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

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

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

                  For the quarterly period ended March 31, 2006

[ ]      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)
                           (516) 755-6650 (Hicksville)
              (Registrant's telephone number, including area code)

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

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

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

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

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 April 24, 2006
  ---------------------                           -----------------------------
     $.01 par value                                       174,960,377

<PAGE>


                      KEYSPAN CORPORATION AND SUBSIDIARIES

                                      INDEX
                                      -----

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

Item 1. Financial Statements

         Consolidated Balance Sheet -
         March 31, 2006 and December 31, 2005                               3

         Consolidated Statement of Income -
         Three Months Ended March 31, 2006 and 2005                         5

         Consolidated Statement of Cash Flows -
         Three Months Ended March 31, 2006 and 2005                         6

         Notes to Consolidated Financial Statements                         7

Item 2. Management's Discussion and Analysis of Financial
        Condition and Results of Operations                                39

Item 3. Quantitative and Qualitative Disclosures About Market Risk         62

Item 4. Controls and Procedures                                            64

                           Part II.   OTHER INFORMATION


Item 1. Legal Proceedings                                                  65

Item 1A. Risk Factors                                                      65

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds         66

Item 3. Defaults Upon Senior Securities                                    66

Item 4. Submission of Matters to a Vote of Security Holders                66

Item 5. Other Information                                                  67

Item 6. Exhibits                                                           67

Signatures                                                                 68



                                       2
<PAGE>

<TABLE>

                           CONSOLIDATED BALANCE SHEET
                                   (Unaudited)

<CAPTION>
-----------------------------------------------------------------------------------------------


(In Millions of Dollars)                            March 31, 2006       December 31, 2005
-----------------------------------------------------------------------------------------------

ASSETS
<S>                                                        <C>                  <C>
Current Assets
    Cash and temporary cash investments                   $    313.1           $    124.5
    Restricted cash                                              5.2                 13.2
    Accounts receivable                                      1,200.9              1,035.6
    Unbilled revenue                                           479.7                685.6
    Allowance for uncollectible accounts                       (83.1)               (62.8)
    Gas in storage, at average cost                            491.4                766.9
    Material and supplies, at average cost                     132.4                140.5
    Derivative contracts                                        22.3                142.8
    Other                                                      116.9                173.8
                                               ---------------------- --------------------
                                                             2,678.8              3,020.1
                                               ---------------------- --------------------

Investments and  Other                                         252.1                242.4

Property
    Gas                                                      7,352.5              7,275.9
    Electric                                                 2,518.3              2,492.3
    Other                                                      415.9                416.3
    Accumulated depreciation                                (2,979.7)            (2,922.6)
    Gas exploration and production, at cost                    184.7                184.2
    Accumulated depletion                                     (110.2)              (109.2)
                                               ---------------------- --------------------
                                                             7,381.5              7,336.9
                                               ---------------------- --------------------

Deferred Charges
    Regulatory assets:
         Miscellaneous assets                                  678.3                688.3
         Derivative contracts                                   27.1                 30.9
    Goodwill and other intangible assets                     1,666.3              1,666.3
    Derivative contracts                                        34.0                 75.2
    Other                                                      774.5                752.5
                                               ---------------------- --------------------
                                                             3,180.2              3,213.2
                                               ---------------------- --------------------

Total Assets                                              $ 13,492.6           $ 13,812.6
                                               ====================== ====================
------------------------------------------------------------------------------------------
</TABLE>

        See accompanying Notes to the Consolidated Financial Statements.



                                       3
<PAGE>

<TABLE>
                           CONSOLIDATED BALANCE SHEET
                                   (Unaudited)

<CAPTION>
--------------------------------------------------------------------------------------------------


(In Millions of Dollars)                                  March 31, 2006       December 31, 2005
--------------------------------------------------------------------------------------------------
<S>                                                               <C>                  <C>
LIABILITIES AND CAPITALIZATION
Current Liabilities
    Accounts payable and other liabilities                       $    767.6            $  1,087.0
    Commercial paper                                                  496.8                 657.6
    Current redemption of long-term debt                               13.5                  13.0
    Taxes accrued                                                     329.9                 176.3
    Dividends payable                                                  81.3                  81.1
    Customer deposits                                                  37.9                  39.1
    Interest accrued                                                   73.4                  53.8
    Derivative contracts                                               31.1                  47.3
                                                      ---------------------- ---------------------
                                                                    1,831.5               2,155.2
                                                      ---------------------- ---------------------

Deferred Credits and Other Liabilities
    Regulatory liabilities:
          Miscellaneous liabilities                                    15.9                  69.9
          Removal cost recovered                                      529.7                 516.4
          Derivative contracts                                         31.0                 175.4
    Asset retirement obligations                                       48.1                  47.4
    Deferred income tax                                             1,144.0               1,157.9
    Postretirement benefits and other reserves                      1,192.4               1,118.4
    Derivative contracts                                               23.1                  44.3
    Other                                                             116.1                 127.5
                                                      ---------------------- ---------------------
                                                                    3,100.3               3,257.2
                                                      ---------------------- ---------------------

Commitments and Contingencies (See Note 6)                                -                     -

Capitalization
    Common stock - 184,864 shares issued, 174,940
           shares outstanding, stated at                            3,983.3               3,975.9
    Retained earnings                                                 993.7                 866.9
    Other comprehensive (loss)                                        (64.2)                (74.8)
    Treasury stock                                                   (287.3)               (303.9)
                                                      ---------------------- ---------------------
         Total common shareholders' equity                          4,625.5               4,464.1
    Long-term debt and capital leases                               3,920.0               3,920.8
                                                      ---------------------- ---------------------
Total Capitalization                                                8,545.5               8,384.9
                                                      ---------------------- ---------------------

Minority Interest in Subsidiary Companies                              15.3                  15.3
                                                      ---------------------- ---------------------
Total Liabilities and Capitalization                             $ 13,492.6            $ 13,812.6
                                                      ====================== =====================
--------------------------------------------------------------------------------------------------
</TABLE>

        See accompanying Notes to the Consolidated Financial Statements.


                                       4
<PAGE>

<TABLE>
                        CONSOLIDATED STATEMENT OF INCOME
                                   (Unaudited)

<CAPTION>
-------------------------------------------------------------------------------------------
                                                               Three Months Ended March 31,
(In Millions of Dollars, Except Per Share Amounts)               2006              2005
-------------------------------------------------------------------------------------------
<S>                                                             <C>              <C>
Revenues
     Gas Distribution                                           $ 2,180.1        $ 2,025.5
     Electric Services                                              424.8            400.4
     Energy Services                                                 48.4             44.5
     Energy Investments                                               7.8             10.1
                                                         -----------------   --------------
Total Revenues                                                    2,661.1          2,480.5
                                                         -----------------   --------------
Operating Expenses
     Purchased gas for resale                                     1,511.4          1,308.8
     Fuel and purchased power                                       130.0            133.1
     Operations and maintenance                                     406.0            387.2
     Depreciation, depletion and amortization                       110.3            106.1
     Operating taxes                                                118.2            111.9
                                                         -----------------   --------------
Total Operating Expenses                                          2,275.9          2,047.1
                                                         -----------------   --------------
Income from equity investments                                        3.4              5.3
Gain on sale of property                                              0.5                -
                                                         -----------------   --------------
Operating Income                                                    389.1            438.7
                                                         -----------------   --------------
Other Income and (Deductions)
     Interest charges                                               (66.2)           (60.0)
     Gain on sale of investments                                        -              4.1
     Cost of debt redemption                                            -            (20.9)
     Other                                                           11.4              9.1
                                                         -----------------   --------------
Total Other Income and (Deductions)                                 (54.8)           (67.7)
                                                         -----------------   --------------
Income Taxes
     Current                                                        159.4            128.8
     Deferred                                                       (33.1)             6.5
                                                         -----------------   --------------
Total Income Taxes                                                  126.3            135.3
                                                         -----------------   --------------
Earnings from continuing operations                                 208.0            235.7
Discontinued Operations
Loss from discontinued operations, net of tax                           -             (2.2)
Gain on disposal, net of tax                                            -              2.2
                                                         -----------------   --------------
Loss from discontinued operations                                       -                -
                                                         -----------------   --------------
Net Income                                                          208.0            235.7
Preferred stock dividend requirements                                   -              1.3
                                                         -----------------   --------------
Earnings for Common Stock                                       $   208.0        $   234.4
                                                         =================   ==============
Basic Earnings Per Share:
  Continuing Operations,
         less preferred stock dividends                         $    1.19        $    1.45
  Discontinued Operations                                               -                -
                                                         -----------------   --------------
Basic Earnings Per Share                                        $    1.19        $    1.45
                                                         =================   ==============
Diluted Earnings Per Share
  Continuing Operations,
         less preferred stock dividends                              1.18        $    1.44
  Discontinued Operations                                               -                -
                                                         -----------------   --------------
Diluted Earnings Per Share                                      $    1.18        $    1.44
                                                         =================   ==============
Average Common Shares Outstanding (000)                           174,704          161,125
Average Common Shares Outstanding - Diluted (000)                 176,953          162,245
-------------------------------------------------------------------------------------------
</TABLE>

        See accompanying Notes to the Consolidated Financial Statements.


                                       5
<PAGE>

<TABLE>

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (Unaudited)

<CAPTION>
---------------------------------------------------------------------------------------
                                                           Three Months Ended March 31,
(In Millions of Dollars)                                      2006             2005
---------------------------------------------------------------------------------------
<S>                                                            <C>             <C>
Operating Activities
Net income                                                     $ 208.0         $ 235.7
Adjustments to reconcile net income to net
      cash provided by (used in) operating activities
    Depreciation, depletion and amortization                     110.3           106.1
    Deferred income tax                                          (33.1)            6.5
    Income from equity investments                                (3.4)           (5.3)
    Amortization of financing fees / interest rate swap            2.1           (11.7)
    (Gain) on sale of investment                                     -            (4.1)
    Amortization of property taxes                                33.4            28.3
Changes in assets and liabilities
    Accounts receivable                                           12.3          (262.3)
    Materials and supplies, fuel oil and gas in storage          283.5           297.8
    Accounts payable and other liabilities                      (308.1)         (126.5)
    Taxes accrued                                                166.0            85.7
    Interest accrued                                              19.6            15.0
    Environmental payments                                       (10.0)           (7.4)
    Other                                                         63.3            25.6
                                                        ---------------   -------------
Net Cash Provided by Operating Activities                        543.9           383.4
                                                        ---------------   -------------
Investing Activities
    Construction expenditures                                   (122.2)         (111.8)
    Cost of removal                                               (6.7)           (4.8)
    Net proceeds from sale of property and investments               -            48.1
                                                        ---------------   -------------
Net Cash Used in Investing Activities                           (128.9)          (68.5)
                                                        ---------------   -------------
Financing Activities
    Common/Treasury stock issued                                  15.5            24.3
    Payment of commercial paper                                 (160.8)         (441.4)
    Payment of long-term debt                                        -          (515.0)
    Common stock dividends paid                                  (81.1)          (74.6)
    Preferred stock dividends paid                                   -            (1.3)
    Other                                                            -             9.1
                                                        ---------------   -------------
Net Cash Used in Financing Activities                           (226.4)         (998.9)
                                                        ---------------   -------------
Net Increase (Decrease) in Cash and Cash Equivalents             188.6          (684.0)
Cash Flow from Discontinued Operations - Operating                   -            (4.4)
Cash Flow from Discontinued Operations - Investing                   -           (10.6)
Cash and Cash Equivalents at Beginning of Period                 124.5           922.0
                                                        ---------------   -------------
Cash and Cash Equivalents at End of Period                     $ 313.1         $ 223.0
                                                        ===============   =============
---------------------------------------------------------------------------------------
</TABLE>

Cash equivalents are short-term  marketable securities purchased with maturities
of three months or less that were carried at cost which approximates fair value.

        See accompanying Notes to the Consolidated Financial Statements.



                                       6
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

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

Consummation of the Merger is subject to various closing  conditions,  including
but not  limited  to the  receipt  of  requisite  regulatory  approvals  and the
adoption of the Merger  Agreement by the stockholders of KeySpan and the Parent.
Assuming receipt of all required approvals, it is currently anticipated that the
Merger will be  consummated  in early 2007.  However,  no assurance can be given
that the Merger will occur, or, the timing of its completion.

At December 31, 2005,  KeySpan was a holding  company  under the Public  Utility
Holding  Company Act of 1935, as amended  ("PUHCA  1935").  In August 2005,  the
Energy  Policy Act of 2005 (the "Energy  Act") was enacted.  The Energy Act is a
broad energy bill that places an increased  emphasis on the production of energy
and promotes the development of new technologies and alternative  energy sources
and provides  tax credits to companies  that  produce  natural gas,  oil,  coal,
electricity  and  renewable  energy.  For KeySpan,  one of the more  significant
provisions  of the  Energy  Act was the  repeal  of  PUHCA  1935,  which  became
effective  on  February  8,  2006.  Since  that time,  the  jurisdiction  of the
Securities  and  Exchange   Commission  ("SEC")  over  certain  holding  company
activities,  including the regulation of our affiliate  transactions and service
companies,  has been  transferred  to the Federal Energy  Regulatory  Commission


                                       7
<PAGE>


("FERC")  pursuant to PUHCA 2005. (For additional  information on the Energy Act
and PUHCA  2005 see  KeySpan's  Annual  Report  on Form 10-K for the year  ended
December 31, 2005,  Item 7.  Management's  Discussion  and Analyses of Financial
Condition and Results of Operations - "Regulation and Rate Matters.")

1. BASIS OF PRESENTATION

In our opinion,  the accompanying  unaudited  Consolidated  Financial Statements
contain all adjustments necessary to present fairly KeySpan's financial position
as of March 31, 2006,  and the results of operations  for the three months ended
March 31, 2006 and March 31,  2005,  as well as cash flows for the three  months
ended March 31, 2006 and March 31, 2005. The accompanying  financial  statements
should be read in conjunction  with the  consolidated  financial  statements and
notes  included  in  KeySpan's  Annual  Report on Form  10-K for the year  ended
December 31, 2005. The December 31, 2005  financial  statement  information  has
been  derived from the 2005 audited  financial  statements.  Income from interim
periods may not be indicative of future results. Certain  reclassifications were
made  to  conform  prior  period  financial  statements  to the  current  period
financial statement presentation.

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

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

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

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
                                                               Three Months Ended March 31,
(In Millions of Dollars, Except Per Share Amounts)                2006             2005
------------------------------------------------------------------------------------------
<S>                                                              <C>             <C>
Earnings for common stock                                       $   208.0       $   234.4

Weighted average shares outstanding (000)                         174,704         161,125
Add dilutive securities:
Options                                                             2,249           1,120
------------------------------------------------------------------------------------------
Total weighted average shares outstanding - assuming dilution     176,953         162,245
------------------------------------------------------------------------------------------
Basic earnings per share                                        $    1.19       $    1.45
------------------------------------------------------------------------------------------
Diluted earnings per share                                      $    1.18       $    1.44
------------------------------------------------------------------------------------------
</TABLE>


                                       8
<PAGE>


2. BUSINESS SEGMENTS

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

The Gas  Distribution  segment  consists of six gas  distribution  subsidiaries.
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 existing
long-term  service contracts having remaining terms that range from one to seven
years and power purchase agreements having remaining terms that range from seven
to 21 years. On February 1, 2006,  KeySpan and LIPA agreed to extend,  amend and
restate these contractual arrangements. (See Note 10, "2006 LIPA Settlement" for
a further  discussion of these  agreements.) The Electric  Services segment also
includes  subsidiaries  that own or lease and  operate  the 2,200 MW  Ravenswood
Facility located in Queens,  New York, and the 250 MW combined-cycle  Ravenswood
Expansion.  Collectively  the Ravenswood  Facility and Ravenswood  Expansion are
referred to as the "Ravenswood Generating Station." All of the energy,  capacity
and ancillary services related to the Ravenswood  Generating Station are sold to
the New York Independent  Systems Operator ("NYISO") energy markets.  To finance
the purchase and/or construction of the Ravenswood  Generating Station,  KeySpan
entered into a leasing  arrangement  for each  facility.  The Electric  Services
segment also conducts retail  marketing of electricity to commercial  customers.
(See Note 6 "Contractual  Obligations,  Financial  Guarantees and Contingencies"
for further details on the leasing arrangements.)

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

In 2005,  KeySpan sold its mechanical  contracting  subsidiaries.  The operating
results  and  financial  position  of these  companies  have been  reflected  as
discontinued operations on the Consolidated Statement of Income and Consolidated
Statement of Cash Flows for 2005.


                                       9
<PAGE>


The Energy  Investments  segment  consists of our gas exploration and production
investments,  as well as  certain  other  domestic  energy-related  investments.
KeySpan's gas exploration  and production  activities  include its  wholly-owned
subsidiaries  Seneca  Upshur  Petroleum,  Inc.   ("Seneca-Upshur")  and  KeySpan
Exploration  and  Production,  LLC  ("KeySpan  Exploration").  Seneca-Upshur  is
engaged in gas exploration and production activities primarily in West Virginia.
KeySpan  Exploration is engaged in a joint venture with The Houston  Exploration
Company ("Houston Exploration"),  an independent natural gas and oil exploration
company  located in  Houston,  Texas.  Houston  Exploration,  formerly a KeySpan
subsidiary, was sold in 2004.

This segment is also  engaged in pipeline  development  activities.  KeySpan and
Duke Energy  Corporation  each own a 50% interest in the Islander  East Pipeline
Company,  LLC  ("Islander  East").  Islander  East was  created  to  pursue  the
authorization  and  construction  of an interstate  pipeline  from  Connecticut,
across Long Island Sound,  to a terminus  near  Shoreham,  Long Island.  Once in
service,  the  pipeline is expected to  transport up to 260,000 DTH daily to the
Long Island and New York City energy markets.  Further, during the first quarter
of 2006,  KeySpan increased its interest in the Millennium  Pipeline Company LLC
to 26.25% from 21%. The Millennium  Pipeline Company LLC is the developer of the
Millennium pipeline project, which is expected to transport up to 525,000 DTH of
natural gas a day from Corning to Ramapo,  New York, where it will connect to an
existing pipeline. Additionally,  subsidiaries in this segment hold a 20% equity
interest in the Iroquois Gas Transmission  System LP, a pipeline that transports
Canadian  gas  supply  to  markets  in the  Northeastern  United  States.  These
investments  are  accounted  for under the equity  method.  Accordingly,  equity
income from these investments is reflected as a component of operating income in
the Consolidated Statement of Income.

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

In the  first  quarter  of  2005,  KeySpan  sold  its 50%  interest  in  Premier
Transmission  Limited  ("Premier"),  a gas pipeline from  southwest  Scotland to
Northern  Ireland.  The sale  generated  cash  proceeds of  approximately  $48.1
million.  In the fourth quarter of 2004,  KeySpan  reduced its carrying value in
Premier to an amount  approximating the anticipated cash proceeds from the sale.
The final sale of Premier resulted in a pre-tax gain of $4.1 million  reflecting
the  difference  from  earlier  estimates;  this gain was  recorded in the first
quarter of 2005.

