to partially hedge the cash flow  variability
associated  with  our  electric  energy  sales  from the  Ravenswood  Generation
Station, as well as to economically hedge certain other commodity exposures.


                                       70
<PAGE>


When available,  quoted market prices are used to record a derivative contract's
fair value.  However,  market values for certain derivative contracts may not be
readily available or determinable.  A number of our commodity related derivative
instruments are exchange traded and,  accordingly,  fair value  measurements are
based on available quotes. Additionally, we use market quoted forward prices for
commodities  that are not  exchange  traded,  such as No.  6 grade  fuel oil and
electric power swaps. The fair value of our electric  capacity hedge is based on
published NYISO capacity bidding prices. Further, if no active market exists for
a commodity, fair values may be based on pricing models.

SFAS 133  establishes  criteria  that must be  satisfied  in order  for  forward
contracts  for the physical  delivery of  commodities  to qualify for the normal
purchases  and sales  exception.  Those  contracts  that  qualify for the normal
purchase and sale exception,  and where the exception has been elected,  are not
recognized in the financial  statements  until  settlement.  The  distinguishing
characteristics  between  contracts  that qualify for the normal  purchases  and
sales  exception  and those that do not are,  at times,  subjective  and require
judgment.

All fair value measurements,  whether calculated using available quotes or other
valuation  techniques,  are subjective and subject to  fluctuations in commodity
prices,  interest rates and overall economic market conditions and, as a result,
our fair value  measurements may not be precise and can fluctuate  significantly
from period to period.

Dividends

KeySpan declared a quarterly common stock dividend of $0.475 per share,  payable
August 1, 2007 to  shareholders  of record as of July 11,  2007.  This  dividend
payment  reflects  an  annual  increase  of $0.04 per  share  over  last  year's
dividend.  In anticipation of the close of the pending merger with National Grid
plc, KeySpan's Board of Directors approved the payment of a pro-rata dividend to
shareholders of record one business day prior to the transaction close date with
National  Grid plc. The amount of such  dividend  will be based on the number of
days elapsed between July 9, 2007 (ex-dividend date) up to but not including the
closing date.

Regulation and Rate Matters

Gas Matters

The rate  agreements  for KEDNY and KEDLI have  expired.  Under the terms of the
KEDNY and KEDLI rate agreements, gas distribution rates and all other provisions
will  remain  in  effect  until  changed  by  the  NYPSC.  As  discussed  in the
"Introduction  to the Notes to the Consolidated  Financial  Statements," in late
June 2007,  KeySpan and National Grid plc reached an agreement in principle with
the Staff of the NYPSC, the New York State Consumer Protection Board and certain
other parties that would, upon NYPSC approval, resolve all issues in the pending
Merger application before the NYPSC. On July 6, 2007, the Merger and Gas Revenue
Requirement  Joint  Proposal  (the "Merger JP") was filed with the NYPSC and the
Administrative Law Judges presiding over the Merger proceeding.

The Merger JP  supersedes  the proposed  ten-year  rate plan  included  with the
merger  application  filed  with the NYPSC on July 20,  2006.  If adopted by the
NYPSC,  the Merger JP would provide for five-year rate plans for KEDNY and KEDLI
that would go into  effect on January 1,  2008.  The Merger JP  provides  for no
increase in gas delivery  rates in each of the five years of KEDNY's merger rate


                                       71
<PAGE>


plan and an increase of $60 million in gas  delivery  rates in the first year of
the KEDLI  merger rate plan and no further  increase in years two through  five.
The individual  KEDNY and KEDLI rate plan  applications  filed with the NYPSC on
October 3, 2006 will  supplement  the Merger JP. If the Merger JP is approved by
the NYPSC,  the merger rate plans,  as they may be  supplemented  by KEDNY's and
KEDLI's individual rate cases, will go into effect on January 1, 2008.

