UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549
                                    Form 10-Q
(Mark One)
 X   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
---
EXCHANGE ACT OF 1934

For the quarterly period ended                               September 30, 2001
                               ------------------------------------------------

                                       OR
     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 Identification No.)
 incorporation or organization)

                 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)
                           (631) 755-6650 (Hicksville)
                          -----------------------------
              (Registrant's telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last
 report)

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

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

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 October 31, 2001
---------------------------                     --------------------------------
       $.01 par value                                      139,085,432


<PAGE>



                      KEYSPAN CORPORATION AND SUBSIDIARIES

                                      INDEX
                                      -----

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

Item 1. Financial Statements

           Consolidated Balance Sheet -
           September 30, 2001 and December 31, 2000                            3

           Consolidated Statement of Income -
           Three and Nine Months Ended September 30, 2001 and 2000             5

           Consolidated Statement of Cash Flows -
           Nine Months Ended September 30, 2001 and 2000                       6

           Notes to Consolidated Financial Statements                          7

Item 2. Management's Discussion and Analysis Of Financial
           Condition and Results of Operations                                23

Item 3. Quantitative and Qualitative Disclosures
           About Market Risk                                                  37

                               Part II.   OTHER INFORMATION

Item 1. Legal Proceedings                                                     41

Item 6. Exhibits and Reports on Form 8-K                                      42

Signatures                                                                    43












                                        2

<PAGE>


<TABLE>

                                                      CONSOLIDATED BALANCE SHEET
                                                       (In Thousands of Dollars)
<CAPTION>



                                                                                  September 30, 2001              December 31, 2000
------------------------------------------------------------------------------------------------------------------------------------
                                                                                   (Unaudited)                           (Audited)
<S>                                                                                       <C>                          <C>
ASSETS

Current Assets
    Cash and cash equivalents                                          $                      177,762     $                 94,508
    Customer accounts receivable                                                            1,131,619                    1,775,683
    Allowance for uncollectible accounts                                                      (72,579)                     (49,478)
    Gas in storage, at average cost                                                           394,688                      282,654
    Materials and supplies, at average cost                                                   120,281                      123,608
    Other                                                                                     118,300                      148,353
                                                                             ------------------------        ---------------------
                                                                                            1,870,071                    2,375,328
                                                                             ------------------------        ---------------------


Equity Investments and Other                                                                  210,236                      199,196
                                                                             ------------------------        ---------------------

Property
    Gas                                                                                     5,545,128                    5,346,799
    Electric                                                                                1,545,863                    1,412,839
    Other                                                                                   1,144,365                      734,801
    Accumulated depreciation                                                               (2,498,850)                  (2,301,722)
    Gas exploration and production, at cost                                                 1,670,171                    1,781,379
    Accumulated depletion                                                                    (718,239)                    (615,799)
                                                                             ------------------------        ---------------------
                                                                                            6,688,438                    6,358,297
                                                                             ------------------------        ---------------------

Deferred Charges
    Regulatory assets                                                                         402,109                      385,116
    Goodwill, net of amortizations                                                          1,789,824                    1,848,721
    Other                                                                                     468,184                      363,785
                                                                             ------------------------        ---------------------
                                                                                            2,660,117                    2,597,622
                                                                             ------------------------        ---------------------

Total Assets                                                           $                   11,428,862     $             11,530,443
                                                                             ========================        =====================

</TABLE>





        See accompanying Notes to the Consolidated Financial Statements.



                                                                  3

<PAGE>


<TABLE>

                                                      CONSOLIDATED BALANCE SHEET
                                                      (In Thousands of Dollars)
<CAPTION>



                                                                                  September 30, 2001               December 31, 2000
------------------------------------------------------------------------------------------------------------------------------------
                                                                                      (Unaudited)                      (Audited)
<S>                                                                                       <C>                      <C>
LIABILITIES AND CAPITALIZATION

Current Liabilities
    Current redemption of long term debt                               $                      6,426    $                5,480
    Accounts payable and accrued expenses                                                   867,543                 1,440,351
    Commercial paper                                                                        889,930                 1,300,237
    Dividends payable                                                                        62,799                    62,218
    Taxes accrued                                                                            35,511                    74,614
    Customer deposits                                                                        35,571                    32,855
    Interest accrued                                                                        160,551                    69,402
                                                                              ---------------------       -------------------
                                                                                          2,058,331                 2,985,157
                                                                              ---------------------       -------------------

Deferred Credits and Other Liabilities
    Regulatory liabilities                                                                   38,840                    40,041
    Deferred income tax                                                                     593,579                   451,721
    Postretirement benefits and other reserves                                              575,763                   628,910
    Other                                                                                   167,049                   127,393
                                                                              ---------------------       -------------------
                                                                                          1,375,231                 1,248,065
                                                                              ---------------------       -------------------

Capitalization
    Common stock, $.01 par value, authorized
       450,000,000 shares; outstanding 138,858,818 and
       134,575,028 shares stated at                                                       2,997,038                 2,985,022
    Retained earnings                                                                       474,199                   480,639
    Other comprehensive income                                                               30,740                       825
    Treasury stock purchased                                                               (580,533)                 (650,670)
                                                                              ---------------------       -------------------
      Total common shareholders' equity                                                   2,921,444                 2,815,816
    Preferred stock                                                                          84,077                    84,205
    Long-term debt                                                                        4,803,199                 4,255,260
                                                                              ---------------------       -------------------
Total Capitalization                                                                      7,808,720                 7,155,281
                                                                              ---------------------       -------------------

Minority Interest in Subsidiary Companies                                                   186,580                   141,940
                                                                              ---------------------       -------------------
Total Liabilities and Capitalization                                   $                 11,428,862    $           11,530,443
                                                                              =====================       ===================

</TABLE>


        See accompanying Notes to the Consolidated Financial Statements.





                                        4

<PAGE>


<TABLE>
                                                   CONSOLIDATED STATEMENT OF INCOME
                                                             (Unaudited)
                                         (In Thousands of Dollars, Except Per Share Amounts)
<CAPTION>

                                                            Three Months      Three Months      Nine Months       Nine Months
                                                               Ended             Ended             Ended             Ended
                                                           September 30,     September 30,     September 30,     September 30,
                                                                2001              2000              2001              2000
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>                <C>               <C>              <C>
Revenues
Gas Distribution                                       $      346,703   $      292,352      $    2,721,032   $    1,458,595
Electric Services                                             387,881          374,517           1,089,156        1,097,616
Energy Services                                               270,056          215,745             821,920          480,120
Energy Investments                                            172,140           64,523             594,425          175,007
                                                        -------------    -------------       -------------    -------------
Total Revenues                                              1,176,780          947,137           5,226,533        3,211,338
                                                        -------------    -------------       -------------    -------------
Operating Expenses
Purchased gas for resale                                      148,893          140,415           1,694,591          717,198
Fuel and purchased power                                      164,555          161,086             454,212          334,077
Operations and maintenance                                    566,128          389,116           1,707,642        1,123,581
Depreciation, depletion and amortization                      142,005           72,973             407,317          216,364
Operating taxes                                                98,555           91,469             348,963          298,010
                                                        -------------    -------------       -------------    -------------
Total Operating Expenses                                    1,120,136          855,059           4,612,725        2,689,230
                                                        -------------    -------------       -------------    -------------

Operating Income                                               56,644           92,078             613,808          522,108
                                                        -------------    -------------       -------------    -------------

Other Income and (Deductions)
Minority interest                                              (7,694)          (5,952)            (34,970)         (13,747)
Other income                                                    7,774            4,146              39,192           26,573
                                                        -------------    -------------       -------------    -------------
Total Other Income                                                 80           (1,806)              4,222           12,826
                                                        -------------    -------------       -------------    -------------
Income Before Interest Charges
  and Income Taxes                                             56,724           90,272             618,030          534,934
                                                        -------------    -------------       -------------    -------------
Interest Charges                                               81,799           42,781             273,150          123,836
                                                        -------------    -------------       -------------    -------------
Income Taxes
    Current                                                   (29,488)           7,579              57,957          116,396
    Deferred                                                   39,587           25,282             103,848           54,462
                                                        -------------    -------------       -------------    -------------
Total Income Taxes                                             10,099           32,861             161,805          170,858
                                                        -------------    -------------       -------------    -------------
Net Income (Loss)                                             (35,174)          14,630             183,075          240,240
Preferred stock dividend requirements                           1,473            1,476               4,425           16,453
                                                        -------------    -------------       -------------    -------------
Earnings (Loss) for Common Stock                     $        (36,647)$         13,154    $        178,650 $        223,787
                                                        =============    =============       =============    =============
Basic Earnings (Loss) Per Share                      $         (0.26) $           0.10    $           1.30 $           1.67
                                                        =============    =============       =============    =============
Diluted Earnings (Loss) Per Share                    $         (0.26) $           0.10    $           1.28 $           1.66
                                                        =============    =============       =============    =============
Average Common Shares Outstanding (000)                       138,693          134,335             137,856           133,965
Average Common  Shares
     Outstanding - Diluted (000)                              139,508          135,669             138,921           134,653

</TABLE>

        See accompanying Notes to the Consolidated Financial Statements.









                                        5

<PAGE>


<TABLE>
                                                 CONSOLIDATED STATEMENT OF CASH FLOWS
                                                             (Unaudited)
                                                      (In Thousands of Dollars)

<CAPTION>
                                                                       Nine Months                       Nine Months
                                                                          Ended                             Ended
                                                                   September 30, 2001                September 30, 2000
--------------------------------------------------------------------------------------------------------------------------------

<S>                                                                             <C>                           <C>
Operating Activities
Net Income                                                    $                   183,075  $                    240,240
Adjustments to reconcile net income to  net cash
  provided by (used in) operating activities
    Depreciation, depletion and amortization                                      407,317                       216,364
    Deferred income tax                                                           103,848                        54,462
    Income from equity investments                                                 (9,249)                      (16,333)
    Dividends from equity investments                                               2,901                        19,568
Changes in assets and liabilities
    Accounts receivable                                                           665,224                       (38,759)
    Materials and supplies, fuel oil and
         gas in storage                                                          (109,188)                     (128,705)
    Accounts payable and accrued expenses                                        (609,699)                       27,451
    Interest accrued                                                               91,149                       (12,269)
    Prepayments and other                                                         (14,483)                      105,181
                                                                 ------------------------     -------------------------
Net Cash Provided by Operating Activities                                         710,895                       467,200
                                                                 ------------------------     -------------------------
Investing Activities
Capital expenditures                                                             (677,857)                     (403,611)
Investments                                                                             -                      (175,977)
Proceeds from sale of assets                                                       18,458                             -
Other                                                                                (356)                        7,599
                                                                 ------------------------     -------------------------
Net Cash Used in Investing Activities                                            (659,755)                     (571,989)
                                                                 ------------------------     -------------------------
Financing Activities
Issuance of treasury stock                                                         82,025                        20,951
Issuance of long-term debt                                                        721,474                       463,627
Payment of long-term debt                                                        (172,956)                      (37,000)
Issuance / (Payment) of commercial paper                                         (410,307)                      173,790
Payment of preferred stock                                                              -                      (363,000)
Preferred stock dividends paid                                                     (4,425)                      (18,600)
Common stock dividends paid                                                      (184,052)                     (179,049)
Other                                                                                 355                       (20,914)
                                                                 ------------------------     -------------------------
Net Cash (Used in) Provided by Financing
    Activities                                                                     32,114                        39,805
                                                                 ------------------------     -------------------------
Net increase (decrease) in Cash and
     Cash Equivalents                                         $                    83,254  $                    (64,984)
                                                                 ========================     =========================
Cash and cash equivalents at
    beginning of period                                       $                    94,508  $                    128,602
Net increase (decrease) in cash and
     cash equivalents                                                              83,254                       (64,984)
                                                                 ------------------------     -------------------------
Cash and Cash Equivalents at
    End of Period                                             $                   177,762  $                     63,618
                                                                 ========================     =========================
</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

KeySpan Corporation (referred to in the Notes to the Financial Statements as
"KeySpan", "we", "us", and "our") is a registered holding company under the
Public Utility Holding Company Act of 1935, as amended ("PUHCA"). We operate six
utilities that distribute natural gas to approximately 2.5 million customers in
New York City, Long Island, Massachusetts and New Hampshire, making us the fifth
largest gas distribution company in the United States and the largest in the
Northeast. We also own and operate electric generating plants in Nassau and
Suffolk Counties on Long Island and in Queens County in New York City. Under
contractual arrangements, we provide power, electric transmission and
distribution services, billing and other customer services for approximately one
million electric customers of the Long Island Power Authority ("LIPA"). Our
other subsidiaries are involved in gas and oil exploration and production; gas
storage; wholesale and retail gas and electric marketing; appliance service;
heating, ventilation and air conditioning installation and services; large
energy-system ownership, installation and management; engineering services;
fiber optic services; and marine transportation, including the barge hauling of
fuel and other cargo. We also invest and participate in the development of,
natural gas pipelines, electric generation and other energy-related projects,
domestically and internationally. (See Note 2 "Business Segments" for additional
information on each operating segment.)

1.    BASIS OF PRESENTATION

On  November  8,  2000,  KeySpan  acquired  all of the  common  stock of Eastern
Enterprises  ("Eastern")  and  EnergyNorth,  Inc.  ("ENI").  The transaction was
accounted for as a purchase,  with KeySpan being the acquiring company.  Eastern
is a  Massachusetts  business  trust that owns  primarily  Boston  Gas  Company,
Colonial Gas Company,  Essex Gas Company, each of which provide gas distribution
service in Eastern Massachusetts, and Midland Enterprises, Inc. ("Midland"). ENI
is a holding company that owns primarily EnergyNorth Natural Gas,  Inc.("ENGI"),
a provider  of gas  distribution  services to  customers  in New  Hampshire.  As
required by the Securities and Exchange  Commission  ("SEC") in connection  with
the  registration of KeySpan under PUHCA, in October 2001, ENI was merged out of
existence and ENGI became a direct wholly-owned subsidiary of Eastern.

Consolidated results of operations for both the three and nine months ended
September 30, 2001 include the results of operations for Eastern and ENI. As
required under purchase accounting, reported results of operations for periods
prior to November 8, 2000 do not include the operating results of Eastern and
ENI.

In our opinion, the accompanying unaudited Consolidated Financial Statements
contain all adjustments necessary to present fairly our financial position as of
September 30, 2001, and the results of our operations for the three and nine
months ended September 30, 2001 and September 30, 2000, as well as cash flows
for the nine months ended September 30, 2001 and September 30, 2000. The
accompanying financial statements should be read in conjunction with the
consolidated financial statements and notes included in our Annual Report on
Form 10-K for the year ended December 31, 2000. Income from interim periods may
not be indicative of future results. Certain reclassifications were made to
conform prior period financial statements with the current period financial
statement presentation. Other than as noted, adjustments were of a normal,
recurring nature.








                                        7

<PAGE>



Basic earnings per share ("EPS") is calculated by dividing net income 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 net income, as adjusted, by the sum of the weighted average number
of shares of common stock outstanding plus all potentially dilutive securities.