The  accounting  policies  of the  segments  are the same as those  used for the
preparation of the Consolidated Financial Statements. The segments are strategic
business units that are managed separately because of their different  operating
and regulatory environments.  Operating results of our segments are evaluated by
management on an operating  income basis. At March 31, 2006, the total assets of
each reportable  segment have not changed  materially from those levels reported
at December 31, 2005. The reportable segment information is as follows:


                                       10
<PAGE>


<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
                                            Gas           Electric        Energy         Energy
(In Millions of Dollars)               Distribution       Services       Services      Investments   Eliminations     Consolidated
----------------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>               <C>            <C>          <C>                <C>           <C>
Three Months Ended March 31, 2006
Unaffiliated revenue                       2,180.1           424.8          48.4          7.8                  -          2,661.1
Intersegment revenue                             -               -           2.5          1.3               (3.8)               -
Operating Income                             336.4            65.0          (0.4)         3.0              (14.9)           389.1

Three Months Ended March 31, 2005
Unaffiliated revenue                       2,025.5           400.4          44.5         10.1                  -          2,480.5
Intersegment revenue                             -             4.6           2.6            -               (7.2)               -
Operating Income                             391.9            51.0          (2.8)         6.4               (7.8)           438.7

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

Because of the nature of our Electric Services  business,  electric revenues are
derived  from two  large  customers  - the NYISO  and  LIPA.  Electric  Services
revenues from these customers of $422.7 million and $371.0 million for the three
months ended March 31, 2006 and 2005, respectively,  represent approximately 16%
and 15%, respectively of our consolidated revenues in both periods.

3. COMPREHENSIVE INCOME

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

------------------------------------------------------------------------------------------------
                                                                    Three Months Ended March 31,
(In Millions of Dollars)                                                 2006             2005
------------------------------------------------------------------------------------------------
<S>                                                                     <C>              <C>
Net Income                                                             $ 208.0          $ 235.7
------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax
Net (gains) on derivative instruments                                    (35.7)            (4.8)
Foreign currency translation adjustments                                     -             (5.0)
Unrealized gains (losses) on marketable securities                         0.4             (1.8)
Unrealized gains (losses) on derivative financial instruments             45.9             (7.3)
------------------------------------------------------------------------------------------------
Other comprehensive loss, net of tax                                      10.6            (18.9)
------------------------------------------------------------------------------------------------
Comprehensive Income                                                   $ 218.6          $ 216.8
------------------------------------------------------------------------------------------------
Related tax (benefit) expense
Net  (gains) on derivative instruments                                   (19.2)            (0.5)
Foreign currency translation adjustments                                     -             (2.7)
Unrealized gains (losses) on marketable securities                         0.2             (1.0)
Unrealized gains (losses) on derivative financial instruments             25.4             (6.7)
------------------------------------------------------------------------------------------------
Total Tax (Benefit) Expense                                            $   6.4          $ (10.9)
------------------------------------------------------------------------------------------------
</TABLE>


4. HEDGING AND DERIVATIVE FINANCIAL INSTRUMENTS

Financially-Settled  Commodity Derivative Instruments - Hedging Activities: From
time  to  time,  KeySpan   subsidiaries  have  utilized   derivative   financial
instruments,  such as futures, options and swaps, for the purpose of hedging the
cash flow variability  associated with changes in commodity  prices.  KeySpan is
exposed to commodity  price risk primarily  with regard to its gas  distribution
operations,   gas  exploration  and  production   activities  and  its  electric
generating facilities at the Ravenswood site.


                                       11
<PAGE>


Derivative financial instruments are employed by our gas distribution operations
to reduce the cash flow  variability  associated  with the purchase  price for a
portion  of  future  natural  gas  purchases  for our  regulated  firm gas sales
customers. The accounting for certain of these derivative instruments is subject
to SFAS 71 "Accounting for the Effects of Certain Types of Regulation."  See the
caption below "Firm Gas Sales Derivative  Instruments - Regulated Utilities" for
a  further  discussion  of these  derivatives.  Certain  derivative  instruments
employed by our gas distribution  operations,  however,  are not subject to SFAS
71. Utility tariffs applicable to certain  large-volume  customers permit gas to
be sold at prices established  monthly,  relative to a prevailing alternate fuel
price, but limited to the cost of gas plus the rate for the highest  consumption
block  otherwise  applicable  to  our  firm  commercial  customers.  KEDNY  uses
over-the-counter  ("OTC") natural gas swaps,  with  offsetting  positions in OTC
fuel oil swaps of equivalent energy value, to hedge the cash-flow variability of
specified  portions of gas purchases and sales  associated with these customers.
The  maximum  length of time over  which we have  hedged  cash flow  variability
associated with forecasted purchases and sales of natural gas is through October
2006. We use standard New York Mercantile  Exchange  ("NYMEX") futures prices to
value the gas and heating oil  positions.  At March 31, 2006,  the fair value of
gas swap  contracts was a liability of $1.4  million;  the fair value of the oil
swap contracts was a liability of $1.7 million.  The estimated  amount of losses
associated  with  such  derivative   instruments  that  are  reported  in  other
comprehensive income and that are expected to be reclassified into earnings over
the  next  twelve  months  is $3.1  million,  or  $2.0  million  after-tax.  The
ineffective  portion of these  derivatives  for the three months ended March 31,
2006 was immaterial.

Our Energy Investments subsidiary, Seneca-Upshur, utilizes OTC natural gas swaps
to hedge the cash flow variability associated with forecasted sales of a portion
of its  natural  gas  production.  At March 31,  2006,  Seneca-Upshur  has hedge
positions in place for  approximately 85% of its estimated 2006 through 2008 gas
production, net of gathering costs. We use market quoted forward prices to value
these swap positions.  The maximum length of time over which  Seneca-Upshur  has
hedged such cash flow  variability  is through  December 2008. The fair value of
these derivative instruments at March 31, 2006 was a liability of $14.0 million.
The estimated amount of losses associated with such derivative  instruments that
are  reported  in  other  comprehensive  income  and  that  are  expected  to be
reclassified  into  earnings  over the next twelve  months is $5.2  million,  or
approximately  $3.4 million  after-tax.  Ineffectiveness  associated  with these
outstanding derivative financial instruments was immaterial for the three months
ended March 31, 2006.

The Ravenswood Generating Station uses derivative financial instruments to hedge
the cash flow  variability  associated  with the purchase of natural gas or fuel
oil that will be consumed during the generation of  electricity.  The Ravenswood
Generating  Station  also  hedges the cash flow  variability  associated  with a
portion of electric energy sales.

With respect to price exposure associated with fuel purchases for the Ravenswood
Generating Station, KeySpan employs OTC natural gas swaps to hedge the cash flow
variability for a portion of forecasted  purchases of natural gas. We use market
quoted forward prices to value these swap positions.  The maximum length of time
over which we have  hedged  cash flow  variability  associated  with  forecasted
purchases  of natural  gas is  through  December  2006.  The fair value of these


                                       12
<PAGE>


derivative instruments at March 31, 2006, was a liability of $0.1 million. These
derivative  instruments,  which are reported in other comprehensive  income, are
expected to be reclassified into earnings over the next twelve months.

We have also engaged in the use of  cash-settled  swap  instruments to hedge the
cash flow  variability  associated with a portion of forecasted  electric energy
sales from the Ravenswood  Generating Station.  Our hedging strategy is to hedge
at least 50% of forecasted  on-peak  summer season  electric  energy sales and a
portion of forecasted  electric  energy sales for the remainder of the year. The
maximum  length of time over  which we have  hedged  cash  flow  variability  is
through October 2006. To accomplish our stated hedging strategy, KeySpan employs
financially-settled    electric-power    swap    contracts    with    offsetting
financially-settled  oil swap contracts and OTC natural gas swaps. We use market
quoted forward prices to value the electric-power swap contracts. The fair value
of these derivative instruments at March 31, 2006 was $19.6 million all of which
is expected to be reclassified  into earnings within the next twelve months.  We
use market quoted forward prices to value the oil swap contracts. The fair value
of these  derivative  instruments  at March 31,  2006,  was a liability  of $3.9
million all of which is expected to be  reclassified  into  earnings  within the
next twelve  months.  We use market quoted  forward prices to value the gas swap
contracts. The fair value of these derivative instruments at March 31, 2006, was
a liability  of $0.2  million all of which is expected to be  reclassified  into
earnings  within  the  next  twelve  months.  The  after-tax  benefit  of  these
derivative  instruments  is  anticipated  to be $10.0  million.  Ineffectiveness
associated  with  these  outstanding   derivative   financial   instruments  was
immaterial for the three months ended March 31, 2006.

The above  noted  derivative  financial  instruments  are cash flow  hedges that
qualify  for  hedge   accounting  under  SFAS  133  "Accounting  for  Derivative
Instruments  and  Hedging  Activities,"  as  amended by SFAS 149  "Amendment  of
Statement 133 on Derivative  Instruments and Hedging  Activities,"  collectively
SFAS 133, and are not considered held for trading purposes as defined by current
accounting  literature.  Accordingly,  we carry the fair value of our derivative
instruments  on the  Consolidated  Balance Sheet as either a current or deferred
asset  or  liability,  as  appropriate,  and  defer  the  effective  portion  of
unrealized gains or losses in accumulated other comprehensive  income. Gains and
losses are  reclassified  from  accumulated  other  comprehensive  income to the
Consolidated  Statement of Income in the period the hedged  transaction  affects
earnings.  Gains and losses are  reflected as a component  of either  revenue or
fuel  and  purchased   power   depending  on  the  hedged   transaction.   Hedge
ineffectiveness, which was negligible for the three months ended March 31, 2006,
results from changes  during the period in the price  differentials  between the
index price of the derivative contract and the price of the purchase or sale for
the cash flow that is being hedged, and is recorded directly to earnings.


Firm Gas Sales Derivative  Instruments - Regulated Utilities:  We use derivative
financial  instruments to reduce the cash flow  variability  associated with the
purchase price for a portion of future natural gas purchases associated with our
Gas Distribution  operations.  Our strategy is to minimize  fluctuations in firm
gas sales prices to our regulated  firm gas sales  customers in our New York and
New England service territories. The accounting for these derivative instruments


                                       13
<PAGE>


is subject to SFAS 71. Therefore, changes in the fair value of these derivatives
have  been  recorded  as a  regulatory  asset  or  regulatory  liability  on the
Consolidated Balance Sheet. Gains or losses on the settlement of these contracts
are initially deferred and then refunded to or collected from our firm gas sales
customers  consistent with regulatory  requirements.  At March 31, 2006 the fair
value of these  derivative  instruments was a liability of $14.1 million and are
reflected as a current asset of $2.7 million,  a deferred asset of $7.0 million,
and a regulatory  asset of $20.1 million,  with offsetting  positions in current
liabilities,  regulatory liabilities and deferred credits of $18.8 million, $7.9
million and $3.2 million, respectively on the Consolidated Balance Sheet.

Physically-Settled  Commodity  Derivative  Instruments:   SFAS  133  establishes
criteria that must be satisfied in order for option contracts, forward contracts
with  optionality  features,  or contracts that combine a forward contract and a
purchase option contract to be exempted as normal  purchases and sales.  Certain
contracts for the physical purchase of natural gas associated with our regulated
gas utilities are not exempt as normal  purchases from the  requirements of SFAS
133. Since these contracts are for the purchase of natural gas sold to regulated
firm gas sales customers,  the accounting for these contracts is subject to SFAS
71. Therefore, changes in the market value of these contracts have been recorded
as a regulatory asset or regulatory liability on the Consolidated Balance Sheet.
At March 31, 2006,  these  derivatives had a net fair value of $16.8 million and
are  reflected as a deferred  asset of $25.7  million and a regulatory  asset of
$7.0 million with  offsetting  positions in regulatory  liabilities and deferred
credits of $23.1  million and $9.5  million,  respectively  on the  Consolidated
Balance Sheet.

Further,  certain  contracts for the physical purchase of natural gas associated
with the  Ravenswood  facility  are not  exempt  as  normal  purchases  from the
requirements  of SFAS 133. At March 31, 2006, the fair value of these  contracts
was a liability of $0.9 million and was recorded through earnings.

Financially-Settled  Commodity  Derivative  Instruments  that Do Not Qualify for
Hedge  Accounting:  KeySpan  subsidiaries also have employed a limited number of
financial  derivatives that do not qualify for hedge accounting  treatment under
SFAS 133. During the first quarter, we purchased a series of call options on the
spread  between  the price of  heating  oil and the price of  natural  gas.  The
options  cover  the  period  February  2006  through  October  2006 and  further
complement  our  hedging   strategy  noted  above  regarding  sales  to  certain
large-volume customers. As stated, we sell gas to certain large-volume customers
at prices established monthly relative to a prevailing alternate fuel price, but
limited to the cost of gas plus the tail block rate.  Utility tariffs,  however,
establish an upper limit on the price KeySpan can charge for the sale of natural
gas to these customers.  These options are intended to limit KeySpan's  exposure
to  spikes in  heating  oil  prices.  These  options  do not  qualify  for hedge
accounting treatment under SFAS 133. We recorded a $0.7 million benefit in other
income and  deductions  on the  Consolidated  Statement of Income to reflect the
change in the market value  associated with this  derivative  instrument for the
first quarter of 2006.


                                       14
<PAGE>


Further, the Ravenswood facility has also employed a limited number of financial
derivatives  that do not qualify for hedge  accounting  treatment under SFAS 133
associated  with the purchase of fuel oil. We recorded a $0.7 million expense in
other income and deductions on the  Consolidated  Statement of Income to reflect
the change in the market value  associated with this  derivative  instrument for
the first quarter of 2006.

On  January  18,  2006,  KeySpan  entered  into an  International  SWAP  Dealers
Association  Master Agreement for a fixed for float unforced capacity  financial
swap  (the   "Agreement")  with  Morgan  Stanley  Capital  Group  Inc.  ("Morgan
Stanley").  The  Agreement  has a three year term  beginning  May 1,  2006.  The
notional  quantity is 1,800,000kW (the "Notional  Quantity") of In-City Unforced
Capacity  and the fixed  price is  $7.57/kW-month  ("Fixed  Price"),  subject to
adjustment upon the occurrence of certain events.  Cash settlement will occur on
a monthly basis based on the In-City  Unforced  Capacity price determined by the
relevant  New York  Independent  System  Operator  ("NYISO")  Spot Demand  Curve
Auction Market ("Floating Price"). For each monthly settlement period, the price
difference  will equal the Fixed Price minus the Floating  Price.  If such price
difference is less than zero, Morgan Stanley will pay KeySpan an amount equal to
the product of (a) the  Notional  Quantity  and (b) the  absolute  value of such
price  difference.  Conversely,  if such price  difference is greater than zero,
KeySpan  will pay  Morgan  Stanley  an amount  equal to the  product  of (a) the
Notional Quantity and (b) the absolute value of such price  difference.  KeySpan
believes that the average annual monthly capacity market price will settle above
the  Fixed  Price.  This  derivative  instrument  does  not  qualify  for  hedge
accounting treatment under SFAS 133 and is subject to mark-to-market  accounting
treatment;  although  currently there is no observable market reference to value
this derivative instrument.

The  table  below  summarizes  the fair  value of all of the  above  outstanding
derivative  instruments at March 31, 2006 and December 31, 2005, and the related
line item on the Consolidated  Balance Sheet.  Fair value is the amount at which
derivative  instruments  could be  exchanged  in a current  transaction  between
willing parties, other than in a forced liquidation sale.


----------------------------------------------------------------------------
(In Millions of Dollars)                 March 31, 2006   December 31, 2005
----------------------------------------------------------------------------
Gas Contracts:
  Other current assets                            $  2.7            $ 132.1
  Other deferred charges                            33.5               75.2
  Regulatory asset                                  27.1               30.9
  Other current liability                          (25.6)             (39.8)
  Other deferred liabilities                       (22.4)             (44.3)
  Regulatory liability                             (31.0)            (175.4)

Oil Contracts:
  Other current assets                                 -                0.5
  Other current liability                           (5.6)              (6.8)
  Other deferred liabilities                        (0.7)                 -

Electric Contracts:
  Other current assets                              19.6               10.2
  Other deferred charges                             0.5                  -
  Other current liability                              -               (0.7)
----------------------------------------------------------------------------
                                                  $ (1.9)           $ (18.1)
----------------------------------------------------------------------------


                                       15
<PAGE>


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

In 2005, we entered into  heating-degree  day put options to mitigate the effect
of fluctuations from normal weather on KEDNE's financial position and cash flows
for the  2005/2006  winter  heating  season - November  2005 through March 2006.
These put options  would have paid KeySpan up to $40,000 per heating  degree day
when  the  actual   temperature   was  below  4,169  heating   degree  days,  or
approximately  5% warmer than normal,  based on the most recent 20-year  average
for normal  weather.  The maximum  amount  KeySpan  would have received on these
purchased  put options was $16 million.  The net premium cost for these  options
was $1.2  million and was  amortized  over the heating  season.  Weather for the
first quarter of 2006 was  approximately  8% warmer than normal in KeySpan's New
England service territory;  however for the entire primary winter heating season
-November  2005 through  March 2006 - weather was  slightly  colder than normal.
Therefore,   there  was  no  earnings  impact   associated  with  these  weather
derivatives, except for the amortization of the net premium cost. We account for
these  derivatives  pursuant to the  requirements of EITF 99-2,  "Accounting for
Weather  Derivatives." In this regard,  such instruments are accounted for using
the "intrinsic value method" as set forth in such guidance.

Credit and Collateral:
Derivative  contracts  are  primarily  used to manage  exposure  to market  risk
arising  from changes in commodity  prices and interest  rates.  In the event of
non-performance by a counterparty to a derivative  contract,  the desired impact
may not be  achieved.  The risk of  counterparty  non-performance  is  generally
considered a credit risk and is actively managed by assessing each  counterparty
credit  profile and  negotiating  appropriate  levels of  collateral  and credit
support. In instances where the counterparties'  credit quality has declined, or
credit  exposure  exceeds  certain  levels,  we may limit our credit exposure by
restricting  new  transactions   with   counterparties,   requiring   additional
collateral or credit support and  negotiating  the early  termination of certain
agreements.  At March 31,  2006,  KeySpan has  received  $5.2  million  from its
counterparties as collateral  associated with outstanding  derivative contracts.
This amount has been recorded as restricted cash, with an offsetting position in
current  liabilities  on the  Consolidated  Balance  Sheet.  At March 31,  2006,
KeySpan has no outstanding margin calls to its counterparties.

We  believe  that our credit  risk  related  to the above  mentioned  derivative
financial  instruments is no greater than the risk  associated  with the primary
contracts  which they hedge and that the  elimination  of a portion of the price
risk  reduces  volatility  in the  reported  results  of  operations,  financial
position and cash flows and lowers overall business risk.

5. RECENT ACCOUNTING PRONOUNCEMENTS

On March 31,2006,  the Financial  Accounting  Standards Board ("FASB") issued an
Exposure  Draft of proposed rules on employers'  accounting for defined  benefit
pensions and other postretirement  benefit plans that would require employers to
fully  recognize the plan's funded  status on the balance  sheet.  If adopted as


                                       16
<PAGE>


proposed,  the new  rules  would be  applied  retroactively  to prior  financial
statements presented and be effective for fiscal years ending after December 15,
2006.  The new  rules,  if  adopted  as  proposed,  may  significantly  increase
KeySpan's recorded pension and other  postretirement  liabilities and reduce its
shareholders'  equity. The comment period on this Exposure Draft ends on May 31,
2006.  KeySpan is  currently  evaluating  the Exposure  Draft,  and at this time
cannot determine the full impact that the potential requirements of the Exposure
Draft may have on its financial statements.

On July 14, 2005,  the FASB issued an Exposure Draft  "Accounting  for Uncertain
Tax Positions,"  that would  interpret SFAS 109,  "Accounting for Income Taxes."
This proposal seeks to reduce the diversity in practice  associated with certain
aspects of the recognition and  measurement  requirements  related to accounting
for income taxes. KeySpan anticipates that implementation of this Exposure Draft
in its  proposed  form will have  minimal  impact on its results of  operations,
financial position or cash flows.