Effective  November 1, 2003, the MADTE approved a $25.9 million increase in base
revenues for Boston Gas with an allowed return on equity of 10.2%  reflecting an
equal  balance of debt and equity.  On January 27,  2004,  the MADTE  issued its
order on Boston Gas  Company's  Motion for  Recalculation,  Reconsideration  and
Clarification  that granted an additional  $1.1 million in base revenues,  for a
total of $27 million. The MADTE also approved a Performance Based Rate Plan (the
"Plan") for up to ten years. On November 1, 2006, the MADTE approved a base rate
increase  of $8.7  million  under the Plan.  In  addition,  an  increase of $3.7
million in the local  distribution  adjustment  clause was  approved  to recover
pension  and other  postretirement  costs.  The MADTE  also  approved  a true-up
mechanism  for  pension  and other  postretirement  benefit  costs  under  which
variations  between  actual pension and other  postretirement  benefit costs and
amounts used to establish  rates are deferred and collected  from or refunded to
customers in  subsequent  periods.  This true-up  mechanism  allows for carrying
charges on deferred assets and liabilities at Boston Gas's weighted-average cost
of capital.

In connection with the Eastern Enterprises  acquisition of Colonial Gas in 1999,
the MADTE  approved a merger and rate plan that resulted in a ten year freeze of
base rates to  Colonial  Gas's firm  customers.  The base rate freeze is subject
only to certain  exogenous  factors,  such as  changes  in tax laws,  accounting
changes, or regulatory,  judicial,  or legislative changes. Due to the length of
the base rate freeze,  Colonial Gas  discontinued  its  application  of SFAS 71.
Essex Gas is also under a ten-year  base rate  freeze and has also  discontinued
its application of SFAS 71.  EnergyNorth base rates continue as set by the NHPUC
in 1993.

For an additional  discussion of our current gas  distribution  rate agreements,
see KeySpan's  Annual Report on Form 10-K for the year ended  December 31, 2006,
Item 7 Management's  Discussion and Analysis of Financial  Condition and Results
of Operations "Regulation and Rate Matters."


Electric Matters

KeySpan sells to LIPA all of the capacity and, to the extent  requested,  energy
conversion  services  from our  existing  Long  Island  based oil and  gas-fired
generating  plants.  Sales of capacity and energy  conversion  services are made
under rates approved by the FERC in accordance with the PSA entered into between
KeySpan and LIPA in 1998.  The original FERC approved  rates,  which had been in
effect since May 1998, expired on December 31, 2003. On October 1, 2004 the FERC
approved a settlement  reached between KeySpan and LIPA to reset rates effective
January 1, 2004. The settlement  agreement reflects a cost of equity of 9.5%, as
well as updated operating and maintenance expense levels and recovery of certain
other costs as agreed to by the parties.


                                       72
<PAGE>


As noted  earlier,  on February 1, 2006,  KeySpan and LIPA  entered  into (i) an
amended  and  restated  Management  Services  Agreement;  (ii) a new  Option and
Purchase and Sale Agreement, to replace the Generation Purchase Rights Agreement
as  amended;  and (iii) a  Settlement  Agreement  resolving  outstanding  issues
between  the  parties  regarding  the  1998  LIPA  Agreements.  (For  a  further
discussion  on the LIPA  agreements  see Note 10 to the  Consolidated  Financial
Statements  "2006 LIPA  Settlement," as well as KeySpan's  Annual Report on Form
10-K for the year ended December 31, 2006,  Item 7  Management's  Discussion and
Analysis of Financial  Condition and Results of Operations  "Electric Services -
LIPA Agreements.")

The Public Utility Holding Company Act of 2005

Pursuant  to PUHCA  2005,  FERC has  jurisdiction  over  certain of our  holding
company  activities,  including (i) regulating  certain  transactions  among our
affiliates  within our holding  company  system;  (ii)  governing  the issuance,
acquisition  and  disposition  of securities and assets by certain of our public
utility   subsidiaries;   and  (iii)  approving   certain  utility  mergers  and
acquisitions. The SEC's jurisdiction over KeySpan's activities is limited to the
registration and issuance of our securities  under the federal  securities laws.
Moreover,  our affiliate transactions also remain subject to certain regulations
of the NYPSC, MADTE and NHPUC, in addition to FERC.

Environmental Matters

KeySpan  is  subject to  various  federal,  state and local laws and  regulatory
programs related to the  environment.  Through various rate orders issued by the
NYPSC,  MADTE and NHPUC,  costs related to MGP environmental  cleanup activities
are recovered in rates charged to gas  distribution  customers and, as a result,
adjustments  to  these  reserve  balances  do  not  impact  earnings.   However,
environmental  cleanup activities related to the three non-utility sites are not
subject to rate recovery.