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

                                                                              (In Thousands of Dollars, Except Per Share)
-------------------------------------------------------------------------------------------------------------------------

                                                       Three Months         Three Months          Nine Months          Nine Months
                                                           Ended                Ended                Ended                Ended
                                                       September 30,        September 30,        September 30,        September 30,
                                                           2001                 2000                 2001                 2000
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>                 <C>                  <C>                  <C>
Earnings (loss) for common stock                    $        (36,647)  $          13,154  $           178,650  $           223,787
Houston Exploration dilution (options)                          (200)              (219)              (1,040)                (358)
--------------------------------------------------  -----------------  -----------------  -------------------  -------------------
Earnings (loss) for common stock - adjusted         $        (36,847)  $          12,935  $           177,610  $           223,429
--------------------------------------------------  -----------------  -----------------  -------------------  -------------------

Weighted average shares outstanding (000)                     138,693            134,335              137,856              133,965
Add dilutive securities:
   Options                                                        815              1,334                1,065                  688
--------------------------------------------------  -----------------  -----------------  -------------------  -------------------
Total weighted average shares outstanding
  - assuming dilution                                         139,508            135,669              138,921              134,653
--------------------------------------------------  -----------------  -----------------  -------------------  -------------------

Basic Earnings (Loss) Per Share                     $          (0.26)  $            0.10  $              1.30  $              1.67
--------------------------------------------------  -----------------  -----------------  -------------------  -------------------
Diluted Earnings Per Share                                        N/A  $            0.10  $              1.28  $              1.66
--------------------------------------------------  -----------------  -----------------  -------------------  -------------------
</TABLE>

2.    BUSINESS SEGMENTS

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

The Gas Distribution segment consists of our six gas distribution subsidiaries.
KeySpan Energy Delivery New York ("KEDNY") provides gas distribution services to
customers in the New York City Boroughs of Brooklyn, Queens and Staten Island.
KeySpan Energy Delivery Long 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 long-term
service contracts having remaining terms that range from five to twelve years.
The Electric Services segment also includes subsidiaries that own, lease and
operate the 2,200 megawatt Ravenswood electric generation facility ("Ravenswood
facility"), located in Queens, New York. Our contract with Consolidated Edison
Company of New York ("Consolidated Edison"), under which we provided
Consolidated Edison with 100% of the available capacity of the Ravenswood
facility for a fixed monthly fee, expired on April 30, 2000. Since that time we
provide all of the energy, capacity and ancillary services related to the
Ravenswood facility to the New York Independent System Operator ("NYISO") energy
markets. Currently, our primary electric generation customers are LIPA and the
NYISO energy markets.



                                        8

<PAGE>



The Energy Services segment includes companies that provide energy-related
services to customers located within the New York City metropolitan area, as
well as, Rhode Island, Pennsylvania, Massachusetts and New Hampshire, through
the following four lines of business: (i) Home Energy Services, which provides
residential customers with service and maintenance of energy systems and
appliances, as well as the retail marketing of natural gas and electricity to
residential and small commercial customers; (ii) Business Solutions, which
provides professional engineering-consulting and design of energy systems for
commercial and industrial customers, including installation of plumbing,
heating, ventilation and air conditioning equipment; (iii) Commodity
Procurement, which provides management and procurement services for fuel supply
and management of energy sales, primarily for and from the Ravenswood facility;
and (iv) Fiber Optic Services, which provides various services to carriers of
voice and data transmission on Long Island and in New York City.

The Energy Investments segment consists of our gas exploration and production
investments, as well as certain other domestic and international energy-related
investments. Our gas exploration and production subsidiaries are engaged in gas
and oil exploration and production, and the development and acquisition of
domestic natural gas and oil properties. These investments consist of our 68%
equity interest in The Houston Exploration Company ("Houston Exploration"), an
independent natural gas and oil exploration company, as well as KeySpan
Exploration and Production, LLC, our wholly owned subsidiary engaged in a joint
venture with Houston Exploration. Subsidiaries in this segment also 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; a
50% interest in the Premier Transmission Pipeline and a 24.5% interest in
Phoenix Natural Gas, both in Northern Ireland; and investments in certain
midstream natural gas assets in Western Canada through KeySpan Canada. Further,
this segment includes our marine transportation subsidiary, Midland, that was
acquired as part of the Eastern acquisition. With the exception of KeySpan
Canada and Midland, which are consolidated in our financial statements, these
subsidiaries are accounted for under the equity method. Accordingly, equity
income from these investments is reflected in other income and (deductions) in
the Consolidated Statement of Income.

We were  ordered by the SEC to divest  Midland by November  8, 2003  because its
operations  have  been  deemed  not  functionally  related  to our core  utility
operations. At this time, we are uncertain as to the timing of such divestiture.

The accounting policies of the segments are the same as those used for the
preparation of the Consolidated Financial Statements. Our 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 a earnings before interest and taxes ("EBIT") basis. At September
30, 2001, the total assets of each reportable segment have not changed
materially from those levels reported at December 31, 2000. The reportable
segment information is as follows:














                                        9

<PAGE>


<TABLE>
<CAPTION>
                                                                                                    (In Thousands of Dollars)

                                                                             Energy Investments
                                                                             ------------------
                               Gas          Electric      *Energy    Gas Exploration      Other
                           Distribution     Services      Services    and Production   Investments   **Reconciliations  Consolidated
------------------------------------------------------------------------------------------------------------------------------------
<S>                           <C>           <C>         <C>               <C>           <C>            <C>              <C>
Three Months Ended
September 30, 2001
Unaffiliated Revenue           346,703        387,881     270,056           82,362        89,778              -           1,176,780
Intersegment Revenue                 -              -      23,318                -             -         (23,318)                 -
Earnings Before Interest
  and Taxes                   (31,009)         78,654    (51,744)           26,787         8,874           25,162            56,724


Three Months Ended
September 30, 2000
Unaffiliated Revenue           292,352        374,517     215,745           62,748         1,649              126           947,137
Intersegment Revenue                 -              -      15,903                -             -         (15,903)                 -
Earnings Before Interest
  and Taxes                   (20,395)         78,930      20,447           26,051         3,442         (18,203)            90,272
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

*Includes $23.3 million of revenues and an EBIT loss of $72.6 million associated
with the Roy Kay companies for the three months ended September 30, 2001 and
$19.6 million of revenues and EBIT of $0.7 million associated with the Roy Kay
companies for the three months ended September 30, 2000. (See note 9, "Roy Kay
Operations" for additional information.)

**Includes $22 million of EBIT associated with the 1989 class action settlement
for the three months ended September 30, 2001. (See note 10, "Class Action
Settlement" for additional information.
<TABLE>
<CAPTION>
                                                                                        (In Thousands of Dollars)

                                                                          Energy Investments
                                                                          ------------------

                                 Gas        Electric      *Energy    Gas Exploration     Other
                            Distribution    Services      Services    and Production  Investments   **Reconciliations   Consolidated
------------------------------------------------------------------------------------------------------------------------------------
<S>                            <C>         <C>          <C>              <C>           <C>              <C>             <C>
Nine Months Ended
September 30, 2001
Unaffiliated Revenue            2,721,032    1,089,156     821,920          318,093      276,332                 -        5,226,533
Intersegment Revenue                    -            -      44,706                -            -           (44,706)               -
Earnings Before Interest
  and Taxes                       318,596      191,996    (95,224)          136,260       37,392             29,010         618,030


Nine Months Ended
September 30, 2000
Unaffiliated Revenue            1,458,595    1,097,616     480,120         169,966         4,650                391       3,211,338
Intersegment Revenue                    -            -      48,061               -             -           (48,061)               -
Earnings Before Interest
  and Taxes                       221,701      210,970      51,671          60,691        14,475           (24,574)         534,934
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

*Includes $14.2 million of revenues and an EBIT loss of $133.7 million
associated with the Roy Kay companies for the nine months ended September 30,
2001 and $52.6 million of revenues and EBIT of $3.1 million associated with the
Roy Kay companies for the nine months ended September 30, 2000. (See note 9,
"Roy Kay Operations" for additional information.)

**Includes $22 million of EBIT associated with the 1989 class action settlement
for the nine months ended September 30, 2001. (See note 10, "Class Action
Settlement" for additional information.













                                       10

<PAGE>



3. COMPREHENSIVE INCOME

The table below indicates the components of comprehensive income.
<TABLE>
<CAPTION>

                                                                                                       (In Thousands of Dollars)

                                                        Three Months           Three Months          Nine Months         Nine Months
                                                            Ended                 Ended                 Ended                Ended
                                                        September 30,         September 30,         September 30,      September 30,
                                                            2001                   2000                  2001               2000
--------------------------------------------------- -------------------  ------------------  ------------------  -------------------
<S>                                                          <C>                   <C>                <C>                  <C>
Net Income (Loss)                                   $          (35,174)  $           14,630  $          183,075  $           240,240
--------------------------------------------------- -------------------  ------------------  ------------------  -------------------
Other comprehensive income (loss), net of tax
   Net gains on derivative instruments                         (13,584)                   -             (8,441)                    -
   Reclassification adjustment for other gains
         reclassified to net income                                   -                   -             (3,242)                    -
   Foreign currency translation adjustments                       (179)             (3,094)             (8,307)              (9,224)
   Unrealized losses on marketable securities                   (2,672)                   -             (5,032)                    -
   Unrealized gains (losses) on derivative
         financial  instruments                                  39,004                   -              54,936                    -
--------------------------------------------------- -------------------  ------------------  ------------------  -------------------
Other comprehensive income (loss)                                22,569             (3,094)              29,914              (9,224)
--------------------------------------------------- -------------------  ------------------  ------------------  -------------------
Comprehensive income                                $          (12,605)  $           11,536  $          212,989  $           231,016
--------------------------------------------------- -------------------  ------------------  ------------------  -------------------
Related tax (benefit) expense
    Net gains on derivative instruments             $           (7,315)                   -             (4,545)                    -
    Reclassification adjustment for other gains
          reclassified to net income                                  -                   -             (1,746)                    -
    Foreign currency translation adjustments                       (97)             (1,666)             (4,473)              (4,966)
    Unrealized losses on marketable securities                  (1,439)                   -             (2,709)                    -
    Unrealized gains (losses) on derivative
          financial  instruments                                 21,003                   -              29,581                    -
--------------------------------------------------- -------------------  ------------------  ------------------  -------------------
Total tax expense (benefit)                         $            12,152  $          (1,666)  $           16,108  $           (4,966)
--------------------------------------------------- -------------------  ------------------  ------------------  -------------------
</TABLE>



4.    ENVIRONMENTAL MATTERS

New York/Long Island

We have identified 26 manufactured gas plant ("MGP") sites which were
historically owned or operated by KEDNY or KEDLI (or such companies'
predecessors). These sites, some of which are no longer owned by us, have been
identified to the New York State Department of Environmental Conservation
("DEC") for inclusion on appropriate waste site inventories, as well as to the
New York State Public Service Commission (" NYPSC").

Thirteen of the sites referenced above are currently the subject of
Administrative Orders on Consent ("ACOs") with the DEC and one is subject to the
negotiation of such an agreement. Our remaining MGP sites may not become subject
to ACOs in the future, and accordingly no liability has been accrued for these
sites. It is possible, based on future investigation, that we may be required to
undertake investigation and potential remediation efforts at these, or other
currently unknown former MGP sites. However, we are currently unable to
determine whether or to what extent such additional costs may be incurred.





                                       11

<PAGE>



We presently estimate the remaining cost of our New York/Long Island MGP-related
environmental  cleanup activities will be $107.6 million;  which amount has been
accrued as our current best  estimate of our aggregate  environmental  liability
for known sites.  We believe that in the  aggregate,  the accrued  liability for
investigation  and remediation of the MGP sites  identified above are reasonable
estimates  of likely  costs  within a range of  reasonable,  foreseeable  costs.
However,  the total New York/Long Island  MGP-related costs may be substantially
higher or lower,  depending upon  remediation  experience,  selected end use for
each site, and actual environmental conditions encountered.

Rate plans for KEDNY and KEDLI approved by the NYPSC generally provide for the
recovery of MGP site investigation and remediation costs. Under prior rate
orders, KEDNY has offset certain amounts due to ratepayers against its estimated
environmental cleanup costs for MGP sites. At September 30, 2001, we have a
regulatory asset of $86.5 million. Expenditures incurred to date by us with
respect to our New York/Long Island MGP-related activities total approximately
$31 million.

In addition, we will be responsible for environmental obligations relating to
the Ravenswood facility operations other than liabilities arising from
pre-closing disposal of waste at off-site locations and any monetary fines
arising from Consolidated Edison's pre-closing conduct. Based on information
currently available, we have accrued a liability of $5.0 million.

New England

We are aware of certain non-utility sites associated with former operations of
Eastern, for which we may have or share environmental remediation responsibility
or ongoing maintenance, the most significant of which is a former coal tar
processing facility in Everett, Massachusetts (the "Everett Facility").

In addition, Boston Gas Company, Colonial Gas Company and Essex Gas Company may
have or share responsibility under applicable environmental laws, for the
remediation of 28 former MGP sites. A subsidiary of New England Electric System
("NEES") has assumed responsibility for remediating eleven of these sites,
subject to a limited contribution from Boston Gas Company.

We are aware of 40 other former MGP sites within the Massachusetts service
territories and 6 other former MGP sites within the New Hampshire service
territory. The NEES subsidiary has provided full indemnification to Boston Gas
Company with respect to eight of these sites. At this time, there is substantial
uncertainty as to whether Boston Gas Company, Colonial Gas Company or Essex Gas
Company have or share responsibility for remediating any of these other sites.
No notice of responsibility has been issued for any of these sites from any
governmental environmental authority.

At the time of the Eastern and ENI acquisition,  we made  preliminary  estimates
for  environmental  clean-up costs associated with the Everett Facility and with
the New England  MGP-related sites of approximately $20 million and $22 million,
respectively.  We are  currently in the process of  finalizing  our estimates of
these costs. It is anticipated that any variation from these original estimates,
established  when we acquired  these  companies  on  November  8, 2000,  will be
reflected  as an  adjustment  to  goodwill  for those  companies  not subject to
Statement of Financial  Accounting  Standards SFAS No. 71,  "Accounting  for the
Effects of Certain Types of Regulation". Revised estimates for companies subject
to SFAS No. 71 will be recorded as an adjustment to regulatory assets.  Further,
we anticipate  full recovery,  through gas rates,  for costs recorded under SFAS
No. 71.



                                       12

<PAGE>



Rate plans for our New England gas utilities approved by the Massachusetts
Department of Telecommunications and Energy ("DTE") and New Hampshire Public
Service Commission provide for the recovery of site investigation and
remediation costs and, accordingly, we have reflected a regulatory asset of
$29.9 million at September 30, 2001. Expenditures incurred for the period of
November 8, 2000 through September 30, 2001 totaled approximately $8 million.

See our Annual Report on Form 10-K for the year ended December 31, 2000 for
further information on environmental matters.

5.     LONG-TERM DEBT

In May 2001, we filed a $1 billion shelf registration statement with the SEC for
the issuance of debt, equity or various forms of preferred stock. In May 2001,
we issued $500 million 6.15% Notes due June 1, 2006 under this shelf
registration and at September 30, 2001, $500 million remains available for
issuance.

KEDLI filed a shelf registration statement with the SEC in December 1999 for the
issuance of up to $600 million of medium term notes. During the nine months
ended September 30, 2001, KEDLI issued $125 million of medium term notes at 6.9%
due January 15, 2008 and now has a total of $525 million of medium term notes
outstanding. The medium term notes are unconditionally guaranteed by us.