In December 2004 the FASB issued SFAS 123 (revised 2004) "Share-Based  Payment."
This  Statement  focuses  primarily on accounting for  transactions  in which an
entity obtains  employee  services in  share-based  payment  transactions.  This
Statement  revises  certain  provisions of SFAS 123  "Accounting for Stock-Based
Compensation"  and  supersedes  APB Opinion 25  "Accounting  for Stock Issued to
Employees."  The  fair-value-based  method in this  Statement  is similar to the
fair-value-based method in SFAS 123 in most respects. However, the following are
key differences  between the two:  entities are required to measure  liabilities
incurred to  employees  in  share-based  payment  transactions  at fair value as
compared to using the  intrinsic  method  allowed  under SFAS 123;  entities are
required to estimate the number of instruments  for which the requisite  service
is expected to be rendered,  as compared to accounting  for  forfeitures as they
occur under SFAS 123; and  incremental  compensation  cost for a modification of
the terms or  conditions of an award are also  measured  differently  under this
Statement  compared to Statement  123. This Statement also clarifies and expands
SFAS 123's  guidance in several  areas.  The effective date of this Statement is
the beginning of the first fiscal year  beginning  after June 15, 2005.  KeySpan
adopted the  prospective  method of  transition  for stock options in accordance
with  SFAS  148  "Accounting  for  Stock-Based  Compensation  -  Transition  and
Disclosure." Accordingly,  compensation expense has been recognized by employing
the fair  value  recognition  provisions  of SFAS 123 for grants  awarded  after
January 1, 2003. Therefore  implementation of this Statement in January 2006 did
not have a material  impact on  KeySpan's  results of  operations  or  financial
position and no impact on its cash flows.

6. FINANCIAL GUARANTEES AND CONTINGENCIES

Variable  Interest Entity:  KeySpan has an arrangement with a variable  interest
entity through which we lease a portion of the Ravenswood Facility.  We acquired
the Ravenswood Facility,  a 2,200-megawatt  electric generating facility located
in  Queens,  New York,  in part,  through  the  variable  interest  entity  from
Consolidated Edison on June 18, 1999 for approximately $597 million. In order to


                                       17
<PAGE>


reduce the initial cash  requirements,  we entered into a lease  agreement  (the
"Master Lease") with a variable  interest,  unaffiliated  financing  entity that
acquired a portion of the facility,  or three steam generating  units,  directly
from Consolidated Edison and leased it to our subsidiary.  The variable interest
unaffiliated  financing entity acquired the property for $425 million,  financed
with debt of $412.3 million (97% of capitalization)  and equity of $12.7 million
(3% of  capitalization).  KeySpan has no ownership interests in the units or the
variable  interest  entity.  KeySpan has guaranteed all payment and  performance
obligations of our subsidiary,  KeySpan Ravenswood, LLC, under the Master Lease.
Monthly lease payments  substantially equal the monthly interest expense on such
debt securities.

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

We have  classified  the Master Lease as $412.3 million of long-term debt on the
Consolidated  Balance Sheet based on our current status as primary  beneficiary.
Further,  we have an asset  on the  Consolidated  Balance  Sheet  for an  amount
substantially  equal  to the  fair  market  value of the  leased  assets  at the
inception of the lease,  less  depreciation  since that date,  or  approximately
$318.9 million.

If our subsidiary that leases the Ravenswood  Facility,  KeySpan Ravenswood LLC,
was not able to fulfill its payment obligations with respect to the Master Lease
payments,  then the maximum amount KeySpan would be exposed to under its current
guarantees  would be $425 million plus the present value of the remaining  lease
payments through June 20, 2009.

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

Asset Retirement  Obligations:  KeySpan has various asset retirement obligations
primarily   associated  with  its  gas  distribution  and  electric   generation
activities.   These  obligations  have  remained  substantially  unchanged  from
December  31,  2005,  except for  accretion  adjustments.  Generally,  KeySpan's
largest asset retirement  obligations  relate to: (i) legal  requirements to cut


                                       18
<PAGE>


(disconnect from the gas distribution  system),  purge (clean of natural gas and
PCB contaminants) and cap gas mains within its gas distribution and transmission
system when mains are retired in place;  (ii) cleaning and removal  requirements
associated with storage tanks containing waste oil and other waste contaminants;
and (iii)  legal  requirements  to remove  asbestos  upon  major  renovation  or
demolition of structures and facilities.  At March 31, 2006,  these  obligations
total $48.1 million. See KeySpan's Annual Report on Form 10-K for the year ended
December 31, 2005, Note 7 to the Consolidated Financial Statements  "Contractual
Obligations,  Financial Guarantees and Contingencies" for additional information
regarding these obligations.

Environmental Matters

New York Sites:  Within the State of New York we have  identified  43 historical
manufactured gas plant ("MGP") sites and related facilities, which were owned or
operated by KeySpan subsidiaries or such companies'  predecessors.  These former
sites,  some of which are no longer owned by us, have been identified to the New
York  State  Public   Service   Commission   ("NYPSC")  and  the  Department  of
Environmental   Conservation   ("DEC")  for   inclusion  on   appropriate   site
inventories.  Administrative  Orders on  Consent  ("ACO") or  Voluntary  Cleanup
Agreements  ("VCA") have been executed with the DEC to address the investigation
and/or remediation activities associated with certain sites and one waterway. In
March 2005,  KeySpan withdrew its previously filed  applications under the DEC's
Brownfield  Cleanup Program  ("BCP") because of the uncertainty  associated with
contribution suits which we may need to bring against other parties who impacted
these sites for their share of remedial  cost.  As a result of the December 2004
Cooper Industries v. Aviall Services, Inc. decision by the United States Supreme
Court and the emerging case law in New York,  KeySpan  continues to evaluate how
to  proceed  with  respect  to  participation  in  the  BCP or  alternative  DEC
remediation programs.

We have  identified 28 of these sites as being  associated  with the  historical
operations of KEDNY. One site has been fully  remediated.  Subject to the issues
described  in  the  preceding   paragraph,   the  remaining  27  sites  will  be
investigated  and, if necessary,  remediated  under the terms and  conditions of
ACOs, VCAs, or Brownfield Cleanup Agreements ("BCA").  Expenditures  incurred to
date by us with respect to KEDNY MGP-related activities total $64.8 million.

The  remaining  15 sites  have  been  identified  as being  associated  with the
historical  operations  of  KEDLI.  One  site has been  fully  investigated  and
requires no further action. Subject to the issues described above, the remaining
sites will be  investigated  and, if necessary,  remediated  under the terms and
conditions  of ACOs,  VCAs,  or BCAs.  Expenditures  incurred to date by us with
respect to KEDLI MGP-related activities total $53.7 million.

We presently  estimate  the  remaining  cost of our KEDNY and KEDLI  MGP-related
environmental  remediation  activities will be $349.6 million,  which amount has
been  accrued by us as a reasonable  estimate of probable  cost for known sites.
However,  remediation  costs for each site may be materially  higher than noted,
depending upon changing technologies and regulatory standards,  selected end use
for each site, and actual environmental conditions encountered.


                                       19
<PAGE>


With  respect to  remediation  costs,  the KEDNY and KEDLI rate plans  generally
provide for the recovery from customers of investigation  and remediation  costs
of certain  sites.  At March 31, 2006, we have  reflected a regulatory  asset of
$385.3 million for our KEDNY/KEDLI  MGP sites. In October 2003,  KEDNY and KEDLI
filed a joint  petition  with the NYPSC seeking rate  treatment  for  additional
environmental  costs that may be incurred at all of our New York MGP sites. That
petition is still pending.

We are  also  responsible  for  environmental  obligations  associated  with the
Ravenswood  Facility,  purchased  from  Consolidated  Edison in 1999,  including
remediation  activities  associated with its historical  operations and those of
the MGP facilities  that formerly  operated at the site. We are not  responsible
for  liabilities  arising from disposal of waste at off-site  locations prior to
the  acquisition  closing  and any  monetary  fines  arising  from  Consolidated
Edison's pre-closing conduct. We presently estimate the remaining  environmental
clean up activities  for this site will be $1.6  million,  which amount has been
accrued by us. Expenditures incurred to date total $3.4 million.

New England Sites: Within the Commonwealth of Massachusetts and the State of New
Hampshire, we are aware of 77 former MGP sites and related facilities within the
existing or former service territories of KEDNE.

Boston Gas Company, Colonial Gas Company and Essex Gas Company may have or share
responsibility under applicable  environmental laws for the remediation of 67 of
these sites. A subsidiary of National Grid USA ("National  Grid"),  formerly New
England Electric System, has assumed  responsibility for remediating 11 of these
sites,  subject  to a limited  contribution  from  Boston Gas  Company,  and has
provided full  indemnification to Boston Gas Company with respect to eight other
sites.  In  addition,  Boston Gas Company,  Colonial Gas Company,  and Essex Gas
Company have assumed  responsibility  for remediating  three sites each. At this
time, it is uncertain as to whether Boston Gas Company,  Colonial Gas Company or
Essex Gas Company have or share  responsibility for remediating any of the other
sites. No notice of responsibility  has been issued to us for any of these sites
from any governmental environmental authority.

We presently estimate the remaining cost of the Massachusetts  KEDNE MGP-related
environmental  cleanup  activities will be $12.2 million,  which amount has been
accrued by us as a reasonable estimate of probable cost for known sites, however
remediation costs for each site may be materially  higher than noted,  depending
upon changing technologies and regulatory  standards,  selected end use for each
site, and actual environmental  conditions  encountered.  Expenditures  incurred
since  November 8, 2000,  the date KeySpan  acquired  these  subsidiaries,  with
respect to these MGP-related activities total $31.3 million.

We may have or share responsibility under applicable  environmental laws for the
remediation  of  10  MGP  sites  and  related  facilities  associated  with  the
historical operations of EnergyNorth in New Hampshire. At four of these sites we
have  entered  into  cost  sharing  agreements  with  other  parties  who  share


                                       20
<PAGE>


responsibility for remediation of these sites. EnergyNorth also has entered into
an agreement with the United States Environmental  Protection Agency ("EPA") for
the  contamination  from the  Nashua  site that was  allegedly  commingled  with
asbestos at the so-called Nashua River Asbestos Site, adjacent to the Nashua MGP
site.

We  presently   estimate  the   remaining   cost  of   EnergyNorth   MGP-related
environmental  cleanup  activities will be $30.9 million,  which amount has been
accrued  by us as a  reasonable  estimate  of  probable  cost for  known  sites,
however,  remediation  costs for each site may be materially  higher than noted,
depending upon changing technologies and regulatory standards,  selected end use
for each site and  actual  environmental  conditions  encountered.  Expenditures
incurred since November 8, 2000, the date KeySpan acquired this subsidiary, with
respect to these MGP-related activities total $17.6 million.

By rate orders, the Massachusetts  Department of  Telecommunications  and Energy
("MADTE") and the New Hampshire Public Utility Commission  ("NHPUC") provide for
the recovery of site  investigation and remediation costs and,  accordingly,  at
March 31, 2006,  we have  reflected a regulatory  asset of $64.6 million for the
KEDNE MGP sites.

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

We presently estimate the remaining cost of our environmental cleanup activities
for these three  non-utility  sites will be approximately  $19.4 million,  which
amount has been  accrued by us as a  reasonable  estimate of probable  costs for
known sites however,  remediation  costs for each site may be materially  higher
than noted,  depending  upon changing  technologies  and  regulatory  standards,
selected end use for each site, and actual environmental conditions encountered.
Expenditures  incurred since November 8, 2000, with respect to these sites total
$13.4 million.


                                       21
<PAGE>


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

See KeySpan's  Annual  Report on Form 10-K for the year ended  December 31, 2005
Note 7 to those  Consolidated  Financial  Statements  "Contractual  Obligations,
Financial Guarantees and Contingencies" for further information on environmental
matters.

Legal Matters

From time to time we are subject to various legal proceedings arising out of the
ordinary  course of our  business.  Except as described  below,  or in KeySpan's
Annual  Report on Form 10-K for the year  ended  December  31,  2005,  we do not
consider  any of such  proceedings  to be material to our  business or likely to
result in a material  adverse  effect on our  results of  operations,  financial
condition or cash flows.

On March 20, 2006, a purported class action lawsuit was filed alleging breach of
fiduciary duty against us and our directors.  The complaint,  which was filed in
the New York  State  Supreme  Court  for the  County of  Kings,  relates  to the
execution of the merger  agreement  with  National Grid plc and alleges that the
merger  consideration which our stockholders will receive in connection with the
proposed  merger  transaction is inadequate  and unfair because the  transaction
value of  $42.00  for each  share  of our  common  stock  does not  provide  our
stockholders  with a  meaningful  premium  over the  market  price of the common
stock.  We believe  the  lawsuit  is  without  merit and we intend to contest it
vigorously.

Other  Contingencies:  We derive a  substantial  portion of our  revenues in our
Electric  Services  segment from a series of  agreements  with LIPA  pursuant to
which we manage  LIPA's  transmission  and  distribution  system  and supply the
majority of LIPA's customers'  electricity needs.  KeySpan and LIPA have entered
into agreements to extend,  amend, and restate these  contractual  arrangements.
See Note 10 "2006 LIPA Settlement" for a further discussion of these agreements.

LIPA  completed  its  strategic  review  initiative  that it had  undertaken  in
connection with, among other reasons,  its option under the Generation  Purchase
Rights  Agreement.  As part of its review,  LIPA  engaged a team of advisors and
consultants,  held public hearings and explored its strategic options, including
continuing its existing operations,  municipalizing,  privatizing, selling some,
but not all of its  assets,  becoming  a  regulator  of rates and  services,  or
merging with one or more  utilities.  Upon  completion of its strategic  review,
LIPA determined that it would continue its existing  operations,  as part of its
settlement with KeySpan and the renegotiated  2006 LIPA Agreements  discussed in


                                       22
<PAGE>


Note 10 "2006  LIA  Settlement."  Following  the  announcement  of the  proposed
acquisition  of KeySpan by National Grid,  LIPA,  National Grid and KeySpan have
engaged  in  discussions  concerning  the  impact of the  transaction  on LIPA's
operations.  At this time, we are unable to determine what impact,  if any, such
discussions  may have on the 2006 LIPA  Agreements and the receipt and timing of
governmental approvals relating thereto.

As reported in KeySpan's  Annual Report on Form 10-K for the year ended December
31, 2005,  KeySpan is currently in discussions with the Internal Revenue Service
("IRS") at the Appeals level with regard to the Long Island  Lighting  Company's
("LILCO's") tax returns for the tax years ending December 31, 1996 through March
31, 1999 and KeySpan's and the Brooklyn  Union Gas Company's tax returns for the
years ending  September  30, 1997 through  December 31, 1998.  The primary issue
relates  to  the  valuation  of the  transferred  assets  in  the  KeySpan/LILCO
combination.  Additionally,  the IRS has recently  commenced the  examination of
KeySpan's  tax returns for the year ended 2002 and 2003. At this time, we cannot
predict the result of these audits. However, KeySpan has evaluated the potential
outcomes  based on the issues  raised and progress of the  discussions  to date.
KeySpan believes that it has adequately provided for the additional tax, if any,
which may result.

Financial Guarantees

KeySpan  has  issued  financial  guarantees  in the normal  course of  business,
primarily on behalf of its  subsidiaries,  to various third party creditors.  At
March 31, 2006,  the  following  amounts would have to be paid by KeySpan in the
event of non-payment by the primary obligor at the time payment is due:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
                                                           Amount of        Expiration
  Nature of Guarantee (In Millions of Dollars)              Exposure          Dates
------------------------------------------------------------------------------------------
<S>                                               <C>           <C>       <C>
Guarantees for Subsidiaries
  Medium-Term Notes - KEDLI                       (i)          $   525.0    2008-2010
  Industrial Development Revenue Bonds            (ii)             128.3       2027
  Ravenswood - Master Lease                       (iii)            425.0       2009
  Ravenswood - Sale/leaseback                     (iv)             403.5       2019
  Surety Bonds                                    (v)               71.7   2006 - 2008
  Commodity Guarantees and Other                  (vi)              52.9   2006 - 2009
  Letters of Credit                               (vii)             73.5   2006 - 2010
------------------------------------------------------------------------------------------
                                                               $ 1,679.9
------------------------------------------------------------------------------------------
</TABLE>

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

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


                                       23
<PAGE>


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

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

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

(v)  KeySpan  has  agreed  to  indemnify  the  issuers  of  various  surety  and
     performance  bonds  associated  with certain  construction  projects  being
     performed by certain current or former subsidiaries.  In the event that the
     subsidiaries fail to perform their obligations under contracts, the injured
     party may demand that the surety make  payments or provide  services  under
     the bond.  KeySpan  would then be obligated to reimburse the surety for any
     expenses or cash outlays it incurs.  Although  KeySpan is not  guaranteeing
     any new  bonds  for any of the  former  subsidiaries,  KeySpan's  indemnity
     obligation   supports   the   contractual   obligation   of  these   former
     subsidiaries.  KeySpan  has  also  received  from a  former  subsidiary  an
     indemnity bond issued by a third party  insurance  company,  the purpose of
     which is to  reimburse  KeySpan in an amount up to $80 million in the event
     it is required to perform under all other indemnity obligations  previously
     incurred by KeySpan to support  such  company's  bonded  projects  existing
     prior to  divestiture.  At March 31, 2006,  the total cost to complete such
     remaining bonded projects is estimated to be approximately $33 million.

(vi) KeySpan has guaranteed  commodity-related  payments for subsidiaries within
     the Energy  Services  segment,  as well as KeySpan  Ravenswood,  LLC. These
     guarantees  are  provided  to third  parties  to  facilitate  physical  and
     financial  transactions  involved in the  purchase of natural  gas, oil and
     other petroleum products for electric production and marketing  activities.
     The guarantees cover actual purchases by these  subsidiaries that are still
     outstanding as of March 31, 2006.


                                       24
<PAGE>


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

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

7. STOCK BASED COMPENSATION

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

Under this Plan,  19,250,000  shares were  authorized  for issuance of which the
total shares awarded to date include 16.9 million stock options,  222,143 shares
of restricted  stock, and 891,555  performance  shares. At March 31, 2006, after
adjusting for  forfeitures,  there are  approximately  2.8 million  shares still
eligible to be granted under the Incentive  Plan.  In addition,  under  previous
plans,  there  were an  additional  1.7  million  shares  authorized  for  which
approximately 1.2 million stock options were awarded.

In 2005,  KeySpan continued to apply APB Opinion 25 "Accounting for Stock Issued
to  Employees,"  in accounting  for grants  awarded prior to January 1, 2003. No
compensation  cost had been  recognized  for these stock option awards since the
exercise  prices  and  market  values  were  equal  on  the  grant  dates.   Had
compensation cost for these plans been determined based on the fair value at the
grant dates for awards under the plans  consistent with SFAS 123 "Accounting for
Stock-Based  Compensation,"  our net income and earnings per share for the three
months  ended  March 31,  2005 would have  decreased  to the  pro-forma  amounts
indicated below:


                                       25
<PAGE>


<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
                                                                               March 31,
(In Millions of Dollars, Except Per Share Amounts)                               2005
----------------------------------------------------------------------------------------
<S>                                                                              <C>
Earnings available for common stock:
As reported                                                                     $ 234.4
     Add: recorded stock-based compensation expense, net of tax                     2.9
     Deduct: total stock-based compensation expense, net of tax                    (3.4)
----------------------------------------------------------------------------------------
Pro-forma earnings                                                              $ 233.9
----------------------------------------------------------------------------------------
Earnings per share:
     Basic - as reported                                                        $  1.45
     Basic - pro-forma                                                          $  1.45

     Diluted - as reported                                                      $  1.44
     Diluted - pro-forma                                                        $  1.44
----------------------------------------------------------------------------------------
</TABLE>

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

In January 2006,  KeySpan adopted SFAS 123 (revised 2004)  "Share-Based  Payment
("SFAS 123R")." The  implementation of this standard required KeySpan to expense
certain  stock  options  that  had  previously  been  accounted  for  under  the
requirements of APB Opinion 25 and related  Interpretations,  i.e. awards issued
prior to January 1, 2003. No  compensation  cost had been  recognized  for these
fixed stock  option plans in the  Consolidated  Financial  Statements  since the
exercise  prices and market values were equal on the grant dates.  For the three
months  ended March 31,  2006,  KeySpan  recorded an expense of $0.3 million for
stock option  awards  previously  accounted  for under APB 25 and which have not
fully vested.

