UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                      FORM

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

                  For the quarterly period ended June 30, 2003
                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           (IRS Employer Identification No.)
     incorporation or organization)

                 One MetroTech Center, Brooklyn, New York 11201
             175 East Old Country Road, Hicksville, New York 11801
             -----------------------------------------------------
               (Address of principal executive offices) (Zip Code)

                            (718) 403-1000 (Brooklyn)
                           (631) 755-6650 (Hicksville)
                           ---------------------------
              (Registrant's telephone number, including area code)

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.[X]

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act).[X]

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

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


Class of Common Stock                              Outstanding at July 31, 2003
---------------------                              ----------------------------
      $.01 par value                                        158,492,590

<PAGE>



                      KEYSPAN CORPORATION AND SUBSIDIARIES

                                      INDEX
                                      -----

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

Item 1. Financial Statements

           Consolidated Balance Sheet -
           June 30, 2003 and December 31, 2002                              3

           Consolidated Statement of Income -
           Three and Six Months Ended June 30, 2003 and 2002                5

           Consolidated Statement of Cash Flows -
           Six Months Ended June 30, 2003 and 2002                          6

           Notes to Consolidated Financial Statements                       7

Item 2. Management's Discussion and Analysis of Financial
           Condition and Results of Operations                             33

Item 3. Quantitative and Qualitative Disclosures
           About Market Risk                                               62

Item 4. Controls and Procedures                                            67


                               Part II.   OTHER INFORMATION

Item 1. Legal Proceedings                                                  66

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

Item 6. Exhibits and Reports on Form 8-K                                   69

Signatures                                                                 71



                                       2
<PAGE>






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


(In Thousands of Dollars)                                 June 30, 2003         December 31, 2002
--------------------------------------------------------------------------------------------------

ASSETS
<S>                                                          <C>                      <C>
Current Assets
    Cash and temporary cash investments                     $    195,668             $    170,617
    Accounts receivable                                        1,307,457                1,122,022
    Unbilled revenue                                             252,292                  473,060
    Allowance for uncollectible accounts                         (81,933)                 (63,029)
    Gas in storage, at average cost                              281,850                  297,060
    Material and supplies, at average cost                       110,498                  113,519
    Other                                                         99,124                   93,980
                                                    ----------------------------------------------
                                                               2,164,956                2,207,229
                                                    ----------------------------------------------

Investments and  Other                                           280,581                  265,977

Property
    Gas                                                        6,287,988                6,124,281
    Electric                                                   2,073,464                1,974,352
    Other                                                        396,014                  394,374
    Accumulated depreciation                                  (2,869,820)              (2,740,516)
    Gas exploration and production, at cost                    2,705,912                2,438,998
    Accumulated depletion                                     (1,060,124)                (973,889)
                                                    ----------------------------------------------
                                                               7,533,434                7,217,600
                                                    ----------------------------------------------

Deferred Charges
    Regulatory assets                                            434,147                  438,516
    Goodwill, net of amortization                              1,790,033                1,789,751
    Other                                                        696,992                  695,233
                                                    ----------------------------------------------
                                                               2,921,172                2,923,500
                                                    ----------------------------------------------

Total Assets                                                $ 12,900,143             $ 12,614,306
                                                    ==============================================
</TABLE>




        See accompanying Notes to the Consolidated Financial Statements.



                                       3
<PAGE>







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


(In Thousands of Dollars)                                            June 30, 2003        December 31, 2002
-----------------------------------------------------------------------------------------------------------

LIABILITIES AND CAPITALIZATION
<S>                                                                    <C>                      <C>
Current Liabilities
    Current redemption of long-term debt                             $    111,416             $     11,413
    Accounts payable and other liabilities                                967,751                1,061,649
    Commercial paper                                                      431,000                  915,697
    Dividends payable                                                      71,779                   64,714
    Taxes accrued                                                         168,381                   51,276
    Customer deposits                                                      39,047                   38,387
    Interest accrued                                                       59,227                   77,092
                                                              ---------------------------------------------
                                                                        1,848,601                2,220,228
                                                              ---------------------------------------------

Deferred Credits and Other Liabilities
    Regulatory liabilities                                                 76,129                   84,479
    Deferred income tax                                                   903,961                  877,013
    Postretirement benefits and other reserves                            822,088                  759,731
    Other                                                                 201,080                  189,912
                                                              ---------------------------------------------
                                                                        2,003,258                1,911,135
                                                              ---------------------------------------------

Commitments and Contingencies (See Note 8)                                      -                        -

Capitalization
    Common stock                                                        3,481,361                3,005,354
    Retained earnings                                                     616,740                  522,835
    Other comprehensive income                                            (91,848)                (108,423)
    Treasury stock                                                       (417,733)                (475,174)
                                                              ---------------------------------------------
         Total common shareholders' equity                              3,588,520                2,944,592
    Preferred stock                                                        83,697                   83,849
    Long-term debt                                                      4,905,609                5,224,081
                                                              ---------------------------------------------
Total Capitalization                                                    8,577,826                8,252,522
                                                              ---------------------------------------------

Minority Interest in Subsidiary Companies                                 470,458                  230,421
                                                              ---------------------------------------------
Total Liabilities and Capitalization                                 $ 12,900,143             $ 12,614,306
                                                              =============================================
</TABLE>



        See accompanying Notes to the Consolidated Financial Statements.



                                       4
<PAGE>

<TABLE>
<CAPTION>
                        CONSOLIDATED STATEMENT OF INCOME
                                   (Unaudited)
                                                        ----------------------------------------------------------------------------
                                                                  Three Months Ended June 30,            Six Months Ended June 30,
------------------------------------------------------------------------------------------------------------------------------------
(In Thousands of Dollars, Except Per Share Amounts)                 2003                 2002               2003              2002
------------------------------------------------------------------------------------------------------------------------------------
Revenues
    <S>                                                          <C>                  <C>              <C>              <C>
     Gas Distribution                                           $   732,036          $   521,822       $ 2,564,737      $ 1,744,791
     Electric Services                                              370,591              354,756           704,985          669,440
     Energy Services                                                154,022              229,311           346,393          470,870
     Gas Exploration and Production                                 122,875               90,563           250,722          167,489
     Energy Investments                                              28,628               21,748            53,840           39,187
                                                        ----------------------------------------------------------------------------
Total Revenues                                                    1,408,152            1,218,200         3,920,677        3,091,777
                                                        ----------------------------------------------------------------------------
Operating Expenses
     Purchased gas for resale                                       424,300              249,942         1,620,465          899,299
     Fuel and purchased power                                       102,476               93,292           199,998          177,664
     Operations and maintenance                                     509,636              552,706         1,007,825        1,050,784
     Depreciation, depletion and amortization                       142,290              127,463           287,261          253,460
     Operating taxes                                                 95,251               84,062           219,964          197,966
                                                        ----------------------------------------------------------------------------
Total Operating Expenses                                          1,273,953            1,107,465         3,335,513        2,579,173
                                                        ----------------------------------------------------------------------------
Income from Equity Investments                                        4,030                3,240             9,759            7,409
Operating Income                                                    138,229              113,975           594,923          520,013
                                                        ----------------------------------------------------------------------------
Other Income and (Deductions)
     Interest charges                                               (79,198)             (70,054)         (148,137)        (142,661)
     Loss on sale of subsidiary stock                               (30,345)                   -           (11,325)               -
     Cost of debt redemption                                         (5,900)                   -           (24,094)               -
     Minority interest                                              (13,000)              (6,138)          (30,358)         (10,569)
     Other                                                             (246)               7,761            14,455           18,704
                                                        ----------------------------------------------------------------------------
Total Other Income and (Deductions)                                (128,689)             (68,431)         (199,459)        (134,526)
                                                        ----------------------------------------------------------------------------
Earnings Before Income Taxes                                          9,540               45,544           395,464          385,487
Income Taxes
     Current                                                          4,017                5,298           133,592          (62,453)
     Deferred                                                        11,461               11,072            24,719          204,135
                                                        ----------------------------------------------------------------------------
Total Income Taxes                                                   15,478               16,370           158,311          141,682
                                                        ----------------------------------------------------------------------------
Earnings (Loss) from Continuing Operations                           (5,938)              29,174           237,153          243,805
                                                        ----------------------------------------------------------------------------
Discontinued Operations
    Income from Operations, net of tax                                    -                    -                 -                -
    Loss on Disposal , net of tax of $13,050                              -              (19,662)                -          (19,662)
                                                        ----------------------------------------------------------------------------
Loss from Discontinued Operations                                         -              (19,662)                -          (19,662)
                                                        ----------------------------------------------------------------------------
Cummulative Effect of Change in Accounting Principle                      -                    -               174                -

                                                        ----------------------------------------------------------------------------
Net Income (Loss)                                                    (5,938)               9,512           237,327          224,143
Preferred stock dividend requirements                                 1,461                1,476             2,922            2,952
                                                        ----------------------------------------------------------------------------
Earnings (Loss) for Common Stock                                $    (7,399)         $     8,036       $   234,405      $   221,191
                                                        ============================================================================
Basic Earnings Per Share From:
  Continuing Operations, less preferred dividends                     (0.05)                0.20              1.49             1.71
  Discontinued Operations                                                 -                (0.14)                -            (0.14)
  Change in Accounting Principle                                          -                    -                 -                -
                                                        ----------------------------------------------------------------------------
Basic Earnings (Loss) Per Share                                 $     (0.05)         $      0.06       $      1.49      $      1.57
                                                        ============================================================================
Diluted Earnings Per Share From:
  Continuing Operations, less preferred dividends                     (0.05)                0.20              1.48             1.70
  Discontinued Operations                                                 -                (0.14)                -            (0.14)
  Change in Accounting Principle                                          -                    -                 -                -
                                                        ----------------------------------------------------------------------------
Diluted Earnings (Loss) Per Share                               $     (0.05)         $      0.06       $      1.48      $      1.56
                                                        ============================================================================
Average Common Shares Outstanding (000)                             157,943              141,063           157,414          140,551
Average Common Shares Outstanding - Diluted (000)                   158,757              142,156           158,464          141,706
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


See accompanying Notes to the Consolidated Financial Statements.


                                       5
<PAGE>
<TABLE>
<CAPTION>

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (Unaudited)

--------------------------------------------------------------------------------------------------
                                                                      Six Months Ended June 30,
(In Thousands of Dollars)                                                2003             2002
                                                               -----------------------------------
<S>                                                                      <C>             <C>
Operating Activities
Net income                                                              $ 237,327       $ 224,143
Adjustments to reconcile net income to net
      cash provided by (used in) operating activities
    Depreciation, depletion and amortization                              287,261         253,460
    Deferred income tax                                                    24,719          20,978
    Income from equity investments                                         (9,759)         (7,409)
    Dividends from equity investments                                           -             120
    Amortization of interest rate swap                                     (4,930)              -
    Loss on disposal of subsidiary investments                             15,048          19,662
Changes in assets and liabilities
    Accounts receivable                                                    54,237         125,015
    Materials and supplies, fuel oil and gas in storage                    18,231          94,637
    Accounts payable and other liabilities                                  7,292         (48,213)
    Interest accrued                                                      (17,865)         (8,793)
    Other                                                                 (46,184)         (5,443)
                                                               -----------------------------------
Net Cash Provided by Operating Activities                                 565,377         668,157
                                                               -----------------------------------
Investing Activities
    Construction expenditures                                            (434,052)       (579,903)
    Proceeds from sale of subsidiary investments                          198,553               -
                                                               -----------------------------------
Net Cash Used in Investing Activities                                    (235,499)       (579,903)
                                                               -----------------------------------
Financing Activities
    Treasury stock issued                                                  57,441          51,896
    Equity issuance                                                       473,573               -
    Issuance of long-term debt                                            599,684         507,754
    Payment of long-term debt                                            (377,174)        (54,590)
    Payment of commercial paper                                          (484,697)       (477,795)
    Redemption of promissory notes                                       (447,005)              -
    Preferred stock dividends paid                                         (2,922)         (2,952)
    Common stock dividends paid                                          (133,435)       (124,684)
    Other                                                                   9,708          (9,536)
                                                               -----------------------------------
Net Cash Used in Financing Activities                                    (304,827)       (109,907)
                                                               -----------------------------------
Net Increase in Cash and Cash Equivalents                               $  25,051       $ (21,653)
Cash and Cash Equivalents at Beginning of Period                          170,617         159,252
                                                               -----------------------------------
Cash and Cash Equivalents at End of Period                              $ 195,668       $ 137,599
                                                               ===================================
</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  Utility  Holding  Company  Act of 1935,  as amended  ("PUHCA").  KeySpan
operates six regulated  utilities that distribute  natural gas to  approximately
2.5 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 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  investor owned 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  one million  electric  customers of the Long Island
Power Authority  ("LIPA").  KeySpan's other subsidiaries are involved in gas and
oil  exploration  and production;  gas storage;  liquefied  natural gas storage;
wholesale and retail gas and electric  marketing;  appliance service;  plumbing;
heating,  ventilation and air conditioning and other mechanical services;  large
energy-system ownership, installation and management; engineering and consulting
services;  and fiber  optic  services.  We also  invest and  participate  in the
development of, natural gas pipelines,  natural gas processing plants, and other
energy-related projects, domestically and internationally. (See Note 2 "Business
Segments" for additional information on each operating segment.)


1. BASIS OF PRESENTATION


In our opinion, the accompanying unaudited Consolidated Financial Statements
contain all adjustments necessary to present fairly KeySpan's financial position
as of June 30, 2003, and the results of operations for the three and six months
ended June 30, 2003 and June 30, 2002, as well as cash flows for the six months
ended June 30, 2003 and June 30, 2002. 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, 2002, as well as KeySpan's March 31, 2003 quarterly report on Form.
The December 31, 2002 financial statement information has been derived from the
2002 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 current period financial statement
presentation.

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.

We have  approximately  2 million  common stock options  outstanding at June 30,
2003,  that  were not  included  in the  calculation  of  diluted  EPS since the
exercise price associated with these options was greater than the average market
price of our  common  stock.  Further,  we have  88,486  shares  of  convertible
preferred stock  outstanding that can be converted into 228,406 shares of common
stock.  These shares were not included in the calculation of diluted EPS for the
three months ended June 30, 2003 since to do so would have been anti-dilutive.