6.    DERIVATIVE FINANCIAL INSTRUMENTS

Non-firm Gas Sales and Electric Derivative Instruments: From time to time we
utilize derivative financial instruments, such as futures, options and swaps,
for the purpose of hedging exposure to commodity price risk and to fix the
selling price on a portion of our peak electric energy capacity. Our hedging
objectives and strategies have remained substantially unchanged from year-end.
See our Annual Report on Form 10-K for the year ended December 31, 2000, Note 10
to the Consolidated Financial Statements "Hedging, Derivative Financial
Instruments and Fair Values" for a detailed explanation of our derivative
instruments.

Consistent  with past practice,  during the quarter ended September 30, 2001, we
began to hedge a portion of our  anticipated  2001/2002  winter gas sales to our
large-volume market. We use gas swap contracts, with offsetting positions in oil
swap  contracts of  equivalent  energy  value,  with third parties to fix profit
margins  on  specific  portions  of gas sales to this  market.  Also  during the
quarter,  our gas and electric  marketing  subsidiary  has entered into gas swap
contracts  to  "lock-in"  profit  margin  on a number  of fixed  rate gas  sales
contracts for the remainder of 2001 and into 2002.

At September 30, 2001, Houston Exploration has hedged approximately 70% of its
anticipated 2002 production. Houston Exploration utilizes collars and gas swap
contracts to hedge future sales prices on a portion of its natural gas
production to achieve a more predictable cash flow, as well as to reduce
exposure to adverse price fluctuations of natural gas. We also entered into a
number of oil swap derivative contracts during the nine months ended September
30, 2001. We intend to utilize these contracts to fix the purchase price for a
portion of the oil used to fuel the Ravenswood facility.

In addition to the above mentioned derivative instruments, we also have a number
of electric tolling arrangements in place for 2002. We utilize tolling
arrangements to "lock-in" a profit margin on a portion of our peak electric
sales at the Ravenswood facility.



                                       13

<PAGE>



The following tables set forth selected financial data associated with our
derivative financial instruments that were outstanding at September 30, 2001.
<TABLE>
<CAPTION>


                             Year of      Volumes      Floor         Ceiling        Fixed Price      Current Price      Fair Value
      Type of Contract       Maturity      mmcf          $              $               $                 $               ($000)
-------------------------- ----------- ------------ -----------  --------------- ---------------- ------------------  --------------
             Gas
<S>                           <C>        <C>           <C>        <C>             <C>               <C>                   <C>
Collars                        2001       18,400        3.84       5.65 - 5.86          -            1.83 - 2.62          29,232
                               2002       58,400        3.63           5.17             -            2.74 - 3.27          48,217
Swaps -Short Natural Gas       2002       10,950         -              -              3.01          2.74 - 3.27           1,200
Swaps - Long Natural Gas       2001        5,200         -              -          3.02 - 3.87       2.24 - 3.04          (5,758)
                               2002        7,460         -              -          3.11 - 4.03       2.74 - 3.27          (7,034)
-------------------------- ----------- ------------ -----------  --------------- ---------------- ------------------  -------------
                                         100,410                                                                          65,857
-------------------------- ----------- ------------ -----------  --------------- ---------------- ------------------  -------------
</TABLE>


<TABLE>
<CAPTION>
                                  Year of             Volumes            Purchase Price          Current Price          Fair Value
       Type of Contract          Maturity             Barrels                  $                      $                   ($000)
---------------------------  -----------------  ------------------- ----------------------  --------------------  ------------------
             Oil
<S>                               <C>               <C>                <C>                    <C>                         <C>
Swaps - Short Heating Oil          2001                415,000          29.74 - 33.15          28.14 - 28.45                 1,174
                                   2002                742,000          29.42 - 33.15          27.93 - 28.68                 1,985
Swaps - Long Heating Oil           2001                317,299          25.95 - 30.02          21.15 - 23.14                (2,178)
                                   2002                163,755          24.25 - 29.18          22.75 - 23.74                  (573)
                                   2003                 50,738          25.20 - 26.72          23.01 - 23.12                  (140)
---------------------------  -----------------  ------------------- ----------------------  --------------------  ------------------
                                                     1,688,792                                                                 268
---------------------------  -----------------  ------------------- ----------------------  --------------------  ------------------
</TABLE>

<TABLE>
<CAPTION>
                              Year of                            Fixed Margin /Price      Estimated Margin        Fair Value
    Type of Contract          Maturity           MWh                      $                       $                 ($000)
-------------------------  -------------- ------------------  ------------------------- ---------------------  ----------------
       Electricity
<S>                            <C>              <C>                    <C>                     <C>                      <C>
Tolling Arrangements            2002             408,000                26.00                   12.67                     5,437
-------------------------  -------------- ------------------  ------------------------- ---------------------  ----------------
</TABLE>

During the nine months ended September 30, 2001, all of our derivative
instruments associated with sales to our large-volume gas customers that were
outstanding at December 31, 2000, expired and were settled. We recognized a gain
of $1.1 million on the settlement of these contracts during this period. Also
during this time, a number of gas and oil swap contracts to fix the purchase
price of a portion of the fuel used for the Ravenswood facility settled, and we
realized a gain of approximately $10.1 million on the settlement of these
contracts. We recorded these gains as a decrease to purchased gas and fuel
expense.

Further, during the past nine months, approximately 70% of the collar positions
outstanding at December 31, 2000 employed by Houston Exploration expired and
were settled. Houston Exploration recognized a loss of $11.8 million on the
settlement of these contracts and recorded this loss as an offset to revenues.



                                       14

<PAGE>



Finally, all of the electric tolling arrangements and electric swaps associated
with 2001 peak electric sales expired during the past nine months. We recognized
a gain of $13.6 million on the settlement of these contracts during this period.
We recorded this gain as a decrease to purchased fuel expense.

We are exposed to credit risk in the event of nonperformance by counter parties
to derivative contracts, as well as nonperformance by the counter parties of the
transactions hedged against. We believe that the credit risk related to the
futures, options and swap contracts is no greater than that associated with the
primary contracts which they hedge, as these contracts are with major investment
grade financial institutions, and that elimination of the price risk lowers
overall business risk.

Interest Rate Swaps: We also have an interest rate swap agreement in which
approximately $70 million of our Gas Facilities Revenue Bonds, 6.75% Series A
and B, have been effectively exchanged for floating rate debt. For the term of
the agreement, we will receive a fixed interest payment of 5.54%. The variable
interest rate is reset on a weekly basis. During the nine months ended September
30, 2001, the average variable interest rate that we were obligated to pay was
2.96% and through the utilization of this interest rate swap we reduced our
recorded interest expense by $1.8 million. The interest rate swap has a positive
fair value of $1.4 million at September 30, 2001, reflecting the current
interest rate we are required to pay to the counter party and the fair value of
certain embedded call option features.

Subsequent to September 30, 2001, we entered into several interest rate swap
agreements in which $1.3 billion of fixed rate debt (6.15% and 7.625% Medium
Term Notes and 8.2% Promissory Notes) have been effectively exchanged for
floating rate debt. For the term of the agreement, we will receive the fixed
coupon rate associated with these bonds and pay the counter parties a variable
interest rate that is reset on a quarterly basis. Additionally, we entered into
a swap agreement that effectively replaces $270 million of outstanding
commercial paper with fixed rate debt.

Firm Gas Sales Derivative Instruments: We utilize derivative financial
instruments to "lock-in" the purchase price for a portion of our future natural
gas purchases. Our strategy is to minimize fluctuations in firm gas sales prices
to our regulated firm gas sales customers in our New York service territory.
During the nine months ended September 30, 2001, we entered into a number of
derivative instruments such as, collars, purchased calls, transformer calls and
variable premium contracts. Since these derivative instruments are being
employed to support our gas sales prices to regulated firm gas sales customers,
the accounting for these derivative instruments is subject to SFAS No. 71.
Therefore, mark-to-market valuations are recorded as a regulatory asset or
regulatory liability on our 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 during the appropriate winter heating season.














                                       15

<PAGE>



The following table sets forth selected financial data associated with our
derivative financial instruments that were outstanding at September 30, 2001.


<TABLE>
<CAPTION>
                         Year of       Volumes          Floor          Ceiling         Fixed Price      Current Price     Fair Value
    Type of Contract     Maturity       mmcf              $               $                 $                 $             ($000)
---------------------  ------------  ------------  --------------  ---------------  ----------------  ----------------- ------------
           Gas
<S>                       <C>         <C>           <C>             <C>               <C>               <C>                 <C>
Collars                    2001         1,800        4.55 - 5.43     5.70 - 6.20            -            2.25 - 2.63         (4,178)
                           2002         2,700        5.43 - 4.55     6.20 - 5.70            -            2.81 - 2.84         (6,268)
Call Options               2001         5,700             -               -            4.00 -5.60        2.25 - 2.63         (3,588)
                           2002         6,000             -               -            4.00 -5.60        2.81 - 2.84         (5,382)
Variable Premiums          2001         2,400             -               -            3.90 - 6.00       2.25 - 2.63         (2,566)
                           2002         3,600             -               -            3.90 - 6.00       2.81 - 2.84         (3,848)
---------------------  ------------  ------------  --------------  ---------------  ----------------  ----------------- ------------
                                       22,200                                                                               (25,830)
---------------------  ------------  ------------  --------------  ---------------  ----------------  ----------------- ------------
</TABLE>

We adopted SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities" on January 1, 2001. The adoption of SFAS No 133 did not have a
significant effect on the results of operations for the nine months ended
September 30, 2001. All of our derivative financial instruments currently
qualify for hedge accounting and, except for the fixed-to-variable interest rate
swaps, are cash-flow hedges. Periodic changes in market value of derivatives
which meet the definition of a cash-flow hedge are recorded as comprehensive
income, subject to effectiveness, and then included in net income to match the
underlying hedged transactions. We do not expect SFAS No. 133 to have a material
effect on our net income for the year ended December 31, 2001. However, SFAS No.
133 may have a significant effect on comprehensive income because of
fluctuations in the market value of the derivatives we employ.

Weather  Derivative:  The utility  tariffs  associated  with our New England gas
distribution operations do not contain a weather normalization  adjustment. As a
result,  fluctuations  from normal  weather may have a  significant  positive or
negative  effect on the results of these  operations.  To mitigate the effect of
fluctuations  from normal weather on our financial  position and cash flows,  we
entered into a weather swap in October 2001.  This  derivative  instrument  will
hedge  approximately  15% of our weather  related risk for the  November  2001 -
March 2002  winter  season.  The  maximum  payout or recovery is limited to $2.0
million. Weather derivatives are outside the scope of SFAS No. 133.

7.   WORKFORCE REDUCTION PROGRAMS

As a result of the Eastern acquisition, we implemented early retirement and
severance programs in an effort to reduce our workforce. In 2000, we recorded a
$22.7 million liability associated with these programs. This severance program
is targeted to reduce the workforce by 500 employees and will continue through
2002. At September 30, 2001 we paid $8.1 million for these programs and had a
remaining liability of $14.6 million.








                                       16

<PAGE>



8.  RECENT ACCOUNTING PRONOUNCEMENTS

On July 20, 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations", and SFAS No. 142. "Goodwill and Other
Intangible Assets". The key concepts from the two interrelated Statements
include mandatory use of the purchase method when accounting for business
combinations, discontinuance of goodwill amortization, a revised framework for
testing goodwill impairment at a "reporting unit" level, and new criteria for
the identification and potential amortization of other intangible assets. Other
changes to existing accounting standards involve the amount of goodwill to be
used in determining the gain or loss on the disposal of assets, and a
requirement to test goodwill for impairment at least annually.

The Business Combination  Statement is generally effective for combinations that
are  initiated  after  June 30,  2001.  The  Statement  on  Goodwill  and  Other
Intangible  Assets is effective for fiscal years  beginning  after  December 15,
2001.  The  annual  impairment  test is to be  performed  within  six  months of
adopting  the  Statement  on  Goodwill  and  Other  Intangible  Assets  with any
resulting  impairment  reflected  as a change  in  accounting  principle  in the
financial statements.

We are currently amortizing approximately $52 million of goodwill on an annual
basis. As noted, effective January 1, 2002 goodwill will no longer be subject to
amortization, but rather, will be tested for impairment.

In July of 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". The Standard requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity will capitalize a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its then present value, and the capitalized
cost is depreciated over the useful life of the related asset. Upon settlement
of the liability, an entity either settles the obligation for its recorded
amount or incurs a gain or loss upon settlement. The standard is effective for
fiscal years beginning after June 15, 2002, with earlier application encouraged.
We are currently evaluating the impact, if any, that the Statement may have on
our results of operations and financial condition.

SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
is effective January 1, 2002, and addresses accounting and reporting for the
impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" and APB Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business." SFAS
No. 144 retains the fundamental provisions of SFAS No. 121 and expands the
reporting of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and that will
be eliminated from the ongoing operations of the entity in a disposal
transaction. We are currently evaluating the impact, if any, that the Statement
may have on our results of operations and financial condition.

9. ROY KAY OPERATIONS

During the second and third quarters of 2001 we undertook a complete evaluation
of the strategy, operating controls and organizational structure of the Roy Kay
companies - plumbing, mechanical, electrical and general contracting companies
acquired by us in January 2000. For the three months ended June 30, 2001, the
Roy Kay companies incurred an after-tax loss of $30.1 million reflecting: (i)
unanticipated costs to complete work on certain construction projects; (ii) the
impact of inaccuracies in the books of these companies relating to their overall
financial and operational performance; and (iii) quarterly operating losses.
During the quarter ended



                                       17

<PAGE>



September 30, 2001, we decided to discontinue the general  contracting  business
conducted by these  companies  based upon our view that the general  contracting
business  is  not a  core  competency  of  these  companies.  Certain  remaining
activities  engaged in by the Roy Kay companies will be integrated with those of
other KeySpan energy-related  businesses. For the third quarter of 2001, the Roy
Kay  companies  incurred an  after-tax  loss of $56.6  million  reflecting:  (i)
additional  project completion costs; (ii)  discontinuance  costs of the general
contracting activities of those companies,  including the write-off of goodwill,
and certain accounts and retainage  receivables;  and (iii) quarterly  operating
losses.  For the third  quarter of 2001 the Roy Kay  companies  recorded an EBIT
loss of $72.6  million and for the nine months  ended  September  30, 2001 these
companies recorded an EBIT loss of $133.7 million and net loss of $92.2 million.
For the third  quarter  of 2000,  the Roy Kay  companies  recorded  EBIT of $0.7
million and net income of $0.3 million;  for the nine months ended September 30,
2000  these  companies  recorded  EBIT of $3.1  million  and net  income of $1.4
million.  KeySpan  and the former Roy Kay  companies  are  currently  engaged in
litigation  relating to the  termination of the former owners,  as well as other
matters relating to the acquisition of the Roy Kay companies.

10. CLASS ACTION SETTLEMENT

During  the third  quarter  of 2001,  we  reversed a  previously  recorded  loss
provision regarding certain pending rate refund issues relating to the 1989 RICO
class action settlement. This adjustment resulted from a favorable United States
Court of Appeals  ruling  received on September  28, 2001,  overturning  a lower
court  decision,  and resulted in a positive  pre-tax  adjustment to earnings of
$33.5 million, or $20.1 million after-tax.