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

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
                                                                              Three Months Ended
------------------------------------------------------------------------------------------------------
                                                                         March 31,           March 31,
(In Millions of Dollars, Except Per Share Amounts)                         2006                2005
------------------------------------------------------------------------------------------------------
<S>                                                                          <C>                <C>
Performance shares                                                           $ 2.3              $ 1.7
Restricted stock                                                               3.7                0.2
Stock options                                                                  1.5                1.5
EDSPP discount                                                                 1.5                1.2
------------------------------------------------------------------------------------------------------
Total stock-based compensation included in operations and
maintenance expense                                                            9.0                4.6
Income tax (benefit)                                                          (3.2)              (1.7)
------------------------------------------------------------------------------------------------------
Total stock based compensation expense, net of tax                           $ 5.8              $ 2.9
------------------------------------------------------------------------------------------------------
</TABLE>


                                       26
<PAGE>


Prior to the  adoption of SFAS 123R,  KeySpan  presented  all tax  benefits  for
deductions  resulting  from the  exercise  of stock  options  and  disqualifying
dispositions  as  operating  cash flows in its  Consolidated  Statement  of Cash
Flows. SFAS 123R requires the benefits of tax deductions in excess of recognized
compensation  expense to be reported as a financing cash flow, rather than as an
operating cash flow. This  requirement  will reduce net operating cash flows and
increase net  financing  cash flows in periods after  adoption.  Total cash flow
will remain  unchanged from what would have been reported under prior accounting
rules. During the three months ended March 31, 2006 and 2005, cash received from
stock options  exercised was $15.5 million and $24.3 million, respectively.  The
actual tax benefit realized for tax deductions from stock options  exercised was
$1.6  million  and $2.6  million for the three  months  ended March 31, 2006 and
2005,  respectively.  The benefits  received from these tax deductions were less
than the recognized  compensation  expense and accordingly  there were no excess
tax deductions  reported in the financing section of the Consolidated  Statement
of Cash Flows.

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

Performance shares

Performance  shares were awarded under the Incentive Plan in 2004 and 2005 based
upon the attainment of overall corporate  performance  goals.  These performance
shares are measured over a three year period by comparing  KeySpan's  cumulative
total  shareholder  return to the S&P Utilities  Group.  For actual  performance
achieved at a  threshold  level,  50% of the award will be  granted;  for actual
performance achieved at a targeted level, 100% of the award will be granted; and
for actual performance  achieved at the maximum level, 150% of the award will be
granted The 2004 and 2005 awards are being expensed ratably over their remaining
performance periods. Previously, these awards met the performance based criteria
under SFAS 123.  However,  under SFAS 123(R),  the goals  associated  with these
awards are now viewed as market  conditions,  which  prohibits  the  reversal of
previously  recognized expense should the attainment of the market condition not
be met.

The 2006  performance  share award was  revised to reflect  the new  performance
condition criteria under SFAS 123(R). In 2006,  314,560  performance shares were
granted  to  officers.   Performance  shares  were  granted  with  a  three-year
performance period with a threshold,  target and maximum  performance level. The
number of  performance  shares earned at the end of the  performance  period can
range  from  0% to  150%  of the  shares  granted  and  will  be  linked  to two
performance measures:  the percentage improvement in return on invested capital,
or "ROIC",  and KeySpan's  cumulative  three-year total  stockholder  return, or
"TSR",  relative to the  cumulative  three-year  TSR for the Standard and Poor's
Utilities Group,  using a matrix approach that  encompasses  both measures.  The
ROIC goal will act as the primary trigger. If the ROIC goal performance is below
the  threshold  level,  all shares shall be forfeited  without  payment.  Upon a
change of  control,  performance  shares  shall be  distributed  based  upon the
greater of the number of performance  shares originally  awarded at target level
or the number of shares earned based on actual performance through the change of
control date. Under the performance based criteria  associated with SFAS 123(R),
the inability to achieve goals requires  reversal of the  previously  recognized
expense.


                                       27
<PAGE>


Performance share awards were priced at fair value. The unearned compensation as
of March 31, 2006 associated with all of the performance  share awards was $18.4
million.  Upon a change of control,  all  performance  share awards  granted and
outstanding will vest immediately.

Restricted Stock Awards

KeySpan has made certain  grants of  restricted  stock to officers and directors
under the Incentive Plan. Awards of restricted stock were made in 2002, 2005 and
2006.  These  awards  may not be sold or  otherwise  transferred  until  certain
restrictions have lapsed. The unearned stock-based compensation related to these
awards is being amortized to  compensation  expense over the period in which the
awards vest.  The share based expense for these awards was  determined  based on
the fair value of the stock at the date of grant  applied to the total number of
shares that were  anticipated  to fully  vest.  The 2002 and 2005 awards will be
fully  expensed  by the end of this year and the 2006 award was  expensed in the
first quarter of 2006.  Upon a change of control,  all  restricted  stock awards
will vest immediately. The unearned compensation as of March 31, 2006 associated
with these awards was $0.4 million.

Employee Discount Stock Purchase Plan

KeySpan's  Employee  Discount  Stock  Purchase  Plan  ("EDSPP")  allows  KeySpan
employees to purchase shares of KeySpan stock at a 10% discount  through payroll
deductions. KeySpan is currently expensing the discount. The number of shares of
common stock  authorized  for issuance  under the EDSPP is 1,750,000  shares and
there are 538,551 shares remaining to be issued.

Stock Options

The stock option  component of the Incentive Plan entitles the  participants  to
purchase  shares of common stock at an exercise price per share which is no less
than the  closing  price of the  common  stock on the date of the  grant.  Stock
options  generally  vest over a  three-to-five  year period and have an exercise
period of ten years.  Upon a change of control,  all stock  options  granted and
outstanding will vest immediately.

The value of all stock  option  grants  are  estimated  on the date of the grant
using the Black-Scholes  option-pricing model. There were no stock grants issued
in 2006. The following table presents the weighted average fair value,  exercise
price and assumptions used for the 2005 stock option grant:


                                       28
<PAGE>


---------------------------------------------------
                                       2005
---------------------------------------------------
Fair value of grants issued          $     5.47
Dividend yield                             4.74%
Expected volatility                       23.48%
Risk free rate                             3.22%
Expected lives                         6.5 years
Exercise price                       $    37.54
---------------------------------------------------

A summary of the status of our fixed stock option plans and changes is presented
below for the three months ended March 31, 2006:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
                                                              Weighted          Aggregate
                                                               Average      Intrinsic Value
            Fixed Options                     Shares        Exercise Price    (In Millions)
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
<S>                                         <C>                    <C>               <C>
Outstanding at beginning of period           10,443,055           $ 33.74
Granted during the year                               -           $     -
Exercised                                      (483,241)          $ 32.25
Forfeited                                        (7,656)          $ 38.52
-------------------------------------------------------------------------------------------
Outstanding at end of period                  9,952,158           $ 33.81           $ 49.0
-------------------------------------------------------------------------------------------
Exercisable at end of period                  7,280,106           $ 32.72           $ 43.7
-------------------------------------------------------------------------------------------
</TABLE>

The total  intrinsic  value of the options  exercised  during the periods ending
March  31,  2006 and 2005  was  approximately  $3.1  million  and $4.5  million,
respectively.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Remaining         Options Outstanding    Weighted Average     Range of       Options Exercisable   Weighted Average    Range of
Contractual Life   at March 31, 2006      Exercise Price    Exercise Price     at March 31, 2006   Exercise Price    Exercise Price
------------------------------------------------------------------------------------------------------------------------------------
<S>                     <C>                   <C>           <C>                     <C>                 <C>         <C>
 1 years                   119,500           $ 30.50            30.50                  119,500         $ 30.50          30.50
 2 years                   186,410           $ 32.52       $ 19.15 - 32.63             186,410         $ 32.52     $ 19.15 - 32.63
 3 years                   729,625           $ 27.99       $ 24.73 - 29.38             729,625         $ 27.99     $ 24.73 - 29.38
 4 years                   382,181           $ 26.97       $ 21.99 - 27.06             382,181         $ 26.97     $ 21.99 - 27.06
 5 years                   979,987           $ 22.69       $ 22.50 - 32.76             979,987         $ 22.69     $ 22.50 - 32.76
 6 years                 1,582,578           $ 39.50           $39.50                1,582,578         $ 39.50         $39.50
 7 years                 1,841,906           $ 32.66           $32.66                1,490,006         $ 32.66         $32.66
 8 years                 1,231,531           $ 32.40           $32.40                  807,931         $ 32.40         $32.40
 9 years                 1,477,075           $ 37.54           $37.54                  674,504         $ 37.54         $37.54
 10 years                1,421,365           $ 39.25           $39.25                  327,384         $ 39.25         $39.25
------------------------------------------------------------------------------------------------------------------------------------
                         9,952,158                                                   7,280,106
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

As of March 31, 2006, there are approximately 2.7 million options which have not
yet vested. The unearned  compensation cost related to these stock option awards
is $7.8  million  which is expected  to be  recognized  over a weighted  average
period of 2.0 years.


                                       29
<PAGE>


8. POSTRETIREMENT BENEFITS

Pension  Plans:  The  following  information  represents  the  consolidated  net
periodic pension cost for the three months ended March 31, 2006 and 2005 for our
noncontributory  defined  benefit  pension plans which cover  substantially  all
employees. Benefits are based on years of service and compensation.  Funding for
pensions is in  accordance  with  requirements  of federal law and  regulations.
KEDLI and  Boston  Gas  Company  are  subject  to  certain  deferral  accounting
requirements mandated by the NYPSC and the MADTE, respectively for pension costs
and other postretirement benefit costs. Further, KeySpan's electric subsidiaries
are subject to certain "true-up"  provisions in accordance with the LIPA service
agreements.

The calculation of net periodic pension cost is as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
                                                                  Three Months Ended March 31,
(In Millions of Dollars)                                            2006              2005
-----------------------------------------------------------------------------------------------
<S>                                                                 <C>               <C>
Service cost, benefits earned during the period               $      16.1         $    15.0
Interest cost on projected benefit obligation                        38.6              37.4
Expected return on plan assets                                      (47.0)            (42.9)
Net amortization and deferral                                        21.9              18.9
-----------------------------------------------------------------------------------------------
Total pension cost                                            $      29.6         $    28.4
-----------------------------------------------------------------------------------------------
</TABLE>

Other  Postretirement   Benefits:   The  following  information  represents  the
consolidated net periodic other postretirement benefit cost for the three months
ended  March 31, 2006 and 2005 for our  noncontributory  defined  benefit  plans
covering certain health care and life insurance  benefits for retired employees.
We have been funding a portion of future benefits over employees' active service
lives  through  Voluntary  Employee  Beneficiary  Association  ("VEBA")  trusts.
Contributions  to  VEBA  trusts  are  tax  deductible,  subject  to  limitations
contained in the Internal Revenue Code.

Net  periodic   other   postretirement   benefit  cost  included  the  following
components:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
                                                                Three Months Ended March 31,
(In Millions of Dollars)                                           2006                2005
---------------------------------------------------------------------------------------------
<S>                                                                <C>                 <C>
Service cost, benefits earned during the period                   $  6.9              $  6.3
Interest cost on accumulated
   postretirement benefit obligation                                20.2                19.9
Expected return on plan assets                                      (9.1)               (9.1)
Net amortization and deferral                                       16.6                16.5
---------------------------------------------------------------------------------------------
Other postretirement cost                                         $ 34.6              $ 33.6
---------------------------------------------------------------------------------------------
</TABLE>

During  the first  quarter  of 2006,  KeySpan  contributed  $4.0  million to its
pension  plans and $9.0  million  to its  other  postretirement  benefit  plans.
KeySpan  anticipates  contributing an additional $107 million to its pension and
other postretirement benefit plans during the remainder of 2006. These estimated
contribution  levels  are  subject  to change  based on future  market  returns,
interest rates and certain other measurements. Actual contributions,  therefore,
may vary from these levels.


                                       30
<PAGE>


9. COMMERCIAL PAPER

At March 31, 2006,  KeySpan had two credit  facilities  totaling  $1.5 billion -
$920 million for five years through 2010, and $580 million  through 2009,  which
continue to support  KeySpan's  commercial  paper  program  for ongoing  working
capital needs.

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

The facilities  contain certain  affirmative and negative  operating  covenants,
including  restrictions on KeySpan's  ability to mortgage,  pledge,  encumber or
otherwise subject its utility property to any lien, as well as certain financial
covenants  that  require us to,  among  other  things,  maintain a  consolidated
indebtedness  to  consolidated  capitalization  ratio of no more than 65% at the
last day of any fiscal quarter. Violation of these covenants could result in the
termination  of the facilities  and the required  repayment of amounts  borrowed
thereunder,  as well as possible cross defaults under other debt agreements.  At
March  31,  2006,   KeySpan's   consolidated   indebtedness  was  48.9%  of  its
consolidated capitalization and KeySpan was in compliance with all covenants.

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

At March 31, 2006, we had cash and temporary cash investments of $313.1 million.
During the first quarter of 2006, we repaid $160.8  million of commercial  paper
and, at March 31, 2006,  $496.8 million of commercial paper was outstanding at a
weighted average  annualized  interest rate of 4.71%. At March 31, 2006, KeySpan
had the ability to issue up to an  additional $1 billion,  under its  commercial
paper program.


                                       31
<PAGE>


10. 2006 LIPA SETTLEMENT

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

On February 1, 2006,  KeySpan and LIPA  entered into (i) an amended and restated
Management  Services Agreement (the "2006 MSA"),  pursuant to which KeySpan will
continue to operate and  maintain  the electric T&D System owned by LIPA on Long
Island;  (ii) a new Option and  Purchase  and Sale  Agreement  (the "2006 Option
Agreement"),  to replace the Generation  Purchase Rights  Agreement (as amended,
the "GPRA"),  pursuant to which LIPA had the option,  through December 15, 2005,
to acquire  substantially  all of the electric  generating  facilities  owned by
KeySpan on Long Island;  and (iii) a Settlement  Agreement (the "2006 Settlement
Agreement")  resolving outstanding issues between the parties regarding the 1998
LIPA Agreements. The 2006 MSA, the 2006 Option Agreement and the 2006 Settlement
Agreement  are  collectively  referred to herein as the "2006 LIPA  Agreements."
Each of the 2006 LIPA  Agreements  will become  effective as of January 1, 2006,
upon  all of the  2006  LIPA  Agreements  receiving  the  required  governmental
approvals;  otherwise none of the 2006 LIPA  Agreements  will become  effective.
Following the  announcement  of the proposed  acquisition of KeySpan by National
Grid, LIPA, National Grid and KeySpan have engaged in discussions concerning the
impact of the transaction on LIPA's  operations.  At this time, we are unable to
determine  what  impact,  if any,  such  discussions  may have on the 2006  LIPA
Agreements  and the  receipt  and  timing  of  governmental  approvals  relating
thereto.

2006 Settlement Agreement

Pursuant to the terms of the 2006 Settlement Agreement,  KeySpan and LIPA agreed
to resolve issues that have existed between the parties  relating to the various
1998 LIPA Agreements. In addition to the resolution of these matters,  KeySpan's
entitlement  to utilize  LILCO's  available tax credits and other tax attributes
will  increase from  approximately  $50 million to  approximately  $200 million.


                                       32
<PAGE>


These  credits  and  attributes  may be used  to  satisfy  KeySpan's  previously
incurred indemnity  obligation to LIPA for any federal income tax liability that
may result from the settlement of a pending  Internal  Revenue  Service  ("IRS")
audit for LILCO's tax year ended March 31, 1999. In  recognition of these items,
as  well  as for  the  modification  and  extension  of the  1998  MSA  and  the
elimination of the GPRA, upon effectiveness of the Settlement Agreement, KeySpan
will record a contractual asset in the amount of approximately $160 million,  of
which approximately $110 million will be attributed to the right to utilize such
additional  tax credits and  attributes  and  approximately  $50 million will be
amortized over the eight year term of the 2006 MSA. In order to compensate  LIPA
for the  foregoing,  KeySpan  will pay LIPA $69  million in cash and will settle
certain accounts  receivable in the amount of approximately $91 million due from
LIPA.

Generation Purchase Rights Agreement and 2006 Option Agreement.

Under an amended GPRA,  LIPA had the right to acquire  certain of KeySpan's Long
Island-based  generating assets formerly owned by LILCO, at fair market value at
the time of the exercise of such right.  LIPA was  initially  required to make a
determination  by May 2005,  but  KeySpan  and LIPA agreed to extend the date by
which LIPA was to make this  determination  to December 15, 2005. As part of the
2006  settlement  between  KeySpan and LIPA,  the parties  entered into the 2006
Option  Agreement  whereby LIPA has the option during the period January 1, 2006
to December 31, 2006 to purchase only KeySpan's Far Rockaway and/or E.F. Barrett
Generating  Stations  (and certain  related  assets) at a price equal to the net
book value of each facility.  The 2006 Option  Agreement  replaces the GPRA, the
expiration  of which  has been  stayed  pending  effectiveness  of the 2006 LIPA
Agreements.  If LIPA were to exercise the option and purchase one or both of the
generation  facilities  (i) LIPA and KeySpan  will enter into an  operation  and
maintenance agreement,  pursuant to which KeySpan will continue to operate these
facilities for a fixed management fee plus  reimbursement for certain costs; and
(ii) the 1998 PSA and 1998 EMA will be  amended to  reflect  that the  purchased
generating  facilities  would no longer be  covered by those  agreements.  It is
anticipated  that the fees received  pursuant to the  operation and  maintenance
agreement  will offset the reduction in the operation  and  maintenance  expense
recovery component of the 1998 PSA and the reduction in fees under the 1998 EMA.
In the event such  agreements  do not become  effective  by reason of failure to
secure the requisite governmental  approvals,  the GPRA will be reinstated for a
period of 90 days.

Management Services Agreements

In place of the previous compensation  structure (whereby KeySpan was reimbursed
for budgeted  costs,  and earned a management  fee and certain  performance  and
cost-based incentives), KeySpan's compensation for managing the T&D System under
the 2006 MSA consists of two  components:  a minimum  compensation  component of
$224 million per year and a variable component based on electric sales. The $224
million  component  will  remain  unchanged  for three  years and then  increase
annually by 1.7%, plus inflation. The variable component, which will comprise no
more than 20% of  KeySpan's  compensation,  is based on  electric  sales on Long
Island  exceeding a base amount of 16,558 gigawatt hours,  increasing by 1.7% in
each year. Above that level,  KeySpan will receive  approximately 1.34 cents per


                                       33
<PAGE>


kilowatt hour for the first contract  year,  1.29 cents per kilowatt hour in the
second  contract  year  (plus an annual  inflation  adjustment),  1.24 cents per
kilowatt hour in the third contract year (plus an annual inflation  adjustment),
with the per  kilowatt  hour rate  thereafter  adjusted  annually by  inflation.
Subject to certain  limitations,  KeySpan will be able to retain all operational
efficiencies realized during the term of the 2006 MSA.