                                       7
<PAGE>

Under the requirements of Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share" our basic and diluted EPS are as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                                                        Three Months Ended June 30,     Six Months Ended June 30,

(In Thousands of Dollars, Except Per Share Amounts)                         2003              2002        2003             2002
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>               <C>           <C>               <C>
Earnings (loss) for common stock                                        $ (7,399)          $ 8,036     $ 234,405         $ 221,191
Interest savings on convertible preferred stock                                -                 -           265               284
Houston Exploration dilution                                                 (57)             (129)         (144)             (225)
-----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) for common stock - adjusted                             $ (7,456)          $ 7,907     $ 234,526         $ 221,250
-----------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding (000)                                157,943           141,063       157,414           140,551
Add dilutive securities:
Options                                                                      814             1,093           822               911
Convertible preferred stock                                                    -                 -           228               244
-----------------------------------------------------------------------------------------------------------------------------------
Total weighted average shares outstanding - assuming dilution            158,757           142,156       158,464           141,706
-----------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss )per share                                         $  (0.05)          $  0.06     $    1.49         $    1.57
-----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share                                       $  (0.05)          $  0.06     $    1.48         $    1.56
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

2. BUSINESS SEGMENTS

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

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

The  Electric  Services  segment  consists  of  subsidiaries  that:  operate the
electric  transmission  and  distribution  system owned by LIPA; own and provide
capacity to and produce energy for LIPA from our generating  facilities  located
on Long  Island;  and  manage  fuel  supplies  for LIPA to fuel our Long  Island
generating facilities.  These services are provided in accordance with long-term
service  contracts  having remaining terms that range from four to twelve years.
Also, in the summer of 2002, we placed two 79.9 megawatt  generating  facilities
into service;  the capacity of and energy from these facilities are dedicated to
LIPA under 25 year  contracts.  The  Electric  Services  segment  also  includes
subsidiaries that own, lease and operate the 2,200 megawatt  Ravenswood electric
generation facility ("Ravenswood facility"), located in Queens, New York. All of
the energy,  capacity and ancillary services related to the Ravenswood  facility
is sold to the New York Independent System Operator ("NYISO") energy markets.



                                       8
<PAGE>

The Energy  Services  segment  includes  companies  that provide  energy-related
services to customers  primarily  located in the New York City metropolitan area
including New Jersey and  Connecticut,  as well as Rhode  Island,  Pennsylvania,
Massachusetts and New Hampshire,  through the following three lines of business:
(i) Home Energy Services,  which provides residential customers with service and
maintenance of energy systems and appliances, as well as the retail marketing of
electricity  to  residential  and  small  commercial  customers;  (ii)  Business
Solutions, which provides plumbing, heating,  ventilation,  air conditioning and
mechanical services, as well as operation and maintenance,  design,  engineering
and consulting services to commercial and industrial customers;  and (iii) Fiber
Optic Services,  which provides  various  services to carriers of voice and data
transmission on Long Island and in New York City.

KeySpan Services, Inc. and its wholly-owned subsidiary Paulus,  Sokolowski,  and
Sartor,  LLC.,  have entered into an  agreement to acquire  Bard,  Rao + Athanas
Consulting  Engineers,  Inc. (BR+A), a Boston,  Massachusetts company engaged in
the business of providing engineering services relating to heating, ventilation,
and air conditioning systems. The purchase price is expected to be approximately
$35 million, plus up to $14.7 million in contingent  consideration  depending on
the financial performance of BR+A over the five-year period after the closing of
the acquisition.  We have received all necessary  regulatory approvals and it is
anticipated that the closing of this transaction will occur in the third quarter
of 2003.  On May 1,  2003,  KeySpan's  gas and  electric  marketing  subsidiary,
KeySpan Energy  Services  Inc.,  assigned the majority of its retail natural gas
customers,  consisting mostly of residential and small commercial customers,  to
ECONnergy Energy Co., Inc. ("ECONnergy").  KeySpan Energy Services will continue
to provide  retail  natural gas  marketing to a small number of customers in New
Jersey and will continue its electric marketing activities.

The Energy  Investments  segment  consists of our gas exploration and production
investments, as well as certain other domestic and international  energy-related
investments.  Our gas exploration and production subsidiaries are engaged in gas
and oil  exploration  and  production,  and the  development  and acquisition of
domestic natural gas and oil properties.  These  investments  consist of our 56%
equity interest in The Houston Exploration Company ("Houston  Exploration"),  an
independent  natural  gas  and oil  exploration  company,  as  well  as  KeySpan
Exploration and Production,  LLC, our wholly owned subsidiary engaged in a joint
venture with Houston Exploration. On February 26, 2003, we reduced our ownership
interest in Houston  Exploration  from 66% to 56% following the  repurchase,  by
Houston  Exploration,  of three million shares of common stock owned by KeySpan.
We realized  net  proceeds of $79 million in  connection  with this  repurchase.
KeySpan follows an accounting policy of income statement  recognition for Parent
company  gains  or  losses  from  common  stock  transactions  initiated  by its
subsidiaries.  As a  result,  KeySpan  realized  a gain of $19  million  on this
transaction.  Income  taxes  were  not  provided,  since  this  transaction  was
structured as a return of capital.

KeySpan  subsidiaries  also  hold a 20%  equity  interest  in the  Iroquois  Gas
Transmission  System  LP, a  pipeline  that  transports  Canadian  gas supply to
markets  in the  Northeastern  United  States;  a 50%  interest  in the  Premier
Transmission  Pipeline  and a 24.5%  interest in Phoenix  Natural  Gas,  both in
Northern Ireland. These subsidiaries are accounted for under the equity method.


                                       9
<PAGE>

We also have  investments  in certain  midstream  natural  gas assets in Western
Canada through  KeySpan  Canada.  These assets include 14 processing  plants and
associated gathering systems that can process  approximately 1.5 BCFe of natural
gas daily and provide associated natural gas liquids  fractionation.  On May 30,
2003,  we  sold  a  portion  of our  interest  in  KeySpan  Canada  through  the
establishment  of an open-ended  income fund trust (the "Fund")  organized under
the laws of Alberta,  Canada.  The Fund acquired a 39.09% ownership  interest in
KeySpan Canada through an indirect subsidiary,  and then issued 17 million trust
units to the  public  through  an  initial  public  offering.  Each  trust  unit
represents a beneficial  interest in the Fund and is  registered  on the Toronto
Stock Exchange under the symbol KEY.UN.  Additionally,  we sold our 20% interest
in Taylor NGL LP that owns and operates two extraction  plants also in Canada to
AltaGas  Services,  Inc. Net proceeds of $119.4 million from the two sales, plus
proceeds of $45.7  million drawn under a new credit  facility made  available to
KeySpan Canada,  were used to pay down existing KeySpan Canada credit facilities
of $160.4  million.  A  pre-tax  loss of $30.3  million  was  recognized  on the
transactions   and  is  included  in  Other  Income  and   (Deductions)  in  the
Consolidated  Statement of Income. These transactions  produced a tax expense of
$3.8 million as a result of certain United States  partnership tax rules and we,
therefore,  recorded an after-tax loss of $34.1 million.  This investment is now
expected to provide an annual cash dividend of approximately $20 million.

The  accounting  policies  of the  segments  are the same as those  used for the
preparation of the Consolidated Financial Statements. The segments are strategic
business units that are managed separately because of their different  operating
and regulatory environments.  Operating results of our segments are evaluated by
management on an operating  income basis.  At June 30, 2003, the total assets of
each reportable  segment have not changed  materially from those levels reported
at December 31, 2002. The reportable segment information is as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                Energy Investments
                                                                       -------------------------------
(InThousands of Dollars)                 Gas       Electric    Energy    Gas Exploration      Other
                                    Distribution   Services   Services   and Production    Investments  Eliminations   Consolidated
------------------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>         <C>         <C>           <C>             <C>           <C>          <C>
Three Months Ended June 30, 2003
Unaffiliated revenue                   732,036     370,591     154,022       122,875         28,628             -       1,408,152
Intersegment revenue                         -          26       1,542             -          1,252        (2,820)              -
Operating Income                        31,616      51,480      (9,872)       50,148          9,074         5,783         138,229

Three Months Ended June 30, 2002
Unaffiliated revenue                   521,822     354,756     229,311        90,563         21,748             -       1,218,200
Intersegment revenue                         -          25           -             -            194          (219)              -
Operating Income                        30,096      59,501     (10,867)       29,455           (147)        5,937         113,975
------------------------------------------------------------------------------------------------------------------------------------
</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 for the three months ended June 30, 2003 and 2002
represent approximately 26% and 29% of our consolidated revenues, respectively.


                                       10
<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                               Energy Investments
                                                                       ------------------------------
(InThousands of Dollars)              Gas         Electric    Energy    Gas Exploration     Other
                                 Distribution     Services   Services   and Production   Investments    Eliminations    Consolidated
------------------------------------------------------------------------------------------------------------------------------------
<S>                               <C>            <C>         <C>          <C>              <C>            <C>            <C>
Six Months Ended June 30, 2003
Unaffiliated revenue               2,564,737      704,985     346,393      250,722          53,840              -         3,920,677
Intersegment revenue                       -           51       2,968            -           2,504         (5,523)                -
Operating Income                     396,553       91,150     (19,020)     105,738          19,198          1,304           594,923

Six Months Ended June 30, 2002
Unaffiliated revenue               1,744,791      669,440     470,870      167,489          39,187              -         3,091,777
Intersegment revenue                       -           49           -            -             388           (437)                -
Operating Income                     361,118      120,991     (20,224)      49,280           4,555          4,293           520,013
------------------------------------------------------------------------------------------------------------------------------------
</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  for the six months ended June 30, 2003 and 2002
represent approximately 18% and 22% of our consolidated revenues, respectively.

3. COMPREHENSIVE INCOME

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

------------------------------------------------------------------------------------------------------------------------------------
                                                                  Three Months Ended June 30,             Six Months Ended June 30,
(In Thousands of Dollars)                                          2003                  2002             2003              2002
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>                  <C>               <C>               <C>
Earnings (loss) for common stock                                $ (7,399)           $  8,036          $ 234,405         $ 221,191
----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax
 Reclassification adjustments for loss (gains) realized in
  net income                                                       8,817              (2,998)            11,171           (10,285)
 Foreign currency translation adjustments                         17,773              10,829             27,526             9,116
 Unrealized gains (losses) on marketable securities                5,405              (3,195)             2,249            (4,236)
 Accrued unfunded pension obligation                                   -                   -                  -            (1,132)
 Premiums on derivative financial instruments                     (3,437)                  -             (3,437)                -
 Unrealized losses on derivative financial instruments            (6,184)             (2,159)           (20,933)          (25,944)
----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax                     22,374               2,477             16,576           (32,481)
----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income                                            $ 14,975            $ 10,513          $ 250,981         $ 188,710
----------------------------------------------------------------------------------------------------------------------------------
Related tax (benefit) expense
 Reclassification adjustments for loss (gains) realized in net
  income                                                           4,748            $ (1,614)             6,015         $  (5,538)
 Foreign currency translation adjustments                          9,570               5,831             14,822             4,908
 Unrealized gains (losses) on marketable securities                2,910              (1,721)             1,211            (2,281)
 Accrued unfunded pension obligation                                   -                   -                  -              (610)
 Premiums on derivative financial instruments                     (1,851)                  -             (1,851)
 Unrealized losses on derivative financial instruments            (3,329)             (1,163)           (11,271)          (13,970)
----------------------------------------------------------------------------------------------------------------------------------
Total Tax (Benefit) Expense                                     $ 12,048            $  1,333          $   8,926         $ (17,491)
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>




                                       11
<PAGE>


4. CAPITAL STOCK

On January 17, 2003,  we issued 13.9 million  shares of common stock in a public
offering that generated net proceeds of approximately  $473 million.  All shares
were offered by KeySpan  pursuant to an effective shelf  registration  statement
filed with the Securities and Exchange Commission ("SEC").


5. LONG-TERM DEBT AND COMMERCIAL PAPER

On June 27, 2003,  KeySpan renewed its $1.3 billion  revolving  credit facility,
which was syndicated among sixteen banks. The credit facility supports KeySpan's
commercial  paper program,  and consists of two separate credit  facilities with
different  maturities but  substantially  similar terms and  conditions:  a $450
million  facility that extends for 364 days, and a $850 million facility that is
committed  for  three  years.  The  fees for the  facilities  are  subject  to a
ratings-based  grid,  with an annual fee of 0.10% on the  364-day  facility  and
0.125% on the three-year  facility.  Both credit agreements allow for KeySpan to
borrow using several different types of loans;  specifically,  Eurodollar loans,
Adjustable Bank Rate (ABR) loans, or competitively  bid loans.  Eurodollar loans
are based on the Eurodollar  rate plus a margin of 0.625% for loans up to 33% of
the total  facility,  and an  additional  0.125% for loans over 33% of the total
facility. ABR loans are based on the highest 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. In addition, the
364-day facility has a one-year term out option,  which would cost an additional
0.25%  if  utilized.  We do not  anticipate  borrowing  against  this  facility;
however,  if the  credit  rating  on our  commercial  paper  program  were to be
downgraded, it may be necessary to do so.

In June 2003, as part of the sale of a portion of KeySpan's ownership in KeySpan
Canada, two outstanding  KeySpan Canada credit facilities were replaced with one
new facility with three tranches that combined allow KeySpan Canada to borrow up
to  approximately  $125 million.  These  facilities  mature as follows:  (i) $50
million  matures in 180 days;  (ii) $37.5 million matures in 364 days; and (iii)
$37.5 million matures in two years.

On June 10, 2003, Houston Exploration  finalized a private placement issuance of
$175 million of 7.0%, senior subordinated notes due 2013. Interest payments will
begin on December 15, 2003, and will be paid semi-annually thereafter. The notes
will mature on June 15, 2013.  Houston  Exploration  has the right to redeem the
notes as of June 15, 2008,  at a price equal to the issue price plus a specified
redemption premium.  Until June 15, 2006, Houston Exploration may also redeem up
to 35% of the notes at a redemption  price of 107% with  proceeds from an equity
offering.  Houston  Exploration  incurred  approximately  $4.5  million  of debt
issuance costs on this private placement.

Houston  Exploration  used a portion of the net  proceeds  from the  issuance to
redeem all of its  outstanding  $100 million  principal  amount of 8.625% senior
subordinated  notes due 2008 at a price of 104.313% of par plus interest accrued
to the redemption date. Debt redemption costs totaled approximately $5.9 million
and is reflected in Other Income and (Deductions) in the Consolidated  Statement
of Income. The remaining net proceeds from the offering were used to reduce debt


                                       12
<PAGE>

amounts  associated with Houston  Exploration's  revolving bank credit facility.
The  actual  cash  payment   associated   with  the  redemption  of  the  senior
subordinated  notes did not occur until July 11, 2003. The Consolidated  Balance
Sheet  at  June  30,  2003,  therefore  reflects  $100  million  in  cash  and a
corresponding current liability.