11.  GAS EXPLORATION AND PRODUCTION PROPERTY - DEPLETION

The full cost method of  accounting is used for  investments  in natural gas and
oil  properties.  Under  the  full  cost  method  of  accounting,  all  costs of
acquisition,  exploration  and  development  of natural gas and oil reserves are
capitalized into a "full cost pool" as incurred,  and properties in the pool are
depleted and charged to operations using the unit-of-production  method based on
the ratio of current  production  to total proved  natural gas and oil reserves.
Under full cost  accounting,  a quarterly  ceiling test  calculation is required
using commodity prices as of the end of the period. If capitalized costs (net of
accumulated  depreciation,  depletion and amortization)  less deferred taxes are
greater than the present value (using a 10% discount  rate) of estimated  future
net cash flows from proved natural gas and oil reserves and the lower of cost or
fair value of unproved  properties (the "ceiling  limitation"),  a write-down or
impairment of the full cost pool is required. A write-down of the carrying value
of the full  cost pool is a charge  to  earnings  that,  once  incurred,  is not
reversible at a later date.

The ceiling test calculation does not consider the impact of hedged production.
However, SFAS 133, "Accounting for Derivatives Instruments and Hedging
Activities", requires that if assets are impaired and derivatives have been used
to hedge the future cash inflows from those assets, the impairment charge to
earnings is to be offset by reclassifying into earnings, to the extent
available, any net gain that has been deferred in accumulated other
comprehensive income relating to the fair value of hedged production. As a
result, the impairment charge to earnings would be completely eliminated or
reduced to the extent a deferred gain on hedged production exists.

As of  September  30,  2001,  we  estimated,  using a  September  2001  New York
Mercantile  Exchange  ("NYMEX")  gas price of $2.295  per Dth,  that the  actual
capitalized  costs of our natural gas and oil properties  (the "full cost pool")
exceeded the estimated future net revenues or the "ceiling  limitation"  imposed
under full cost accounting  rules by approximately  $44.5 million,  after taxes.
The estimated $44.5 million charge to earnings would be entirely  eliminated due
to the  reclassification  of a  portion  of  hedging  gains  deferred  in  other
comprehensive income. However,



                                       18

<PAGE>



subsequent  to  September  30,  2001 and prior to the  filing of this  quarterly
report on Form 10-Q for the third quarter of 2001,  natural gas prices increased
such that we estimated, using a November 2001 NYMEX price of $3.20 per Dth, that
a "cushion"  existed  whereby the carrying  value of the full cost pool was less
than the ceiling limitation.  As a result of the increase in natural gas prices,
we were not  required to write down or impair our full cost pool as of September
30, 2001. Natural gas prices continue to be volatile and the risk that we may be
required to write-down  our full cost pool increases when natural gas prices are
depressed or if we have significant  downward  revisions in our estimated proved
reserves.

12. KEYSPAN GAS EAST CORPORATION SUMMARY FINANCIAL INFORMATION

KEDLI, a wholly owned subsidiary of KeySpan, established a program for the
issuance, from time to time, of up to $600 million aggregate principal amount of
medium term notes, which are unconditionally guaranteed by us. 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 15, 2008. The following condensed financial statements are required to
be disclosed by the SEC and are those of KEDLI and KeySpan as guarantor of the
medium term notes.

<TABLE>
<CAPTION>

Statement of Income
                                                                                                         (In Thousands of Dollars)
------------------------------------------------------------------------------------------------------------------------------------
                                 Three Months Ended September 30, 2001                 Three Months Ended September 30, 2000
-------------------------------------------------------------------------------- ---------------------------------------------------
                            KeySpan                                               KeySpan
                          Corporation     KEDLI     Eliminations   Consolidated Corporation     KEDLI   Eliminations    Consolidated
------------------------------------------------------------------------------------------------------------------------------------
<S>                       <C>            <C>         <C>          <C>           <C>          <C>           <C>             <C>
Revenues                 $  1,094,199 $    82,581 $         - $     1,176,780  $  851,908  $   95,229  $        -  $         947,137
                         ------------ ----------- ----------- ---------------  ----------  ----------  ----------  ----------------
Operating Expenses
Purchased gas                 117,511      31,382           -         148,893      96,898      43,517           -           140,415
Fuel and purchased power      164,555           -           -         164,555     161,086           -           -           161,086
Operations and
    maintenance               557,543       8,585           -         566,128     363,423      25,693           -           389,116
Intercompany expense          (18,998)     18,998           -               -      (3,092)      3,092           -                 -
Depreciation and
    amortization              131,572      10,433           -         142,005      62,599      10,374           -            72,973
Operating taxes                80,202      18,353           -          98,555      72,069      19,400           -            91,469
                         ------------ ----------- ----------- ---------------  ----------  ----------  ----------  ----------------
Total Operating Expenses    1,032,385      87,751           -       1,120,136     752,983     102,076           -           855,059
                         ------------ ----------- ----------- ---------------  ----------  ----------  ----------  ----------------
Operating Income               61,814      (5,170)          -          56,644      98,925      (6,847)          -            92,078
Other Income and
      (Deductions)              6,711       3,400     (10,031)             80       6,057          12      (7,875)           (1,806)
                         ------------ ----------- ----------- ---------------  ----------  ----------  ----------  ----------------
Income Before
    Interest Charges and
    Income Taxes               68,525      (1,770)    (10,031)         56,724     104,982      (6,835)     (7,875)           90,272
Interest Expense               77,159      14,671     (10,031)         81,799      37,155      13,501      (7,875)           42,781
Income Taxes                   16,553      (6,454)          -          10,099      40,202      (7,341)          -            32,861
                         ------------ ----------- ----------- ---------------  ----------  ----------  ----------  ----------------
Net Income (Loss)             (25,187)     (9,987)          -         (35,174)     27,625     (12,995)          -            14,630
Preferred Stock Dividends       1,473           -           -           1,473       1,476           -           -             1,476
                         ------------ ----------- ----------- ---------------  ----------  ----------  ----------  ----------------
Earnings (Loss) for
    Common  Stock        $    (26,660)$    (9,987)$         - $       (36,647) $   26,149  $  (12,995) $        -  $         13,154
                         ============ =========== =========== ===============  ==========  ==========  ==========  ================

</TABLE>














                                       19

<PAGE>




<TABLE>
<CAPTION>
Statement of Income
------------------------------------------------------------------------------------------------------------------------------------
                               Nine Months Ended September 30, 2001               Nine Months Ended September 30, 2000
------------------------------------------------------------------------------------------------------------------------------------
                            KeySpan                                            KeySpan
                          Corporation    KEDLI   Eliminations Consolidated   Corporation     KEDLI   Eliminations     Consolidated
------------------------------------ ----------- ----------- ------------- -------------  ---------- ----------  -----------------
<S>                       <C>         <C>         <C>         <C>           <C>           <C>         <C>             <C>
Revenues                 $ 4,575,318 $ 651,215   $       - $   5,226,533  $  2,698,868  $  512,470   $      -  $       3,211,338
                         ----------- ----------- ----------- ------------- -------------  ---------- ----------  -----------------
Operating Expenses
Purchased gas              1,330,410   364,181           -     1,694,591       474,734     242,464          -            717,198
Fuel and purchased power     454,212         -           -       454,212       334,077           -          -            334,077
Operations and
    maintenance            1,667,285    40,357           -     1,707,642     1,029,521      94,060          -          1,123,581
Intercompany expense         (64,198)   64,198           -             -        (8,159)      8,159          -                  -
Depreciation and
    amortization             382,815    24,502           -       407,317       185,814      30,550          -            216,364
Operating taxes              281,004    67,959           -       348,963       231,453      66,557          -            298,010
                         ----------- --------- ----------- -------------  ------------  ----------  ---------    ---------------
Total Operating Expenses   4,051,528   561,197           -     4,612,725     2,247,440     441,790          -          2,689,230
                         ----------- --------- ----------- -------------  ------------  ----------  ---------    ---------------
Operating Income             523,790    90,018           -       613,808       451,428      70,680          -            522,108
Other Income and
      (Deductions)            23,977     9,979     (29,734)        4,222        31,581       2,245    (21,000)            12,826
                         ----------- --------- ----------- -------------  ------------  ----------  ---------    ---------------
Income Before
    Interest Charges and
    Income Taxes             547,767    99,997     (29,734)      618,030       483,009      72,925    (21,000)           534,934
Interest Expense             257,776    45,108     (29,734)      273,150       106,608      38,228    (21,000)           123,836
Income Taxes                 144,015    17,790           -       161,805       159,421      11,437          -            170,858
                         ----------- --------- ----------- -------------  ------------  ----------  ---------    ---------------
Net Income                   145,976    37,099           -       183,075       216,980      23,260          -            240,240
Preferred Stock Dividends      4,425         -           -         4,425        16,453           -          -             16,453
                         ----------- --------- ----------- -------------  ------------  ----------  ---------    ---------------
Earnings for Common      $   141,551 $  37,099 $         - $     178,650  $    200,527  $   23,260  $       -  $         223,787
  Stock
                         =========== ========= =========== =============  ============  ==========  =========    ===============
</TABLE>




                                       20

<PAGE>


<TABLE>

Balance Sheet
<CAPTION>
                                                                                                           (In Thousands of dollars)


                                               September 30, 2001                                  December 31, 2000

                               KeySpan                                              KeySpan
                              Corporation      KEDLI    Eliminations  Consolidated Corporation     KEDLI  Eliminations  Consolidated
                              -----------      -----    ------------  ------------ -----------     -----  ------------  ------------
<S>                           <C>           <C>        <C>          <C>            <C>            <C>          <C>        <C>
ASSETS
Current Assets
  Cash and temporary cash
   investments              $     177,762 $        - $          -   $   177,762    $    94,508    $      -     $       -  $   94,508
  Accounts receivable, net      1,368,103    139,309    (448,372)     1,059,040      2,006,795     277,632     (558,222)   1,726,205
  Other current assets            460,818    172,451            -       633,269        460,773      93,842             -     554,615
                            ------------- ---------- ------------  ------------   ------------  ---------- ------------- -----------
                                2,006,683    311,760    (448,372)     1,870,071      2,562,076     371,474     (558,222)   2,375,328
                            ------------- ---------- ------------  ------------   ------------  ---------- ------------- -----------
Equity Investments                743,098          -    (532,862)       210,236        732,058           -     (532,862)     199,196
                            ------------- ---------- ------------  ------------   ------------  ---------- ------------- -----------
Property
  Gas                           3,965,274  1,579,854            -     5,545,128      3,845,803   1,500,996             -   5,346,799
  Other                         4,360,399          -            -     4,360,399      3,929,019           -             -   3,929,019
  Accumulated depreciation
   and depletion              (2,929,506)  (287,583)            -   (3,217,089)    (2,649,261)   (268,260)             - (2,917,521)
                            ------------- ---------- ------------  ------------   ------------  ---------- ------------- -----------
                                5,396,167  1,292,271            -     6,688,438      5,125,561   1,232,736             -   6,358,297
                            ------------- ---------- ------------  ------------   ------------  ---------- ------------- -----------
Deferred Charges                2,469,543    190,574            -     2,660,117      2,390,495     207,127             -   2,597,622
                            ------------- ---------- ------------  ------------   ------------  ---------- ------------- -----------

Total Assets                $  10,615,491 $1,794,605  $ (981,234)   $11,428,862     $10,810,190  $1,811,337 $(1,091,084) $11,530,443
                            ============= ========== ============  ============   ============  ========== ============= ===========


LIABILITIES AND
CAPITALIZATION

Current Liabilities
  Accounts payable and
   accrued  expenses         $   812,705  $   54,838 $         -  $    867,543   $   1,243,814  $  196,537  $          - $ 1,440,351
  Commercial paper               889,930           -           -       889,930       1,300,237           -             -   1,300,237
  Other current liabilities      221,306      79,552           -       300,858         224,162      20,407             -     244,569
                             -----------  ---------- -----------  ------------   -------------  ----------  ------------ -----------
                               1,923,941     134,390           -     2,058,331       2,768,213     216,944             -   2,985,157
                             -----------  ---------- -----------  ------------   -------------  ----------  ------------ -----------
Intercompany Accounts Payable          -     272,468   (272,468)             -               -     382,318     (382,318)           -
                             -----------  ---------- -----------  ------------   -------------  ----------  ------------ -----------

Deferred Credits and Other
 Liabilities
  Deferred income tax            592,233       1,346           -       593,579         477,815    (26,094)             -     451,721
  Other deferred credits and
   liabilities                   683,279      98,373           -       781,652         684,105     112,239             -     796,344
                             -----------  ---------- -----------  ------------   -------------  ----------  ------------ -----------
                               1,275,512      99,719           -     1,375,231       1,161,920      86,145             -   1,248,065
                             -----------  ---------- -----------  ------------   -------------  ----------  ------------ -----------
Capitalization
  Common shareholders' equity  2,867,182     587,124   (532,862)     2,921,444       2,798,652     550,026     (532,862)   2,815,816
  Preferred stock                 84,077           -           -        84,077          84,205           -             -      84,205
  Long-term debt               4,278,199     700,904   (175,904)     4,803,199       3,855,260     575,904     (175,904)   4,255,260
                             -----------  ---------- -----------  ------------   -------------  ----------  ------------ -----------
Total Capitalization           7,229,458   1,288,028   (708,766)     7,808,720       6,738,117   1,125,930     (708,766)   7,155,281
                             -----------  ---------- -----------  ------------   -------------  ----------  ------------ -----------

Minority Interest in
 Subsidiary Companies
                                 186,580           -           -       186,580         141,940           -             -     141,940
                             -----------  ---------- -----------  ------------   -------------  ----------  ------------ -----------

Total Liabilities and
 Capitalization              $10,615,491  $1,794,605 $ (981,234)  $ 11,428,862   $  10,810,190  $1,811,337  $(1,091,084) $11,530,443
                             ===========  ========== ===========  ============   =============  ==========  ============ ===========

</TABLE>


                                       21

<PAGE>


<TABLE>
<CAPTION>

       Statement of Cash Flows                                                       (In Thousands of Dollars)

                                             Nine Months Ended September 30, 2001           Nine Months Ended September 30, 2000
-----------------------------------------------------------------------------------------------------------------------------------

                                            KeySpan                                          KeySpan
                                          Corporation        KEDLI      Consolidated       Corporation       KEDLI      Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>             <C>             <C>              <C>            <C>            <C>
Operating Activities
Net Cash Provided by
  Operating Activities                  $     647,655  $      63,240  $       710,895 $       363,742  $   103,458  $       467,200
                                        -------------  -------------  --------------- ---------------  -----------  ---------------
Investing Activities
   Capital expenditures                     (599,467)       (78,390)        (677,857)       (327,438)     (76,173)        (403,611)
   Investment                                       -              -                -       (175,977)            -        (175,977)
   Proceeds from sale of  assets               18,458              -           18,458               -            -                -
   Other                                        (356)              -            (356)           7,599            -            7,599
                                        -------------  -------------  --------------- ---------------  -----------  ---------------
Net Cash (Used in) Provided by
      Investing Activities                  (581,365)       (78,390)        (659,755)       (495,816)     (76,173)        (571,989)
                                        -------------  -------------  --------------- ---------------  -----------  ---------------
Financing Activities
   Issuance of treasury stock                  82,025              -           82,025          20,951            -           20,951
   Redemption of preferred stock                    -              -                -       (363,000)            -        (363,000)
   Issuance of long-term  debt                596,474        125,000          721,474          63,627      400,000          463,627
   Payment of long-term debt                (172,956)              -        (172,956)        (37,000)            -         (37,000)
   Issuance (Payment) of commercial paper   (410,307)              -        (410,307)         173,790            -          173,790
   Long-term debt received (paid)                   -              -                -         397,000    (397,000)                -
   Preferred stock dividends paid             (4,425)              -          (4,425)        (18,600)            -         (18,600)
   Common  stock dividends paid             (184,052)              -        (184,052)       (179,049)            -        (179,049)
   Net intercompany accounts payable          109,850      (109,850)                -          30,285     (30,285)                -
   Other                                          355              -              355        (20,914)            -         (20,914)
                                        -------------  -------------  --------------- ---------------  -----------  ---------------
Net Cash Provided by
   (Used in) Financing Activities       $      16,964  $      15,150  $        32,114 $        67,090  $  (27,285)  $        39,805
                                        -------------  -------------  --------------- ---------------  -----------  ---------------
Net (Decrease) Increase
   in Cash and Cash Equivalents         $      83,254              -  $        83,254 $      (64,984)            -  $      (64,984)
                                        =============  =============  =============== ===============  ===========  ===============
Cash and Cash Equivalents
    at Beginning of Period              $      94,508              -  $        94,508 $       128,602            -  $       128,602
Net (Decrease) Increase
    in Cash and Cash Equivalents        $      83,254              -  $        83,254 $      (64,984)            -  $      (64,984)
                                        -------------  -------------  --------------- ---------------  -----------  ---------------
Cash and Cash Equivalents
    at End of Period                    $     177,762              -  $       177,762 $        63,618            -  $        63,618
                                        =============  =============  =============== ===============  ===========  ===============

</TABLE>





                                       22

<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 and a
discussion  of material  changes in revenues and  expenses  during the three and
nine months  ended  September  30,  2001,  compared to the three and nine months
ended September 30, 2000. As mentioned in Note 1 to the  Consolidated  Financial
Statements "Basis of  Presentation",  on November 8, 2000 we acquired all of the
common stock of Eastern Enterprises  ("Eastern") and EnergyNorth Inc. ("ENI") in
a transaction accounted for as a purchase. As a result, consolidated comparisons
in  earnings,  and revenues and  expenses  between  reporting  periods have been
significantly  affected by the addition of these  operations.  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.