We estimate that the  remaining  cost of our MGP related  environmental  cleanup
activities,  including costs associated with the Ravenswood  Generating Station,
will be  approximately  $340.4 million and we have recorded a related  liability
for such amount.  We have also  recorded an additional  $8.7 million  liability,
representing the estimated  environmental cleanup costs related to a former coal
tar processing facility. As of June 30, 2007, we have expended a total of $248.7
million on environmental  investigation and remediation activities.  (See Note 6
to  the   Consolidated   Financial   Statements,   "Financial   Guarantees   and
Contingencies.")

Market and Credit Risk Management Activities

Market Risk: KeySpan is exposed to market risk arising from potential changes in
one or more market variables,  such as energy commodity prices,  interest rates,
volumetric risk due to weather or other variables. Such risk includes any or all
changes  in value  whether  caused  by  commodity  positions,  asset  ownership,


                                       73
<PAGE>


business or contractual  obligations,  debt covenants,  exposure  concentration,
currency,  weather, and other factors regardless of accounting method. We manage
our  exposure  to  changes  in  market  prices  using  various  risk  management
techniques,  including hedging through the use of derivative  instruments,  both
exchange-traded  and  over-the-counter  contracts,  purchase  of  insurance  and
execution of other contractual arrangements.

KeySpan  is  exposed  to  price  risk  due to  investments  in  equity  and debt
securities held to fund benefit  payments for various employee pension and other
postretirement  benefit plans. To the extent that the value of investments  held
change,  or long-term  interest  rates  change,  the effect will be reflected in
KeySpan's  recognition  of periodic cost of such employee  benefit plans and the
determination of contributions to the employee benefit plans.

Credit Risk:  KeySpan is exposed to credit risk arising from the potential  that
our counterparties fail to perform on their contractual obligations.  Our credit
exposures  are  created  primarily  through  the sale of gas and  transportation
services  to  residential,   commercial,  electric  generation,  and  industrial
customers and the provision of retail access  services to gas marketers,  by our
regulated gas  businesses;  the sale of commodities and services to LIPA and the
NYISO; the sale of power and services to our retail customers by our unregulated
energy  service  businesses;  entering  into  financial  and  energy  derivative
contracts with energy marketing  companies and financial  institutions;  and the
sale of gas, oil and  processing  services to energy  marketing  and oil and gas
production companies.

We  have  regional   concentration  of  credit  risk  due  to  receivables  from
residential,  commercial and industrial customers in New York, New Hampshire and
Massachusetts,  although this credit risk is spread over a  diversified  base of
residential, commercial and industrial customers. Customers' payment records are
monitored and action is taken,  when  appropriate and in accordance with various
regulatory requirements.

We also have credit risk from LIPA, our largest customer,  and from other energy
and financial services  companies.  Counterparty  credit risk may impact overall
exposure to credit risk in that our  counterparties may be similarly impacted by
changes in economic, regulatory or other considerations. We actively monitor the
credit  profile  of  our  wholesale   counterparties  in  derivative  and  other
contractual  arrangements,  and manage  our level of  exposure  accordingly.  In
instances where counterparties'  credit quality has declined, or credit exposure
exceeds  certain  levels,  we may limit our credit  exposure by restricting  new
transactions with the counterparty,  requiring  additional  collateral or credit
support and negotiating the early termination of certain agreements.

Regulatory Issues and Competitive  Environment:  We are subject to various other
risk  exposures  and   uncertainties   associated  with  our  gas  and  electric
operations.  The most significant  contingency involves the evolution of the gas
distribution  and electric  industries  towards more competitive and deregulated
environments.  The risks associated with KeySpan's gas  distribution  operations
have  not  changed   substantially  since  December  31,  2006.  For  additional


                                       74
<PAGE>


information  regarding these risks see KeySpan's  Annual Report on Form 10-K for
the year ended December 31, 2006, Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations "Market and Credit Risk Management
Activities."  The following is an update to certain matters related to KeySpan's
electric operations.

10-Minute Spinning and Non-Spinning Reserves
--------------------------------------------

Due to the  volatility in the market  clearing  price of 10-minute  spinning and
non-spinning reserves during the first quarter of 2000, the NYISO requested that
FERC  approve a bid cap on such  reserves,  as well as require a refunding of so
called alleged "excess payments"  received by sellers,  including the Ravenswood
Facility. On May 31, 2000, FERC issued an order that granted approval of a $2.52
per MWh bid cap for  10-minute  non-spinning  reserves,  plus  payments  for the
opportunity cost of not making energy sales. The NYISO's other requests, such as
a bid cap for spinning reserves,  retroactive refunds,  recalculation of reserve
prices, were rejected.