In April 2003, we issued $300 million of  medium-term  and long-term  debt.  The
debt was issued in the  following  two series:  (i) $150 million 4.65% Notes due
2013; and (ii) $150 million 5.875% Notes due 2033. The proceeds of this issuance
were used to pay down outstanding commercial paper.

In connection with the KeySpan/Long  Island Lighting Company ("LILCO")  business
combination in 1998,  KeySpan and certain of its subsidiaries  issued promissory
notes to LIPA to support certain debt  obligations  assumed by LIPA. At December
31, 2002, the remaining  principal amount of promissory notes issued to LIPA was
approximately  $600  million.  To  mitigate  the  dilutive  effect of the equity
issuance previously  mentioned in Note 4, in March 2003, we called approximately
$447  million  aggregate  principal  amount  of  such  promissory  notes  at the
applicable  redemption prices plus accrued and unpaid interest through the dates
of redemption. Interest savings associated with this redemption are estimated to
be $15.6  million  after-tax,  or $0.09  per  share,  in 2003.  We  applied  the
provisions  of  Statement  of  Financial   Accounting   Standards  ("SFAS")  145
"Rescission of FASB Statement No. 4, 44 and 64,  Amendment of FASB Statement No.
13, and  Technical  Corrections"  and  recorded  an  expense  of $18.2  million,
reflecting  redemption  costs,  as well as the write-off of previously  deferred
debt  issuance  costs.  This  expense  has been  recorded  in Other  Income  and
Deductions in the Consolidated Statement of Income.

KeySpan had authorization  under PUHCA to issue up to $2.2 billion of securities
through December 31, 2003. Following the recent common stock offering previously
mentioned and shares of common stock expected to be issued for employee  benefit
and dividend reinvestment plans, we generally exhausted our ability to issue new
securities  under our current  PUHCA  authorization.  However,  the  issuance of
securities in connection with the redemption of existing  securities  (including
the  promissory  notes  discussed  previously)  is  permitted  under  our  PUHCA
authorization  notwithstanding the foregoing limit. We have filed an application
with the SEC  requesting  authorization  to, among other things,  issue up to an
additional $3 billion of securities through December 31, 2006. It is anticipated
that this  authorization  will be  obtained  before  the end of the  year.  This
request is intended to provide us with maximum flexibility to finance our future
capital requirements over the next three years.


6. HEDGING AND DERIVATIVE FINANCIAL INSTRUMENTS

Financially-Settled  Commodity Derivative Instruments: From time to time KeySpan
has utilized  derivative  financial  instruments,  such as futures,  options and
swaps,  for the purpose of hedging exposure to commodity price risk and to hedge
the cash flow  variability  associated  with a portion of peak  electric  energy
sales.


                                       13
<PAGE>

Houston   Exploration  has  utilized  collars  and  put  options,   as  well  as
over-the-counter  ("OTC") swaps, to hedge the cash flow  variability  associated
with forecasted sales of a portion of its natural gas production. As of June 30,
2003, Houston Exploration has hedged approximately 67% of its estimated 2003 and
2004 gas production.  To value its outstanding derivatives,  Houston Exploration
used standard New York Mercantile  Exchange  ("NYMEX")  futures prices,  and, in
addition,  used  published  volatility  in  its  Black-Scholes  calculation  for
outstanding  options.  The maximum length of time over which Houston Exploration
has hedged such cash flow is through  December  2004.  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 $47.5 million, or $30.6 million after-tax.

With respect to price exposure associated with fuel purchases for the Ravenswood
facility,  KeySpan  employs  standard  NYMEX  natural gas futures  contracts and
over-the-counter  financially  settled natural gas basis swaps to hedge the cash
flow  variability of a portion of forecasted  purchases of natural gas.  KeySpan
also employs the use of financially-settled oil swap contracts to hedge the cash
flow  variability of a portion of forecasted  purchases of fuel oil that will be
consumed at the  Ravenswood  facility.  The maximum length of time over which we
have hedged cash flow variability  associated with: (i) forecasted  purchases of
natural gas is through September 2004; and (ii) forecasted purchases of fuel oil
is through April 2005. We used  standard  NYMEX futures  prices to value the gas
futures contracts and industry published oil indices for number 6 grade fuel oil
to value the oil swap contracts.  The estimated  amount of gains associated with
all 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 $1.5 million, or $1.0 million after-tax.

KeySpan Canada employs  natural gas swaps to lock-in a price for expected future
natural gas purchases.  As applicable,  we used relevant  natural gas indices to
value the outstanding  contracts.  The maximum length of time over which we have
hedged such cash flow  variability is through October 2004. 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 negligible at June 30, 2003.

We have also engaged in the use of  cash-settled  swap  instruments to hedge the
cash flow  variability  associated  with a portion of  forecasted  peak electric
energy sales from the Ravenswood facility. The maximum length of time over which
we  have  hedged  cash  flow  variability  is  through  December  2004.  We used
NYISO-location  zone published indices to value these  outstanding  derivatives.
The estimated amount of gains  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 $3.3 million,  or $2.2
million after-tax.

KeySpan Canada also employs  electricity  swap contracts to lock-in the purchase
price  of  electricity  needed  to  operate  its gas  processing  plants.  These
contracts are not exchange-traded and local published indices were used to value
these outstanding swap agreements. The maximum length of time over which we have
hedged such cash flow variability is through December 2003. 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 $0.7 million, or $0.5 million after-tax.


                                       14
<PAGE>


The following tables set forth selected financial data associated with these
derivative financial instruments noted above that were outstanding at June 30,
2003.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                   Year of    Volumes    Floor      Ceiling         Fixed Price     Current Price         Fair Value
               Type of Contract    Maturity   (mmcf)      ($)         ($)               ($)              ($)               ($000)
------------------------------------------------------------------------------------------------------------------------------------
                     Gas
<S>                                  <C>      <C>        <C>            <C>           <C>             <C>                 <C>
Collars                               2003     27,600     3.48 - 3.49    4.91 - 4.95             -     5.29 - 5.82         (22,760)
                                      2004     64,100     3.75 - 4.50    5.05 - 7.00             -     4.87 - 5.92         (16,920)

Put Options - Short Natural Gas       2004      9,100     5.00                     -             -     5.66 - 5.92           4,228

Swaps/Futures - Short Natural Gas     2003      7,483               -              -   3.19 - 3.89     4.35 - 5.82         (17,161)

Swaps/Futures - Long Natural Gas      2003        410               -              -   3.22 - 5.72     5.41 - 5.48           1,215
                                      2004         50               -              -   5.11 - 5.13     4.87 - 4.89             (10)

------------------------------------------------------------------------------------------------------------------------------------
                                              108,743                                                                      (51,408)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
                                     Year of        Volumes                              Current            Fair Value
           Type of Contract          Maturity      (Barrels)      Fixed Price ($)       Price ($)             ($000)
----------------------------------------------------------------------------------------------------------------------
                 Oil
<S>                                   <C>           <C>          <C>                  <C>                       <C>
Swaps - Short Fuel Oil                 2003          30,000               29.70        28.50 - 30.52              (25)

Swaps - Long Fuel Oil                  2003          66,195       20.60 - 30.88        29.15 - 31.99              253
                                       2004          76,548       20.50 - 29.95        27.05 - 30.37              141
                                       2005           9,000       24.65 - 26.28        26.60 - 26.85               17
----------------------------------------------------------------------------------------------------------------------
                                                    181,743                                                       386
----------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
                                   Year of                          Fixed Margin/ Price         Current             Fair Value
          Type of Contract        Maturity              MWh                ($)                 Price ($)                ($000)
---------------------------------------------------------------------------------------------------------------------------------
          Electricity
<S>                                 <C>               <C>           <C>                     <C>                           <C>
Swaps - Energy                       2003              584,928       22.40 - 67.53           14.67 - 46.59                 2,477
                                     2004              308,000       14.00 - 26.50           13.13 - 24.04                   774

---------------------------------------------------------------------------------------------------------------------------------
                                                       892,928                                                             3,251
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>


--------------------------------------------------------------------------------
                                                                          2003
Change in Fair Value of Derivative Instruments                           ($000)
--------------------------------------------------------------------------------
Fair value of contracts at January 1,                                $  (32,628)
Net losses on contracts realized                                         17,186
(Decrease) in fair value of all open contracts                          (32,329)
--------------------------------------------------------------------------------
Fair value of contracts outstanding at June 30,                      $  (47,771)
--------------------------------------------------------------------------------


                                       15
<PAGE>

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
(In Thousands of Dollars)
---------------------------------------------------------------------------------------------------------
                                                     Fair Value of Contracts
---------------------------------------------------------------------------------------------------------
                                                  Maturity             Maturity                  Total
Sources of Fair Value                           In 12 Months          2004 - 2005              Fair Value
---------------------------------------------------------------------------------------------------------
<S>                                               <C>                    <C>                    <C>
Prices actively quoted                            $ (40,995)             $ (2,292)             $ (43,287)
Prices provided by external sources                     427                     2                    429
Prices based on models and
    other valuation methods                          (5,753)               (2,765)                (8,518)
Local published indicies                              2,961                   644                  3,605
---------------------------------------------------------------------------------------------------------
                                                  $ (43,360)             $ (4,411)             $ (47,771)
---------------------------------------------------------------------------------------------------------
</TABLE>

NYMEX  futures  are also used to  economically  hedge the cash flow  variability
associated  with the  purchase  of fuel for a  portion  of our  fleet  vehicles.
Further,  KeySpan  Canada has a  portfolio  of  financially-settled  natural gas
collars and swap  transactions  for  natural gas  liquids.  Such  contracts  are
executed  by KeySpan  Canada to: (i) fix the price that is paid or  received  by
KeySpan  Canada for  certain  physical  transactions  involving  natural gas and
natural gas  liquids and (ii)  transfer  the price  exposure to  counterparties.
These derivative financial instruments do not qualify for hedge accounting under
SFAS 133. At June 30,  2003,  these  instruments  had a net fair market value of
$0.6 million, which was recorded on the Consolidated Balance Sheet. Based on the
non-hedge  designation  of these  instruments,  the gain was  recognized  in the
Consolidated Statement of Income.

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  Hampshire  service  territories.  Since these  derivative  instruments  are
employed to reduce the  variability  of the purchase  price of natural gas to be
sold to regulated firm gas sales customers,  the accounting for these derivative
instruments is subject to SFAS 71  "Accounting  for the Effects of Certain Types
of Regulation". Therefore, changes in the market 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.

The following  table sets forth selected  financial data  associated  with these
derivative financial instruments that were outstanding at June 30, 2003.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
     Type of Contract      Year of       Volumes                                                                          Fair Value
                          Maturity        mmcf      Floor $       Ceiling $       Fixed Price $       Current Price $        ($000)
------------------------------------------------------------------------------------------------------------------------------------
<S>                         <C>         <C>      <C>              <C>             <C>                  <C>                     <C>
Options                      2003         3,040   4.00 - 5.00      5.50 - 6.35               -                    -              72
                             2004         3,560   4.00 - 5.00      5.37 - 6.00               -                    -             (87)
Swaps                        2003         9,690             -                -     5.09 - 6.23          5.36 - 5.90              46
                             2004        11,440             -                -     4.42 - 6.23          4.52 - 5.83              99
------------------------------------------------------------------------------------------------------------------------------------
                                         27,730                                                                                 130
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>



                                       16
<PAGE>


Physically-Settled  Commodity Derivative Instruments:  Derivative Implementation
Group  ("DIG") Issue C15 and C16 of Statement of Financial  Accounting  Standard
133, "Accounting for Derivative Instruments and Hedging Activities",  as amended
and  interpreted,  ("SFAS 133")  establishes  criteria that must be satisfied in
order for  option-type  and forward  contracts in  electricity to be exempted as
normal  purchases and sales,  and relates to the exemption (as normal  purchases
and normal sales) of contracts  that combine a forward  contract and a purchased
option  contract.  Based  upon a  continuing  review of our  physical  commodity
contracts,  we determined  that certain  contracts for the physical  purchase of
natural gas are not exempt as normal  purchases  from the  requirements  of SFAS
133. At June 30, 2003, the fair value of these contracts was $1.5 million. 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.

Interest Rate Derivative  Instruments:  In May 2003, we entered into an interest
rate swap  agreement  in which we swapped $250 million of 7.25 % fixed rate debt
to floating rate debt.  Under the terms of the  agreements,  we will receive the
fixed coupon rate associated with these bonds and pay our swap  counterparties a
variable  interest rate based on LIBOR,  that is reset on a  semi-annual  basis.
These swaps are  designated  as  fair-value  hedges and qualify for  "short-cut"
hedge accounting treatment under SFAS 133. During the second quarter of 2003, we
paid our  counterparty an interest rate of 6.43%,  and as a result,  we realized
interest savings of $0.3 million for the quarter.  The fair market value of this
derivative was $1.9 million at June 30, 2003.

During  2002,  we  had  interest  rate  swap  agreements  in  which  we  swapped
approximately  $1.3 billion of fixed rate debt to floating rate debt.  Under the
terms of the agreements, we received the fixed coupon rate associated with these
bonds and paid the swap  counterparties a variable  interest rate that was reset
on a quarterly  basis.  These swaps were  designated  as  fair-value  hedges and
qualified for "short-cut" hedge accounting treatment under SFAS 133. In 2002, we
terminated two of these interest rate swap agreements with an aggregate notional
amount of $1.0  billion.  The  remaining  swap,  which had a notional  amount of
$270.0  million,  was terminated on February 25, 2003. We received $18.4 million
from our swap  counterparties  as a result of the latter  termination,  of which
$8.1 million  represented  accrued swap  interest.  The  difference  between the
termination settlement amount and the amount of accrued interest, $10.3 million,
was  recorded to earnings  in the first  quarter of 2003.  This swap was used to
hedge a portion of our  outstanding  promissory  notes to LIPA.  As discussed in
Note 5 "Long-Term  Debt", we called a portion of these  promissory  notes during
the first quarter of 2003.

Additionally,  we had an interest rate swap  agreement that hedged the cash flow
variability  associated  with the forecasted  issuance of a series of commercial
paper offerings. This hedge expired in March 2003.