Consolidated results of operations for the three months ended September 30, 2001
reflect a loss of $36.6 million, or $0.26 per share, compared to earnings of
$13.2 million, or $0.10 per share for the same period last year. Earnings for
the nine months ended September 30, 2001 were $178.7 million, or $1.30 per
share, compared to $223.8 million, or $1.67 per share for the corresponding
period last year.

Reflected in results of operations for the three and nine months ended September
30, 2001 are losses incurred by the Roy Kay companies of $56.6 million, or $0.41
per share,  and $92.2  million or $0.67 per share,  respectively.  These  losses
primarily reflect costs related to the discontinuance of the general contracting
activities of these  companies,  costs to complete work on certain  construction
projects, and operating losses incurred. Certain remaining activities engaged in
by the  Roy Kay  companies  will be  integrated  with  those  of  other  KeySpan
energy-related  businesses.  KeySpan  and  the  former  owners  of the  Roy  Kay
companies are currently engaged in litigation relating to the termination of the
former owners,  as well as other matters  relating to the acquisition of the Roy
Kay companies.  (See Note 9 to the Consolidated  Financial Statements,  "Roy Kay
Operations" and Part II Item 1. Legal Matters for a further  discussion of these
issues.)

Also included in the results of operations for the three and nine months ended
September 30, 2001, is the reversal of a previously recorded loss provision
regarding certain pending rate refund issues relating to the 1989 RICO class
action settlement. This adjustment was due to the favorable United States Court
of Appeals ruling received on September 28, 2001 and resulted in a positive
after-tax adjustment to earnings of $20.1 million, or $0.15 per share. (See Part
II Item 1. Legal Proceedings and Note 10 to the Consolidated Financial
Statements "Class Action Settlement", for a further discussion of this matter.)

Excluding the losses incurred by the Roy Kay companies and the adjustment for
the RICO class settlement, consolidated results of operations were break-even
and $250.8 million for the three and nine months ended September 30, 2001,
respectively.

In addition to the above issues, results of operations for the third quarter of
2001 were impacted by the expected seasonal losses incurred by our New England
gas distribution companies, as well as higher interest expense as a result of
higher levels of debt outstanding. For the nine months ended September 30, 2001,
results of operations also reflect the favorable impact of winter heating gas
sales from our New England gas distribution operations, cost reduction measures
realized in 2001, and significantly higher earnings realized by our gas
exploration and production activities.



                                       23

<PAGE>



Also affecting comparative earnings are certain corporate expenses that were
not allocated to the operating segments last year, as well as an additional
contribution made to the KeySpan Foundation last year.

Due to the acquisition of Eastern's and ENI's gas distribution companies, the
seasonal impact of gas distribution operations on our business has increased. As
a result, excluding special items, we expect to earn approximately 60%, and 30%
to 35% of our yearly earnings in the first and fourth quarters, respectively and
breakeven or marginally profitable earnings are anticipated to be achieved in
the second and third quarters. Our 2001earnings forecast remains at a range of
$2.50 to $2.60 per share, excluding the special items, and we currently expect
earnings to be toward the middle of this range.

Revenues

Consolidated revenues are derived primarily from our two core operating segments
- Gas  Distribution and Electric  Services.  For the nine months ended September
30,  2001,  these  two  core  segments   accounted  for   approximately  73%  of
consolidated revenues. For the third quarter of 2001, consolidated revenues were
$1.2  billion,  compared  to $947.1  million for the third  quarter of 2000,  an
increase of $229.6 million or 24%. For the nine months ended  September 30, 2001
consolidated  revenues were $5.2 billion,  compared to $3.2 billion for the nine
months  ended  September  30,  2000,  an  increase of $2.0  billion or 63%.  The
increase in the quarter and nine months ended September 30, 2001 was due to: (i)
increases  in Gas  Distribution  revenues  of $54.4  million  and $1.3  billion,
respectively;  (ii) increases of $54.3 million and $341.8 million, respectively,
from the Energy  Services  segment;  and (iii)  increases of $107.7  million and
$419.8 million, respectively, from the Energy Investments segment.

Revenues from the Gas  Distribution  segment for the nine months ended September
30, 2001 benefitted from the acquisition of Eastern's and ENI's gas distribution
operations,  which added $969.6 million to revenues during this period, and from
continued sales growth in our New York service territories, particularly on Long
Island.  Revenues from the Gas Distribution segment also include recovery of gas
costs, which were significantly higher during the first nine months of 2001 than
during the  corresponding  period last year.  The increase in revenues  from the
Energy Services  segment  resulted from the  acquisition of companies  providing
various energy-related  services throughout the New York City metropolitan area,
New England and  Pennsylvania,  and sales growth related to our gas and electric
marketing  subsidiary.  The  increase  in revenues  from our Energy  Investments
activities  reflects  higher  revenues  associated  with (i) gas exploration and
production  activities;  (ii) gas  processing  operations in Canada,  which were
accounted  for under the equity method of  accounting  last year;  and (iii) our
newly acquired marine transportation operations,  which were acquired as part of
the Eastern acquisition.

Operating Expenses

Consolidated operating expenses for the third quarter of 2001 were $1.1 billion,
compared to $855.1 million for the third quarter of 2000, an increase of $265.1
million. For the nine months ended September 30, 2001 consolidated operating
expenses were $4.6 billion, compared to $2.7 billion for the corresponding
period last year, an increase of $1.9 billion. The increase in comparative
operating expenses in both periods of 2001 reflects, for the most part, costs
associated with the addition of the Eastern and ENI companies, and for the nine
months ended September 30, 2001, higher gas costs. Also contributing to the
increase were operating expenses associated with the Roy Kay companies,
including costs to discontinue their general contracting activities, of $95.9
million and $148.0 million for the three and nine months ended September 30,
2001, respectively, compared to $18.8 million and $49.5 million for the same
periods last year.



                                       24

<PAGE>



The increase in gas costs of $977.4 million for the nine months ended  September
30, 2001,  compared to last year,  resulted from the addition of the New England
gas  distribution  operations which added $662.5 million to gas costs during the
nine months ended  September  30, 2001.  In addition,  significantly  higher gas
prices  and  sales  growth  associated  with our two New  York gas  distribution
subsidiaries and our gas and electric  marketing  subsidiary also contributed to
the  increased  gas costs.  Fluctuations  in utility gas costs have little or no
impact  on  operating  results  as  the  rate  structure  of  each  of  our  gas
distribution  utilities  includes a gas cost recovery clause,  pursuant to which
variations  between  actual  gas  costs  incurred  and gas cost  recoveries  are
deferred  and refunded to or collected  from  customers in a subsequent  period.
Fluctuations in gas costs,  however, can affect earnings of our gas and electric
marketing  subsidiary.  This  subsidiary  employs,  from time to time, a hedging
strategy designed to reduce the risk associated with future gas prices.

Operations and maintenance expense,  excluding the Roy Kay companies,  increased
by  $114.9  million,  or 31%,  in the  third  quarter  of 2001  compared  to the
corresponding  period last year and by $499.6 million or 46% for the nine months
ended September 30, 2001 compared to the same period last year.  These increases
are  primarily  the  result  of  the  acquisition  of: (i) the  Eastern  and ENI
subsidiaries  which  resulted  in an  increase in  consolidated  operations  and
maintenance  expense of $122.2  million  and $372.0  million for the quarter and
nine months ended September 30, 2001, respectively; and (ii) companies providing
various energy-related  services, which resulted in an increase in operation and
maintenance  expense for the three and nine months ended  September  30, 2001 of
$34.0 million and $161.4 million, respectively. These increases to operation and
maintenance  expense  were  offset,  in part,  by the  reversal of a $22 million
previously recorded reserve regarding certain pending rate refund issues under a
1989 RICO class  action  settlement,  as mentioned  previously,  as well as cost
reduction measures realized during the year.

Other Income and Deductions

Other income and deductions includes equity income from subsidiaries in the
Energy Investments segment. In addition, other income and deductions includes
interest income from temporary cash investments, certain non- operating
transactions and the effect on net income of the minority interest associated
primarily with Houston Exploration. During the nine months ended September
30, 2000 we recorded a $5 million contribution to the KeySpan Foundation and a
$6 million charge to write-off certain software projects.

Other Expense

Interest  expense for the three and nine  months  ended  September  30, 2001 was
$81.8  million and $273.2  million  respectively,  compared to $42.8 million and
$123.8  million for the  corresponding  periods last year.  The increase in both
periods in 2001 reflects higher levels of debt  outstanding,  primarily  related
to: (i) $1.65 billion of long-term debt and $308.6  million of commercial  paper
issued to finance the  acquisition  of Eastern and ENI; (ii) debt assumed in the
Eastern and ENI acquisition;  (iii) $625 million of Notes issued during the nine
months ended September 30, 2001; (iv) debt incurred by our Canadian  subsidiary;
as well as (v) higher  commercial  paper  borrowings to satisfy seasonal working
capital needs. As part of the RICO class settlement adjustment noted earlier, we
reversed $11.5 million of previously  recorded carrying charges during the third
quarter of 2001. During the nine months ended September 30, 2000, we recorded $9
million of these carrying charges.

Income tax expense generally reflects the level of pre-tax income in all
periods. Further, during the third quarter of 2000, the basis for computing
certain local income taxes was changed which partially offset the effect of
lower earnings on comparative income tax expense for the nine months ended
September 30, 2001.



                                       25

<PAGE>



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

Gas Distribution

KeySpan Energy Delivery New York ("KEDNY") provides gas distribution service to
customers in the New York City Boroughs of Brooklyn, Queens and Staten Island,
and 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. Our newly acquired gas distribution
subsidiaries, Boston Gas Company, Colonial Gas Company, Essex 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. Since the New England entities were acquired on
November 8, 2000, results of operations for periods prior to such date do not
reflect the operating results of these entities.

The table below highlights certain significant financial data and operating
statistics for the Gas Distribution segment for the periods indicated.
<TABLE>
<CAPTION>
                                                                                                          (In Thousands of Dollars)

                                                    Three Months           Three Months           Nine Months           Nine Months
                                                       Ended                  Ended                  Ended                 Ended
                                                    September 30,         September 30,          September 30,         September 30,
                                                        2001                   2000                  2001                   2000
---------------------------------------------  --------------------  ------------------  -------------------- ----------------------
<S>                                                        <C>                 <C>                 <C>                    <C>
Revenues                                       $            346,703  $          292,352  $          2,721,032 $            1,458,595
Cost of gas                                                 144,279             132,618             1,578,074                663,247
Revenue taxes                                                12,949              14,615                90,951                 78,695
---------------------------------------------  --------------------  ------------------  -------------------- ----------------------
Net Revenues                                                189,475             145,119             1,052,007                716,653
---------------------------------------------  --------------------  ------------------  -------------------- ----------------------
Operating expenses
  Operations and maintenance                                125,276             103,361               442,504                321,853
  Depreciation and amortization                              60,341              29,330               191,677                 86,698
  Operating taxes                                            37,581              33,456               111,359                 93,866
---------------------------------------------  --------------------  ------------------  -------------------- ----------------------
Total Operating Expenses                                    223,198             166,147               745,540                502,417
---------------------------------------------  --------------------  ------------------  -------------------- ----------------------
Operating Income (Loss)                                     (33,723)            (21,028)              306,467                214,236
Other Income and (Deductions)                                 2,714                 633                12,129                  7,465
---------------------------------------------  --------------------  ------------------  -------------------- ----------------------
Earnings (Loss) Before Interest and Taxes             $     (31,009) $          (20,395) $            318,596 $              221,701
---------------------------------------------  --------------------  ------------------  -------------------- ----------------------
Firm gas sales (MDTH)                                        23,095              17,547               189,317                125,318
Firm transportation (MDTH)                                   20,330               3,679                76,818                 19,306
Transportation - Electric
      Generation   (MDTH)                                    29,341              14,711                45,473                 45,342
Other sales (MDTH)                                           26,356              24,887                75,191                 67,380
Warmer than normal -  New York                               N/A                  N/A                  2.0%                   5.9%
Colder than normal - New England                             N/A                  N/A                  2.1%                   N/A
---------------------------------------------  --------------------  ------------------  -------------------- ----------------------
</TABLE>
                     An 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.

Net Revenues

Net gas revenues (revenues less the cost of gas and associated revenue taxes)
increased by $335.4 million or 47% for the nine months ended September 30, 2001
compared to the corresponding period last year. The gas distribution operations
of KEDNE added $307.1 million to net firm revenues during this period, while our
New York gas distribution operations added the remaining $28.3 million. The
increase in net firm revenues in New York was



                                       26

<PAGE>



accomplished through the addition of new gas customers and through our
continuing efforts to convert residential and commercial customers from
oil-to-gas for space heating purposes, primarily on Long Island. Further,
comparative net revenues in 2001 were favorably affected by the recovery of $14
million of previously deferred property taxes. These property taxes are
currently being amortized through operating taxes and therefore do not benefit
net income.

Net revenues during the nine months ended September 30, 2001 in our large volume
heating markets and other interruptible (non-firm) markets, which include large
apartment houses, government buildings and schools, were comparable to the sales
in this market during the corresponding period of 2000. The majority of
interruptible profits earned by KEDNE and KEDLI are returned to firm customers.