The NYISO,  Consolidated Edison,  Niagara Mohawk Power Corporation and Rochester
Gas and Electric each  individually  appealed FERC's order in federal court. The
appeals  were  consolidated  into one case and on November  7, 2003,  the United
States Court of Appeals for the District of Columbia  (the  "Court")  issued its
decision  in the case of  Consolidated  Edison  Company  of New York,  Inc.,  v.
Federal Energy Regulatory  Commission (the "Decision").  Essentially,  the Court
found errors in FERC's  order and remanded  some issues back to FERC for further
explanation and action.

     On June 25, 2004, the NYISO submitted a motion to FERC seeking refunds as a
result of the Decision.  KeySpan and others  submitted  statements of opposition
opposing  the  refunds.  On March 4, 2005,  FERC issued an order  upholding  its
original  decision  not  to  order  refunds.  FERC  also  provided  the  further
explanation requested by the Court as to why refunds were not being ordered. The
NYISO and various New York  Transmission  Owners  requested  rehearing of FERC's
latest order and on November 17, 2005, FERC denied those requests. The NYISO and
various New York Transmission  Owners appealed FERC's November 17, 2005 order to
the United States Court of Appeals for the District of Columbia, which appeal is
pending.

 NYISO In-City Capacity Mitigation
 ---------------------------------

The NYPSC, Con Edison and other load serving entities ("LSEs") complained to the
NYISO that in-City capacity market clearing prices during the summer of 2006 did
not decline as they had expected with the  introduction of additional  supply in
the New York City market.  The NYISO issued a letter to FERC  indicating that no
tariff  violations  occurred and that prices were as it expected.  Nevertheless,
the NYISO  stated that if changes to the market are  warranted,  the NYISO would
consider making revisions as necessary.


                                       75
<PAGE>


Accordingly,  the NYPSC and Consolidated Edison developed additional  mitigation
measures that would apply to certain In-City generation owned by KeySpan.  These
mitigation  measures  essentially  proposed to reduce the capacity  offer cap on
bids by the Ravenswood Generating Station and certain other generation owners of
capacity into the NYISO Spot Demand Curve Auction Market, from the current offer
cap of $105/kW-year to $82/kW-year plus 3%.


FERC rejected the $82 In-City Capacity  Mitigation  Proposal filed by the NYISO.
FERC found that the NYISO filing failed to meet the burden of proof  required to
support  revisions  to  market  rules.  Nevertheless,  on its own  motion,  FERC
initiated  a   proceeding   to   investigate   and  consider  the  justness  and
reasonableness of the NYISO's In-City capacity market, including whether and how
market rules should be revised to provide a fair level of compensation that will
attract and retain needed infrastructure.

At this time, we are unable to predict the outcome of this  proceeding  and what
effect it will have on our financial condition,  results of operations, and cash
flows. However, if the FERC rules that a refund is required,  the effective date
will  be on or  about  May  15,  2007  regardless  of when  this  proceeding  is
completed. However, the FERC is under no obligation to order refunds and has not
indicated  whether it intends to do so in this  proceeding.  In connection  with
this proceeding,  in July 2007,  KeySpan received notice that the FERC Office of
Enforcement  is  conducting a formal  investigation  into matters  regarding the
offering  practices of generating units serving New York City's In-city capacity
market.

NYISO May 2006 In-City Capacity Market Error
--------------------------------------------

On December 1, 2006, the NYISO filed a complaint against  SCS/Astoria Energy LLC
("Astoria"),  an In-City  electric  generating  unit,  alleging  that it did not
follow the NYISO tariff rules related to the  certification and sale of capacity
in relation to its auctions for the sale of capacity to the NYISO  market.  As a
result,  a certain amount of capacity that was sold in the May 2006 auctions was
determined by the NYISO to be ineligible.  In its complaint,  the NYISO proposes
to impose a  deficiency  charge  against  Astoria  for the  improperly-certified
capacity.  The NYISO could then award  additional  capacity  payments to another
In-City  supplier  (including the Ravenswood  Generating  Station)  because that
supplier would have sold additional capacity if not for the Astoria discrepancy.