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.  To  mitigate  a  substantial  portion  of the  effect  of


                                       17
<PAGE>

fluctuations  from normal weather on our financial  position and cash flows,  we
sold  heating  degree-day  call  options and  purchased  heating-degree  day put
options for the November  2002-March  2003 winter  season.  With respect to sold
call  options,  KeySpan  was  required  to make a payment of $40,000 per heating
degree day to its  counterparties  when actual  weather  experienced  during the
November 2002 - March 2003 time frame was above 4,470 heating degree days, which
equates  to  approximately  1% colder  than  normal  weather.  With  respect  to
purchased put options,  KeySpan  would receive a $20,000 per heating  degree day
payment  from its  counterparties  when actual  weather was below 4,150  heating
degree days, or approximately 7% warmer than normal.  Based on the terms of such
contracts,  we account for such instruments pursuant to the requirements of EITF
99-2,  "Accounting for Weather  Derivatives."  In this regard,  such instruments
were  accounted  for using the  "intrinsic  value  method"  as set forth in such
guidance.  During the first quarter of 2003,  weather was 10% colder than normal
and, as a result, $11.9 million has been recorded as a reduction to revenues.

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  credit risk and is actively  managed by assessing each  counterparty
credit  profile and  negotiating  appropriate  levels of  collateral  and credit
support.

7. RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS 143,
"Accounting for Asset  Retirement  Obligations."  SFAS 143 requires an entity to
record a liability and  corresponding  asset  representing  the present value of
legal obligations associated with the retirement of tangible, long-lived assets.
SFAS 143 was effective for fiscal years beginning after June 2002.

At June 30, 2003,  the present value of our future asset  retirement  obligation
("ARO") was  approximately  $62 million,  primarily related to our investment in
Houston  Exploration.  The  cumulative  effect  of SFAS  143 and the  change  in
accounting  principle  was a  benefit  to net  income of $0.6  million,  or $0.2
million,  after-tax.  KeySpan's  largest asset base is its gas  transmission and
distribution   system.  A  legal   obligation   exists  due  to  certain  safety
requirements  at final  abandonment.  In  addition,  a legal  obligation  may be
construed  to exist with  respect to  KeySpan's  liquefied  natural  gas ("LNG")
storage tanks due to clean up  responsibilities  upon cessation of use. However,
mass assets such as storage,  transmission and distribution  assets are believed
to operate in perpetuity and, therefore, have indeterminate cash flow estimates.
Since that exposure is in perpetuity  and cannot be measured,  no liability will
be recorded  pursuant to SFAS 143.  KeySpan's ARO will be re-evaluated in future
periods until sufficient  information exists to determine a reasonable  estimate
of fair value.

KeySpan  recovers  certain  asset  retirement  costs  through  rates  charged to
customers as a portion of depreciation expense. When depreciable  properties are
retired,  the  original  cost plus cost of removal less  salvage,  is charged to
accumulated  depreciation.  As of June 30, 2003,  KeySpan had costs recovered in
excess of costs incurred totaling $444.3 million.


                                       18
<PAGE>


In  January  2003,  the  FASB  issued  FASB  Interpretation  No.  46  "FIN  46",
"Consolidation of Variable Interest Entities,  an Interpretation of ARB No. 51."
FIN 46 requires  certain  variable  interest  entities to be consolidated by the
primary  beneficiary of the entity if the equity  investors in the entity do not
have the  characteristics  of a  controlling  financial  interest or do not have
sufficient  equity at risk for the  entity to  finance  its  activities  without
additional  subordinated  financial  support  from  other  parties.  FIN  46  is
effective  for all new  variable  interest  entities  created or acquired  after
January 31, 2003. For variable  interest  entities  created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. We currently have an arrangement
with a  variable  interest  entity  through  which  we  lease a  portion  of the
Ravenswood facility and we will apply the provisions of FIN 46 beginning July 1,
2003. (See Note 9 "Variable Interest Entity" for a detailed  description of this
leasing arrangement).

In April  2003,  the FASB  issued  SFAS  149,  "Amendment  of  Statement  133 on
Derivative  Instruments  and  Hedging  Activities".  This  Statement  amends and
clarifies  financial  accounting  and  reporting  for  derivative   instruments,
including  certain  instruments  embedded  in other  contracts  and for  hedging
activities under Statement No. 133,  "Accounting for Derivative  Instruments and
Hedging  Activities." This Statement:  (i) clarifies under what  circumstances a
contract  with  an  initial  net  investment  meets  the   characteristic  of  a
derivative;  (ii)  clarifies when a derivative  contains a financing  component;
(iii) amends the  definition  of an  underlying;  and (iv) amends  certain other
existing  pronouncements.  While we are still  evaluating the provisions of this
Statement,  we belive that  implementation  of this Statement is not expected to
have a significant impact on our results of operations,  financial  condition or
cash  flows  since our  derivative  instruments  that meet the  definition  of a
derivative and qualify for hedge accounting treatment will continue to do so.

In May  2003,  the FASB  issued  SFAS 150,  "Accounting  for  Certain  Financial
Instruments with Characteristics of Both Liabilities and Equity." This Statement
establishes  standards  for  how  an  issuer  classifies  and  measures  certain
financial  instruments with  characteristics  of both liabilities and equity. It
requires that an issuer classify  certain  financial  instruments as a liability
(or an asset in some  circumstances)  when there is an  obligation to redeem the
issuer's  shares  and  either  requires  or  may  require  satisfaction  of  the
obligation  by  transferring  assets,  or  satisfy  the  obligation  by  issuing
additional  equity  shares  subject  to  certain  criteria.  This  Statement  is
effective for financial instruments entered into or modified after May 31, 2003,
and  otherwise  is  effective  at the  beginning  of the  first  interim  period
beginning  after  June  15,  2003.  It is to be  implemented  by  reporting  the
cumulative  effect  of  a  change  in  an  accounting  principle  for  financial
instruments created before the issuance date of the Statement and still existing
at the beginning of the interim period of adoption.  The  implementation of this
Statement  is not  expected  to have a  significant  impact  on our  results  of
operations, financial condition or cash flows.


                                       19
<PAGE>


8. FINANCIAL GUARANTEES AND CONTINGENCIES

Environmental Matters

New York Sites. We have  identified 28 manufactured  gas plant ("MGP") sites and
related facilities in New York State that were historically owned or operated by
KeySpan  subsidiaries  or such  companies'  predecessors.  Twenty seven of these
former sites, some of which are no longer owned by KeySpan, were associated with
the regulated gas businesses, and have been identified to both the Department of
Environmental Conservation ("DEC") for inclusion on appropriate site inventories
and listing with the New York Public Service Commission ("NYPSC"). The remaining
former MGP site was acquired when the  Ravenswood  facility was  purchased  from
Consolidated Edison Company of New York Inc. ("Consolidated  Edison").  Fourteen
sites are currently the subjects of Administrative Orders on Consent ("ACOs") or
Voluntary Clean-Up Agreements ("VCAs") with the DEC.

We presently estimate the remaining  environmental  cleanup costs related to our
New York MGP sites will be $135.3  million,  which  amount has been accrued as a
reasonable estimate of probable cost for known sites.  Expenditures  incurred to
date with respect to these MGP-related sites total $56.5 million.  The KEDNY and
KEDLI rate plans generally provide for the recovery of MGP related investigation
and  remediation  costs in rates charged to gas  distribution  customers.  Under
prior rate orders,  KEDNY has offset certain  refunds due customers  against its
estimated  environmental  cleanup  costs for MGP sites.  A  regulatory  asset of
$123.1  million for the New York/Long  Island MGP sites is reflected at June 30,
2003.

KeySpan is also responsible for  environmental  obligations  associated with the
Ravenswood  electric generating  facility.  Our obligations do not include those
arising from disposal of waste at off-site locations prior to our acquisition of
the Ravenswood facility,  or any from Consolidated Edison's post-closing conduct
associated with its  transmission  facilities at the site.  Based on information
currently available, a liability of $3.6 million has been accrued.  Expenditures
incurred  to date with  respect to these  environmental  obligations  total $1.4
million.

New England Sites. Within the Commonwealth of Massachusetts and the State of New
Hampshire, we are aware of 76 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 66 MGP
sites and related  facilities.  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. At this time, there is substantial  uncertainty as
to whether Boston Gas Company, Colonial Gas Company or Essex Gas Company have or
share  responsibility  for  remediating  any of these other sites.  No notice of
responsibility  has  been  issued  to  KeySpan  for any of the  sites  from  any
governmental authority.


                                       20
<PAGE>


We  presently   estimate  the   remaining   cost  of  New  England   MGP-related
environmental  cleanup  activities will be $45.3 million,  which amount has been
accrued as a reasonable estimate of probable cost for known sites.  Expenditures
incurred since our  acquisition of Eastern  Enterprises on November 8, 2000 with
respect to these MGP-related activities total $17.6 million.

The Massachusetts  Department of  Telecommunications  and Energy ("DTE") and the
New Hampshire Public Utilities Commission ("NHPUC") have issued rate orders that
provide for the recovery of site  investigation  and remediation  costs in rates
charged to gas distribution customers.  Accordingly, a regulatory asset of $56.6
million for the KEDNE MGP sites is  reflected  at June 30,  2003.  Colonial  Gas
Company  and Essex Gas  Company  are not  subject to the  provisions  of SFAS 71
"Accounting  for the Effects of Certain Types of Regulation"  and therefore have
recorded  no  regulatory  asset.   However,  rate  plans  in  effect  for  these
subsidiaries provide for the recovery of investigation and remediation costs.

KeySpan  New  England  LLC  Sites.  We are  aware  of  three  non-utility  sites
associated  with the  historical  operations  of KeySpan New  England,  LLC, the
successor  company  to  Eastern  Enterprises,  for  which  we may  have or share
environmental  remediation  responsibility  or ongoing  maintenance:  the former
Philadelphia Coke site located in Pennsylvania; the former Connecticut Coke site
located in New Haven,  Connecticut;  and the Everett  site,  which  includes the
former Coal Tar  Processing  Facility (the "Everett  Coal Tar  Facility"),  Coke
Plant  and  a  by-products   facility   located  in   Massachusetts.   Honeywell
International,  Inc. and Beazer East,  Inc.  (both former owners or operators of
the Everett Coal Tar  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 the Everett Coal
Tar Facility.

We presently estimate the remaining cost of our environmental cleanup activities
for the three  non-utility  sites will be  approximately  $39.2  million,  which
amount has been  accrued as a  reasonable  estimate of probable  costs for known
sites. Expenditures incurred since November 8, 2000, with respect to these sites
total $4.6 million.

We believe that in the aggregate,  the accrued  liability for  investigation and
remediation  of sites and related  facilities  identified  above are  reasonable
estimates of likely cost within a range of reasonable, foreseeable costs. We may
be required to investigate and, if necessary,  remediate each of these, 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  liquidity.  Remediation  costs for each site may be
materially higher than noted,  depending upon remediation  experience,  selected
end use for each site, and actual environmental conditions encountered.


See KeySpan's  Annual  Report on Form 10-K for the year ended  December 31, 2002
Note 7 to those Consolidated Financial Statements  "Contractual  Obligations and
Contingencies" for further information on environmental matters.


                                       21
<PAGE>


Legal Matters

From time to time we are subject to various legal proceedings arising out of the
ordinary  course of our  business.  Except as described  below,  or in KeySpan's
Annual  Report on Form 10-K for the year  ended  December  31,  2002,  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.

KeySpan has been  cooperating  in  preliminary  inquiries  regarding  trading in
KeySpan  Corporation  stock by individual  officers of KeySpan prior to the July
17, 2001  announcement  that  KeySpan was taking a special  charge in its Energy
Services  business and  otherwise  reducing its 2001  earnings  forecast.  These
inquiries are being conducted by the U.S.  Attorney's Office,  Southern District
of New York and the SEC.

On March 5, 2002 , the SEC, as part of its continuing  inquiry,  issued a formal
order of investigation, pursuant to which it will review the trading activity of
certain company  insiders from May 1, 2001 to the present,  as well as KeySpan's
compliance with its reporting rules and regulations, generally during the period
following the acquisition by KeySpan Services,  Inc., a KeySpan  subsidiary,  of
the Roy Kay companies through the July 17th announcement.

KeySpan and certain of its officers and directors are  defendants in a number of
class action  lawsuits filed in the United States District Court for the Eastern
District of New York after the July 17th  announcement.  These lawsuits  allege,
among other  things,  violations of Sections  10(b) and 20(a) of the  Securities
Exchange  Act  of  1934,  as  amended   ("Exchange  Act"),  in  connection  with
disclosures  relating to or following the  acquisition  of the Roy Kay companies
and the  announcement  of the  agreement  to  acquire  Eastern  Enterprises  and
EnergyNorth  Inc.  In  October  2001,  a  shareholder's  derivative  action  was
commenced in the same court against  certain  officers and directors of KeySpan,
alleging,  among other things, breaches of fiduciary duty, violations of the New
York Business  Corporation  Law and  violations of Section 20(a) of the Exchange
Act.  In  addition,  a second  derivative  action has been  commenced  asserting
similar  allegations.  Each  of the  proceedings  seek  monetary  damages  in an
unspecified  amount.  On March 18, 2003, the court granted our motion to dismiss
the  class  action   complaint.   The  court's  order  dismissed  certain  class
allegations with prejudice,  but provided the plaintiffs a final  opportunity to
file an amended complaint concerning the remaining  allegations.  In April 2003,
the plaintiff filed an amended complaint and in July the court denied our motion
to dismiss this amended complaint.  KeySpan intends to vigorously defend each of
these  proceedings.  However,  we are  unable to  predict  the  outcome of these
proceedings  or what effect,  if any,  such  outcome will have on our  financial
condition, results of operations or cash flows.

KeySpan  subsidiaries,  along with  several  other  parties,  have been named as
defendants in numerous  proceedings filed by plaintiffs claiming various degrees
of injury from asbestos exposure at generating facilities formerly owned by Long
Island Lighting Company and others.  In March 2003, a jury rendered a verdict in
one such  proceeding  against our subsidiary,  KeySpan  Generation LLC ("KeySpan
Generation"),  and other  defendants  in the amount of $47 million.  KeySpan has
moved to set aside this verdict and, if necessary,  will prosecute an appeal, on
the grounds that, among other things, the amount of the verdict is excessive and
unreasonable  and the finding of liability  against  KeySpan  Generation  is not
supported by the evidence.


                                       22
<PAGE>

In connection with the May 1998 transaction with LIPA, costs incurred by KeySpan
for  liabilities  for  asbestos  exposure  arising  from the  activities  of the
generating facilities previously owned by LILCO, including the facility involved
in the case  referred  to above,  are  recoverable  from LIPA  through the Power
Supply  Agreement  between LIPA and KeySpan.  KeySpan's  cost recovery under the
Power  Supply  Agreement  is reduced by any  insurance  recoveries  received  by
KeySpan  Generation  and by amounts  received by KeySpan  Generation  from other
indemnification claims it is pursuing.