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

11. KEYSPAN GAS EAST CORPORATION SUMMARY FINANCIAL INFORMATION

KEDLI is a wholly owned  subsidiary of KeySpan.  KEDLI was formed on May 7, 1998
and on May 28, 1998 acquired  substantially all of the assets related to the gas
distribution  business of the Long Island Lighting Company.  KEDLI established a
program for the  issuance,  from time to time,  of up to $600 million  aggregate
principal  amount of  Medium-Term  Notes,  which  are fully and  unconditionally
guaranteed by the parent, KeySpan Corporation. On February 1, 2000, KEDLI issued
$400 million of 7.875% Medium-Term Notes due 2010. In January 2001, KEDLI issued
an additional  $125 million of  Medium-Term  Notes at 6.9% due January 2008. The
following  condensed  financial  statements  are required to be disclosed by SEC
regulations  and set forth those of KEDLI,  KeySpan  Corporation as guarantor of
the Medium-Term Notes and our other subsidiaries on a combined basis.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                               Statement of Income
-----------------------------------------------------------------------------------------------------------------------------------
                                                                      Three Months Ended March 31, 2006
(In Millions of Dollars)                       Guarantor         KEDLI        Other Subsidiaries     Eliminations     Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>             <C>                                     <C>             <C>
Revenues                                         $   0.2         $ 543.7              $ 2,117.4         $   (0.2)        $ 2,661.1
                                          -----------------------------------------------------------------------------------------
Operating Expenses
  Purchased gas                                        -           364.9                1,146.5                -           1,511.4
  Fuel and purchased power                             -               -                  130.0                -             130.0
  Operations and maintenance                         7.9            36.3                  361.8                -             406.0
  Intercompany expense                                 -             1.2                   (1.0)            (0.2)                -
  Depreciation and amortization                        -            25.1                   85.2                -             110.3
  Operating taxes                                      -            17.7                  100.5                -             118.2
                                          -----------------------------------------------------------------------------------------
Total Operating Expenses                             7.9           445.2                1,823.0             (0.2)          2,275.9
                                          -----------------------------------------------------------------------------------------
Income from equity investments                         -               -                    3.4                -               3.4
Gain on sale of property                               -               -                    0.5                -               0.5
                                          -----------------------------------------------------------------------------------------
Operating Income (Loss)                             (7.7)           98.5                  298.3                -             389.1
                                          -----------------------------------------------------------------------------------------

Interest charges                                   (39.8)          (14.1)                 (53.0)            40.7             (66.2)
Other income and (deductions)                      249.2               -                   19.4           (257.2)             11.4
                                          -----------------------------------------------------------------------------------------
Total Other Income and (Deductions)                209.4           (14.1)                 (33.6)          (216.5)            (54.8)
                                          -----------------------------------------------------------------------------------------

Income Taxes (Benefit)                              (6.3)           29.9                  102.7                -             126.3
                                          -----------------------------------------------------------------------------------------
Net Income                                       $ 208.0         $  54.5              $   162.0         $ (216.5)        $   208.0
                                          =========================================================================================
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       34

<PAGE>


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                        Statement of Income
------------------------------------------------------------------------------------------------------------------------------------
                                                                      Three Months Ended March 31, 2005
(In Millions of Dollars)                         Guarantor         KEDLI        Other Subsidiaries     Eliminations     Consolidated
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>             <C>                  <C>               <C>              <C>
Revenues                                          $   0.2         $ 503.6              $ 1,976.9         $   (0.2)        $ 2,480.5
                                          ------------------------------------------------------------------------------------------
Operating Expenses
  Purchased gas                                         -           314.1                  994.7                -           1,308.8
  Fuel and purchased power                              -               -                  133.1                -             133.1
  Operations and maintenance                          6.3            32.5                  348.4                -             387.2
  Intercompany expense                                  -             1.3                   (1.3)                                 -
  Depreciation and amortization                         -            26.5                   79.6                -             106.1
  Operating taxes                                       -            17.0                   94.9                -             111.9
                                          ------------------------------------------------------------------------------------------
Total Operating Expenses                              6.3           391.4                1,649.4                -           2,047.1
                                          ------------------------------------------------------------------------------------------
Income from equity investments                          -               -                    5.3                -               5.3
                                          ------------------------------------------------------------------------------------------
Operating Income (Loss)                              (6.1)          112.2                  332.8             (0.2)            438.7
                                          ------------------------------------------------------------------------------------------

Interest charges                                    (29.7)          (14.8)                 (63.3)            47.8             (60.0)
Other income and (deductions)                       261.7             0.1                   13.4           (282.9)             (7.7)
                                          ------------------------------------------------------------------------------------------
Total Other Income and (Deductions)                 232.0           (14.7)                 (49.9)          (235.1)            (67.7)
                                          ------------------------------------------------------------------------------------------

Income Taxes (Benefit)                               (9.8)           34.1                  111.0                -             135.3
                                          ------------------------------------------------------------------------------------------
Net Income                                        $ 235.7         $  63.4              $   171.9         $ (235.3)        $   235.7
                                          ==========================================================================================
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>



                                       35
<PAGE>


<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Balance Sheet
-----------------------------------------------------------------------------------------------------------------------------------
                                                                              March 31, 2006
(In Millions of Dollars)                   Guarantor            KEDLI       Other Subsidiaries      Eliminations       Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>              <C>                  <C>               <C>                <C>
ASSETS
Current Assets
   Cash & temporary cash investments         $   276.2        $     3.6           $     33.3         $        -         $    313.1
   Accounts receivable, net                        0.7            226.1                891.0                  -            1,117.8
   Other current assets                            3.0            202.9              1,042.0                  -            1,247.9
                                         ------------------------------------------------------------------------------------------
                                                 279.9            432.6              1,966.3                  -            2,678.8
                                         ------------------------------------------------------------------------------------------

Equity Investments                             4,791.3                -                134.9           (4,674.1)             252.1
                                         ------------------------------------------------------------------------------------------
Property
   Gas                                               -          2,128.7              5,223.8                  -            7,352.5
   Other                                             -              1.7              2,932.5                  -            2,934.2
   Accumulated depreciation and
    depletion                                        -           (409.7)            (2,495.5)                 -           (2,905.2)
                                         ------------------------------------------------------------------------------------------
                                                     -          1,720.7              5,660.8                  -            7,381.5
                                         ------------------------------------------------------------------------------------------

Intercompany Accounts Receivable               2,607.0            582.1                786.9           (3,976.0)                 -
                                                     -
Deferred Charges                                 481.4            300.9              2,397.9                  -            3,180.2

                                         ------------------------------------------------------------------------------------------
Total Assets                                 $ 8,159.6        $ 3,036.3           $ 10,946.8         $ (8,650.1)        $ 13,492.6
                                         ==========================================================================================

LIABILITIES AND CAPITALIZATION
Current Liabilities
   Accounts payable                          $    46.9        $    91.6           $    629.1         $        -         $    767.6
   Commercial paper                              496.8                -                    -                  -              496.8
   Other current liabilities                     349.2             43.7                174.2                  -              567.1
                                         ------------------------------------------------------------------------------------------
                                                 892.9            135.3                803.3                  -            1,831.5
                                         ------------------------------------------------------------------------------------------
Intercompany Accounts Payable                     45.0            803.2              1,599.0           (2,447.2)                 -
                                         ------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Deferred income tax                               25.4            335.2                783.4                  -            1,144.0
Other deferred credits and liabilities           694.6            160.2              1,101.5                  -            1,956.3
                                         ------------------------------------------------------------------------------------------
                                                 720.0            495.4              1,884.9                  -            3,100.3
                                         ------------------------------------------------------------------------------------------
Capitalization
Common shareholders' equity                    4,639.3            951.5              3,708.8           (4,674.1)           4,625.5
Long-term debt                                 1,862.4            650.9              2,935.5           (1,528.8)           3,920.0
                                         ------------------------------------------------------------------------------------------
Total Capitalization                           6,501.7          1,602.4              6,644.3           (6,202.9)           8,545.5
                                         ------------------------------------------------------------------------------------------
Minority Interest in Subsidiary
 Companies                                           -                -                 15.3                  -               15.3
                                         ------------------------------------------------------------------------------------------
Total Liabilities & Capitalization           $ 8,159.6        $ 3,036.3           $ 10,946.8         $ (8,650.1)        $ 13,492.6
                                         ==========================================================================================
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       36
<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet
------------------------------------------------------------------------------------------------------------------------------------
                                                                                December 31, 2005
(In Millions of Dollars)                           Guarantor         KEDLI      Other Subsidiaries      Eliminations    Consolidated
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>             <C>                <C>                <C>             <C>
ASSETS
Current Assets
   Cash & temporary cash investments               $    79.6      $     3.5          $     41.4         $        -       $    124.5
   Accounts receivable, net                              0.6          149.9               822.2                  -            972.7
   Other current assets                                  4.0          368.9             1,550.0                  -          1,922.9
                                            ----------------------------------------------------------------------------------------
                                                        84.2          522.3             2,413.6                  -          3,020.1
                                            ----------------------------------------------------------------------------------------

Investments and Other                                4,571.0            0.7               128.2           (4,457.5)           242.4
                                            ----------------------------------------------------------------------------------------
Property
   Gas                                                     -        2,111.3             5,164.6                  -          7,275.9
   Other                                                   -              -             3,092.8                  -          3,092.8
   Accumulated depreciation and depletion                  -         (400.6)           (2,631.2)                 -         (3,031.8)
                                            ----------------------------------------------------------------------------------------
                                                           -        1,710.7             5,626.2                  -          7,336.9
                                            ----------------------------------------------------------------------------------------

Intercompany Accounts Receivable                     2,813.6           44.6                95.6           (2,953.8)               -

Deferred Charges                                       482.5          316.1             2,414.6                  -          3,213.2

                                            ----------------------------------------------------------------------------------------
Total Assets                                       $ 7,951.3      $ 2,594.4          $ 10,678.2         $ (7,411.3)      $ 13,812.6
                                            ========================================================================================

LIABILITIES AND CAPITALIZATION
Current Liabilities
   Accounts payable                                $    36.4      $   149.7          $    900.9         $        -       $  1,087.0
   Commercial paper                                    657.6              -                   -                  -            657.6
   Other current liabilities                           196.2          128.5                85.9                  -            410.6
                                            ----------------------------------------------------------------------------------------
                                                       890.2          278.2               986.8                  -          2,155.2
                                            ----------------------------------------------------------------------------------------
Intercompany Accounts Payable                           51.8          338.3             1,049.8           (1,439.9)               -
                                            ----------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Deferred income tax                                     27.2          330.6               800.1                  -          1,157.9
Other deferred credits and liabilities                 634.0          225.3             1,240.0                  -          2,099.3
                                            ----------------------------------------------------------------------------------------
                                                       661.2          555.9             2,040.1                  -          3,257.2
                                            ----------------------------------------------------------------------------------------
Capitalization
Common shareholders' equity                          4,485.4          897.0             3,539.3           (4,457.6)         4,464.1
Long-term debt                                       1,862.7          525.0             3,046.9           (1,513.8)         3,920.8
                                            ----------------------------------------------------------------------------------------
Total Capitalization                                 6,348.1        1,422.0             6,586.2           (5,971.4)         8,384.9
                                            ----------------------------------------------------------------------------------------
Minority Interest in Subsidiary Companies                  -              -                15.3                  -             15.3
                                            ----------------------------------------------------------------------------------------
Total Liabilities & Capitalization                 $ 7,951.3      $ 2,594.4          $ 10,678.2         $ (7,411.3)      $ 13,812.6
                                            ========================================================================================
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>



                                       37
<PAGE>


<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Statement of Cash Flows
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                 Three Months Ended March 31, 2006
                                                             ----------------------------------------------------------------------
(In Millions of Dollars)                                         Guarantor         KEDLI        Other Subsidiaries     Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>           <C>                    <C>              <C>
Operating Activities
Net Cash Provided by Operating Activities                           $  32.7        $ 142.1                $ 369.1          $ 543.9
                                                             ----------------------------------------------------------------------
Investing Activities
   Capital expenditures                                                   -          (20.8)                (101.4)          (122.2)
   Cost of removal                                                        -           (0.6)                  (6.1)            (6.7)
                                                             ----------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities                       -          (21.4)                (107.5)          (128.9)
                                                             ----------------------------------------------------------------------
Financing Activities
   Treasury stock issued                                               15.5              -                      -             15.5
   Payment of debt, net                                              (160.8)             -                      -           (160.8)
   Common and preferred stock dividends paid                          (81.1)             -                      -            (81.1)
   Net intercompany accounts                                          390.3         (120.6)                (269.7)               -
                                                                                                                                 -
                                                             ----------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities                   163.9         (120.6)                (269.7)          (226.4)
                                                             ----------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents                $ 196.6        $   0.1                $  (8.1)         $ 188.6
Cash and Cash Equivalents at Beginning of Period                       79.6            3.5                   41.4            124.5
                                                             ----------------------------------------------------------------------
Cash and Cash Equivalents at End of Period                          $ 276.2        $   3.6                $  33.3          $ 313.1
                                                             ======================================================================
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Statement of Cash Flows
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                   Three Months Ended March 31, 2005
                                                          -------------------------------------------------------------------------
(In Millions of Dollars)                                      Guarantor           KEDLI         Other Subsidiaries     Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>               <C>                   <C>              <C>
Operating Activities
Net Cash Provided by (Used in) Operating Activities              $   33.4           $ 81.6               $  268.4         $  383.4
                                                          -------------------------------------------------------------------------
Investing Activities
   Capital expenditures                                                 -            (17.0)                 (94.8)          (111.8)
  Cost of removal                                                       -             (0.3)                  (4.5)            (4.8)
  Proceeds from sale of property                                        -                -                   48.1             48.1
                                                          -------------------------------------------------------------------------
Net Cash Used in Investing Activities                                   -            (17.3)                 (51.2)           (68.5)
                                                          -------------------------------------------------------------------------
Financing Activities
   Treasury stock issued                                             24.3                -                      -             24.3
   Payment of debt, net                                            (941.4)               -                  (15.0)          (956.4)
   Common and preferred stock dividends paid                        (75.9)               -                      -            (75.9)
   Other                                                              9.1                -                      -              9.1
   Intercompany dividend payment                                    265.0                                  (265.0)               -
   Net intercompany accounts                                        187.5            (68.6)                (118.9)               -
                                                                                                                                 -
                                                          -------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities                (531.4)           (68.6)                (398.9)          (998.9)
                                                          -------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents             $ (498.0)          $ (4.3)              $ (181.7)        $ (684.0)
Net Cash Flow from Discontinued Operations                              -                -                  (15.0)           (15.0)
Cash and Cash Equivalents at Beginning of Period                    580.7             (0.9)                 342.2            922.0
                                                          -------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period                       $   82.7           $ (5.2)              $  145.5         $  223.0
                                                          =========================================================================
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       38
<PAGE>


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

Consolidated Review of Results

The following is a summary of transactions  affecting  comparative  earnings for
the three months ended March 31, 2006,  compared to the three months ended March
31, 2005. Capitalized terms used in the following discussion,  but not otherwise
defined,  have the same  meaning  as when used in the Notes to the  Consolidated
Financial Statements included under Item 1. References to "KeySpan," "we," "us,"
and "our" mean KeySpan Corporation, together with its consolidated subsidiaries.

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


-------------------------------------------------------------------------
(In Millions of Dollars, Except per Share)
-------------------------------------------------------------------------

Quarter Ended March 31,                              2006          2005
-------------------------------------------------------------------------
Gas Distribution                                   $ 336.4       $ 391.9
Electric Services                                     65.0          51.0
Energy Services                                       (0.4)         (2.8)
Energy Investments                                     3.0           6.4
Eliminations and other                               (14.9)         (7.8)
-------------------------------------------------------------------------
Operating Income                                     389.1         438.7
-------------------------------------------------------------------------
Other income and (deductions)
     Interest charges                                (66.2)        (60.0)
     Gain on sale of investments                         -           4.1
     Cost of debt redemption                             -         (20.9)
     Other income and (deductions)                    11.4           9.1
-------------------------------------------------------------------------
                                                     (54.8)        (67.7)
-------------------------------------------------------------------------
Income taxes                                         126.3         135.3
-------------------------------------------------------------------------
Earnings from continuing operations                  208.0         235.7
Discontinued operations                                  -             -
-------------------------------------------------------------------------
Net Income                                           208.0         235.7
Preferred stock dividend requirements                    -           1.3
-------------------------------------------------------------------------
Earnings for Common Stock                          $ 208.0       $ 234.4
-------------------------------------------------------------------------

Basic Earnings per Share                           $  1.19       $  1.45
-------------------------------------------------------------------------


KeySpan's  earnings  for common stock for the three months ended March 31, 2006,
were $208.0 million, or $1.19 per share, compared to $234.4 million or $1.45 per
share realized  during the  corresponding  period last year, a decrease of $26.4
million, or $0.26 per share.


                                       39
<PAGE>


As indicated in the above table,  operating income  decreased $49.6 million,  or
11% for the quarter ended March 31, 2006,  compared to the corresponding  period
last year. The comparative  operating income  primarily  reflects lower earnings
from the Gas Distribution  segment of $55.5 million,  partially offset by higher
earnings from KeySpan's electric  operations of $14.0 million.  Operating income
from the Gas  Distribution  segment was  adversely  impacted by the warm weather
during the first quarter of 2006 which resulted in a decrease to comparative net
gas revenues  (revenues less the cost of gas and associated  revenue taxes). The
Electric  Services  segment  results were  favorably  impacted by an increase in
electric revenues from KeySpan's merchant electric generating  facilities.  (See
the  discussion  under the caption  "Review of Operating  Segments"  for further
details on each segment.)

Other income and (deductions)  reflects interest charges,  costs associated with
debt  redemptions,   income  from  a  subsidiary  stock  transaction  and  other
miscellaneous items. For the three months ended March 31, 2006, other income and
(deductions)  reflects a net expense of $54.8 million  compared to a net expense
of $67.7  million for the three  months  ended  March 31,  2005.  The  favorable
variation of $12.9 million is primarily due to debt redemption costs incurred in
2005.  In 2005,  KeySpan  redeemed  $500  million  6.15%  Series Notes due 2006.
KeySpan  incurred  $20.9 million in call premiums and wrote-off  $1.3 million of
previously   deferred   financing   costs.  In  addition,   we  accelerated  the
amortization of approximately $11.2 million of previously  unamortized  benefits
associated with an interest rate swap on the redeemed bonds.

In  addition,  other  income  and  (deductions)  for the first  quarter  of 2005
reflects the sale of  KeySpan's  50%  interest in Premier  Transmission  Limited
("Premier"),  a gas pipeline from southwest  Scotland to Northern  Ireland.  The
sale  generated  cash proceeds of  approximately  $48.1  million.  In the fourth
quarter of 2004,  KeySpan  reduced  its  carrying  value in Premier to an amount
approximating  the  anticipated  cash proceeds from the sale.  The final sale of
Premier  resulted in a pre-tax gain of $4.1 million  reflecting  the  difference
from earlier estimates.

Income tax expense for the first quarter of 2006 and 2005 generally reflects the
level of pre-tax income.