On March 15, 2007,  FERC issued an order denying the NYISO's  complaint  against
Astoria  regarding  Astoria's  capacity  certification  prior  to the  May  2006
installed  capacity  auctions.  Even though FERC denied the complaint,  it found
that  Astoria  did not  supply  its  certified  capacity  in May 2006,  and must
therefore  pay a  deficiency  charge for its capacity  shortfall.  The NYISO was
directed to pay the affected  suppliers  for the capacity it supplied in May. On
April 16, 2007,  the Ravenswood  Generating  Station  sought  clarification  and
rehearing  of the  order.  The  NYISO  also  sought  clarification  and  Astoria
requested a  rehearing.  A decision  by the FERC  related to the  rehearing  and
clarification requests is pending.


                                       76
<PAGE>


Summer 2002 Capacity under Procurement Complaint
------------------------------------------------

On January 12, 2007,  the Court of Appeals for the District of Columbia  Circuit
("Court") issued its decision related to a KeySpan  complaint  against the NYISO
related to capacity  procurement  activities during the summer of 2002.  KeySpan
had  complained  to FERC  that the NYISO  violated  its  tariff  and as a result
received  $23.3  million  less than it would have if the NYISO had  followed the
tariff.  The Court vacated rulings by the FERC that denied KeySpan's  complaint.
The Court  determined that the NYISO did in fact violate its tariff but remanded
two issues back to the FERC for further consideration.  The two issues relate to
whether FERC should grant KeySpan's  requested relief for the tariff  violation.
The case is still pending at FERC and at this time, we are unable to predict the
outcome of this proceeding and what effect it will have on KeySpan's  results of
operations, financial position and cash flows.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Commodity  Derivative  Instruments  -  Hedging  Activities:  From  time to time,
KeySpan  subsidiaries have utilized derivative  financial  instruments,  such as
futures, options and swaps, for the purpose of hedging the cash flow variability
associated  with  changes in commodity  prices.  KeySpan is exposed to commodity
price  risk  primarily  with  regard  to its gas  distribution  operations,  gas
production and development  activities and its electric  generating  facilities.
Our gas distribution operations utilize over-the-counter ("OTC") natural gas and
fuel oil swaps to hedge the cash-flow  variability of specified  portions of gas
purchases  and  sales  associated  with  certain  large-volume   customers  when
economically  appropriate to do so. Seneca-Upshur utilizes OTC natural gas swaps
to hedge cash flow variability  associated with forecasted sales of natural gas.
The  Ravenswood  Generating  Station  uses  derivative  physical  and  financial
instruments to economically hedge the cash flow variability  associated with the
purchase of a portion of natural  gas and oil that will be  consumed  during the
generation of electricity.  The Ravenswood  Generating Station also economically
hedges the cash flow  variability  associated  with a portion of electric energy
sales using OTC electricity swaps.

Commodity Derivative  Instruments that are not Accounted for as Hedges: As noted
above, the Ravenswood  Generating Station uses derivative physical and financial
instruments to economically hedge the cash flow variability  associated with the
purchase of a portion of natural  gas and oil that will be  consumed  during the
generation of electricity as well as portion of electric energy sales. A portion
of  the  derivative  financial   instruments   associated  with  the  Ravenswood
Generating Station do not qualify for hedge accounting treatment under SFAS 133.

KeySpan  also  employees  a limited  number of OTC  natural gas swaps to hedge a
small  portion of its risk  associated  with  changing  prices  for fleet  fuel.
Additionally,  KeySpan has an  International  SWAP  Dealers  Association  Master
Agreement  ("Swap  Agreement")  for  a  fixed  for  floating  unforced  capacity
financial swap with Morgan Stanley Capital Group Inc.