KeySpan  is  unable  to  determine  the  outcome  of the  appeals  of the  above
referenced action or the outcome of any of these other proceedings, but does not
believe,  for the reasons set forth above, that such outcome,  if adverse,  will
have a material effect on its financial condition,  results of operation or cash
flows.  KeySpan  believes that its cost  recovery  rights under the Power Supply
Agreement,  its  indemnification  rights against third parties and its insurance
coverage (above  applicable  deductible  limits) cover its exposure in this case
and for asbestos liabilities generally.

In June 2002, Hawkeye Electric,  LLC et al.  ("Hawkeye")  commenced an action in
New York State Supreme Court,  Suffolk County against KeySpan and certain of its
subsidiaries  alleging,  among other things,  that KeySpan and its  subsidiaries
breached  certain  contractual  obligations  to  Hawkeye  with  respect  to  the
provision of certain gas, electric and telecommunications  construction services
offered by Hawkeye.  Hawkeye  was  seeking  damages in excess of $90 million and
KeySpan  alleged  a number  of  counterclaims  seeking  damages  in excess of $4
million.  In June 2003,  the parties  entered  into an agreement  settling  this
matter and a stipulation  discontinuing  the lawsuit,  with prejudice,  has been
filed with the court.  The settlement will not have a material adverse effect on
the financial condition,  results of operations or cash flows of KeySpan.  Under
the terms of the  settlement  (i) certain  obligations  between the parties have
been modified and  clarified,  (ii) certain  contracts  were awarded to Hawkeye,
(iii)  certain  property  will be sold to Hawkeye  at fair  market  value,  (iv)
certain credit and bonding  support made available by KeySpan to Hawkeye will be
curtailed and ultimately  terminated and (v) in addition to a short-term  bridge
loan of $21 million due to be repaid in August 2003,  KeySpan will  subsequently
provide a fully  secured,  interest  bearing  loan of up to $50  million  in the
aggregate,  to finance a power plant  currently  being  constructed by a Hawkeye
affiliate.


                                       23
<PAGE>

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
June 30, 2003,  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 Thousands of Dollars)                                        Exposure       Dates
----------------------------------------------------------------------------------------------------------------
<S>                                                             <C>                 <C>           <C>
Guarantees for Subsidiaries
 Medium-Term Notes - KEDLI                                      (i)                $   525,000     2008-2010
 Master Lease  - Ravenswood                                     (ii)                   425,000       2004
 Surety Bonds                                                   (iii)                  250,068     Revolving
 Commodity Guarantees and Other                                 (iv)                    71,494       2005
 Letters of Credit                                              (v)                     64,822       2003
----------------------------------------------------------------------------------------------------------------
Guarantees for Non-Affiliates
 Surety Bonds                                                   (vi)                    11,540     Revolving
 Third Party Line of Credit                                     (vi)                    25,000       2004
----------------------------------------------------------------------------------------------------------------
                                                                                   $ 1,372,924
----------------------------------------------------------------------------------------------------------------
</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.  Currently, KEDLI is
     in compliance  with all covenants and management  does not anticipate  that
     KEDLI will have any difficulty maintaining such compliance.  The face value
     of these notes is included in Long-Term  Debt on the  Consolidated  Balance
     Sheet.

(ii) KeySpan has guaranteed all payment and  performance  obligations of KeySpan
     Ravenswood,  LLC, the lessee under the $425 million Ravenswood master lease
     (the "Master Lease") associated with the lease of the Ravenswood  facility.
     The initial term of the lease  expires on June 20, 2004 and may be extended
     until June 20, 2009. For further information, see Note 9 "Variable Interest
     Entity."

(iii)KeySpan  has  agreed  to  indemnify  the  issuers  of  various  surety  and
     performance bonds associated with certain  construction  projects currently
     being performed by subsidiaries  within the Energy Services segment. In the
     event that the operating  companies in the Energy Services  segment fail to
     perform their  obligations under various  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.


                                       24
<PAGE>

(iv) 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 June 30, 2003.


(v)  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 disbursed 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  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.


The  following  is  a  description  of  KeySpan's   outstanding   guarantees  to
non-affiliates:

(vi) At June 30, 2003,  KeySpan had agreed to support a line of credit up to $25
     million  on behalf of  Hawkeye,  a  non-affiliated  company.  In  addition,
     KeySpan had also guaranteed certain  performance bonds of Hawkeye. To date,
     we have not had a claim made against either the guarantee  associated  with
     the line of credit or the  performance  bonds.  In June 2003,  KeySpan  and
     Hawkeye  settled an outstanding  legal  proceeding.  In connection with the
     settlement  discussed  previously,  our obligation to guarantee the line of
     credit is expected to be reduced to $13 million and will be  eliminated  by
     the end of the first quarter of 2004. Further, we are no longer required to
     provide  support for Hawkeye's  surety bonds.  It is  anticipated  that any
     currently outstanding support will be terminated by the end of August 2003.
     (See Legal Matters above for a summary of the settlement.)


9. 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,
in part,  through  the  variable  interest  entity from  Consolidated  Edison in
June1999 for  approximately  $597  million.  In order to reduce the initial cash
requirements,  we  entered  into the  Master  Lease  with a  variable  interest,
unaffiliated  financing  entity that acquired a portion of the  facility,  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 steam units or in the variable interest entity.


                                       25
<PAGE>

KeySpan has guaranteed all payment and performance obligations of our subsidiary
under the  Master  Lease.  The  Master  Lease  represents  $425  million  of the
acquisition  cost of the  facility,  which is the amount of debt that would have
been recorded on our Consolidated Balance Sheet had the variable interest entity
not been utilized and  conventional  debt financing been employed.  Further,  we
would have recorded an asset in the same amount.  Monthly lease  payments  equal
the monthly interest expense on such debt securities. The Master Lease currently
qualifies as an operating lease for financial reporting purposes.

The  initial  term of the  Master  Lease  expires  on June  20,  2004 and may be
extended  until June 20,  2009.  In June 2004,  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;  (ii) terminate the Master Lease and dispose of the facility;
or (iii)  otherwise  extend the  Master  Lease to 2009.  If the Master  Lease is
terminated in 2004, KeySpan has guaranteed an amount  approximately equal to 83%
of the residual  value of the original  cost of the  property,  plus the present
value of the lease payments that would have otherwise been paid through June 20,
2009.  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.

In January 2003,  the FASB issued FIN 46,  "Consolidation  of Variable  Interest
Entities, an Interpretation of ARB No. 51." FIN 46 requires KeySpan,  based upon
its current  status as the primary  beneficiary,  to  consolidate  this variable
interest entity for the first interim period ending after June 15, 2003. It also
requires that assets,  liabilities and non-controlling interests of the variable
interest entity be  consolidated at fair value,  except to the extent that to do
so would  result in a gain to  KeySpan.  KeySpan  believes  that the fair market
value of the  Ravenswood  facility  exceeds the fair  market  value of the lease
obligation.

Prospectively,  KeySpan  will have a $425  million  asset that will be amortized
over the economic life of the leased  property.  However,  upon  implementation,
there will be a cumulative catch-up adjustment for a change in accounting policy
as if the asset had been owned from inception,  or June 20, 1999. Therefore,  at
July 1, 2003,  assuming a 35-year economic life,  KeySpan will be deemed to have
owned and depreciated the asset from  inception,  or for  approximately 4 years.
Therefore,  it is  anticipated  that we will  record a $29.1  million  after-tax
charge, or $0.18 per share,  change in accounting  principle on the Consolidated
Statement of Income.  Upon  implementation of FIN 46,  therefore,  we anticipate
recording an asset of approximately $376 million and debt of $425 million. Based
upon expected average  outstanding  shares, we anticipate the incremental impact
of the additional  depreciation  expense for the remaining six months of 2003 to
be approximately $0.02 per share.

If our subsidiary that leases the Ravenswood facility is not able to fulfill its
payment  obligation  with respect to the Master Lease,  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.



                                       26
<PAGE>

10. STOCK OPTIONS

Stock options have been issued to KeySpan officers,  directors and certain other
management  employees  and  consultants  as approved by the Board of  Directors.
These  options  generally  vest  over a  three-to-five  year  period  and have a
ten-year exercise period.  Moreover,  under a separate plan, Houston Exploration
has issued stock options to its directors and key Houston Exploration employees.
During  2002,   we  announced  our  intention  to  record  stock  options  as  a
compensation  expense  beginning  with those  options  granted in 2003. In 2003,
KeySpan and Houston  Exploration adopted the prospective method of transition 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  "Accounting  for
Stock-Based Compensation" for grants awarded after January 1, 2003.

KeySpan and Houston  Exploration  continue to apply APB Opinion 25,  "Accounting
for Stock Issued to Employees,"  and related  Interpretations  in accounting for
grants awarded prior to January 1, 2003.  Accordingly,  no compensation cost has
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. 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,
our net income and  earnings  per share would have  decreased  to the  pro-forma
amounts indicated below:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                                                     Three Months Ended June 30,        Six Months Ended June 30,
(In Thousands of Dollars, Except Per Share Amounts)                     2003              2002            2003               2002
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>              <C>            <C>                <C>
Earnings available for common stock:                                  $ (7,399)         $ 8,036       $ 234,405          $ 221,191
As reported
     Add: recorded stock-based compensation expense, net of tax          1,132               66           1,990                 66
     Deduct: total stock-based compensation expense, net of tax         (2,969)          (1,887)         (6,070)            (3,774)
-----------------------------------------------------------------------------------------------------------------------------------
Pro-forma earnings                                                    $ (9,236)         $ 6,215       $ 230,325          $ 217,483
-----------------------------------------------------------------------------------------------------------------------------------
Earnings per share:
     Basic - as reported                                              $  (0.05)         $  0.06       $    1.49          $    1.57
     Basic - pro-forma                                                $  (0.06)         $  0.04       $    1.46          $    1.55

     Diluted - as reported                                            $  (0.05)         $  0.06       $    1.48          $    1.56
     Diluted - pro-forma                                              $  (0.06)         $  0.04       $    1.45          $    1.53
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

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 LILCO.  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 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.  The June 30, 2002  disclosures
have been revised to separately present our other subsidiaries.


                                       27
<PAGE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                    Statement of Income
-----------------------------------------------------------------------------------------------------------------------------------
                                                                        Three Months Ended June 30, 2003
(In Thousands of Dollars)                    Guarantor         KEDLI         Other Subsidiaries     Eliminations     Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>            <C>                  <C>                  <C>            <C>    <C>
Revenues                                     $     34       $ 177,340            $ 1,230,812          $    (34)      $ 1,408,152
Operating Expenses
  Purchased gas                                     -          90,611                333,689                 -           424,300
  Fuel and purchased power                          -               -                102,476                 -           102,476
  Operations and maintenance                   (5,424)         32,760                482,300                 -           509,636
  Intercompany expense                             31             735                   (735)              (31)                -
  Depreciation and amortization                   (20)         18,064                124,246                 -           142,290
  Operating taxes                              (1,824)         16,954                 80,121                 -            95,251
                                         ------------------------------------------------------------------------------------------
Total Operating Expenses                       (7,237)        159,124              1,122,097               (31)        1,273,953

Income from Equity Investments                     36               -                  3,994                 -             4,030
                                         ------------------------------------------------------------------------------------------
Operating Income (Loss)                         7,307          18,216                112,709                (3)          138,229

Interest charges                              (53,403)        (16,104)               (56,720)           47,029           (79,198)
Other income and (deductions)                  34,630          (1,809)               (46,030)          (36,282)          (49,491)
                                         ------------------------------------------------------------------------------------------
Total Other Income and (Deductions)           (18,773)        (17,913)              (102,750)           10,747          (128,689)

Income (Loss) Before Income Taxes             (11,466)            303                  9,959            10,744             9,540

Income Taxes (Benefit)                         (5,528)          1,221                 19,785                 -            15,478
                                         ------------------------------------------------------------------------------------------

Net Income (Loss)                            $ (5,938)      $    (918)           $    (9,826)         $ 10,744       $    (5,938)
                                         =========================================================================================
</TABLE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                            Statement of Income
------------------------------------------------------------------------------------------------------------------------------------
                                                                           Three Months Ended June 30, 2002
(In Thousands of Dollars)                         Guarantor        KEDLI       Other Subsidiaries      Eliminations    Consolidated
------------------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>           <C>                 <C>                    <C>          <C>
Revenues                                          $   130       $ 137,937          $ 1,080,263          $   (130)      $ 1,218,200
Operating Expenses
  Purchased gas                                         -          62,573              187,369                 -           249,942
  Fuel and purchased power                              -               -               93,292                 -            93,292
  Operations and maintenance                        1,522          13,066              538,118                 -           552,706
  Intercompany expense                                 83          20,033              (20,033)              (83)                -
  Depreciation and amortization                        (3)         15,340              112,126                 -           127,463
  Operating taxes                                    (569)         18,354               66,277                 -            84,062
                                               -------------------------------------------------------------------------------------
Total Operating Expenses                            1,033         129,366              977,149               (83)        1,107,465

Income from Equity Investment                          34               -                3,206                 -             3,240
                                               -------------------------------------------------------------------------------------
Operating Income (Loss)                              (869)          8,571              106,320               (47)          113,975

Interest charges                                  (47,831)        (15,900)             (68,663)           62,340           (70,054)
Other income and (deductions)                      52,613           2,193               14,610           (67,793)            1,623
                                               -------------------------------------------------------------------------------------
Total Other Income and (Deductions)                 4,782         (13,707)             (54,053)           (5,453)          (68,431)

Income (Loss) Before Income Taxes                   3,913          (5,136)              52,267            (5,500)           45,544

Income Taxes (Benefit)                             (5,599)         (1,767)              23,736                 -            16,370
                                               -------------------------------------------------------------------------------------
Earnings from Continuing Operations               $ 9,512       $  (3,369)         $    28,531          $ (5,500)      $    29,174

Discontinued Operations                                 -               -              (19,662)                -           (19,662)
                                               -------------------------------------------------------------------------------------
Net Income (Loss)                                 $ 9,512       $  (3,369)         $     8,869          $ (5,500)      $     9,512
                                               ====================================================================================-
</TABLE>