We believe significant growth  opportunities exist on Long Island and in our New
England  service  territories.  We estimate that on Long Island less than 40% of
the  residential  and  multi-family   markets,  and  approximately  55%  of  the
commercial  market  currently  use natural gas for space  heating.  Further,  we
estimate  that in our New  England  service  territories  less  than  50% of the
residential and multi-family  markets,  and  approximately 30% of the commercial
market currently use natural gas for space heating  purposes.  In all our market
segments  we will  continue  to seek growth  through  the  expansion  of our gas
distribution system, as well as through the conversion of residential homes from
oil-to-gas for space heating  purposes and the pursuit of  opportunities to grow
multi-family, industrial and commercial markets.

KEDNY and KEDLI each  operate  under a utility  tariff  that  contains a weather
normalization adjustment that largely offsets shortfalls or excesses of firm net
revenues during a heating season due to variations from normal weather.  The gas
distribution  operations  of our New England  based  subsidiaries  do not have a
weather  normalization  adjustment  and, as a result,  fluctuations  from normal
weather may have a  significant  positive  or negative  effect on the results of
these  operations.  To mitigate  the effect of  fluctuations  in normal  weather
patterns on our  financial  position and cash flows,  we will employ  derivative
hedging  strategies for the up-coming  winter.  (See Note 6 to the  Consolidated
Financial Statements "Derivative Financial Instruments for further information.)

Sales, Transportation and Other Quantities

Firm gas sales and  transportation  quantities  increased by 84% during the nine
months ended  September 30, 2001,  compared to the same period in 2000.  Our New
England  gas  distribution  operations  added  120,790  Mdth to firm  sales  and
transportation  quantities  during this period which represented the majority of
this increase.  Firm gas  transportation  quantities  increased  during the nine
months ended  September 30, 2001 compared to the comparable  period in 2000, due
to our continued  natural gas  deregulation  initiatives and the addition of the
New  England gas  distribution  operations.  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. Effective April 1, 2000, we entered into an
agreement with Coral Resources, L.P. ("Coral"), a subsidiary of Shell Oil
Company. Coral assists in the origination, structuring, valuation and execution
of energy-related transactions on behalf of KEDNY and KEDLI.



                                       27

<PAGE>



Operating Expenses

Operating expenses increased by $ 57.1 million, or 34%, in the third quarter of
2001, and by $243.1 million, or 48%, for the nine months ended September 30,
2001 compared to the same periods last year, due primarily to the addition of
the New England gas distribution operations, which added $87.6 million and
$267.4 million to operating expenses for the three and nine months ended
September 30, 2001, respectively. These amounts include operations and
maintenance costs of $51.1 million and $159.8 million, depreciation and
amortization charges of $28.4 million and $84.4 million, and general taxes of
$8.1 million and $23.2 million, for the three and nine months ended September
30, 2001, respectively. Operating expenses related to our New York based gas
distribution operations, have decreased for both the quarter and period ended
September 30, 2001, compared to the comparable periods last year, as a result of
cost reduction measures realized this year, the timing of certain operating
expenses, and a change in our allocation methodology for general and
administrative expenses pursuant to the SEC's requirements under the Public
Utility Holding Company Act of 1935.

Depreciation and amortization expense for this segment reflects the amortization
of goodwill associated with the acquisition of Eastern and ENI that was assigned
to  gas  distribution   operations,   continued  property  additions,   and  the
amortization  of  certain  costs  previously  deferred  and now being  recovered
through rates.
































                                       28

<PAGE>



Electric Services

The Electric Services segment primarily consists of subsidiaries that own and
operate oil and gas fired electric generating plants in Queens and Long Island
and, through long-term contracts, manage the electric transmission and
distribution ("T&D") system, the fuel and electric purchases, and the off-system
electric sales for the Long Island Power Authority ("LIPA").

Selected financial data for the Electric Services segment is set forth in the
table below for the periods indicated.
<TABLE>
<CAPTION>
                                                                                                           (In Thousands of Dollars)

                                                 Three Months          Three Months          Nine Months           Nine Months
                                                     Ended                 Ended                Ended                 Ended
                                                 September 30,         September 30,        September 30,         September 30,
                                                     2001                  2000                 2001                   2000
-------------------------------------------  ---------------------  -------------------  -------------------  ----------------------
<S>                                                     <C>                 <C>                 <C>                      <C>
 Revenues                                    $             387,881  $           374,517  $         1,089,156           $   1,097,616
 Purchased fuel                                             87,401               94,482              241,055                 235,131
-------------------------------------------  ---------------------  -------------------  -------------------  ----------------------
Net Revenues                                               300,480              280,035              848,101                 862,485
-------------------------------------------  ---------------------  -------------------  -------------------  ----------------------
Operating expenses
  Operations and maintenance                               171,607              152,570              503,143                 497,861
  Depreciation                                              13,197               12,253               38,480                  36,814
  Operating taxes                                           38,931               40,418              120,600                 117,603
-------------------------------------------  ---------------------  -------------------  -------------------  ----------------------
Total Operating Expenses                                   223,735              205,241              662,223                 652,278
-------------------------------------------  ---------------------  -------------------  -------------------  ----------------------
Operating Income                                            76,745               74,794              185,878                 210,207
Other Income and (Deductions)                                1,909                4,136                6,118                     763
-------------------------------------------  ---------------------  -------------------  -------------------  ----------------------
Earnings Before Interest and Taxes           $              78,654  $            78,930  $           191,996  $              210,970
-------------------------------------------  ---------------------  -------------------  -------------------  ----------------------
Electric sales (MWH)*                                    1,869,712            1,431,616            4,185,332               3,938,130
Capacity (MW)*                                               2,200                2,168                2,200                   2,168
Cooling degree days                                            829                  589                1,183                     897
-------------------------------------------  ---------------------  -------------------  -------------------  ----------------------
</TABLE>

                     *Reflects the operations of the Ravenswood facility only.

Net Revenues

Total  electric  net  revenues  increased  by 7% for the third  quarter of 2001,
compared to the same quarter in 2000, and decreased slightly for the nine months
ended  September  30, 2001  compared to the same period last year.  Net revenues
from the Ravenswood  facility were flat for the third quarter of 2001,  compared
to the same period in 2000,  reflecting  higher sales quantities to the New York
Independent  Systems  Operator  ("NYISO")  energy  markets as a result of warmer
weather,  offset  by  lower  realized  energy  prices.  Net  revenues  from  the
Ravenswood facility decreased by 4% for the nine months ended September 30, 2001
compared to the same period last year.  This decrease  reflects  lower  realized
energy prices and  significantly  lower ancillary  services  revenues offset, in
part, by effective hedging strategies.  Energy sales quantities  increased by 6%
on a comparative basis.  (Ancillary services include primarily spinning reserves
and  non-spinning  reserves  available  to replace  energy  that is unable to be
delivered  due to the  unexpected  loss of a major energy  source.) For both the
quarter and nine months ended September 30,2001, weather was considerably warmer
than the corresponding  periods last year. Capacity and energy sales quantities,
and realized  energy prices for both the quarter and nine months ended September
30, 2001 were impacted by an increase in available capacity in New York City.






                                       29

<PAGE>



The pricing for both energy sales and the sale of certain ancillary services to
the NYISO energy markets is still evolving and the Federal Energy Regulatory
Commission ("FERC") has recently adopted several price mitigation measures which
are subject to rehearing and possible judicial review. The final resolution of
these issues and their effect on our financial position, results of operations
and cash flows can not be determined at this time. (See Item 3. Quantitative and
Qualitative Disclosures About Market Risk for a further discussion of these
matters.)

Revenues from the LIPA service agreements increased by 11% for the third quarter
of 2001  compared  to the same  period  last  year.  For the nine  months  ended
September 30, 2001, revenues from the LIPA service agreements were comparable to
last year.  Included in revenues for both periods of 2001,  are billings to LIPA
for certain third party construction  costs that were significantly  higher than
such  billings last year.  These  revenues have no impact on net income since we
record a similar amount of costs in operating  expenses.  Further,  reflected in
the  nine  months  ended  September  30,  2000,  are  revenues  earned  from the
construction  of an  underground  transmission  line to  reinforce  the electric
system  capacity on the  southfork of Long Island.  These  revenues also have no
impact on net income.  Excluding both the third party construction  billings and
revenues associated with the construction of the underground  transmission line,
revenues  for  both the  quarter  and  nine  months  ended  September  30,  2001
associated  with the LIPA service  agreements  were  comparable to such revenues
earned during the same periods last year.

Operating Expenses

Operating expenses increased by $18.5 million, or 9% for the third quarter of
2001, compared to the corresponding period of 2000, primarily as a result of the
increase in third party construction costs previously noted. Operating expenses
for the nine months ended September 30, 2001 were comparable to the same period
last year.

Other Matters

On September 5, 2001 the New York State Board on Electric  Generation Siting and
the Environment  ("Siting Board") approved our application to build a new 250 MW
cogeneration  facility at the  Ravenswood  facility  site.  The new  facility is
expected to commence  operations in 2003. The capacity and energy  produced from
this plant is anticipated to be sold into the NYISO energy markets.  We are also
progressing  through the  pre-application  phase of the siting  process with our
proposal to build a similar 250 MW combined cycle electric  generating  facility
on Long Island.  This facility is anticipated to commence operations in 2004. We
anticipate that 50% of the plant's capacity will be under long-term  contract to
LIPA. Further,  we intend to build two 79 MW electric  generating  facilities on
Long  Island  that,  if built,  will serve  LIPA in the  summer of 2002.  We are
currently evaluating various options for the financing of these facilities.

Under a "Generation  Purchase Rights  Agreement" LIPA has the right to purchase,
at fair market value,  all existing Long Island based  generating  assets during
the twelve month period beginning on May 28, 2001. LIPA is currently  evaluating
the  feasibility  of purchasing  these assets and has solicited  proposals  from
interested parties to operate the generating  facilities should it purchase such
facilities.  At this time,  we can not predict  whether  LIPA will  exercise its
right to  purchase  these  facilities,  nor can we  estimate  the  effect on our
financial  condition,  results  of  operations  or cash  flows  if LIPA  were to
exercise such right.





                                       30

<PAGE>



Energy Services

The Energy Services segment primarily includes companies that provide services
through four lines of business to clients located within the New York City
metropolitan area, Rhode Island, Pennsylvania, Massachusetts and New Hampshire.
The lines of business are: Home Energy Services; Business Solutions; Energy
Commodity Procurement; and Fiber Optic Services.

The table below highlights selected financial information for the Energy
Services segment.
<TABLE>
<CAPTION>
                                                                                                           (In Thousands of Dollars)


                                                    Three Months         Three Months          Nine Months           Nine Months
                                                        Ended                Ended                Ended                 Ended
                                                    September 30,        September 30,        September 30,         September 30,
                                                        2001                 2000                  2001                 2000
-----------------------------------------------  -------------------  -------------------  --------------------  ------------------
<S>                                                        <C>                  <C>                   <C>                 <C>
Unaffiliated revenues                            $           270,056  $           215,745  $            821,920  $          480,120
Intersegment revenues                                         23,318               15,903                44,706              48,061
Less: cost of gas and fuel                                    81,768               74,401               326,943             152,897
-----------------------------------------------  -------------------  -------------------  --------------------  ------------------
Net revenues                                                 211,606              157,247               539,683             375,284
Other operating expenses                                     263,768              136,223               636,367             322,220
-----------------------------------------------  -------------------  -------------------  --------------------  ------------------
Operating Income (Loss)                                      (52,162)              21,024               (96,684)             53,064
Other Income and (Deductions)                                    418                 (577)                1,460              (1,393)
-----------------------------------------------  -------------------  -------------------  --------------------  ------------------
Earnings (Loss) Before Interest and Taxes        $           (51,744) $            20,447  $            (95,224) $           51,671
-----------------------------------------------  -------------------  -------------------  --------------------  ------------------
</TABLE>

The  decrease in EBIT for both the quarter and nine months ended  September  30,
2001 is primarily the result of the  operations  of the Roy Kay companies  which
incurred EBIT losses of $72.6 million and $133.7 million,  respectively. We have
decided to discontinue the general  contracting  activities of these  companies
and integrate their remaining activities with those of other KeySpan affiliates.
(See Note 9 to the  Consolidated  Financial  Statements "Roy Kay Operations" for
further  information.)  Excluding the operations of the Roy Kay companies,  EBIT
for this  segment was $20.8  million and $38.5  million for the quarter and nine
months ended September 30, 2001, respectively. Further, EBIT for the quarter and
nine months ended  September  30, 2001 includes  earnings  from  fuel-management
services provided to the Ravenswood  facility. A subsidiary within this segment,
KeySpan  Energy  Supply  Inc.,  provides  the  Ravenswood  facility  with energy
procurement  advisory  services  and acts as an  energy  broker  for the sale of
energy and ancillary  services.  For these services,  KeySpan Energy Supply Inc.
receives a management  fee and shares in the operating  profit  generated by the
Ravenswood facility on the sale of energy and ancillary services.  Inter-company
EBIT  associated  with  these  services  for the  three  and nine  months  ended
September  30, 2001 was $17.5 million and $37.5  million  respectively.  For the
quarter and nine months ended September 30, 2000, these fuel-management services
resulted in inter-company EBIT of $15.3 million and $45.4 million, respectively.
The remaining  companies in this segment reflected a slight decrease in EBIT for
both the quarter and nine months ended September 30, 2001,  compared to the same
periods last year.













                                                                             31

<PAGE>



Energy Investments

The Energy Investment segment consists of our gas exploration and production
operations as well as certain other domestic and international energy-related
investments. Our gas exploration and production subsidiaries are engaged in gas
and oil exploration and production, and the development and acquisition of
domestic natural gas and oil properties. These investments consist of our 68%
equity interest in Houston Exploration, as well as our wholly- owned subsidiary,
KeySpan Exploration and Production, LLC.

This segment also consists of KeySpan  Canada;  our 20% interest in the Iroquois
Gas  Transmission  System LP  ("Iroquois");  and our 50% interest in the Premier
Transmission  Pipeline and 24.5% interest in Phoenix Natural Gas. Further,  this
segment includes our marine transportation subsidiary, Midland Enterprises, that
was acquired as part of the Eastern  acquisition.  As previously  indicated,  we
have been ordered by the SEC to divest this subsidiary by November 8, 2003.

Selected financial data and operating statistics for our gas exploration and
production activities are set forth in the following table for the periods
indicated.


<TABLE>
                                                                                                          (In Thousands of Dollars)

<CAPTION>
                                                        Three Months            Three Months         Nine Months        Nine Months
                                                            Ended                  Ended                 Ended             Ended
                                                        September 30,          September 30,        September 30,      September 30,
                                                            2001                    2000                 2001               2000
-------------------------------------------------  --------------------- ------------------- --------------------  ----------------
<S>                                                           <C>                 <C>                  <C>                <C>
Revenues                                           $            82,362  $           62,748  $            318,093  $         169,966
Depletion and amortization expense                              35,697              22,008               102,749             65,257
Other operating expenses                                        12,471               9,755                44,915             32,195
-------------------------------------------------  -------------------  ------------------  --------------------  -----------------
Operating Income                                                34,194              30,985               170,429             72,514
Other Income and (Deductions)*                                  (7,407)             (4,934)              (34,169)           (11,823)
-------------------------------------------------  -------------------  ------------------  --------------------  -----------------
Earnings Before Interest and Taxes*                $            26,787  $           26,051  $            136,260  $          60,691
-------------------------------------------------  -------------------  ------------------  --------------------  -----------------
Natural gas and oil production (Mmcf)                           23,265              19,172                69,947             58,228
Natural gas (per Mcf) realized                     $              3.50  $             3.24  $               4.53  $            2.88
Natural gas (per Mcf) unhedged                     $              2.72  $             4.22  $               4.71  $            3.33
Proved reserves at year-end (BCFe)                                 593                 558                   593                558
-------------------------------------------------  -------------------  ------------------  --------------------  -----------------
</TABLE>

*Operating  income above  represents  100% of our gas exploration and production
subsidiaries'  results for the periods  indicated.  Earnings before interest and
taxes,  however,  is adjusted to reflect  minority  interest  and,  accordingly,
include  68% of Houston  Exploration's  results  since  April 1, 2000 and 64% of
Houston  Exploration's results for the prior period. Gas reserves and production
are stated in BCFe and Mmcfe, which includes equivalent oil reserves.