                                       77
<PAGE>


The following  tables set forth selected  financial data  associated  with these
derivative  financial  instruments noted above that were outstanding at June 30,
2007.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
                                         Year of        Volumes        Fixed             Current            Fair Value
    Type of Contract                     Maturity         mmcf         Price $           Price $          (In $ Millions)
----------------------------------------------------------------------------------------------------------------------------
        Gas
<S>                                        <C>          <C>         <C>                <C>                         <C>
Swaps/Futures - Long Natural Gas            2007         11,881      7.68 - 9.82        6.77 - 8.57                (11.3)
                                            2008            687      9.08 - 9.82        7.85 - 8.93                 (0.3)

OTC Swaps - Short Natural Gas               2007          1,371      5.86 - 9.98        6.77 - 8.57                 (2.0)
                                            2008          1,944      6.77 - 8.90        7.85 - 9.24                 (3.2)
                                            2009          1,341      7.60 - 10.90       7.88 - 9.51                 (0.1)

Optimization Contract                                                                                                0.7

----------------------------------------------------------------------------------------------------------------------------
                                                         17,224                                                    (16.2)
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
                                   Year of          Volumes        Fixed                 Current            Fair Value
    Type of Contract               Maturity         Barrels        Price $                Price $         (In $ Millions)
--------------------------------------------------------------------------------------------------------------------------
        Oil
<S>                                  <C>           <C>         <C>                    <C>                        <C>
Swaps - Long Fuel Oil                 2007          172,408     48.30 - 67.60          58.39 - 59.64              1.1
                                      2008           60,607     60.00 - 67.60          59.14 - 61.74             (0.3)

--------------------------------------------------------------------------------------------------------------------------
                                                    233,015                                                       0.8
--------------------------------------------------------------------------------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
                                  Year of                      Fixed Margin/            Current              Fair Value
    Type of Contract              Maturity          MWh           Price $                Price $           (In $ Millions)
-------------------------------------------------------------------------------------------------------------------------------
    Electricity
<S>                                <C>          <C>           <C>                    <C>                         <C>
Swaps - Energy                      2007         1,137,804     65.05 - 135.50         59.50 - 135.50              12.9
                                    2008            35,920     67.95 - 70.10          60.00 - 84.50                 -

UCAP Swap                           2009                                                                         (1.0)

-------------------------------------------------------------------------------------------------------------------------------
                                                 1,173,724                                                       11.9
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       78
<PAGE>


-----------------------------------------------------------------
                                                       2007
Change in Fair Value of Derivative Instruments    (In $ Millions)
-----------------------------------------------------------------
Fair value of contracts at January 1,                       (5.6)
Net (gains) on contracts realized                           (5.3)
Decrease in fair value of all open contracts                 7.4
-----------------------------------------------------------------
Fair value of contracts outstanding at June 30,             (3.5)
-----------------------------------------------------------------


---------------------------------------------------------------------------
(In Millions of Dollars)
---------------------------------------------------------------------------
                                     Fair Value of Contracts
---------------------------------------------------------------------------
                                     Mature Within                  Total
Sources of Fair Value                  12 Months     Thereafter   Fair Value
---------------------------------------------------------------------------
Prices actively quoted                  $ (14.5)      $ (1.7)      $ (16.2)
Local published indicies                   12.7            -          12.7
---------------------------------------------------------------------------
                                         $ (1.8)      $ (1.7)       $ (3.5)
---------------------------------------------------------------------------

We measure the commodity  risk of our  derivative  hedging  instruments  using a
sensitivity analysis.  Based on a sensitivity analysis as of June 30, 2007 a 10%
increase/decrease  in natural gas prices  would  decrease/increase  the value of
derivative instruments maturing in one year by $4.2 million.

The main driver of the Swap  Agreement is the clearing  price of capacity in the
NYISO  administered  Spot auction.  If the Spot auction  clearing prices were to
clear at $7.32,  which is $0.25 per kW-Month  below the fixed price of $7.57 per
kW-Month in the Swap  Agreement,  assuming  no other  capacity  market  changes,
KeySpan  would  incur a loss of $0.5  million  per  month.  If the Spot  auction
clearing  prices were to clear at $7.82,  which is 0.25 per  kW-Month  above the
fixed  price of $7.57 per  kW-Month  in the Swap  Agreement,  assuming  no other
capacity market changes, KeySpan would incur a gain of $0.5 million per month.