                                       28
<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                            Statement of Income
-----------------------------------------------------------------------------------------------------------------------------------
                                                                           Six Months Ended June 30, 2003
(In Thousands of Dollars)                        Guarantor         KEDLI       Other Subsidiaries     Eliminations    Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>           <C>                <C>                   <C>         <C>
Revenues                                        $     177       $ 655,685          $ 3,264,992       $     (177)     $ 3,920,677
Operating Expenses
  Purchased gas                                         -         377,620            1,242,845                -        1,620,465
  Fuel and purchased power                              -               -              199,998                -          199,998
  Operations and maintenance                        1,835          70,980              935,010                -        1,007,825
  Intercompany expense                                 65           1,917               (1,917)             (65)               -
  Depreciation and amortization                       (40)         44,984              242,317                -          287,261
  Operating taxes                                  (1,824)         40,959              180,829                -          219,964
                                               ------------------------------------------------------------------------------------
Total Operating Expenses                               36         536,460            2,799,082              (65)       3,335,513

Income from Equity Investment                         108               -                9,651                -            9,759
                                               ------------------------------------------------------------------------------------
Operating Income (Loss)                               249         119,225              475,561             (112)         594,923

Interest charges                                  (99,880)        (31,110)            (109,019)          91,872         (148,137)
Other income and (deductions)                     328,011          (9,026)             (41,444)        (328,863)         (51,322)
                                               ------------------------------------------------------------------------------------
Total Other Income and (Deductions)               228,131         (40,136)            (150,463)        (236,991)        (199,459)

Income (Loss) Before Income Taxes                 228,380          79,089              325,098         (237,103)         395,464

Income Taxes (Benefit)                             (8,947)         29,533              137,725                -          158,311
                                               ------------------------------------------------------------------------------------
Earnings before Change in Accounting Principle    237,327          49,556              187,373         (237,103)         237,153

Cumulative Effect of Change in Accounting
 Principle                                              -               -                  174                -              174
                                               ------------------------------------------------------------------------------------
Net Income (Loss)                               $ 237,327       $  49,556          $   187,547       $ (237,103)     $   237,327
                                               ====================================================================================
</TABLE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                            Statement of Income
------------------------------------------------------------------------------------------------------------------------------------
                                                                             Six Months Ended June 30, 2002
(In Thousands of Dollars)                         Guarantor       KEDLI        Other Subsidiaries     Eliminations      Consolidated
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>         <C>                  <C>                 <C>             <C>
Revenues                                         $     234     $ 456,884            $ 2,634,893       $     (234)       $ 3,091,777
Operating Expenses
  Purchased gas                                          -       205,440                693,859                -            899,299
  Fuel and purchased power                               -             -                177,664                -            177,664
  Operations and maintenance                         3,028        25,067              1,022,689                -          1,050,784
  Intercompany expense                                 139        38,242                (38,242)            (139)                 -
  Depreciation and amortization                         (3)       35,581                217,882                -            253,460
  Operating taxes                                        1        41,660                156,305                -            197,966
                                               -------------------------------------------------------------------------------------
Total Operating Expenses                             3,165       345,990              2,230,157             (139)         2,579,173

Income from Equity Investments                          34             -                  7,375                -              7,409
                                               -------------------------------------------------------------------------------------
Operating Income (Loss)                             (2,897)      110,894                412,111              (95)           520,013

Interest charges                                   (94,760)      (31,102)              (136,430)         119,631           (142,661)
Other income and (deductions)                      315,864         5,095                 27,498         (340,322)             8,135
                                               -------------------------------------------------------------------------------------
Total Other Income and (Deductions)                221,104       (26,007)              (108,932)        (220,691)          (134,526)

Income (Loss) Before Income Taxes                  218,207        84,887                303,179         (220,786)           385,487

Income Taxes (Benefit)                              (5,936)       37,394                110,224                -            141,682
                                               -------------------------------------------------------------------------------------

Earnings from Continuing Operations                224,143        47,493                192,955         (220,786)           243,805
Discontinued Operations                                  -             -                (19,662)                            (19,662)
                                               -------------------------------------------------------------------------------------
Net Income (Loss)                                $ 224,143     $  47,493            $   173,293       $ (220,786)       $   224,143
                                               =====================================================================================
</TABLE>


                                       29
<PAGE>

<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------------------------------------
Balance Sheet
----------------------------------------------------------------------------------------------------------------------------------
                                                                                June 30, 2003
                                                 Guarantor          KEDLI     Other Subsidiaries     Eliminations     Consolidated
----------------------------------------------------------------------------------------------------------------------------------
ASSETS
<S>                                            <C>               <C>              <C>              <C>                <C>
Current Assets
   Cash & temporary cash investments          $    15,436        $    6,533     $    173,699       $          -      $    195,668
   Accounts receivable, net                        30,604           214,197        1,233,015                  -         1,477,816
   Other current assets                             5,158            69,783          416,531                  -           491,472
                                            --------------------------------------------------------------------------------------
                                                   51,198           290,513        1,823,245                  -         2,164,956
                                            --------------------------------------------------------------------------------------

Investments and Other                           3,930,951             2,542          210,721         (3,863,633)          280,581
                                            --------------------------------------------------------------------------------------
Property
   Gas                                                  -         1,819,692        4,468,296                  -         6,287,988
   Other                                                -                 -        5,175,390                  -         5,175,390
   Accumulated depreciation and depletion               -          (337,659)      (3,592,285)                 -        (3,929,944)
                                            --------------------------------------------------------------------------------------
                                                        -         1,482,033        6,051,401                  -         7,533,434
                                            --------------------------------------------------------------------------------------

Intercompany Accounts Receivable                3,676,581                 -          537,345         (4,213,926)                -

Deferred Charges                                  325,727           187,973        2,407,472                  -         2,921,172
                                            --------------------------------------------------------------------------------------

Total Assets                                  $ 7,984,457       $ 1,963,061     $ 11,030,184       $ (8,077,559)     $ 12,900,143
                                            ======================================================================================

LIABILITIES AND CAPITALIZATION
Current Liabilities
   Accounts payable                           $   131,692       $    84,050     $    752,009       $          -      $    967,751
   Commercial paper                               431,000                 -                -                  -           431,000
   Other current liabilities                      301,777            99,105           48,968                  -           449,850
                                            --------------------------------------------------------------------------------------
                                                  864,469           183,155          800,977                  -         1,848,601
                                            --------------------------------------------------------------------------------------
Intercompany Accounts Payable                           -           140,009        1,942,533         (2,082,542)                -
                                            ---------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Deferred income tax                               (43,229)          147,602          799,588                  -           903,961
Other deferred credits and liabilities            416,927            94,746          587,624                  -         1,099,297
                                            --------------------------------------------------------------------------------------
                                                  373,698           242,348        1,387,212                  -         2,003,258
                                            --------------------------------------------------------------------------------------
Capitalization
Common shareholders' equity                     3,613,651           696,645        3,141,857         (3,863,633)        3,588,520
Preferred stock                                    83,697                 -                -                  -            83,697
Long-term debt                                  3,048,942           700,904        3,287,147         (2,131,384)        4,905,609
                                            --------------------------------------------------------------------------------------
Total Capitalization                            6,746,290         1,397,549        6,429,004         (5,995,017)        8,577,826
                                            --------------------------------------------------------------------------------------
Minority Interest in Subsidiary Companies               -                 -          470,458                  -           470,458
                                            --------------------------------------------------------------------------------------
Total Liabilities & Capitalization            $ 7,984,457       $ 1,963,061     $ 11,030,184       $ (8,077,559)     $ 12,900,143
                                            ======================================================================================
</TABLE>






                                       30
<PAGE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Balance Sheet
-----------------------------------------------------------------------------------------------------------------------------------
                                                                              December 31, 2002
                                                Guarantor            KEDLI    Other Subsidiaries      Eliminations    Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
ASSETS
<S>                                             <C>               <C>              <C>                 <C>              <C>
Current Assets
   Cash & temporary cash investments           $    88,308           $ 6,472          $ 75,837                $ -     $    170,617
   Accounts receivable, net                         23,982           208,512         1,299,559                  -        1,532,053
   Other current assets                              1,757            79,206           423,596                  -          504,559
                                           ----------------------------------------------------------------------------------------
                                                   114,047           294,190         1,798,992                  -        2,207,229
                                           ----------------------------------------------------------------------------------------

Investments and Other                            3,797,964             2,717           201,675         (3,736,379)         265,977
                                           ----------------------------------------------------------------------------------------
Property
   Gas                                                   -         1,771,780         4,352,501                  -        6,124,281
   Other                                                 -                 -         4,807,724                  -        4,807,724
   Accumulated depreciation and depletion                -          (322,236)       (3,392,169)                 -       (3,714,405)
                                           ----------------------------------------------------------------------------------------
                                                         -         1,449,544         5,768,056                  -        7,217,600
                                           ----------------------------------------------------------------------------------------

Intercompany Accounts Receivable                 3,619,515                 -           712,394         (4,331,909)               -

Deferred Charges                                   339,443           192,652         2,391,405                  -        2,923,500
                                           ----------------------------------------------------------------------------------------

Total Assets                                   $ 7,870,969       $ 1,939,103      $ 10,872,522       $ (8,068,288)    $ 12,614,306
                                           ========================================================================================

LIABILITIES AND CAPITALIZATION
Current Liabilities
   Accounts payable                            $   132,966       $    68,772         $ 859,911                $ -     $  1,061,649
   Commercial paper                                915,697                 -                 -                  -          915,697
   Other current liabilities                       107,605           104,975            30,302                  -          242,882
                                           ----------------------------------------------------------------------------------------
                                                 1,156,268           173,747           890,213                  -        2,220,228
                                           ----------------------------------------------------------------------------------------
Intercompany Accounts Payable                            -           178,843         2,071,682         (2,250,525)               -
                                           ----------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Deferred income tax                                (43,110)          139,715           780,408                  -          877,013
Other deferred credits and liabilities             481,964            98,805           453,353                  -        1,034,122
                                           ----------------------------------------------------------------------------------------
                                                   438,854           238,520         1,233,761                  -        1,911,135
                                           ----------------------------------------------------------------------------------------
Capitalization
Common shareholders' equity                      2,983,214           647,089         3,050,668         (3,736,379)       2,944,592
Preferred stock                                     83,849                 -                 -                  -           83,849
Long-term debt                                   3,208,784           700,904         3,395,777         (2,081,384)       5,224,081
                                           ----------------------------------------------------------------------------------------
Total Capitalization                             6,275,847         1,347,993         6,446,445         (5,817,763)       8,252,522
                                           ----------------------------------------------------------------------------------------
Minority Interest in Subsidiary Companies                -                 -           230,421                  -          230,421
                                           ----------------------------------------------------------------------------------------
Total Liabilities & Capitalization             $ 7,870,969       $ 1,939,103      $ 10,872,522       $ (8,068,288)    $ 12,614,306
                                           ========================================================================================
</TABLE>





                                       31
<PAGE>



<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
Statement of Cash Flows
--------------------------------------------------------------------------------------------------------------------------
                                                                        Six Months Ended June 30, 2003
                                                      --------------------------------------------------------------------
                                                         Guarantor        KEDLI        Other Subsidiaries     Consolidated
                                                      --------------------------------------------------------------------
Operating Activities
<S>                                                      <C>              <C>                  <C>              <C>
Net Cash Provided by Operating Activities                $ 138,174       $ 88,770              $ 338,433        $ 565,377
                                                      --------------------------------------------------------------------
Investing Activities
   Capital expenditures                                          -        (49,875)              (384,177)        (434,052)
   Proceeds from the sale of subsidiary investments         79,200              -                119,353          198,553
                                                      --------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities         79,200        (49,875)              (264,824)        (235,499)
                                                      --------------------------------------------------------------------
Financing Activities
   Treasury stock issued                                    57,441              -                      -           57,441
   Equity issuance                                         473,573              -                      -          473,573
   Redemption of promissory notes                         (447,005)             -                      -         (447,005)
   Payment of debt, net                                   (184,697)             -                (77,490)        (262,187)
   Common and preferred stock dividends paid              (136,357)             -                      -         (136,357)
   Other                                                    13,065              -                 (3,357)           9,708
   Net intercompany accounts                               (66,266)       (38,834)               105,100                -
                                                      --------------------------------------------------------------------
                                                                                                                        -
Net Cash Provided by (Used in) Financing Activities       (290,246)       (38,834)                24,253         (304,827)
                                                      --------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents     $ (72,872)      $     61              $  97,862        $  25,051
Cash and Cash Equivalents at Beginning of Period            88,308          6,472                 75,837          170,617
                                                      --------------------------------------------------------------------
Cash and Cash Equivalents at End of Period               $  15,436       $  6,533              $ 173,699        $ 195,668
                                                      ====================================================================
</TABLE>

<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------------------------------------
Statement of Cash Flows
----------------------------------------------------------------------------------------------------------------------------------
                                                                              Six Months Ended June 30, 2002
                                                     -----------------------------------------------------------------------------
Operating Activities                                        Guarantor        KEDLI            Other Subsidiaries      Consolidated
                                                     -----------------------------------------------------------------------------
<S>                                                        <C>             <C>                      <C>                 <C>
Net Cash Provided by (Used in) Operating Activities       $ (170,043)      $ 176,705                $ 661,495           $ 668,157
                                                     -----------------------------------------------------------------------------
Investing Activities
   Capital expenditures                                            -         (60,672)                (519,231)           (579,903)
                                                     -----------------------------------------------------------------------------
Net Cash Used in Investing Activities                              -         (60,672)                (519,231)           (579,903)
                                                     -----------------------------------------------------------------------------
Financing Activities
   Treasury stock issued                                      51,896               -                        -              51,896
   Payment of debt, net                                      (17,795)              -                   (6,836)            (24,631)
   Common and preferred stock dividends paid                (127,636)              -                        -            (127,636)
   Other                                                      (1,355)              -                   (8,181)             (9,536)
   Net intercompany accounts                                 309,651        (116,033)                (193,618)                  -
                                                     -----------------------------------------------------------------------------

Net Cash Provided by (Used in) Financing Activities          214,761        (116,033)                (208,635)           (109,907)
                                                     -----------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents      $   44,718       $       -                $ (66,371)          $ (21,653)
Cash and Cash Equivalents at Beginning of Period                   -               -                  159,252             159,252
                                                     -----------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period                $   44,718       $       -                $  92,881           $ 137,599
                                                     =============================================================================
</TABLE>