As noted  previously,  KeySpan's  earnings for common stock for the three months
ended March 31, 2006 decreased  $26.4 million,  or $0.26 per share,  compared to
same period of 2005 primarily  reflecting  the items noted - specifically  lower
earnings from KeySpan's gas distribution operations,  partially offset by higher
earnings from electric services operations. In addition,  earnings per share for
the first  quarter of 2006 reflects a higher level of  outstanding  common stock
compared to last year. In May 2005, KeySpan issued 12.1 million shares of common
stock upon the  conversion  of previously  held MEDs Equity Units.  The dilutive
effect of this issuance, in addition to KeySpan's employee stock purchase plans,
on earnings per share for the first quarter of 2006 was approximately  $0.10 per
share. (See KeySpan's Annual Report of Form 10-K for the year ended December 31,
2005,  Note 6 to the  Consolidated  Financial  Statements  "Long-term  Debt  and
Commercial Paper" for additional details on the MEDs Equity Units.)


                                       40
<PAGE>


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

In light  of the  pending  Merger  between  KeySpan  and  National  Grid and the
widespread  integration  efforts  being  undertaken by both  companies,  KeySpan
believes that it is no longer relevant to comment on guidance.

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

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

Gas Distribution

KeySpan Energy Delivery New York ("KEDNY") provides gas distribution  service to
customers in the New York City Boroughs of Brooklyn, Staten Island and a portion
of Queens,  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.  Four gas  distribution
companies - 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.

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

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
                                                         Three Months Ended March 31,
(In Millions of Dollars)                                      2006             2005
-------------------------------------------------------------------------------------
<S>                                                        <C>              <C>
Revenues                                                  $ 2,180.1        $ 2,025.5
Cost of gas                                                 1,512.6          1,313.4
Revenue taxes                                                  26.2             24.8
-------------------------------------------------------------------------------------
Net Revenues                                                  641.3            687.3
-------------------------------------------------------------------------------------
Operating Expenses
   Operations and maintenance                                 190.4            181.8
   Depreciation and amortization                               75.9             76.8
   Operating taxes                                             38.6             36.8
-------------------------------------------------------------------------------------
Total Operating Expenses                                      304.9            295.4
-------------------------------------------------------------------------------------
Operating Income                                            $ 336.4          $ 391.9
-------------------------------------------------------------------------------------
Firm gas sales and transportation (MDTH)                    126,904          150,626
Transportation - Electric Generation (MDTH)                   6,471            2,840
Other Sales (MDTH)                                           52,332           56,547
Warmer (Colder) than Normal - New York                        13.0%             (2.7)%
Warmer (Colder) than Normal - New England                      7.7%             (6.6)%
-------------------------------------------------------------------------------------
</TABLE>
A MDTH is 10,000 therms (British Thermal Units) and reflects the heating content
of  approximately  one million  cubic feet of gas. A therm  reflects the heating
content of  approximately  100 cubic feet of gas.One billion cubic feet (BCF) of
gas equals approximately 1,000 MDTH.


                                       41
<PAGE>


Executive Summary

Operating  income  decreased  $55.5 million for the three months ended March 31,
2006  compared to the same period last year,  primarily due to a decrease in net
gas revenues  (revenues  less the cost of gas and  associated  revenue taxes) of
$46.0 million, primarily resulting from the warm first quarter weather. Further,
operating  expenses  increased  $9.5  million due, in part to, to an increase of
$4.7 million in the provision for uncollectible  accounts receivable as a result
of higher gas costs, as well as to higher employee benefit related expenses.

Net Revenues

Net gas revenues from our gas distribution  operations  decreased $46.0 million,
or 7%, in the first quarter of 2006 compared to the same quarter last year. Both
the New York and New England based gas  distribution  operations  were adversely
impacted by the significantly warmer than normal weather experienced  throughout
the Northeastern  United States during the first quarter of 2006. As measured in
heating  degree days,  weather for the first quarter of 2006 in our New York and
New England service territories was approximately 13% and 8% warmer than normal,
respectively,  and was  approximately 15% warmer than last year across KeySpan's
service territories.

Net revenues from firm gas customers  (residential,  commercial  and  industrial
customers)  decreased by $48.7  million in the first quarter of 2006 compared to
the same period last year.  The  favorable  impact to net gas revenues from load
growth  additions  was more than  offset by the adverse  impact of  conservation
measures  adopted  by firm gas sales  customers  and by the warm  weather.  Load
growth  additions  from  oil-to-gas  conversions,  primarily  for space  heating
purposes, as well as from new construction in 2005, resulted in a benefit to net
gas revenues of $7.5 million in the first quarter of 2006.  However,  these load
growth  additions  were  offset  by  declining  usage  per  customer  due to the
extremely  warm first  quarter  weather,  the use of more  efficient gas heating
equipment  and higher gas costs that, in the  aggregate,  resulted in an adverse
impact  to net gas  revenues  of $56.2  million,  net of the  benefits  from the
weather normalization adjustments and weather derivatives discussed below.

KEDNY and KEDLI  each  operate  under  utility  tariffs  that  contain a weather
normalization  adjustment  that  significantly  offsets  variations  in firm net
revenues due to fluctuations in weather. These weather normalization adjustments
resulted  in a benefit  to KeySpan of $25  million  during the first  quarter of
2006,  but this did not fully mitigate the impact of the loss in revenues due to
the  extremely  warm  weather   experienced,   as  previously   noted.  The  New
England-based  gas distribution  subsidiaries do not have weather  normalization
adjustments.  To mitigate the effect of fluctuations in normal weather  patterns
on KEDNE's  results of operations and cash flows,  weather  derivatives  were in
place for the 2005/2006  winter  heating  season.  These  financial  derivatives
afforded KeySpan some protection  against warmer than normal weather.  As noted,
weather for the first quarter of 2006 was approximately 8% warmer than normal in
KeySpan's New England service  territory;  however for the entire primary winter


                                       42
<PAGE>


heating season  -November 2005 through March 2006 - weather was slightly  colder
than  normal.  Therefore,  there was no earnings  impact  associated  with these
weather  derivatives  for  the  first  quarter  of  2006.  (See  Note  4 to  the
Consolidated Financial Statements "Hedging and Derivative Financial Instruments"
for further information).

Firm gas distribution  rates for KEDNY,  KEDLI and KEDNE in 2006, other than for
the recovery of gas costs,  have  remained  substantially  unchanged  from rates
charged in 2005.

In our large-volume  heating and other interruptible  (non-firm) markets,  which
include large apartment houses, government buildings and schools, gas service is
provided  under rates that are  designed to compete  with prices of  alternative
fuel,  including No. 2 and No. 6 grade heating oil. These "dual-fuel"  customers
can consume either natural gas or fuel oil for heating purposes. Net revenues in
these markets  increased  $2.7 million during the first quarter of 2006 compared
to the same period last year reflecting higher pricing.

Firm Sales, Transportation and Other Quantities

Firm gas sales and  transportation  quantities  for the quarter  ended March 31,
2006,  decreased  16%  compared to the same period in 2005 due  primarily to the
warmer  weather  this  year  compared  to  last  year.  Customer  additions  and
oil-to-gas  conversions  offset  the full  impact  of the  warmer  weather.  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. The decrease in these sales quantities for the three
months  ended March 31, 2006,  compared to the same period of 2005  reflects the
warm weather  experienced.  We have a  management  contract  with Merrill  Lynch
Trading,  under  which  Merrill  Lynch  Trading  provides  portfolio  management
services to  KeySpan's  Massachusetts  gas  distribution  subsidiaries.  KeySpan
provides  these  services  internally  for its New  York and New  Hampshire  gas
distribution subsidiaries.

Purchased Gas for Resale

The  increase in gas costs for the first  quarter of 2006  compared to the first
quarter of 2005 of $199.2  million,  or 15%,  reflects an increase of 32% in the
price per dekatherm of gas purchased for firm gas sales  customers,  offset by a
16%  decrease in the  quantity of gas  purchased  due to the warm first  quarter
weather.  The  current  gas  rate  structure  of each  of our  gas  distribution
utilities includes a gas adjustment clause, pursuant to which variations between
actual  gas costs  incurred  for resale to firm  sales  customers  and gas costs
billed to firm sales  customers  are deferred and refunded to or collected  from
customers in a subsequent period.


                                       43
<PAGE>


Operating Expenses

Operating expenses during the first quarter of 2006 compared to the same quarter
last year increased $9.5 million,  or 3%.  Operations  and  maintenance  expense
increased  $8.6  million,  or 5%, in 2006  compared to 2005  primarily due to an
increase of $4.7 million in the provision for uncollectible accounts as a result
of increasing gas costs, as well as from an increase in employee  benefit costs,
including postretirement costs.

Comparative  operating  taxes  increased $1.8 million due to the expiration of a
five-year  property  tax  assessment   agreement  with  New  York  City.  Higher
depreciation  charges of $1.5 million reflecting the continued  expansion of the
gas distribution system were offset by lower regulatory  amortization charges of
$2.4 million.

Gas Supply and Pricing

KeySpan had  adequate  gas supply  available  to meet its gas load demand in its
service  territories  for the 2005/2006  winter  heating season as KeySpan's gas
storage was 100% full at the start of the winter heating season. The current gas
rate  structure  of  each  of our  gas  distribution  utilities  includes  a gas
adjustment clause,  pursuant to which gas costs are recovered in billed sales to
regulated  firm gas  sales  customers.  Although  KeySpan  is  allowed  to "pass
through" the cost of gas to its  customers,  management  is  concerned  with the
rising  natural gas prices and the related  impact on  customers'  gas bills and
recovery  of  customer  accounts  receivable.  As  noted,  KeySpan  has  already
experienced  an increase in bad debt expense and an increase in collection  lag.
Further,  the  high  gas  prices  has led to an  increase  in  price  elasticity
resulting in an increase in customer  conservation  measures and attrition.  The
MADTE  order,  received  in the fourth  quarter of 2005,  permitting  Boston Gas
regulatory  recovery of the gas cost component of net bad debt write-offs should
help to mitigate the increase in bad debt expense.

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


                                       44
<PAGE>


Other Matters

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

In order to serve the  anticipated  market  requirements in our New York service
territories,  KeySpan and Duke Energy  Corporation formed Islander East Pipeline
Company,  LLC  ("Islander  East") in 2000.  Once in  service,  the  pipeline  is
expected  to  transport  up to 260,000 DTH of natural gas to the Long Island and
New York City energy  markets,  enough  natural gas to heat  600,000  homes.  In
addition,  KeySpan has a 26.25% interest in the Millennium Pipeline  development
project which is anticipated to transport up to 525,000 DTH of natural gas a day
to the Algonquin pipeline.  KEDLI has executed a Precedent Agreement for 150,000
DTH of  natural  gas per day of  transportation  capacity  from  the  Millennium
Pipeline  system,  increasing  to 200,000 DTH in the third year of the  pipeline
being in service.  These  pipeline  projects will allow KeySpan to diversify the
geographic  sources of its gas  supply.  See the  discussion  under the  caption
"Energy  Investments"  for  additional   information  regarding  these  pipeline
projects.

Electric Services

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

On February 1, 2006,  KeySpan and LIPA  entered into (i) an amended and restated
Management  Services Agreement (the "2006 MSA"),  pursuant to which KeySpan will
continue to operate and  maintain  the electric T&D System owned by LIPA on Long
Island;  (ii) a new Option and  Purchase  and Sale  Agreement  (the "2006 Option


                                       45
<PAGE>


Agreement"), to replace the Generation Purchase Rights Agreement as amended (the
"GPRA"),  pursuant to which LIPA had the option,  through  December 15, 2005, to
acquire substantially all of the electric generating facilities owned by KeySpan
on  Long  Island;  and  (iii)  a  Settlement  Agreement  (the  "2006  Settlement
Agreement")  resolving outstanding issues between the parties regarding the 1998
LIPA Agreements. The 2006 MSA, the 2006 Option Agreement and the 2006 Settlement
Agreement  are  collectively  referred to herein as the "2006 LIPA  Agreements".
(For  a  further  discussion  on  these  LIPA  agreements  see  Note  10 to  the
Consolidated Financial Statements "2006 LIPA Settlement"). The Electric Services
segment also provides retail marketing of electricity to commercial customers.

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


------------------------------------------------------------------
                                      Three Months Ended March 31,
(In Millions of Dollars)                   2006             2005
------------------------------------------------------------------
Revenues                               $    424.8      $    405.0
Purchased fuel                              130.0           133.0
------------------------------------------------------------------
Net Revenues                                294.8           272.0
------------------------------------------------------------------
Operating Expenses
   Operations and maintenance               155.3           153.6
   Depreciation                              27.1            22.8
   Operating taxes                           47.4            44.6
------------------------------------------------------------------
Total Operating Expenses                    229.8           221.0
------------------------------------------------------------------
Operating Income                       $     65.0      $     51.0
------------------------------------------------------------------
Electric sales (MWH)*                     806,677       1,001,408
Capacity(MW)*                               2,450           2,450
Cooling degree days                           N/A             N/A
------------------------------------------------------------------
*Reflects the operations of the Ravenswood Generating Station only.

Executive Summary

Operating  income  increased  $14.0 million,  or 27%, for the three months ended
March 31,  2006,  compared  to the same period last year,  due  primarily  to an
increase in net revenues from the Ravenswood Generating Station of $23.9 million
as a result of improved  pricing  and gains from the  settlement  of  derivative
financial  instruments.  The hedging  strategies  that were in place  during the
first quarter of 2006 were consistent with past KeySpan policy to hedge the cash
flow variability  associated with a portion of forecasted  electric energy sales
from the Ravenswood  Generating  Station.  This benefit to operating  income was
partially offset by an increase in operating  expenses of $8.8 million primarily
as a result of higher depreciation charges and property taxes.


                                       46
<PAGE>


Net Revenues

Total electric net revenues realized during the first quarter of 2006 were $22.8
million, or 8% higher than such revenues realized during the corresponding
period last year.

Net revenues from the Ravenswood  Generating Station increased $23.9 million, or
35% for the three months ended March 31, 2006,  compared to the same period last
year reflecting  increased energy margins of $38.0 million.  Capacity  revenues,
however,  decreased $14.1 million  reflecting  lower volume sales as a result of
new installed capacity additions in New York City.

The increase in energy margins for the first quarter of 2006 primarily  reflects
the  settlement  of  derivative  financial  instruments.  We  employ  derivative
financial  hedging  instruments to hedge the cash flow variability for a portion
of forecasted  purchases of natural gas and fuel oil consumed at the  Ravenswood
Generating Station.  Further, we have engaged in the use of derivative financial
hedging instruments to hedge the cash flow variability associated with a portion
of forecasted  electric  energy sales from the  Ravenswood  Generating  Station.
These derivative  instruments  resulted in hedging gains, which are reflected in
net electric margins, of $56.3 million for the first quarter of 2006 compared to
hedging  gains of $3.0  million for the first  quarter of 2005.  The benefits to
energy margins from KeySpan's  hedging  strategy were partially offset by an 84%
decrease in realized  "spark-spreads" (the selling price of electricity less the
cost of fuel,  exclusive of hedging gains or losses).  Further, the level of MWh
sold into the New York  Independent  System  Operator  ("NYISO")  energy  market
decreased  19%.  Combined,  these  two items  reduced  energy  margins  by $15.3
million.  (See Note 4 to the  Consolidated  Financial  Statements  "Hedging  and
Derivative  Financial  Instruments" for further information on KeySpan's hedging
strategy.)

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

Net  revenues  for the first  quarter of 2006 from the service  agreements  with
LIPA,  including  the power  purchase  agreements  associated  with two electric
peaking facilities,  decreased  approximately $2.0 million compared to the first
quarter  of  2005.  This  reflects  a  decrease  $4.5  million  in the  level of
incentives earned on these agreements, as well as lower revenues associated with
KeySpan's Long Island based electric generating units of $1.0 million due to the
warm  winter  weather.  The lower  level of  incentives  is, in part,  timing in
nature. Partially offsetting these adverse impacts to net electric revenues, was
an increase in recoverable  operations and  maintenance  costs from LIPA of $3.5
million.   (For  a  description  of  the  LIPA  Agreements  and  power  purchase
agreements,  see  KeySpan's  2005 Annual  Report on Form 10-K for the year ended
December  31, 2005 Item 7.  Management's  Discussion  and  Analysis of Financial
Condition  and  Results of  Operations  under the caption  "Electric  Services -
Revenue Mechanisms.")

Revenues  associated with KeySpan's  electric  marketing  activities  during the
first  quarter of 2006 have  remained  consistent  with such  revenues  realized
during the same period last year.


                                       47
<PAGE>


Operating Expenses

Operating expenses increased $8.8 million,  or 4%, for the first quarter of 2006
compared to the first quarter of 2005. Operations and maintenance expense posted
a slight increase compared to last year - $1.7 million or 1% - reflecting a $3.5
million  increase in recoverable  operations and maintenance  costs from LIPA as
noted above, offset by a decrease in overhaul costs at the Ravenswood Generating
Station . The decrease in overhaul costs are primarily timing related,  since we
anticipate  incurring  the same level of  overhaul  expenses  at the  Ravenswood
Generating  Station in 2006 as we incurred in 2005. The increase in depreciation
expense is  associated  with  KeySpan's  Long Island based  electric  generating
units.  The higher  operating  taxes  primarily  reflect an increase in property
taxes, also related to KeySpan's Long Island based electric generating units.

Other Matters

In 2003,  the New  York  State  Board  on  Electric  Generation  Siting  and the
Environment  issued  an  opinion  and  order  which  granted  a  certificate  of
environmental  capability  and public need for a 250 MW combined  cycle electric
generating facility in Melville, Long Island, which is final and non-appealable.
Also in 2003,  LIPA  issued a Request for  Proposal  ("RFP")  seeking  bids from
developers to either build and operate a Long Island generating facility, and/or
a new cable that will link Long Island to power from a non-Long Island source of
between  250 to 600 MW of  electricity  by no  later  than the  summer  of 2007.
KeySpan  filed a proposal in response  to LIPA's  RFP.  In 2004,  LIPA  selected
proposals submitted by two other bidders in response to the RFP. KeySpan remains
committed  to the  Melville  project and the  benefits to Long  Island's  energy
future that this project would  supply.  The project has received New York State
Article X approval by having met all  operational and  environmental  permitting
requirements.  Further, the project is strategically  located in close proximity
to both the high  voltage  power  transmission  grid and the high  pressure  gas
distribution  network. In addition,  given the intense public pressure to reduce
emissions  from  existing  generating  facilities,  development  of the Melville
project is possible as a means to "virtually  re-power"  older,  less  efficient
generating units. Specifically, KeySpan believes that it would be able to reduce
emissions on Long Island in a cost  effective  manner by developing the Melville
project and retiring an older, less efficient generating facility. We have begun
discussions  with  LIPA  regarding  this  proposal.  At March  31,  2006,  total
capitalized  costs  associated  with the siting,  permitting and  procurement of
equipment for the Melville facility were $61.8 million.

As part of our growth strategy, we continually evaluate the possible acquisition
and development of additional generating facilities in the Northeast, as well as
other  assets to  complement  our core  operations.  However,  we are  unable to
predict when or if any such  facilities will be acquired and the effect any such
acquired facilities will have on our financial condition,  results of operations
or cash flows.

On February 6, 2006,  the  NYISO's  New York City local  reliability  rules that
required that 80% of the electric capacity needs of New York City be provided by
"in-City"  generators  was increased to 83%.  However,  in March 2006, the NYISO
Operating  Committee  reversed its  decision and returned the local  reliability
rules to 80%.  See the  discussion  under the  caption  "Market  and Credit Risk
Management  Activities - Regulatory Issues and the Competitive  Environment" for
further information regarding this matter.