Earnings Before Interest and Taxes

The increase in EBIT of $0.7 million and $75.6 million for the three and nine
months ended September 30, 2001, respectively, compared to the corresponding
periods last year, reflects a significant increase in revenues, partially offset
by increases in operating expenses associated with higher production volumes.
Further, our investment in Houston Exploration is currently 68%, compared to 64%
for the first three months of 2000. Revenues for the third quarter of 2001
benefitted from the combined effect of a 21% increase in production volumes and
an 8% increase in average realized gas prices (average wellhead price received
for production including hedging gains and losses). For the nine months ended
September 30, 2001, revenues benefitted from the combined effect of a 20%
increase in production volumes and a 57% increase in average realized gas
prices. The average realized gas price in the third quarter of 2001 was 129% of
the average unhedged natural gas price



                                       32

<PAGE>



and for the nine months ended September 30, 2001, the average realized gas price
was 96% of the average unhedged natural gas price. Houston Exploration entered
into derivative financial positions in 2000 to hedge a substantial portion of
its anticipated 2001 and 2002 production. These derivative instruments are
designed to provide Houston Exploration with a more predicable cash flow, as
well as to reduce its exposure to adverse price fluctuations in natural gas.
(See Note 6 to the Consolidated Financial Statements, "Derivative Financial
Instruments" for further information.)

Due to the decrease in the price of natural gas since the  beginning of the year
however,  we estimated that, as of September 30, 2001,  using September  prices,
actual  capitalized  costs of our natural gas and oil properties (the "full cost
pool") exceeded the ceiling test limitation  imposed under full costs accounting
rules.  However,  subsequent to September 30, 2001, natural gas prices increased
such that we estimated,  using November prices,  that a "cushion" exists whereby
the carrying  value of the full cost pool was less than the ceiling  limitation.
Therefore,  a  write-down  of the  carrying  value of our full cost pool,  as of
September 30, 2001 was not required.  Natural gas prices continue to be volatile
and the risk that we may be required to write-down  our full cost pool increases
when  natural  gas  prices  are  depressed  or if we have  significant  downward
revisions in our estimated  proved  reserves.  (See Note 11 to the  Consolidated
Financial  Statements "Gas Exploration and Production  Property - Depletion" for
further information.)

At December 31, 2000, our gas exploration and production subsidiaries had 593
BCFe of net proved reserves of natural gas, of which approximately 77% were
classified as proved developed.

Selected financial data and operating statistics for our other energy-related
investments are set forth in the following table for the periods indicated.
<TABLE>
<CAPTION>
                                                                                                 (In Thousands of Dollars)

                                                  Three Months            Three Months             Nine Months          Nine Months
                                                      Ended                  Ended                    Ended                Ended
                                                  September 30,          September 30,            September 30,        September 30,
                                                      2001                    2000                    2001                  2000
-------------------------------------------  --------------------- --------------------  ----------------------  ------------------
<S>                                                       <C>                   <C>                   <C>                   <C>
Revenues                                     $              89,778 $              1,649  $              276,332  $            4,650
Operation and maintenance expense                           71,043                3,434                 207,137               8,288
Other operating expenses                                    14,201                  680                  44,867               1,880
-------------------------------------------  --------------------- --------------------  ----------------------  ------------------
Operating Income                                             4,534               (2,465)                 24,328              (5,518)
Other Income and (Deductions)                                4,340                5,907                  13,064              19,993
-------------------------------------------  --------------------- --------------------  ----------------------  ------------------
Earnings Before Interest and Taxes           $               8,874 $              3,442  $               37,392  $           14,475
-------------------------------------------  --------------------- --------------------  ----------------------  ------------------
</TABLE>

EBIT from these  operations  and  investments  increased  by $5.4 million in the
third quarter of 2001 and by $22.9  million for the nine months ended  September
30, 2001, compared to the corresponding  periods last year. The increase to EBIT
in both periods was due primarily to our marine transportation  operations which
contributed $6.4 million and $18.6 million to EBIT for the three and nine months
ended September 30, 2001, respectively, as well as from our additional ownership
interest in KeySpan Canada. The marine  transportation  operations were acquired
as part of the Eastern  acquisition on November 8, 2000 and, as result, have not
been reflected in our 2000 financial results.  In the fourth quarter of 2000, we
acquired the remaining 50% interest in KeySpan Canada, making us the sole owner.
Results of operations associated with KeySpan Canada are now fully consolidated,
whereas prior to this  transaction,  KeySpan  Canada's  results were reported as
equity income in other income and  deductions.  EBIT in the first nine months of
2001from our investments in Iroquois and Northern  Ireland were slightly greater
than the comparable period last year.




                                       33

<PAGE>



We do not  consider the  businesses  contained in this segment to be part of our
core  asset  group.  We have  stated in the past  that we may sell or  otherwise
dispose of all or a portion of our non-core  assets.  At this point in time,  we
can not predict when, or if any such sale or disposition  may take place, or the
effect that any such sale or  disposition  may have on our  financial  position,
results of operations or cash flows.

Liquidity

Cash  flow  from  operations  for the nine  months  ended  September  30,  2001,
continues  to  reflect  strong  growth  from  our gas  distribution  operations,
positive   contributions   from  our   electric   operations   and   significant
contributions from our gas exploration and production activities. As a result of
the seasonal nature of our gas  distribution  operations,  we incur  significant
cash  expenditures  during the summer and early fall to purchase  and inject gas
into our storage facilities. We recover these costs in subsequent periods as the
gas is removed from storage and delivered to our customers, primarily during the
winter, for space heating purposes.  Significant cash flows are generated during
the first two quarters of the subsequent  fiscal year as we receive payment from
customers for such heating  season use. Due to the  significant  increase in gas
costs  during the summer and early  fall of 2000,  gas cost  recoveries  for the
period ended  September 30, 2001 were greater than such  recoveries for the same
period in 2000. Further,  gas prices during the third quarter of 2001 were lower
than this time last year, resulting in lower cash expenditures  required to fill
our  storage  facilities.  Also,  as stated  earlier,  our gas  exploration  and
production activities benefitted from significantly higher gas prices during the
first two quarters of 2001  compared to 2000.  These  enhancements  to cash flow
were partially  offset by an increase in interest  payments due to higher levels
of outstanding debt.

At September 30, 2001, we had cash and temporary cash investments of $177.8
million. During September 2001, we replaced two existing revolving credit
facilities of $700 million each, with one new credit facility which will
continue to support our $1.4 billion commercial paper program. During the nine
months ended September 30, 2001, we repaid $410.3 million of commercial paper
and, at September 30, 2001, $889.9 million of commercial paper was outstanding
at a weighted average annualized interest rate of 3.40%. We had available
borrowing of $510.1 million at September 30, 2001.

Houston Exploration has an unsecured line of credit with a commercial bank that
provides for a maximum commitment of $250 million, subject to a borrowing base
limitation of $250 million. During the nine months ended September 30, 2001,
Houston Exploration borrowed $83 million under this facility and repaid $168
million; at September 30, 2001, $60 million remained outstanding at a weighted
average annualized interest rate of 6.81%. At September 30, 2001, Houston
Exploration had available borrowings of $190 million. Also, KeySpan Canada has
two revolving loan agreements with financial institutions in Canada. Borrowings
under these agreements totaled approximately $4 million for the nine months
ended September 30, 2001. At September 30, 2001, approximately $173 million was
outstanding at a weighted average annualized interest rate of 4.87%. KeySpan
Canada currently has available borrowings of approximately $32 million.

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. In addition, we utilize treasury stock to satisfy the requirements of our
employee common stock, dividend reinvestment and benefit plans.




                                       34

<PAGE>



Capital Expenditures and Financing

Construction Expenditures

The table below sets forth our construction expenditures by operating segment
for the periods indicated:
<TABLE>
<CAPTION>
                                                                      (In Thousands of Dollars)

                                             Nine Months Ended           Nine Months Ended
                                            September 30, 2001          September 30, 2000
---------------------------------------  -------------------------  ---------------------------
<S>                                                      <C>                          <C>
Gas Distribution                         $                 219,137  $                   160,561
Electric Services                                           67,691                       42,421
Energy Investments                                         381,918                      189,830
Energy Services                                              9,111                       10,799
---------------------------------------  -------------------------  ---------------------------
                                         $                 677,857  $                   403,611
---------------------------------------  -------------------------  ---------------------------
</TABLE>

Construction expenditures related to the Gas Distribution segment are primarily
for the renewal and replacement of mains and services and for the expansion of
the gas distribution system on Long Island and in New England. Construction
expenditures for the Electric Services segment reflect primarily costs to
maintain our electric generating facilities and costs to expand the Ravenswood
facility. Construction expenditures related to the Energy Investments segment
primarily reflect costs associated with our gas exploration and production
activities. These costs are related to the development of properties in Southern
Louisiana and in the Gulf of Mexico. Expenditures also include development costs
associated with our joint venture with Houston Exploration, as well as costs
related to Canadian affiliates.

The amount of future construction expenditures is reviewed on an ongoing basis
and can be affected by timing, scope and changes in investment opportunities.

Financing

We have an effective shelf  registration  statement on file with the SEC for the
issuance  of up to $1  billion  of debt or equity  securities.  In May 2001,  we
issued $500 million 6.15% Notes due June 1, 2006 leaving $500 million  available
for issuance.  The proceeds from the issuance of these notes was used to repay a
portion of  outstanding  commercial  paper.  KEDLI also has an  effective  shelf
registration  statement  on file  with  the SEC for the  issuance  of up to $600
million of debt securities.  In 2000, KEDLI issued $400 million 7.875% Notes due
February 1, 2010.  In January 2001,  KEDLI issued an additional  $125 million of
medium term notes at 6.9% due January 15, 2008.  The medium term notes issued by
KEDLI are fully and unconditionally guaranteed by us.

We will continue to evaluate our capital structure and financing plans for the
balance of the year. In order to take advantage of low cost debt opportunities
currently available, we are reviewing certain financing alternatives. At the
present time, however, we have not finalized our plans and we believe that our
current sources of funding, (i.e., internally generated funds and the
availability of commercial paper) is sufficient to meet our anticipated cash
needs for the remainder of this year. As part of our strategy to increase our
level of floating rate debt, in October 2001 we entered into several interest
rate swap agreements on $1.3 billion of existing fixed rate medium and long-term
debt and effectively replaced it with floating rate debt. These swap agreements
were completed with several counterparties to reduce credit risk. These swap
agreements are fair value hedges and qualify for hedge accounting. Additionally,
in October, we entered into a swap agreement




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<PAGE>



that effectively replaces $270 million of outstanding commercial paper with
fixed rate debt. This swap agreement is a cash flow hedge and also qualifies for
hedge accounting.

As a registered holding company, we are subject to certain financing
restrictions. See our Annual Report on Form 10-K for the year ended December 31,
2000 for additional information on these restrictions.

Regulation and Rate Matters

For a discussion on our current gas distribution rate agreements, and SEC
regulations relating to our operations, see our Annual Report on Form 10-K for
the year ended December 31, 2000.

Environmental Matters

KeySpan is subject to various federal, state and local laws and regulatory
programs related to the environment. Ongoing environmental compliance
activities, which have not been material, are charged to operation and
maintenance activities. We estimate that the remaining cost of our manufactured
gas plant ("MGP") related environmental cleanup activities, including costs
associated with the Ravenswood facility will be approximately $135 million and
we have recorded a related liability for such amount. We have also recorded an
additional $20 million liability representing the estimated environmental
cleanup costs related to a former coal tar processing facility. Further, as of
September 30, 2001, we have expended a total of $40 million. (See Note 4 to the
Consolidated Financial Statements, "Environmental Matters.")

Cautionary Statement Regarding Forward-Looking Statements

Certain statements contained in this Form 10-Q concerning expectations, beliefs,
plans, objectives, goals, strategies, future events or performance and
underlying assumptions and other statements which 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 relating to our future outlook, anticipated capital
expenditures, future cash flows and borrowings, pursuit of potential future
acquisition or divestiture 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: general economic
trends; fluctuations in weather and in gas and electric prices; available
sources and cost of fuel; federal and state regulatory initiatives that increase
competition, threaten cost and investment recovery, and impact rate structures;
our ability to successfully reduce our cost structure; the successful
integration of our subsidiaries, including the Eastern companies; the degree to
which we develop unregulated business ventures; our ability to identify and make
complementary acquisitions, as well as the successful integration of such
acquisitions; inflationary trends and interest rates; and other risks detailed
from time to time in other reports and other documents filed by us with the SEC.
For any of these statements, we claim the protection of the safe harbor for
forward-looking information contained in the Private Securities Litigation
Reform Act of 1995, as amended.









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<PAGE>



Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are subject to various risk exposures and uncertainties associated with our
operations. The most significant contingency involves the evolution of the gas
distribution industry toward a more competitive and deregulated environment.
Most important to KeySpan, is the evolution of regulatory policy as it pertains
to our historical gas merchant role. In addition, we are exposed to commodity
price risk, interest rate risk and, to a much less degree, foreign currency
translation risk. See Note 6 to the Consolidated Financial Statements
"Derivative Financial Instruments" for a discussion of our current outstanding
derivative positions.

Our exposure to the above mentioned market risks has remained substantially
unchanged from December 31, 2000. Recently, however, there has been certain
regulatory developments regarding the deregulation of the gas industry, as well
as certain developments relating to the NYISO energy markets. Below is a
discussion of these developments.

Regulatory Issues and the Competitive Environment

The Gas Industry - Long Island and New York

The NYPSC's December 26, 2000 Order Establishing Interim Rate Plan (the "Interim
Agreement")  provided,  among other things,  that marketers receive an incentive
payment  equal  to 8% of the  delivery  charges  they  incurred  to  serve  firm
customers to encourage  marketers to provide gas  commodity  sales to customers.
The Interim  Agreement  and  incentive  payment  expired on June 30,  2001.  The
Interim  Agreement also provided that the parties resume  negotiations on issues
that were not  resolved,  including  daily  balancing,  a migration  program for
cooking-only  customers,  a low income customer  aggregation program, and a back
out  credit to be  applied  to rates  charged  to  customers  who  migrate  to a
non-utility energy supplier.  We continue to discuss these remaining issues with
a number of interested parties.

The NYPSC also continues to conduct collaborative proceedings on ways to develop
the competitive energy market in New York. On July 13, 2001, the presiding
officers in the case issued their recommended decision ("RD"). The RD recommends
that the NYPSC adopt an end state vision that includes removing the utilities
from the provision of the energy (gas and electric) commodity. The RD also
recommends that utilities exit the commodity function only where there is a
workably competitive market. The RD states that the only market that is
currently workably competitive is the commodity market for non-residential
large- use gas customers. Parties filed briefs on and opposing exceptions to the
RD. An order in this proceeding is pending.