                                       32
<PAGE>


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

Consolidated Review of Results
------------------------------

The following is a summary of transactions  affecting comparative earnings and a
discussion of material changes in revenues and expenses during the three and six
months ended June 30, 2003,  compared to the three and six months ended June 30,
2002.  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  available for
common stock is set forth in the following table for the periods indicated.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
(In Thousands of Dollars, Except per Share)
----------------------------------------------------------------------------------------------------------------------------------
                                                           Three Months Ended June 30,                 Six Months Ended June 30,
                                                          2003                      2002              2003                  2002
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>                       <C>               <C>                  <C>
Gas Distribution                                       $ 31,616                  $ 30,096         $ 396,553             $ 361,118
Electric Services                                        51,480                    59,501            91,150               120,991
Energy Services                                          (9,872)                  (10,867)          (19,020)              (20,224)
Energy Investments                                       59,222                    29,308           124,936                53,835
Eliminations and other                                    5,783                     5,937             1,304                 4,293
----------------------------------------------------------------------------------------------------------------------------------
Operating Income                                        138,229                   113,975           594,923               520,013
Other Income and (Deductions)                          (128,689)                  (68,431)         (199,459)             (134,526)
Income taxes                                             15,478                    16,370           158,311               141,682
----------------------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations                 (5,938)                   29,174           237,153               243,805
Cumulative effect of a change
   in accounting principle (See Note 7)                       -                         -               174                     -
Discontinued operations                                       -                   (19,662)                -               (19,662)
----------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss)                                        (5,938)                    9,512           237,327               224,143
Preferred stock dividend requirements                     1,461                     1,476             2,922                 2,952
----------------------------------------------------------------------------------------------------------------------------------
Earnings (Loss) for Common Stock                       $ (7,399)                 $  8,036         $ 234,405             $ 221,191
----------------------------------------------------------------------------------------------------------------------------------
Basic Earnings per Share
   Income (loss) from continuing operations            $  (0.05)                 $   0.20         $    1.49             $    1.71
   Change in accounting principle                             -                         -                 -                     -
   Discontinued operations                                    -                     (0.14)                -                 (0.14)
----------------------------------------------------------------------------------------------------------------------------------
                                                       $  (0.05)                 $   0.06         $    1.49             $    1.57
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

As indicated in the above table,  operating income  increased $24.3 million,  or
21% and $74.9 million,  or 14% for the three and six months ended June 30, 2003,
respectively,  compared  to the  corresponding  periods of the prior  year.  The
increase in operating income for both the quarter and six months reflects higher
earnings from the Energy  Investments and Gas  Distribution  segments,  somewhat
offset by a decrease in earnings from the Electric Services segment.  The Energy
Investment   segment   benefited  from  higher  earnings   associated  with  gas
exploration  and  production  activities  as a result  of  significantly  higher
realized gas prices.  The Gas Distribution  segment benefited from significantly
colder weather during the January  through April 2003 heating season compared to



                                       33
<PAGE>

the same period last year,  as well as from load growth.  Lower results from the
Electric Services segment are attributable to higher operating costs as a result
of increases in plant maintenance  expenses and pension and other postretirement
costs, as well as lower revenues from our merchant generating facility,  due, in
part to cooler  weather.  (See the  discussion  under  the  caption  "Review  of
Operating Segments" for further details on each segment.)

Included in Other Income and  (Deductions) are interest charges of $79.2 million
and  $148.1  million  for  the  three  and  six  months  ended  June  30,  2003,
respectively,  an increase of 13% and 4% compared to the same periods last year.
The increase in interest charges  primarily  reflects the termination of certain
interest-rate derivative swap instruments that were in effect in 2002. (See Note
6 to the Consolidated  Financial  Statements  "Hedging and Derivative  Financial
Instruments".)  For the three and six months ended June 30,  2003,  Other Income
and  (Deductions)  also reflects a pre-tax loss of $30.3 million  ($34.1 million
after-tax) associated with the partial monetization of our Canadian investments.
In June 2003, we sold 39.09% of our interest in KeySpan  Canada,  a company with
natural  gas  processing  plants and  gathering  facilities  in Western  Canada.
Additionally,  we sold our 20%  interest in Taylor NGL LP that owns and operates
two extraction plants also in Canada. (See Note 2 to the Consolidated  Financial
Statements  "Business  Segments"  for  additional   information  regarding  this
transaction.)

Also included in Other Income and (Deductions) for the six months ended June 30,
2003 is a gain of $19.0 million  reflecting the monetization of a portion of our
ownership interest in The Houston Exploration Company ("Houston Exploration"), a
gas  exploration  and  production  subsidiary.  In February 2003, we reduced our
ownership  interest  in  Houston  Exploration  from  66%  to  approximately  56%
following the  repurchase,  by Houston  Exploration,  of three million shares of
common  stock  owned  by  KeySpan.  Income  taxes  were  not  provided  on  this
transaction,  since the  transaction  was  structured  as a return  of  capital.
Further,  in June 2003,  Houston  Exploration  incurred costs of $5.9 million to
retire $100  million  8.625%  Notes due 2008,  that were also  included in Other
Income  and  (Deductions).  Additionally,  in  July  2002,  Houston  Exploration
received an abatement  of severance  taxes for certain  qualifying  wells.  As a
result of this  abatement,  during the three and six months ended June 30, 2003,
Houston  Exploration  recorded  severance  tax refunds of $2.3 million and $12.9
million for severance  taxes paid in 2002 and earlier  periods,  which have also
been reflected in Other Income and (Deductions).

In March 2003, we called  approximately  $447 million of outstanding  promissory
notes that were issued to the Long Island Power Authority ("LIPA") in connection
with the KeySpan/Long  Island Lighting Company  ("LILCO")  business  combination
completed in May 1998.  We recorded  debt  redemption  charges of $18.2  million
associated  with this  redemption  which is also  recorded  in Other  Income and
(Deductions).

Finally,  Other  Income  and  (Deductions)  reflects  adjustments  for  minority
interest, as well as carrying charges on certain regulatory assets.


                                       34
<PAGE>


Income tax  expense  for the three and six months  ended June 30, 2003 and 2002,
reflects a number of items  impacting  comparative  earnings.  During the second
quarter of 2003,  certain costs associated with employee  deferred  compensation
plans were deducted for federal income tax purposes.  These costs,  however, are
not expensed for "book" purposes resulting in a beneficial permanent book-to-tax
difference of $6.3 million.  Further,  the partial  monetization of our Canadian
investments resulted in a tax expense of $3.8 million, reflecting certain United
States  partnership  tax rules.  Income tax expense for the three and six months
ended June 30, 2002  reflects a tax  benefit of $6.4  million as a result of the
favorable   resolution  of  certain   outstanding  tax  issues  related  to  the
KeySpan/LILCO  merger.  Additionally,  during  the  first  quarter  of 2002,  we
recorded an adjustment to deferred  income taxes of $177.7 million  reflecting a
decrease in the tax basis of the assets acquired at the time of the merger. This
adjustment  was a result  of a  revised  valuation  study  and the  filing of an
amended tax return.  Concurrent  with the  deferred tax  adjustment,  we reduced
current  income  taxes  payable by $183.2  million,  resulting in a $5.5 million
income  tax  benefit.  Further,  it should be noted that  pre-tax  income in the
Consolidated Statement of Income reflects minority interest adjustments, whereas
income  taxes  reflects the full amount of  subsidiary  taxes.  Excluding  these
items,  income taxes  generally  reflects the level of pre-tax  earnings for all
periods.

On January 24, 2002, we announced  that we had entered into an agreement to sell
Midland  Enterprises  LLC  ("Midland"),  our marine barge  business.  During the
fourth quarter of 2001, in anticipation of this  divestiture that closed on July
2, 2002,  we  recorded  an  estimated  loss on the sale of Midland as well as an
estimate for Midland's  results of operations  for the first six months of 2002.
During the three months ended June 30, 2002, we recorded an additional after-tax
loss of $19.7  million,  primarily  reflecting a provision  for certain city and
state taxes that resulted from a change in our tax structuring strategy.

As a result of the above mentioned  items,  earnings  available for common stock
for the three months ended June 30, 2003 decreased  $15.4 million,  or $0.11 per
share,  compared  to the same period last year.  Earnings  available  for common
stock for the six months ended June 30, 2003 increased  $13.2 million;  earnings
per share,  however,  decreased by $0.08 per share,  compared to the same period
last year.  Average common shares  outstanding for the six months ended June 30,
2003 increased 12%, primarily  reflecting the issuance of 13.9 million shares of
common stock on January 17, 2003, as well as the  re-issuance  of shares held in
treasury  pursuant to dividend  reinvestment  and employee  benefit  plans.  The
increase in average common shares  outstanding  reduced six months 2003 earnings
per share by $0.18 compared to the corresponding period in 2002. To mitigate the
dilutive  effect of the equity  offering  we  redeemed a portion of  outstanding
promissory  notes that were issued to LIPA,  as previously  mentioned.  Interest
savings  associated  with this  redemption  are  estimated  to be $15.6  million
after-tax, or $0.09 per share, in 2003.

Consistent  with our prior earnings  guidance,  KeySpan's  earnings for 2003 are
forecasted  to be  approximately  $2.45 to $2.60 per  share,  excluding  special
items. Earnings from continuing core operations (defined for this purpose as all
continuing operations other than gas exploration and production,  less preferred
stock  dividends) are forecasted to be  approximately  $2.15 to $2.20 per share,
while earnings from gas exploration and production  operations are forecasted to
be  approximately  $0.30 to $0.40 per share.  The  earnings  forecasts  may vary
significantly during the year due to, among other things,  changing economic and
energy  market  conditions,  commodity  prices  and  weather,  and  may  vary by
operating segment as well.


                                       35
<PAGE>


Consolidated earnings are seasonal in nature due to the significant contribution
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 of our fiscal year.

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

In response to new disclosure regulations adopted by the Securities and Exchange
Commission  ("SEC") as part of its  implementation of the  Sarbanes-Oxley Act of
2002 -  specifically  Regulation  G which became  effective  March 2003 - we are
reporting all of KeySpan's segment results on an Operating Income basis for 2003
and 2002.  Management believes that this Generally Accepted Accounting Principle
(GAAP)  based  measure  provides  a  true  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.  Net
revenues  for 2002 have been  restated  to reflect a  reclassification  of gross
receipt  taxes  from  revenue  taxes  to  state  income  taxes,  which is not an
Operating Income measure.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
                                                     Three Months Ended June 30,                 Six Months Ended June 30,
(In Thousands of Dollars)                              2003                2002                   2003               2002
----------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>                 <C>                 <C>                 <C>
Revenues                                            $ 732,036           $ 521,822           $ 2,564,737         $ 1,744,791
Cost of gas                                           417,484             236,357             1,571,616             849,939
Revenue taxes                                          17,269              15,588                55,886              48,144
----------------------------------------------------------------------------------------------------------------------------
Net Revenues                                          297,283             269,877               937,235             846,708
----------------------------------------------------------------------------------------------------------------------------
Operating Expenses
   Operations and maintenance                         163,124             152,767               329,214             298,305
   Depreciation and amortization                       66,192              58,118               137,009             121,138
   Operating taxes                                     36,351              28,896                74,459              66,147
----------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses                              265,667             239,781               540,682             485,590
----------------------------------------------------------------------------------------------------------------------------
Operating Income                                    $  31,616           $  30,096           $   396,553         $   361,118
----------------------------------------------------------------------------------------------------------------------------
Firm gas sales and transportation (MDTH)               56,048              47,978               211,714             164,496
Transportation - Electric Generation (MDTH)             9,145              13,182                14,148              26,541
Other Sales (MDTH)                                     24,482              39,112                78,151             102,024
Warmer (Colder) than Normal - New York                   (30%)         -                           (13%)                15%
Warmer (Colder) than Normal - New England                (45%)                14%                  (17%)                10%
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

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


                                       36
<PAGE>

Net Revenues

Net gas revenues  (revenues less the cost of gas and  associated  revenue taxes)
from our gas distribution operations increased by $90.5 million, or 11%, for the
six months ended June 30, 2003  compared to the same period last year.  Both our
New York and New England based gas  distribution  operations  benefited from the
significantly colder than normal weather experienced throughout the Northeastern
United States during this past winter  heating  season.  Based on heating degree
days,  weather for the six months ended June 30, 2003 was approximately  13%-17%
colder than normal and  approximately 30% - 35% colder than last year in our New
York and New England service territories.

Net revenues from firm gas customers  (residential,  commercial  and  industrial
customers) in our New York service territory  increased by $51.4 million for the
six months ended June 30, 2003,  compared to the same period last year. Customer
additions and oil-to-gas conversions,  net of attrition and conservation,  added
approximately $10 million to net revenues during the six months. Higher customer
consumption due primarily to colder than normal weather added  approximately $50
million to net  revenues  during the six months.  However,  KEDNY and KEDLI each
operate under a utility tariff that contains a weather normalization  adjustment
that  significantly  offsets variations in firm net revenues due to fluctuations
in normal weather.  These weather normalization  adjustments resulted in a $26.3
million  refund  to firm gas  customers  during  the past six  months.  Further,
included in net revenues are regulatory incentives and recovery of certain taxes
that added $4.0 million and $13.5 million,  respectively  to net revenues during
this time period.  The recovery of taxes  through  revenues,  however,  does not
impact net income  since the taxes they are  designed to recover are expensed as
amortization  charges and income  taxes,  as  appropriate,  on the  Consolidated
Statement of Income.






                                       37
<PAGE>

Net  revenues  from firm gas  customers  in our New  England  service  territory
increased by $26.0  million for the six months  ended June 30, 2003  compared to
the same period last year. Customer additions and oil-to-gas conversions, net of
attrition  and  conservation,  added  approximately  $9 million to net  revenues
during the six months.  Higher customer consumption due primarily to colder than
normal weather added  approximately  $33 million to net revenues during the past
six  months.   The  gas  distribution   operations  of  our  New  England  based
subsidiaries  do not have a weather  normalization  adjustment.  To mitigate the
effect  of  fluctuations  in normal  weather  patterns  on  KEDNE's  results  of
operations  and cash  flows,  weather  derivatives  were  put in  place  for the
2002/2003 winter heating season.  Since weather during the first quarter of 2003
was 10% colder than normal in the New England service territory,  we recorded an
$11.9  million  reduction  to revenues  to reflect the loss on these  derivative
transactions.  (See Note 6 to the Consolidated Financial Statements "Hedging and
Derivative Financial Instruments" for further information). Further, included in
net revenues  for the period ended June 30, 2002,  was a benefit of $3.9 million
as a result of a favorable ruling from the Massachusetts  Supreme Judicial Court
relating to the appeal by Boston Gas Company of its Performance  Based Rate Plan
("PBR").