                                       48
<PAGE>


Energy Services

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

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

----------------------------------------------------------------------
                                          Three Months Ended March 31,
(In Millions of Dollars)                       2006            2005
----------------------------------------------------------------------
Revenues                                      $ 50.9           $ 47.1
Operating expenses                              51.3             49.9
----------------------------------------------------------------------
Operating (Loss)                              $ (0.4)          $ (2.8)
----------------------------------------------------------------------

The Energy Services segment  incurred a seasonal  operating loss of $0.4 million
for the first  quarter of 2006  compared to an  operating  loss of $2.8  million
incurred in the first quarter of 2005. The improved  performance reflects higher
gross  profit  margins  on  engineering  and  service  contracts,  as  well as a
reduction in general and administrative expenses.

Energy Investments

The Energy  Investments  segment  consists of our gas exploration and production
investments,  as well as  certain  other  domestic  energy-related  investments.
KeySpan's gas exploration  and production  activities  include its  wholly-owned
subsidiaries  Seneca  Upshur  Petroleum,  Inc.   ("Seneca-Upshur")  and  KeySpan
Exploration  and  Production,  LLC  ("KeySpan  Exploration").  Seneca-Upshur  is
engaged in gas exploration and production activities primarily in West Virginia.
KeySpan  Exploration  is primarily  engaged in a joint  venture with The Houston
Exploration Company, an independent natural gas and oil exploration company that
was a former KeySpan subsidiary.

This segment is also  engaged in pipeline  development  activities.  KeySpan and
Duke Energy Corporation each own a 50% interest in Islander East.  Islander East
was  created to pursue  the  authorization  and  construction  of an  interstate
pipeline  from  Connecticut,  across  Long  Island  Sound,  to a  terminus  near
Shoreham,  Long  Island.  Further,  during the first  quarter  of 2006,  KeySpan
increased  its interest in the  Millennium  Pipeline  Company LLC to 26.25% from
21%. The  Millennium  Pipeline  Company LLC is the  developer of the  Millennium
pipeline project which is expected to transport up to 525,000 DTH of natural gas
a day from  Corning to Ramapo,  New York,  where it will  connect to an existing
pipeline. Additionally,  subsidiaries in this segment hold a 20% equity interest


                                       49
<PAGE>


in the Iroquois Gas Transmission  System LP, a pipeline that transports Canadian
gas supply to markets in the Northeastern  United States.  These investments are
accounted for under the equity method of accounting.  Accordingly, equity income
from these  investments  is reflected as a component of operating  income in the
Consolidated  Statement of Income.  KeySpan also owns a 600,000 barrel liquefied
natural gas ("LNG") storage and receiving facility in Providence,  Rhode Island,
through its wholly owned  subsidiary  KeySpan LNG, the  operations  of which are
fully  consolidated.  KeySpan has filed a petition for judicial review of a FERC
decision that denied KeySpan LNG's application for FERC  authorization to expand
the facility to accept marine deliveries and triple vaporization capacity.

As noted previously, in the first quarter of 2005, KeySpan sold its 50% interest
in Premier, a gas pipeline from southwest Scotland to Northern Ireland. On March
18, 2005,  the sale was completed and generated  cash proceeds of $48.1 million.
In the fourth quarter of 2004,  KeySpan reduced its carrying value in Premier to
an amount  approximating  the anticipated cash proceeds from the sale. The final
sale of  Premier  resulted  in a pre-tax  gain of $4.1  million  reflecting  the
difference  from earlier  estimates.  This gain was recorded in other income and
(deductions) on the Consolidated Statement of Income.

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

-----------------------------------------------------------------------------
                                                 Three Months Ended March 31,
(In Millions of Dollars)                             2006             2005
-----------------------------------------------------------------------------
Revenues                                             $ 9.1            $ 10.1
Less: Operation and maintenance expense                6.6               6.5
          Other operating expenses                     3.1               2.5
Add:  Equity earnings                                  3.4               5.3
          Gain on sale of property                     0.2                 -
-----------------------------------------------------------------------------
Operating Income                                     $ 3.0            $  6.4
-----------------------------------------------------------------------------

As  indicated in the above table,  operating  income for the Energy  Investments
segment  decreased  $3.4  million in the first  quarter of 2006  compared to the
corresponding  period of 2005 due, in part, to lower equity earnings as a result
of the sale Premier. Further, a KeySpan subsidiary engaged in the transportation
of liquefied  natural gas realized  lower earnings due to the warm first quarter
weather.

Other Matters

In order to serve the  anticipated  market  requirements in our New York service
territories,  KeySpan and Duke Energy  Corporation formed Islander East Pipeline
Company,  LLC ("Islander  East") in 2000.  Islander East is owned 50% by KeySpan
and  50% by Duke  Energy,  and was  created  to  pursue  the  authorization  and
construction  of an  interstate  pipeline from  Connecticut,  across Long Island
Sound, to a terminus near Shoreham, Long Island.  Applications for all necessary
regulatory  authorizations  were  filed  in 2000  and  2001.  Islander  East has
received a final  certificate  from the FERC and all necessary  permits from the
State of New York. The State of Connecticut denied Islander East's request for a


                                       50
<PAGE>


consistency  determination  under the Coastal Zone  Management  Act ("CZMA") and
application for a permit under Section 401 of the Clean Water Act. Islander East
appealed  the  State of  Connecticut's  determination  on the CZMA  issue to the
United  States  Department  of  Commerce.  In 2004,  the  Secretary  of Commerce
overrode   Connecticut's   denial  and  granted  the  CZMA  authorization.   The
determination  of the  Secretary of Commerce  was appealed to the United  States
District  Court for the District of Columbia  and a decision  from that court is
pending.  Islander East's petition for a declaratory order overriding the denial
of the Clean  Water Act  permit is pending  with  Connecticut's  State  Superior
Court.  Pursuant to a provision  of the Energy  Policy Act of 2005 (the  "Energy
Act"),  Islander  East has  appealed  the  denial of the Clean  Water Act permit
directly to the United  States  Court of Appeals for the Second  Circuit and has
moved to stay the Connecticut  case pending the Second Circuit's  decision.  The
State of Connecticut  has filed a motion to challenge the  constitutionality  of
the provisions of the Energy Act providing this appeal. The appeal was argued in
January 2006.  Further,  oral arguments on the constitutional and jurisdictional
issues  were held in April  2006.  Various  options  for the  financing  of this
pipeline construction are being evaluated. As of March 31, 2006, KeySpan's total
capitalized costs associated with the siting and permitting of the Islander East
pipeline were approximately $25.6 million.

As  noted,  KeySpan  also owns a 26.25%  ownership  interest  in the  Millennium
Pipeline  Company LLC, the developer of the  Millennium  Pipeline  project.  The
other partners in the Millennium Pipeline are Columbia Gas Transmission Corp., a
unit of NiSource Incorporated and DTE Energy. The Millennium Pipeline project is
anticipated  to transport up to 525,000 DTH of natural gas a day from Corning to
Ramapo,  New York,  interconnecting  with the pipeline  systems of various other
utilities in New York.  The project  received a FERC  certificate  to construct,
acquire and operate the facilities in 2002. On August 1, 2005, the project filed
an amended application with FERC requesting,  among other things,  approval of a
reduction  in capacity and maximum  allowable  operating  pressure,  minor route
modifications, the addition of certain facilities and the acquisition of certain
facilities from Columbia Gas Transmission Corporation. Additionally, in December
2005,  Consolidated  Edison Company of New York Inc. ("Con  Edison"),  KEDLI and
Columbia Gas  Transmission  each entered into amended  precedent  agreements  to
purchase capacity on the pipeline.  KEDLI has agreed to purchase 150,000 DTH per
day from the Millennium Pipeline system,  increasing to 200,000 DTH in the third
year of the  pipeline  being in  service.  This  will  provide  KEDLI  with new,
competitively  priced  supplies  of  natural  gas from  Canada  and other  North
American supply basins.  The conditions in the precedent  agreements are subject
to,  among other  things,  the receipt of  necessary  regulatory  approvals  and
financing,  it is anticipated that the Millennium Pipeline will be in service in
either  2007  or  2008.  As of  March  31,  2006,  KeySpan's  investment  in the
Millennium Pipeline project was $13.6 million.

In 2005, KeySpan LNG entered into a development agreement with BG, LNG Services,
a subsidiary of British Gas, to upgrade the KeySpan LNG's liquefied  natural gas
facility  to  accept  marine   deliveries   and  to  triple   vaporization   (or
regasification)   capacity.   In  June  2005,  the  FERC  denied  KeySpan  LNG's
application to expand the facility  citing  concerns that the proposed  upgraded
facility would not meet current federal safety standards,  which the facility is
not currently  subject to.  KeySpan sought a rehearing with FERC, and on January
20, 2006, the FERC denied such request, although the order provided that KeySpan
LNG could file an  amendment to its  original  application  addressing a revised


                                       51
<PAGE>


expansion project which would differ substantially from that originally proposed
by KeySpan. Any amended application would need to include a detailed analysis of
the new  project  scope,  including  upgrades  to the  existing  facilities  and
alternative  plans for any  service  disruptions  that may be  necessary  during
construction  of a new  expanded  project.  KeySpan  has  filed a  petition  for
judicial  review of the FERC order with the United States  Circuit Court for the
District of Columbia.

In addition to the  proceeding at FERC,  KeySpan LNG also is involved in seeking
other required  regulatory  approvals and the  resolution of certain  litigation
regarding  such  approvals.  In  February  2005,  KeySpan LNG filed an action in
Federal District Court in Rhode Island seeking a declaratory judgment that it is
not  required to obtain a "Category B Assent" from the State of Rhode Island and
an injunction  preventing the Rhode Island Coastal Resources  Management Council
("CRMC") from enforcing the Category B assent  requirements.  In March 2005, the
Rhode Island Attorney General answered the complaint and moved to substitute the
State of Rhode  Island  as the  defendant  and  filed a  counterclaim  seeking a
declaratory  judgment that the expansion requires a Category B Assent. In April,
the parties filed cross motions for summary  judgment with respect to all issues
presented to the Court.  On April 14, 2005,  the Attorney  General also filed on
behalf  of the State a  complaint  against  KeySpan  LNG in Rhode  Island  State
Superior  Court  raising  substantially  the same  issues as the  federal  court
action.  KeySpan LNG removed that action to federal  court and moved for summary
judgment.  The  Attorney  General  subsequently  withdrew  both  the  motion  to
substitute defendants and the counterclaim. Although the Court had indicated its
intention to issue a decision in the pending cases by August 2005, the Court has
now indicated  that it will stay the litigation  pending  resolution of the FERC
rehearing  and/or appeal  process  discussed  above.  As of March 31, 2006,  our
investment in this project was $15.8 million,  a portion of which may be subject
to reimbursement from BG LNG pursuant to the terms of the development agreement.

Allocated Costs

We are subject to the  jurisdiction of the FERC under PUHCA 2005. As part of the
regulatory  provisions of PUHCA 2005,  the FERC regulates  various  transactions
among affiliates within a holding company system. In accordance with regulations
under  PUHCA 2005 and  regulations  and  policies  of the New York State  Public
Service  Commission,  the  Massachusetts  Department of  Telecommunications  and
Energy and the New Hampshire Public Utility  Commission,  we established service
companies that provide: (i) traditional  corporate and administrative  services;
(ii) gas and electric transmission and distribution system planning,  marketing,
and gas supply  planning and  procurement;  and (iii)  engineering and surveying
services to  subsidiaries.  The  operating  income  variation  as  reflected  in
"elimination and other" is due primarily to costs residing at KeySpan's  holding
company level such as corporate advertising.

Liquidity

Cash flow from operations  increased $160.5 million in the first quarter of 2006
compared to the same period last year  primarily  reflecting  favorable  working
capital requirements and the timing of income tax payments.


                                       52
<PAGE>


At March 31, 2006, we had cash and temporary cash investments of $313.1 million.
During the first quarter of 2006, we repaid $160.8  million of commercial  paper
and, at March 31, 2006,  $496.8 million of commercial paper was outstanding at a
weighted-average annualized interest rate of 4.71%. We had the ability to borrow
up to an additional $1 billion at March 31, 2006,  under the terms of our credit
facility.

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

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

The facilities  contain certain  affirmative and negative  operating  covenants,
including  restrictions on KeySpan's  ability to mortgage,  pledge,  encumber or
otherwise subject its utility property to any lien, as well as certain financial
covenants  that  require us to,  among  other  things,  maintain a  consolidated
indebtedness to consolidated  capitalization ratio of no more than 65% as of the
last day of any fiscal quarter. Violation of these covenants could result in the
termination  of the facilities  and the required  repayment of amounts  borrowed
thereunder,  as well as possible cross defaults under other debt agreements.  At
March  31,  2006,   KeySpan's   consolidated   indebtedness  was  48.9%  of  its
consolidated capitalization and KeySpan was in compliance with all covenants.

Subject to certain conditions set forth in the credit facility,  KeySpan has the
right, at any time, to increase the commitments  under the $920 million facility
up to an additional $300 million. In addition,  KeySpan has the right to request
that the termination date be extended for an additional period of 365 days prior
to each  anniversary  of the  closing  date.  This  extension  option,  however,
requires the approval of lenders holding more than 50% of the total  commitments
to such  extension  request.  Under the  agreements,  KeySpan has the ability to
replace  non-consenting  lenders  with  other  pre-approved  banks or  financial
institutions.  Upon  effectiveness  of PUHCA  2005,  KeySpan's  ability to issue
commercial  paper was no longer  limited  by the SEC.  Accordingly,  subject  to
compliance with the foregoing conditions,  KeySpan is currently able to issue up
to $1.5 billion of commercial paper.


                                       53
<PAGE>


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

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

Capital Expenditures and Financing

Construction Expenditures

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

--------------------------------------------------------------------
                                        Three Months Ended March 31,
(In Millions of Dollars)                   2006               2005
--------------------------------------------------------------------
Gas Distribution                         $  85.8            $  71.6
Electric Services                           28.9               31.1
Energy Investments                           5.4                6.6
Energy Services and other                    2.1                2.5
--------------------------------------------------------------------
                                         $ 122.2            $ 111.8
--------------------------------------------------------------------

Construction  expenditures related to the Gas Distribution segment are primarily
for  the  renewal,   replacement  and  expansion  of  the  distribution  system.
Construction  expenditures  for the Electric  Services  segment reflect costs to
maintain our generating facilities. The increase in capital expenditures for the
three months ended March 31, 2006 compared to the same period last year of $10.4
million reflects an increase in the Gas  Distribution  segment mainly due to the
timing  of  capital  main  and  service  work.  KeySpan  anticipates   incurring
approximately  the  same  amount  of  construction  expenditures  in  2006 as it
incurred in 2005.

Financing

KeySpan did not engage in any financing activities in the first quarter of 2006,
other than  commercial  paper  repayments  as noted  earlier.  However,  KeySpan
anticipates  refinancing  two tax exempt  bonds at KEDNY in the summer of 2006 -
$153.5 million 5.5% due January 1, 2021 and $100 million 6.95% due July 1, 2026.

The following  table  represents  the ratings of our long-term debt at March 31,
2006.  In 2004  Standard & Poor's  reaffirmed  its ratings on KeySpan's  and its
subsidiaries' long-term debt and removed its negative outlook.  Further in 2005,


                                       54
<PAGE>


Fitch Ratings revised its ratings on KeySpan's and its  subsidiaries'  long-term
debt to positive  outlook.  Moody's  Investor  Services,  however,  continues to
maintain  its  negative  outlook  ratings  on  KeySpan's  and its  subsidiaries'
long-term debt.

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

Off-Balance Sheet Arrangements

Guarantees

KeySpan had a number of financial  guarantees with its subsidiaries at March 31,
2006.  KeySpan has fully and  unconditionally  guaranteed:  (i) $525  million of
medium-term notes issued by KEDLI;  (ii) the obligations of KeySpan  Ravenswood,
LLC, which is the lessee under the $425 million Master Lease associated with the
Ravenswood  Facility  and the  lessee  under  the  $385  million  sale/leaseback
transaction for the Ravenswood  Expansion including future decommission costs of
$19 million;  and (iii) the payment  obligations of our subsidiaries  related to
$128 million of  tax-exempt  bonds issued  through the Nassau County and Suffolk
County   Industrial   Development   Authorities  for  the  construction  of  two
electric-generation  peaking  facilities on Long Island.  The medium-term notes,
the Master Lease and the  tax-exempt  bonds are  reflected  on the  Consolidated
Balance Sheet; the sale/leaseback obligation is not recorded on the Consolidated
Balance  Sheet.  Further,  KeySpan has  guaranteed:  (i) up to $71.7  million of
surety bonds  associated  with certain  construction  projects  currently  being
performed by current and former  subsidiaries;  (ii) certain  supply  contracts,
margin  accounts and purchase  orders for certain  subsidiaries  in an aggregate
amount of $52.9  million;  and (iii)  $73.5  million  of  subsidiary  letters of
credit.  These  guarantees are not recorded on the  Consolidated  Balance Sheet.
KeySpan's   guarantees  on  certain   performance   bonds  relating  to  current
construction projects of the discontinued  mechanical contracting companies will
remain in place throughout the construction  period for these projects.  KeySpan
has  received an  indemnity  bond  issued by a third  party to offset  potential
exposure related to a significant portion of the continuing  guarantee.  At this
time, we have no reason to believe that our subsidiaries or former  subsidiaries
will default on their current obligations. However, we cannot predict when or if
any  defaults  may  take  place  or the  impact  such  defaults  may have on our
consolidated results of operations, financial condition or cash flows. (See Note
6  to  the  Consolidated   Financial   Statements,   "Financial  Guarantees  and
Contingencies" for additional information regarding KeySpan's guarantees.)


                                       55
<PAGE>


Contractual Obligations

KeySpan has certain contractual obligations related to its outstanding long-term
debt,  outstanding  credit facility  borrowings,  outstanding  commercial  paper
borrowings,  operating and capital  leases,  and demand charges  associated with
certain  commodity  purchases.  These  obligations  have remained  substantially
unchanged  since December 31, 2005.  (For  additional  details  regarding  these
obligations see KeySpan's Annual Report on Form 10-K for the year ended December
31, 2005, Item 7 Management's Discussion and Analysis of Financial Condition and
Results  of  Operations,  as  well  as  Note  6  "Long-Term  Debt"  and  Note  7
"Contractual  Obligations,  Financial  Guarantees  and  Contingencies"  to those
Consolidated Financial Statements.)

Discussions of Critical Accounting Policies and Assumptions

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

Below is a discussion of KeySpan's critical  accounting policies and assumptions
at  March  31,  2006.  For a more  detailed  discussion  of these  policies  and
assumptions see KeySpan's Annual Report on Form 10-K for the year ended December
31, 2005, Item 7.  Management's  Discussion and Analysis of Financial  Condition
and Results of  Operations  "Discussion  of  Critical  Accounting  Policies  and
Assumptions."

Valuation of Goodwill

KeySpan records  goodwill on purchase  transactions,  representing the excess of
acquisition  cost over the fair value of net  assets  acquired.  In testing  for
goodwill impairment under Statement of Financial  Accounting  Standards ("SFAS")
142 "Goodwill and Other Intangible Assets,"  significant reliance is placed upon
a  number  of  estimates   regarding  future   performance  that  require  broad
assumptions and significant  judgment by management.  A change in the fair value
of our  investments  could cause a significant  change in the carrying  value of
goodwill.  The assumptions used to measure the fair value of our investments are
the  same  as  those  used  by  us  to  prepare  annual  operating  segment  and
consolidated  earnings and cash flow forecasts.  In addition,  these assumptions
are used to set annual budgetary guidelines. At March 31, 2006, KeySpan has $1.7
billion  of  recorded  goodwill  and has  concluded  that the fair  value of the
business units that have recorded goodwill exceed their carrying value.