In a  seperate  phase of the case the  parties  have  discussed  preparation  of
embedded cost of service studies by all gas and electric  utilities in New York.
The presiding  administrative  law judge (the "ALJ") recommended to the NYPSC at
its  October  24, 2000 public  session  that the NYPSC  order the  utilities  to
prepare  abbreviated  embedded  cost of service  studies by the end of  February
2002.  The ALJ further  recommended  that the NYPSC order the  utilities to file
unbundled  rates  reflecting  the  results of those  studies by the end of March
2002. An order in this proceeding is also pending.  We are unable, at this time,
to predict the outcome of these  proceedings  or what effect,  if any, they will
have on our financial condition, results of operations or cash flows.





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<PAGE>



The Electric Industry - Long Island and New York City

As previously mentioned, our electric operations on Long Island are generally
governed by service agreements with LIPA. The agreements have terms of eight to
fifteen years and generally provide for recovery of virtually all costs of
production, operation and maintenance. Although additional generating capacity
and transmission interconnections for Long Island are in various stages of
development, at this time, we face minimal competitive pressures associated with
our electric operations on Long Island.

With our investment in the Ravenswood facility, we also have electric operations
in New York City. We currently sell the energy produced by the Ravenswood
facility, as well as its capacity and ancillary services, through bidding into
the NYISO energy markets. New York City local reliability rules currently
require that 80% of the electric capacity needs of New York City be provided by
"in-city" generators. A total of over 500 MW of additional generating capacity
was either placed in service or attained through improved generating facility
operations over the past several months. The majority of this additional
capacity was placed in service by the New York Power Authority; the Ravenswood
facility increased its installed capacity by 32MW. At this time, we anticipate
that we can continue to sell a significant portion of the capacity of the
Ravenswood facility. We expect that the current local reliability rules will
remain in effect at least through April 30, 2002. However, should new, more
efficient electric power plants be built in New York City, the requirement that
80% of in-city load be served by in-city generators be modified, and/or the
availability of the Ravenswood facility deteriorate, then capacity and energy
sales volumes could be adversely affected. We cannot predict, however, when or
if new power plants will be built or the nature of future New York City
requirements.

Regional Transmission Organizations

In July 2001, the Federal Energy Regulatory Commission ("FERC") issued an order,
the  Regional  Transmission  Organization  Order,  requiring  each of the  three
Northeast  Independent System Operator systems,  the NYISO, the Pennsylvania/New
Jersey/Maryland  Independent  System  Operator  and the New England  Independent
System  Operator  to work  towards  establishing  a  single  Northeast  Regional
Transmission  Organization  ("RTO").  In September 2001, the  Administrative Law
Judge issued a mediator's  report to FERC which included an alternative  plan to
design and implement the RTO. The details of how the three Northeast Independent
System  Operator  systems will combine and how the markets would develop are not
yet known. We do not know how these proposed  changes will impact the operations
of the NYISO or its market  rules.  Furthermore,  we are unable to  determine to
what  extent,  if any,  this  process  will  impact  the  Ravenswood  facility's
financial condition, results of operations or cash flows.

New York Independent System Operator Matters

We currently  realize  revenues from our investment in the  Ravenswood  facility
through the wholesale  sale of capacity,  energy and ancillary  services at FERC
approved market based rates.



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<PAGE>



The  Ravenswood  facility  currently  sells its  capacity,  energy and ancillary
services through bidding into the NYISO energy markets.  It also has the ability
to sell these services through bilateral and financial transactions.

As a condition of FERC's approval of the Ravenswood facility's market based rate
authority, it is subject to certain mitigation measures associated with the sale
of its products, the most significant of which are the capacity bid and price
cap, and day ahead energy bid cap.

Currently, the Ravenswood facility's energy bids are evaluated against the
energy price at Indian Point 2 ("Indian Point"). If the Ravenswood facility's
bid prices become five percent greater than the price at Indian Point, the
Ravenswood facility's bid price is not used. Instead, its bid is capped
(mitigated) at the amount that the Ravenswood facility has bid during
unmitigated hours in the prior 90 days. With respect to capacity, the Ravenswood
facility, as a New York City mitigated supplier, is currently subject to an
$112.95 per kW-year unforced capacity ("UCAP") bid and price cap.

Due to recent market activity and volatility in the New York energy markets, as
well as the projected increased demand for energy during peak periods, the
NYISO, NYPSC, Consolidated Edison and FERC have proposed, evaluated and
implemented various market mitigation measures. Many of these mitigation
measures will remain in effect in the near future and additional mitigation
measures are expected to be proposed and possibly implemented. These measures
are discussed below.

General Mitigation

On October  25,  2001,  FERC  granted  the NYISO's  requested  extension  of its
Temporary Extraordinary  Procedures ("TEP") authority until the Northeast RTO is
operational  and operating  pursuant to market rules as established in the final
rule to be issued in FERC's RTO market design and market  structure  rulemaking.
The  TEP  are  designed  to  address   unanticipated  market  design  flaws  and
transitional abnormalities which have occurred during the start-up period of the
NYISO.  Under the TEP,  the NYISO may take  Extraordinary  Corrective  Action in
order to recalculate  energy prices,  when possible with  reasonable  certainty,
that are incorrect due to market design flaws.  However,  the order requires the
NYISO to narrow the scope of this TEP authority.

In addition, on March 1, 2001, Consolidated Edison requested that FERC revise
the localized market power mitigation measures for generating units located in
the New York City service area. Specifically, Consolidated Edison requested that
existing bid mitigation measures be applied to the real-time market, as well as
the day ahead market. Moreover, Consolidated Edison requested that the
mitigation measures apply to all existing and planned New York City generation
and not only the divested Consolidated Edison generation. On July 20, 2001, FERC
approved Consolidated Edison's request through October 31, 2001. In its order
approving Consolidated Edison's request, FERC instructed the NYISO to file a
proposed schedule and implementation plan for these mitigation measures and on
July 30, 2001, the NYISO informed FERC that the earliest date it would be able
to expand its existing day-ahead in-city mitigation measures to the rest of the
in-city generators would be August 28, 2001. In addition, the NYISO informed
FERC that it was unable to implement some of



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<PAGE>



the requested  mitigation measures in the real- time market. On October 5, 2001,
Consolidated  Edison  requested FERC extend the revised  localized  market power
mitigation measures through October 31, 2002. This extension has not been agreed
to nor  approved  by  FERC  and  it is  opposed  by  several  parties  including
Ravenswood.  It is not  known  to  what  extent  this  may  impact  Ravenswood's
financial condition, results of operation or cash flows.

The NYISO has also  developed an  Automatic  Mitigation  Procedure  (AMP) which,
according to the NYISO, is intended to implement existing  day-ahead  mitigation
measures  automatically  rather  than on a one day lag. On June 28,  2001,  FERC
approved the NYISO's  proposed AMP but has required the NYISO to make additional
filings in order to justify  its  continued  use beyond  October  31,  2001.  On
September 28, 2001, the NYISO  requested FERC extend the expiration  date of the
AMP to October 31, 2002.  This  extension has not been agreed to nor approved by
FERC and it is opposed by several parties including Ravenswood. It is not known
to what  extent this may impact  Ravenswood's  financial  condition,  results of
operation or cash flows.

Energy Mitigation

On October 25, 2001, FERC granted the NYISO's requested extension of the $1,000
per MWh energy price bid cap until the Northeast RTO is operational and
operating pursuant to market rules as established in the final rule to be issued
in FERC's RTO market design and market structure rulemaking.

Capacity Mitigation

The NYISO and market  participants have been discussing the  implementation of a
revised capacity market.  Currently, a generator may sell 100% of its dependable
maximum net  capacity,  otherwise  known as  installed  capacity  ("ICAP").  The
proposed  revision  would reduce this amount by taking into account a generating
unit's forced outage rate,  and capacity  would be measured in terms of unforced
capacity  ("UCAP").  In  addition,  it has been  proposed  that  the  obligation
procurement  period be revised  from six months to one month.  On  September  4,
2001,  FERC accepted  NYISO's  tariff  revisions to implement a capacity  market
based on UCAP and reduce the length of the  obligation  procurement  period from
six months to one month.  In addition,  FERC directed the NYISO to translate the
existing  $105 per kW-year  bid and price cap based on the most recent  12-month
availability  data. On October 4, 2001, the NYISO made its compliance  filing in
response to the  September 4th order and  indicated  that based on  availability
data for the most recent 12-month period, the bid and price cap for In-City UCAP
would be $112.95 per kW-year.  Ravenswood  and other In-City  generation  owners
requested  rehearing of FERC's September 4th order claiming that the translation
of the bid and price cap based  solely on a brief  12-month  time period was not
accurate.  However,  the NYISO is conducting capacity auctions for the 2001/2002
winter capability periods based on the $112.95 per kW-year bid and price cap. It
is not known to what extent this may impact the Ravenswood  facility's financial
condition, results of operations or cash flows.






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<PAGE>



Other Matters

In October, American National Power, Inc. ("ANP") filed a complaint with the
FERC requesting that the June 26, 1997 Power Supply Agreement (the "PSA")
between KeySpan Generation LLC and LIPA be reformed to amend Section 4.3 of the
PSA. Section 4.3 provides that LIPA is responsible for all transmission
reinforcements required by any new generation, sufficient to maintain the
deliverability of the electricity produced by the generation facilities owned by
KeySpan Generation LLC. ANP claims that Section 4.3 will allow LIPA to require
ANP to pay a disproportionate share of the interconnection costs associated with
ANP's proposed Brookhaven facility. The decision for the defendant's response to
the complaint at FERC is October 31 ,2001.

Penalties

On July 2, 2001, the NYISO submitted to FERC for approval a proposal to impose
penalties on generators that exercise market power. On August 31, 2001, FERC
accepted in part and rejected in part the NYISO's proposal. Specifically, FERC
accepted the NYISO's proposal to impose financial penalties on generators that
submit false information and fail to follow NYISO's dispatch instructions, as
well as on load-serving entities (LSEs) that repeatedly cause operational
problems by underscheduling in the day-ahead market. However, FERC denied the
NYISO's proposal to levy new financial penalties on generators for repeated
exercises of market power. Although we do not anticipate being subject to any
such penalties, it is not known to what extent these revisions may impact the
Ravenswood facility's financial condition, results of operations or cash flows.


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

Item 1. Legal Proceedings

KeySpan, through its subsidiary, Roy Kay, Inc., has terminated the employment of
the former owners of the Roy Kay companies and commenced a proceeding in the
Chancery Division of the Superior Court, Monmouth County, New Jersey (Docket No.
Mon. C. 95-01) as a result of the alleged fraudulent acts of the former owners,
both before and after the acquisition of the Roy Kay companies in January 2000.
KeySpan believes the former owners misstated the financial statements of the Roy
Kay companies and certain underlying work-in-progress schedules. KeySpan is
seeking damages in excess of $76 million as well as a judicial determination
that KeySpan is not required to pay the former owners any further amounts under
the terms of the stock purchase agreement entered into in connection with the
acquisition of the Roy Kay companies. The causes of action include breach of
contract and fiduciary duty, fraud, and violation of the New Jersey Securities
Laws. The former owners have filed counterclaims against KeySpan and certain of
its subsidiaries, as well as certain of their respective officers, to recover
damages they claim to have incurred as a result of, among other things, their
alleged improper termination and the alleged fraud on the part of KeySpan in
failing to disclose the limitations imposed upon the Roy Kay companies, with
respect to the performance of certain services, under the Public Utility Holding
Company Act of 1935. The fraud claims asserted by the former owners include
claims under the New Jersey Uniform Securities Law and RICO statutes. We are
unable to predict the outcome of these proceedings or what effect, if any, such
outcome will have on our financial condition, results of operations or cash
flows.






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<PAGE>

KeySpan has been  cooperating  in  preliminary  inquiries  regarding  trading in
KeySpan  Corporation  stock by individual  officers of KeySpan prior to the July
17, 2001  announcement  that  KeySpan was taking a special  charge in its energy
services  business and  otherwise  reducing its 2001  earnings  forecast.  These
inquiries are being conducted by the U.S.  Attorney's Office,  Southern District
of New York,  and the U.S.  Securities  and  Exchange  Commission.  In addition,
KeySpan and certain of its officers and directors are  defendants in a number of
class action  lawsuits filed in the United States District Court for the Eastern
District of New York after the July 17th  announcement.  These lawsuits  allege,
among other  things,  violations of Sections  10(b) and 20(a) of the  Securities
Exchange  Act  of  1934,  as  amended   ("Exchange  Act"),  in  connection  with
disclosures relating to or following the acquisition of the Roy Kay Companies by
KeySpan  Services,  Inc.,  a KeySpan  subsidiary.  Finally,  in October  2001, a
shareholder's  derivative action was commenced in the same court against certain
officers and directors of KeySpan,  alleging,  among other  things,  breaches of
fiduciary  duty,  violations  of the  New  York  Business  Corporation  Law  and
violations of Section 20(a) of the Exchange Act. Each of the  proceedings  seeks
monetary  damages  in an  unspecified  amount.  We are unable to  determine  the
outcome of these  proceedings  and what effect,  if any,  such outcome will have
on our financial condition, results of operations or cash flows.

On September 28, 2001, the United States Court of Appeals for the Second Circuit
(the "Second Circuit") issued an Order reversing a decision of the United States
District  Court for the Eastern  District of New York which would have  required
KeySpan to pay approximately $22 million,  plus interest for violating the terms
of a 1989 class action settlement of a RICO class action (County of Suffolk,  et
al., v. Long  Island  Lighting  Company,  et al.).  Under the class  settlement,
KeySpan's  predecessor,  Long Island Lighting Company,  was required to pay $390
million in the form of rate  reductions to a class of electric  ratepayers.  For
additional   information   concerning   this  settlement  see  Note  10  to  the
Consolidated  Financial  Statements  "Class  Action  Settlement"  and our Annual
Report on Form 10-K for the year ended  December  31,  2000 Note 9  "Contractual
Obligations and Contingencies".

The current appeal involved a district court decision which held that the rate
reductions to electric ratepayers should have been increased to reflect the
amount of gross receipt tax savings attributable to the reduction in ratepayers'
electric bills pursuant to the class settlement. The Second Circuit, however,
disagreed and concluded that no additional amounts were owed to such ratepayers
as the district court incorrectly interpreted the class settlement to have
required KeySpan to pass along rate reductions to electric ratepayers exclusive
of any corresponding gross receipt tax savings. Accordingly, we have reversed a
prior loss provision and recorded an after-tax benefit of $20.1 million.




Item 6.  Exhibits and Reports on Form 8-K

(a)        Exhibits

None.

(b)        Reports on Form 8-K

In our report on Form 8-K dated July 26, 2001, KeySpan reported the issuance of
a press release concerning, among other matters, its earnings for the quarter
ended June 30, 2001.

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




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<PAGE>


                      KEYSPAN CORPORATION AND SUBSIDIARIES
                                    SIGNATURE

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)







Date: November 14, 2001                         /s/ Gerald Luterman
                                             -------------------------------
                                                    Gerald Luterman
                                               Senior Vice President and
                                               Chief Financial Officer


Date: November 14, 2001                         /s/ Ronald S. Jendras
                                             -------------------------------
                                                  Ronald S. Jendras
                                                Vice President, Controller
                                                and Chief Accounting Officer



                                       43