Commodity  Derivative  Instruments  -  Regulated  Utilities:  We use  derivative
financial  instruments to reduce the cash flow  variability  associated with the
purchase price for a portion of future natural gas purchases associated with our
Gas  Distribution  operations.  Further,  KeySpan has a gas  distribution  asset
optimization  contract  that  employs  derivative  financial  instruments.   The
accounting  for these  derivative  instruments is subject to SFAS 71 "Accounting
for the Effects of Certain Types of Regulation." Therefore,  changes in the fair
value  of  these  derivatives  have  been  recorded  as a  regulatory  asset  or
regulatory  liability on the Consolidated  Balance Sheet. Gains or losses on the
settlement of these  contracts  are  initially  deferred and then refunded to or
collected  from  our  firm  gas  sales  customers   consistent  with  regulatory
requirements.




                                       79
<PAGE>


The following  table sets forth selected  financial data  associated  with these
derivative financial instruments that were outstanding at June 30, 2007.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                         Year of       Volumes        Floor         Ceiling           Fixed            Current         Fair Value
Type of Contract         Maturity         mmcf         ($)            ($)             Price ($)        Price ($)     (In $ Millions)
------------------------------------------------------------------------------------------------------------------------------------
<S>                       <C>          <C>        <C>              <C>             <C>               <C>                  <C>
Options                    2007            450     5.50 - 7.00      8.00 - 9.50               -       6.77 - 8.57           (1.5)
                           2008            830         7.00             9.50                  -       7.85 - 8.93           (0.8)

Swaps                      2007         30,919                                      6.79 - 11.18      6.77 - 8.57          (29.0)
                           2008         57,624                                      7.16 - 11.64      7.85 - 9.24          (34.8)
                           2009          6,831                                      7.92 - 9.96       7.89 - 9.51           (2.1)

Optimization Contract                                                                                                       14.3

------------------------------------------------------------------------------------------------------------------------------------
                                        96,654                                                                             (53.9)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See Note 4 to the  Consolidated  Financial  Statements  "Hedging and  Derivative
Financial   Instruments"  for  a  further  description  of  all  our  derivative
instruments.

Item 4. Controls and Procedures

We maintain  disclosure  controls and  procedures (as defined under Exchange Act
Rule  13a-15(e)  and  15d-15(e))  that are  designed to ensure that  information
required  to be  disclosed  by us in the  reports  we file or  submit  under the
Exchange Act is recorded,  processed,  summarized  and reported  within the time
periods specified in the Securities and Exchange  Commission's  rules and forms,
and  that  such   information  is  accumulated  and  communicated  to  KeySpan's
management,  including our Chief Executive Officer and Chief Financial  Officer,
as appropriate,  to allow timely decisions  regarding required  disclosure.  Any
control  system,  no matter how well  designed  and  operated,  can provide only
reasonable   assurance  of  achieving  the  desired  control   objectives.   Our
management,  under  the  supervision  and with the  participation  of our  Chief
Executive Officer and Chief Financial  Officer,  has evaluated the effectiveness
of our disclosure  controls and procedures as of June 30, 2007.  Based upon that
evaluation,  our Chief Executive  Officer and Chief Financial  Officer concluded
that the design and operation of our  disclosure  controls and  procedures  were
effective at the reasonable  assurance level in alerting them timely to material
information required to be included in KeySpan's periodic SEC reports.

Furthermore,  there  has been no  change  in  KeySpan's  internal  control  over
financial  reporting that occurred during  KeySpan's last fiscal quarter,  which
has materially affected, or is reasonably likely to materially affect, KeySpan's
internal control over financial reporting.


                                       80
<PAGE>


PART II.  OTHER INFORMATION
---------------------------

Item 1. Legal Proceedings

See Note 6 to the Consolidated  Financial Statements  "Financial  Guarantees and
Contingencies."

Item 1A. Risk Factors

Certain  statements  contained in this Quarterly  Report on Form 10-Q concerning
expectations,  beliefs, plans, objectives,  goals, strategies,  future events or
performance and underlying  assumptions and other statements that are other than
statements of historical  facts,  are  "forward-looking  statements"  within the
meaning of Section  21E of the  Securities  Exchange  Act of 1934,  as  amended.
Without  limiting the  foregoing,  all  statements  under the captions  "Item 2.
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations" and "Item 3.  Quantitative and Qualitative  Disclosures About Market
Risk" relating to our future outlook,  anticipated capital expenditures,  future
cash flows and borrowings, pursuit of potential future acquisition opportunities
and sources of funding,  are forward-looking  statements.  Such  forward-looking
statements  reflect  numerous  assumptions  and  involve  a number  of risks and
uncertainties  and actual results may differ  materially from those discussed in
such statements.