Accounting for the Effects of Rate Regulation on Gas Distribution Operations

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


                                       56
<PAGE>


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

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

As is further  discussed  under the caption  "Regulation  and Rate Matters," the
rate plans previously in effect for KEDNY and KEDLI have expired.  The continued
application  of SFAS 71 to  record  the  activities  of  these  subsidiaries  is
contingent  upon the actions of regulators  with regard to future rate plans. We
are currently  evaluating various options that may be available to us including,
but not  limited  to,  proposing  new plans for KEDNY and  KEDLI.  The  ultimate
resolution  of any future  rate plans  could  have a  significant  impact on the
application  of SFAS 71 to these  entities  and,  accordingly,  on our financial
position,  results of operations and cash flows.  However,  management  believes
that currently available facts support the continued  application of SFAS 71 and
that all regulatory assets and liabilities are recoverable or refundable through
the regulatory environment.

Pension and Other Postretirement Benefits

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

Historically, we have funded our qualified pension plans in excess of the amount
required to satisfy  minimum ERISA funding  requirements.  At March 31, 2006, we
had  a  funding  credit   balance  in  excess  of  the  ERISA  minimum   funding
requirements.  Although we have presently  exceeded ERISA funding  requirements,
our pension plans, on an actuarial basis, are currently underfunded.  Therefore,
for 2006,  KeySpan  expects to  contribute a total of $120 million to its funded
and unfunded  post-retirement  plans.  Future funding  requirements  are heavily
dependent on actual return on plan assets and  prevailing  interest  rates.  (In
addition to Item 7 Management's  Discussion and Analysis of Financial  Condition
and Results of Operations  in KeySpan's  Annual Report on Form 10-K for the year
ended  December  31,  2005,  see  also  Note 4 of those  Consolidated  Financial
Statements, "Postretirement Benefits.")


                                       57
<PAGE>


Regulation and Rate Matters

Gas Matters

The rate  agreements  for KEDNY and KEDLI have  expired.  Under the terms of the
KEDNY and KEDLI rate agreements, gas distribution rates and all other provisions
will remain in effect until changed by the NYPSC. At this time, we are currently
evaluating  various  options that may be available to us regarding the KEDNY and
KEDLI rate plans, including but not limited to, proposing new rate plans.

Effective  November 1, 2003, the MADTE approved a $25.9 million increase in base
revenues for Boston Gas with an allowed return on equity of 10.2%  reflecting an
equal  balance of debt and equity.  On January 27,  2004,  the MADTE  issued its
order on Boston Gas  Company's  Motion for  Recalculation,  Reconsideration  and
Clarification  that granted an additional  $1.1 million in base revenues,  for a
total of $27 million. The MADTE also approved a Performance Based Rate Plan (the
"Plan") for up to ten years. On November 1, 2005, the MADTE approved a base rate
increase  of $7.2  million  under the Plan.  In  addition,  an  increase of $7.5
million in the local  distribution  adjustment  clause was  approved  to recover
pension  and other  postretirement  costs.  The MADTE  also  approved  a true-up
mechanism  for  pension  and other  postretirement  benefit  costs  under  which
variations  between  actual pension and other  postretirement  benefit costs and
amounts used to establish  rates are deferred and collected  from or refunded to
customers in  subsequent  periods.  This true-up  mechanism  allows for carrying
charges on deferred assets and liabilities at Boston Gas's weighted-average cost
of capital.

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

In  December  2005,  Boston Gas  received a MADTE  order  permitting  regulatory
recovery  of the 2004  gas  cost  component  of bad  debt  write-offs.  This was
approved for full recovery as an exogenous cost  effective  November 1, 2005. In
addition,  effective  January 1, 2006,  Boston Gas is permitted to fully recover
the gas cost component of bad debt write-offs through its cost-of-gas adjustment
clause  rather than filing for  recovery as an exogenous  cost.  Boston Gas also
plans  to  request  full  recovery,  as an  exogenous  cost,  the  2005 gas cost
component of bad debt write-offs from Boston Gas ratepayers  beginning  November
1, 2006.


                                       58
<PAGE>


For an additional discussion of our current gas distribution rate agreements,
see KeySpan's Annual Report on Form 10-K for the year ended December 31, 2005,
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations "Regulation and Rate Matters."

Electric Matters

KeySpan sells to LIPA all of the capacity and, to the extent  requested,  energy
conversion  services  from our  existing  Long  Island  based oil and  gas-fired
generating  plants.  Sales of capacity and energy  conversion  services are made
under rates approved by the FERC in accordance with the PSA entered into between
KeySpan and LIPA in 1998.  The original FERC approved  rates,  which had been in
effect since May 1998, expired on December 31, 2003. On October 1, 2004 the FERC
approved a settlement  reached between KeySpan and LIPA to reset rates effective
January 1, 2004.  Under the new  agreement,  KeySpan's  rates  reflect a cost of
equity of 9.5% with no revenue  increase  in the first year.  The FERC  approved
updated  operating and maintenance  expense levels and recovery of certain other
costs as agreed to by the parties.

As noted  earlier,  on February 1, 2006,  KeySpan and LIPA  entered  into (i) an
amended  and  restated  Management  Services  Agreement;  (ii) a new  Option and
Purchase and Sale Agreement, to replace the Generation Purchase Rights Agreement
as  amended;  and (iii) a  Settlement  Agreement  resolving  outstanding  issues
between  the  parties  regarding  the  1998  LIPA  Agreements.  (For  a  further
discussion  on the LIPA  agreements  see Note 10 to the  Consolidated  Financial
Statements  "2006 LIPA  Settlement," as well as KeySpan's  Annual Report on Form
10-K for the year ended December 31, 2005,  Item 7  Management's  Discussion and
Analysis of Financial  Condition and Results of Operations  "Electric Services -
LIPA Agreements.")

The Energy  Policy Act of 2005 and the Public  Utility  Holding  Company Acts of
1935 and 2005

In August 2005,  the Energy Policy Act of 2005 (the "Energy Act") was enacted by
Congress and signed into law by the  President.  The Energy Act is a broad based
energy bill that places an increased  emphasis on the  production  of energy and
promotes the development of new technologies  and alternative  energy sources by
providing  tax  credits to  companies  that  produce  natural  gas,  oil,  coal,
electricity  and  renewable  energy.  For KeySpan,  one of the more  significant
provisions of the Energy Act was the repeal of PUHCA 1935, effective February 8,
2006, and the transfer of certain holding company oversight from the SEC to FERC
pursuant to PUHCA 2005.

Pursuant  to PUHCA  2005,  the SEC no longer has  jurisdiction  over our holding
company  activities,   other  than  those  traditionally   associated  with  the
registration and issuance of our securities  under the federal  securities laws.
FERC now has  jurisdiction  over  certain  of our  holding  company  activities,
including (i) regulating  certain  transactions  among our affiliates within our
holding company system; (ii) governing the issuance, acquisition and disposition
of  securities  and assets by certain of our public  utility  subsidiaries;  and
(iii) approving certain utility mergers and acquisitions.

Moreover,  our affiliate transactions also remain subject to certain regulations
of the NYPSC, MADTE and NHPUC, in addition to FERC.


                                       59
<PAGE>


Environmental Matters

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

We estimate that the  remaining  cost of our MGP related  environmental  cleanup
activities,  including costs associated with the Ravenswood  Generating Station,
will be  approximately  $394.3 million and we have recorded a related  liability
for such amount.  We have also recorded an additional  $19.4 million  liability,
representing the estimated  environmental cleanup costs related to a former coal
tar  processing  facility.  As of March 31,  2006,  we have  expended a total of
$184.2 million on environmental  investigation and remediation activities.  (See
Note 6 to the  Consolidated  Financial  Statements,  "Financial  Guarantees  and
Contingencies.")

Market and Credit Risk Management Activities

Market Risk: KeySpan is exposed to market risk arising from potential changes in
one or more market variables,  such as energy commodity prices,  interest rates,
volumetric risk due to weather or other variables. Such risk includes any or all
changes  in value  whether  caused  by  commodity  positions,  asset  ownership,
business or contractual  obligations,  debt covenants,  exposure  concentration,
currency,  weather, and other factors regardless of accounting method. We manage
our  exposure  to  changes  in  market  prices  using  various  risk  management
techniques  for  non-trading  purposes,  including  hedging  through  the use of
derivative  instruments,  both exchange-traded and  over-the-counter  contracts,
purchase of insurance and execution of other contractual arrangements.

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

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


                                       60
<PAGE>


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

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

Regulatory Issues and Competitive  Environment:  We are subject to various other
risk  exposures  and   uncertainties   associated  with  our  gas  and  electric
operations.  The most significant  contingency involves the evolution of the gas
distribution  and electric  industries  towards more competitive and deregulated
environments.  The risks associated with KeySpan's gas  distribution  activities
have  not  changed   substantially  since  December  31,  2005.  For  additional
information  regarding these risks see KeySpan's  Annual Report on Form 10-K for
the year ended December 31, 2005, Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations "Market and Credit Risk Management
Activities."  The following is an update to certain  matters  related  KeySpan's
electric operations.

The Ravenswood Generating Station and KeySpan's New York City Operations

On February 9, 2006,  the NYISO  Operating  Committee  increased  the  "in-City"
locational  capacity  requirements  (LCR) from 80% to  83%beginning  in May 2006
through the period  ending April 2007,  based in part on the  statewide  reserve
margin of 118% set by the New York State Reliability Council.  However, in early
March 2006, the NYISO discovered data inconsistencies in the input files used in
the Multi Area  Reliability  Simulation  (MARS) computer program that is used to
determine  the  statewide  installed  reserve  margin  (Statewide  IRM)  and the
corresponding  minimum LCRs for New York City and Long Island.  Revisions to the
data,  and  rerunning  the  MARS  computer  program  resulted  in a shift in the
relationship  between the Statewide IRM and the minimum LCRs. On March 20, 2006,
the New York State Reliability Council voted to retain the Statewide IRM of 118%
and reported the  corresponding  revised minimum LCRs to the NYISO. On March 28,
2006, the NYISO Operating Committee approved revised minimum LCRs of 80% and 99%
for New York City and Long Island, respectively.  For New York City, this action
effectively  returned the  locational  requirement to the minimum level used for
the last six years (80%) and negated the increase to 83%.

KeySpan  appealed  this  decision to the NYISO Board of  Directors  claiming the
revised  study was hastily  prepared and that there were  historic  factors that
justified  using  83% as the New York City LCR.  The  NYISO  Board of  Directors
denied KeySpan's appeal on April 3, 2006 and the "in-City"  locational  capacity
requirement  beginning  May 1, 2006 through the period  ending April 30, 2007 is
currently 80%.


                                       61
<PAGE>


Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

KeySpan uses market quoted forward prices to value OTC swap contracts.

Financially-Settled  Commodity  Derivative  Instruments  that Do Not Qualify for
Hedge  Accounting:  KeySpan  subsidiaries also have employed a limited number of
financial  derivatives that do not qualify for hedge accounting  treatment under
SFAS 133. During the first quarter, we purchased a series of call options on the
spread  between  the price of  heating  oil and the price of  natural  gas.  The
options  cover  the  period  February  2006  through  October  2006 and  further
complement  our  hedging   strategy  noted  above  regarding  sales  to  certain
large-volume  customers.  Further,  the Ravenswood  facility has also employed a
limited number of financial derivatives that do not qualify for hedge accounting
treatment under SFAS 133 associated with the purchase of fuel oil. Additionally,
KeySpan entered into an International SWAP Dealers  Association Master Agreement
for a fixed for float  unforced  capacity  financial  swap with  Morgan  Stanley
Capital Group Inc.

The following  tables set forth selected  financial data  associated  with these
derivative financial  instruments noted above that were outstanding at March 31,
2006.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
                                         Year of        Volumes           Fixed             Current             Fair Value
        Type of Contract                 Maturity         mmcf            Price $            Price $         (In $ Millions)
----------------------------------------------------------------------------------------------------------------------------
             Gas
<S>                                        <C>           <C>          <C>                <C>                          <C>
Swaps/Futures - Long Natural Gas            2006          4,468        7.67 - 8.50        7.69 - 8.27                  (1.7)

OTC Swaps - Short Natural Gas               2006          1,389        6.17 - 6.29        7.52 - 10.50                 (3.0)
                                            2007          1,702        5.86 - 5.97        9.27 - 11.16                 (6.9)
                                            2008          1,552        6.77 - 6.85        8.59 - 11.19                 (4.1)
----------------------------------------------------------------------------------------------------------------------------
                                                          9,111                                                       (15.7)
----------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       62
<PAGE>


<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
                                  Year of         Volumes            Fixed                 Current                 Fair Value
         Type of Contract         Maturity        Barrels            Price $                Price $             (In $ Millions)
-------------------------------------------------------------------------------------------------------------------------------
             Oil
<S>                                 <C>          <C>            <C>                    <C>                           <C>
Swaps - Long Fuel Oil                2006          952,625       57.00 - 66.80          53.49 - 58.10                (4.6)
                                     2007            2,875       59.20 - 62.14          62.51                           -

Swaps - Short Heating Oil            2006          406,004       73.50 - 79.38          78.12 - 82.74                (1.7)


-------------------------------------------------------------------------------------------------------------------------------
                                                 1,361,504                                                           (6.3)
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
                                  Year of                        Fixed Margin/             Current                Fair Value
    Type of Contract             Maturity             MWh           Price $                 Price $            (In $ Millions)
------------------------------------------------------------------------------------------------------------------------------
       Electricity
<S>                                <C>               <C>        <C>                    <C>                              <C>
Swaps - Energy                      2006              898        73.50 - 156.25         69.96 - 118.90                   20.1


------------------------------------------------------------------------------------------------------------------------------
                                                      898                                                                20.1
------------------------------------------------------------------------------------------------------------------------------
</TABLE>

-----------------------------------------------------------------
                                                       2006
Change in Fair Value of Derivative Instruments    (In $ Millions)
-----------------------------------------------------------------
Fair value of contracts at January 1,                      (18.1)
Net (gains) on contracts realized                          (54.9)
Increase in fair value of all open contracts                71.1
-----------------------------------------------------------------
Fair value of contracts outstanding at March 31,            (1.9)
-----------------------------------------------------------------

-------------------------------------------------------------------------------
(In Millions of Dollars)
-------------------------------------------------------------------------------
                                          Fair Value of Contracts
-------------------------------------------------------------------------------
                                       Mature Within                    Total
Sources of Fair Value                    12 Months      Thereafter   Fair Value
-------------------------------------------------------------------------------
Prices actively quoted                       $ (6.4)      $ (8.8)      $ (15.2)
Local published indicies                       13.3            -          13.3
-------------------------------------------------------------------------------
                                             $  6.9       $ (8.8)      $  (1.9)
-------------------------------------------------------------------------------

We measure the commodity risk of our derivative hedging  instruments  (indicated
in the  above  table)  using a  sensitivity  analysis.  Based  on a  sensitivity
analysis  as of March 31,  2006 a 10%  increase/decrease  in natural  gas prices
would decrease/increase the value of derivative instruments maturing in one year
by $1.7 million. Further, a 10% increase/decrease in electricity and fuel prices
would decrease/increase the value of derivative instruments maturing in one year
by $3.6 million.

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


                                       63
<PAGE>


The following  table sets forth selected  financial data  associated  with these
derivative financial instruments that were outstanding at March 31, 2006.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Type of          Year of        Volumes         Floor       Ceiling         Fixed               Current             Fair Value
Contract         Maturity         mmcf           ($)          ($)         Price ($)             Price ($)         (In $ Millions)
------------------------------------------------------------------------------------------------------------------------------------
<S>                 <C>         <C>             <C>         <C>         <C>                  <C>                         <C>
Options              2006         2,096          5.50        10.00                  -         7.21 - 10.07                  1.7

Swaps                2006        27,470             -            -       7.35 - 11.63         7.21 - 10.07                (18.8)
                     2007        35,130             -            -       6.81 - 11.99         8.90 - 10.72                  3.0

------------------------------------------------------------------------------------------------------------------------------------
                                 64,696                                                                                   (14.1)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Note 4 to the  Consolidated  Financial  Statements  "Hedging and  Derivative
Financial   Instruments"  for  a  further  description  of  all  our  derivative
instruments.

Item 4. Controls and Procedures

We maintain  disclosure  controls and  procedures (as defined under Exchange Act
Rule  13a-15(e)  and  15d-15(e))  that are  designed to ensure that  information
required  to be  disclosed  by us in the  reports  we file or  submit  under the
Exchange Act is recorded,  processed,  summarized  and reported  within the time
periods specified in the Securities and Exchange  Commission's  rules and forms,
and  that  such   information  is  accumulated  and  communicated  to  KeySpan's
management,  including our Chief Executive Officer and Chief Financial  Officer,
as appropriate,  to allow timely decisions  regarding required  disclosure.  Any
control  system,  no matter how well  designed  and  operated,  can provide only
reasonable   assurance  of  achieving  the  desired  control   objectives.   Our
management,  under  the  supervision  and with the  participation  of our  Chief
Executive Officer and Chief Financial  Officer,  has evaluated the effectiveness
of our disclosure  controls and procedures as of March 31, 2006. Based upon that
evaluation,  our Chief Executive  Officer and Chief Financial  Officer concluded
that the design and  operation of our  disclosure  controls and  procedures  are
effective to accomplish their objectives.

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



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<PAGE>



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

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

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

-    occurrence or impact of the potential merger with National Grid plc;

-    volatility of energy prices used to generate electricity;

-    fluctuations in weather and in gas and electric prices;

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

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

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

-    implementation  of  new  accounting  standards  or  changes  in  accounting
     standards or GAAP which may require adjustments to financial statements;

-    inflationary trends and interest rates;

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

-    available sources and cost of fuel;

-    creditworthiness of counterparties to derivative  instruments and commodity
     contracts;


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<PAGE>


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

-    retention of key personnel;

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

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

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

-    competition facing our unregulated Energy Services businesses;

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

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

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

-    changes in the UCAP pricing structure;

-    timing of approval of the 2006 LIPA Agreements and;

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

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

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

        None

Item 3. Defaults Upon Senior Securities

        None

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

KeySpan's  2006 Annual  Meeting of  Shareholders,  previously  scheduled for May
2006,  has been  postponed  until  later  this year as a result of the  proposed
acquisition of KeySpan by National  Grid. A new date,  time and location for the
Annual Meeting will be announced at a future time.


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<PAGE>


Item 5. Other Information

The following  disclosure  would otherwise have been filed on Form 8-K under the
heading "Item 1.01 - Entry into a Material Definitive Agreement".

On May 3, 2006, KeySpan's Board of Directors increased the annual base salary of
Robert J. Fani,  President and Chief Operating Officer from $782,000 to $860,000
effective August 1, 2006.

Item 6. Exhibits

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

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

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

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

10.1*     KeySpan's Amended Senior Executive Change of Control Severance Plan



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








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<PAGE>



                                   SIGNATURES


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



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




Date: May 4, 2006                          /s/ Gerald Luterman
                                           ----------------------
                                               Gerald Luterman
                                               Executive Vice President and
                                               Chief Financial Officer




Date: May 4, 2006                          /s/ Theresa A. Balog
                                           --------------------
                                           Theresa A. Balog
                                           Vice President and
                                           Chief Accounting Officer





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