Among the factors that could cause actual results to differ materially are:

-    the occurrence of any event,  change or other circumstances that could give
     rise to the  termination of the Merger  Agreement with National Grid plc or
     the failure of the Merger to close for any reason;

-    volatility of fuel prices used to generate electricity;

-    fluctuations in weather and in gas and electric prices;

-    general economic conditions, especially in the northeast United States;

-    our  ability  to  successfully   manage  our  cost  structure  and  operate
     efficiently;

-    our ability to successfully  contract for natural gas supplies  required to
     meet the needs of our customers;


                                       81
<PAGE>


-    implementation  of  new  accounting  standards  or  changes  in  accounting
     standards or Generally  Accepted  Accounting  Principles  which may require
     adjustments to financial statements;

-    inflationary trends and interest rates;

-    the ability of KeySpan to identify and make complementary acquisitions,  as
     well as the successful integration of such acquisitions;

-    available sources and cost of fuel;

-    creditworthiness of counterparties to derivative  instruments and commodity
     contracts;

-    the resolution of certain disputes with LIPA concerning each party's rights
     and obligations under various agreements;

-    retention of key personnel;

-    federal and state regulatory  initiatives that threaten cost and investment
     recovery, and place limits on the type and manner in which we invest in new
     businesses and conduct operations;

-    the  impact  of  federal,  state  and local  utility  regulatory  policies,
     legislation and orders on our regulated and unregulated businesses;

     - potential write-down of our investment in natural gas properties when
     natural gas prices are depressed or if we have significant downward
     revisions in our estimated proved gas reserves;

-    competition facing our unregulated Energy Services businesses;

-    the degree to which we develop  unregulated  business  ventures  as well as
     federal and state regulatory  policies  affecting our ability to retain and
     operate such business ventures profitably;

-    a change in the fair  market  value of our  investments  that could cause a
     significant  change  in the  carrying  value  of  such  investments  or the
     carrying value of related goodwill;

-    timely  receipts  of  payments  from LIPA and the  NYISO,  our two  largest
     customers;

-    changes in the unforced capacity financial swap pricing structure;

-    receipt of approval for, and the timing thereof,  the 2006 LIPA Agreements;
     and

-    other risks detailed from time to time in other reports and other documents
     filed by KeySpan with the SEC


                                       82
<PAGE>


For any of these  statements,  KeySpan  claims the protection of the safe harbor
for forward-looking  information  contained in the Private Securities Litigation
Reform Act of 1995,  as  amended.  For  additional  discussion  on these  risks,
uncertainties and assumptions, see "Item 2. Management's Discussion and Analysis
of Financial  Condition and Results of Operations" and "Item 3. Quantitative and
Qualitative Disclosures About Market Risk."

Item 2.  Unregistered Sale of Equity Securities and Use of Proceeds
         None

Item 3.  Defaults Upon Senior Securities
         None

Item 4.  Submission of Matters to a Vote of Security Holders
         None

Item 5.  Other Information
         None

Item 6.  Exhibits

31.1*     Certification of the Chairman and Chief Executive  Officer pursuant to
          Section 302 of the Sarbanes-Oxley Act of 2002

31.2*     Certification  of the Executive  Vice  President  and Chief  Financial
          Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*     Certification of the Chairman and Chief Executive  Officer pursuant to
          Section 906 of the Sarbanes-Oxley Act of 2002

32.2*     Certification  of the Executive  Vice  President  and Chief  Financial
          Officer  pursuant  to Section  906 of the  Sarbanes-Oxley  Act of 2002

----------------------
*Filed Herewith



                                       83
<PAGE>









                                   SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant has duly caused this report to be signed on behalf of the undersigned
there unto duly authorized.



                                           KEYSPAN CORPORATION
(Registrant)
                                           By:    /s/Gerald Luterman
                                           -------------------------
                                           Name:  Gerald Luterman
                                           Title: Executive Vice President
                                                  and Chief Financial Officer


Date: August 3, 2007                       /s/ Gerald Luterman
                                           ----------------------
                                           Gerald Luterman
                                           Executive Vice President and
                                           Chief Financial Officer


Date: August 3, 2007                       /s/ Theresa A. Balog
                                           --------------------
                                           Theresa A. Balog
                                           Vice President and
                                           Chief Accounting Officer




                                       84