Firm gas distribution  rates during the first six months of 2003, other than for
the recovery of gas costs,  have  remained  substantially  unchanged  from rates
charged last year in all of our service territories.

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. Net revenues from sales to
these markets  increased by $13.1  million  during the six months ended June 30,
2003 compared to same period last year.  The majority of  interruptible  profits
earned by KEDNE and KEDLI are  returned  to firm  customers  as an offset to gas
costs.

We are  committed  to our  expansion  strategies  initiated  during the past few
years. We believe that significant growth opportunities exist on Long Island and
in our New  England  service  territories.  We  estimate  that  on  Long  Island
approximately 35% of the residential and multi-family markets, and approximately
55% of the  commercial  market,  currently  use natural  gas for space  heating.
Further, we estimate that in our New England service  territories  approximately
50% of the residential and multi-family  markets,  and  approximately 45% 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  economical
expansion of our gas distribution  system,  as well as through the conversion of
residential  homes from oil-to-gas for space heating purposes and the pursuit of
opportunities to grow multi-family, industrial and commercial markets.


                                       38
<PAGE>


Firm Sales, Transportation and Other Quantities

Firm gas sales and  transportation  quantities  increased  by 29% during the six
months ended June 30, 2003,  compared to the same period in 2002,  due to higher
customer  consumption as a result of the significantly colder weather during the
past winter heating  season,  as well as from customer  additions and oil-to-gas
conversions to natural gas. 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
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.  We have an agreement  with Coral  Resources,  L.P.
("Coral"),  a subsidiary of Shell Oil Company,  under which Coral assists in the
origination, structuring, valuation and execution of energy-related transactions
on behalf of KEDNY and KEDLI. We also have a portfolio  management contract with
Entergy-Koch,  under  which  Entergy-Koch  provides  all of the city gate supply
requirements at market prices and manages certain upstream capacity, underground
storage and term supply contracts for KEDNE.  These agreements have been renewed
through March 31, 2006.

Purchased Gas for Resale

The increase in gas costs for the six months ended June 30, 2003 compared to the
same period in 2002 of $721.7  million,  or 85%,  reflects an increase of 51% in
the price per dekatherm of gas purchased,  and a 17% increase in the quantity of
gas  purchased.  Fluctuations  in  utility  gas costs  associated  with firm gas
customers have no impact on operating results. 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 and gas costs
billed are deferred and refunded to or collected  from customers in a subsequent
period.

Operating Expenses

Operating expenses during the second quarter of 2003 increased $25.9 million, or
11%,  compared to the same quarter last year and $55.1  million,  or 11% for the
six months  ended June 30,  2003,  compared to the same period last year.  These
increases are primarily  attributable  to higher  employee  benefits,  primarily
pension and other postretirement  benefits, which have increased (net of amounts
deferred and subject to regulatory true-ups) $11.9 million and $21.1 million for
the three and six months  ended June 30, 2003,  respectively.  The cost of these
benefits has risen primarily as a result of lower actual returns on plan assets,
as well as increased health care costs.  Further, the colder weather experienced
during the first six months of 2003 resulted in increased repair and maintenance
work on our gas distribution  infrastructure  and higher  comparative  operating
expenses.  Also,  for the six months ended June 30, 2003,  the provision for bad
debts has  increased as a result of higher  revenues due to the cold weather and
higher cost of gas purchased.


                                       39
<PAGE>

Higher depreciation and amortization expense reflects the continued expansion of
the gas distribution system. Further, included in depreciation and amortization
expense is the amortization of certain property taxes previously deferred and
currently being recovered through revenues. Comparative operating taxes reflect
a favorable $7.4 million adjustment recorded during the three months ended June
30, 2002 relating to the reversal of excess tax reserves established for the
KeySpan / LILCO merger and subsequent re-organization in May 1998.

Other Matters

In order to serve the  anticipated  market  requirements in our New York service
territory,  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 Northport, Long Island. Applications for all necessary
regulatory  authorizations  were filed in 2000 and 2001. To date,  Islander East
has received a final certificate from the Federal Energy  Regulatory  Commission
("FERC")  and all  necessary  permits from the State of New York.  However,  the
State of Connecticut has denied  Islander East's  application for a coastal zone
management  permit.  Islander  East has  reinstated  its  appeal of the State of
Connecticut's determination to the United States Department of Commerce. Once in
service,  the pipeline will  transport  260,000 DTH daily to the Long Island and
New York City energy  markets,  enough  natural gas to heat 600,000  homes.  The
pipeline will also allow KeySpan to diversify the geographic  sources of its gas
supply. Various options for the financing of pipeline construction are currently
being evaluated.

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
(the  "Ravenswood  facility")  and the  counties  of Nassau and  Suffolk on Long
Island. In addition,  through long-term  contracts of varying lengths, we manage
the electric transmission and distribution ("T&D") system, the fuel and electric
purchases, and the off-system electric sales for LIPA.



                                       40
<PAGE>

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

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
                                                         Three Months Ended June 30,               Six Months Ended June 30,
(In Thousands of Dollars)                                  2003               2002                   2003              2002
----------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>               <C>                   <C>              <C>
Revenues                                               $ 370,617         $   354,781           $   705,036       $  669,489
Purchased fuel                                            90,490              61,146               169,758          115,139
----------------------------------------------------------------------------------------------------------------------------
Net Revenues                                             280,127             293,635               535,278          554,350
----------------------------------------------------------------------------------------------------------------------------
Operating Expenses
   Operations and maintenance                            177,427             183,936               338,731          332,056
   Depreciation                                           16,106              13,928                32,644           27,661
   Operating taxes                                        35,114              36,270                72,753           73,642
----------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses                                 228,647             234,134               444,128          433,359
----------------------------------------------------------------------------------------------------------------------------
Operating Income                                          51,480              59,501                91,150          120,991
----------------------------------------------------------------------------------------------------------------------------
Electric sales (MWH)*                                    995,433           1,125,735             1,762,782        2,216,978
Capacity(MW)*                                              2,200               2,200                 2,200            2,200
Cooling degree days                                          184                 353                    184            353
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Reflects the operations of the Ravenswood facility only.

Net Revenues

Total  electric net revenues  decreased by $13.5  million,  or 5%, in the second
quarter of 2003,  compared to the same quarter of 2002. For the six months ended
June 30, 2003, total electric revenues decreased $19.1 million, or 3 %, compared
to the same period of 2002.

Net revenues from the Ravenswood facility were $8.5 million, or 11% lower during
the  second  quarter  of 2003,  compared  to the same  quarter in 2002 and $21.3
million,  or 14% lower for the six months  ended June 30,  2003  compared to the
same period last year. Comparative quarterly net revenues for the second quarter
reflect a decrease in energy margins of $18.9 million, partially offset by $10.4
million of higher capacity revenues. Comparative net revenues for the six months
reflect a decrease in energy  margins of $19.8 million and a slight  decrease in
capacity  revenues.  Due to a major overhaul of our largest steam generator,  as
well as cooler weather  compared to last year,  energy sales  quantities for the
quarter  and six months  ended June 30,  2003 were  lower  compared  to the same
periods   last  year.   Further,   energy   margins   reflect   lower   realized
"spark-spreads"  (the  selling  price of  electricity  less  cost of fuel,  plus
hedging  gains or losses).  The  increase in  capacity  revenues  for the second
quarter of 2003  reflects  both an increase in the level of capacity sold and an
increase in the selling  price of capacity.  In 2002,  the New York  Independent
System Operator ("NYISO") employed a revised methodology to assess the available
supply of and demand for installed capacity.  This revised methodology  resulted
in insufficient  capacity being procured by the market, as well as a reliability
concern.  For the  three  and six  months  ended  June  30,  2002  this  revised
methodology resulted in both lower capacity volume sold into the NYISO and lower
capacity pricing.  In September 2002, the NYISO recognized a calculation flaw in
its revised  methodology  and prior to the  2002/2003  winter  auction the NYISO
corrected the calculation methodology to ensure sufficient capacity is procured.
Elimination of the flaw ensured compliance with New York State Reliability Rules
and resulted in higher capacity revenue realized at the Ravenswood  facility for
the three and six months ended June 30, 2003.

The rules and  regulations  for  capacity,  energy sales and the sale of certain
ancillary  services to the NYISO energy markets  continue to evolve and the FERC
has adopted  several  price  mitigation  measures that have  adversely  impacted
earnings from the Ravenswood facility.  Certain of these mitigation measures are


                                       41
<PAGE>

still subject to rehearing and possible judicial review. The final resolution of
these issues and their effect on our financial  position,  results of operations
and cash flows cannot be fully  determined  at this time.  (See  KeySpan's  2002
Annual  Report  on Form  10-K for the  Year  Ended  December  31,  2002  Item 7.
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations under the caption "Market and Credit Risk Management  Activities" for
a further discussion of these matters.)

Net revenues from the service  agreements  with LIPA decreased by $10.3 million,
or 5% and $11.0 million, or 3% for the three and six months ended June 30, 2003,
respectively, compared to the same periods last year. Included in 2003 revenues,
are  billings  to LIPA for  certain  third party costs that were lower than such
billings  last year.  These  revenues have minimal  impact on earnings  since we
record a similar  amount  of costs in  operating  expense  and we share any cost
under-runs with LIPA.  Excluding  these third party billings,  revenues for 2003
associated  with these service  agreements were comparable to such revenues last
year.

Net revenues from the Glenwood  Landing and Port  Jefferson  electric  "peaking"
facilities  located on Long Island were $5.3  million and $13.2  million  higher
during  the  three  and  six  months  ended  June  30,  2003,  compared  to  the
corresponding  periods last year. The Glenwood facility was placed in service on
June 1, 2002, while the Port Jefferson facility was placed in service on July 1,
2002.

Operating Expenses

Operating  expenses  decreased  by $5.5  million in the  second  quarter of 2003
compared to the same quarter of 2002. However, included in comparative operating
expenses is a decrease in third party capital  costs that are fully  recoverable
from LIPA, as noted previously. Excluding the decrease in these costs, operating
expenses increased  approximately $5 million, or 2% during the second quarter of
2003  compared to the same  quarter  last year.  Operating  expenses for the six
months ended June 30, 2003 increased $10.8 million compared to the corresponding
period  last year.  Again,  included  in  comparative  operating  expenses  is a
decrease  in third party  capital  costs that are fully  recoverable  from LIPA.
Excluding  the  decrease in these costs,  operating  expenses for the six months
ended June 30, 2003 increased  approximately $21 million, or 5%, compared to the
same period last year. This increase resulted,  in part, from higher pension and
other  postretirement  benefits.  LIPA  reimburses  KeySpan  for costs  directly
incurred by KeySpan in  providing  service to LIPA,  subject to certain  sharing
provisions.  Variations between pension and other  postretirement  costs and the
estimates  used to bill LIPA are deferred and refunded to or collected from LIPA
in subsequent periods. As a result of an adjustment recorded in 2002 relating to
this  "true-up",   comparative  pension  and  other  postretirement  costs  were
approximately  $8 million higher for the six months ended June 30, 2003 compared
to this time last year.  Further,  plant  maintenance  costs  were $5.3  million
higher  for the six  months,  due to the major  overhaul  of our  largest  steam
generator  as  previously  mentioned.  The increase in  depreciation  expense is
primarily due to the depreciation of the two "peaking" facilities.



                                       42
<PAGE>

Other Matters

During  2002,  construction  began  on a new 250 MW  combined  cycle  generating
facility  at the  Ravenswood  facility  site.  The new  facility  is expected to
commence  operations  in late 2003.  The capacity and energy  produced from this
plant are anticipated to be sold into the NYISO energy markets. In addition, our
application  to construct and operate a similar 250 MW combined  cycle  electric
generating  facility on Long Island has been approved.  On May 8th, 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 this  proposed  facility.  KeySpan  plans to respond  to a Request  for
Proposals  ("RFP")  issued by LIPA in May 2003,  by offering  the  capacity  and
services from this proposed 250 MW combined  cycle  electric  generating  plant.
LIPA is seeking  proposals  from  developers  to either build and operate a Long
Island  generating  facility,  and/or a new cable that will link Long  Island to
dedicated  off-Long  Island  power  of  between  250 to 600  megawatts  (MW)  of
electricity by no later than the summer of 2007.

As part of our growth strategy, we continually evaluate the possible acquisition
and development of additional generating  facilities in the Northeast.  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.

Energy Services

The Energy Services segment primarily  includes  companies that provide services
through three lines of business to clients primarily located within the New York
City  metropolitan  area,  including New Jersey and  Connecticut,  as well as in
Rhode  Island,  Pennsylvania,  Massachusetts  and New  Hampshire.  The  lines of
business are Home Energy Services, Business Solutions, and Fiber Optic Services.

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

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
                                                    Three Months Ended June 30,                  Six Months Ended June 30,
(In Thousands of Dollars)                             2003                  2002                 2003                  2002
------------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>                    <C>                 <C>                   <C>
Revenues                                          $ 155,564              $ 229,311           $ 349,361              $ 470,870
Less: cost of gas and fuel                           18,688                 45,731              78,841                111,885
------------------------------------------------------------------------------------------------------------------------------
Net Revenues                                        136,876                183,580             270,520                358,985
Other operating expenses                            146,748                194,447             289,540                379,209
------------------------------------------------------------------------------------------------------------------------------
Operating Income                                  $  (9,872)             $ (10,867)          $ (19,020)             $ (20,224)
------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Revenues decreased  approximately 32% and 26% for the three and six months ended
June 30, 2003,  respectively,  compared to the same  periods last year,  due, in
part, to lower revenues realized by the Business Solutions group of companies as
a  result  of the  continued  down  turn in the  economy,  as  well as from  the
discontinuation of the general contracting  business of one of our subsidiaries.
The Business  Solutions  group of  companies  provide  mechanical,  contracting,
plumbing, engineering, and consulting services to commercial, institutional, and
industrial  customers.  Further,  on May 1,  2003,  KeySpan's  gas and  electric
marketing  subsidiary,  KeySpan  Energy  Services,  assigned the majority of its
retail  natural  gas  customers,  consisting  mostly  of  residential  and small
commercial customers, to ECONnergy Energy Co., Inc. ("ECONnergy). KeySpan Energy
Services  will  continue to provided  retail  natural gas  marketing  to a small
number of  customers  in New Jersey and will  continue  its  electric  marketing
activities. Comparative revenues, as well as gas and fuel costs were impacted by
this transaction.


                                       43
<PAGE>

Operating Income for the Business Solutions group of companies decreased by $8.8
million for the second  quarter of 2003 and by $10.6  million for the six months
ended June 30, 2003,  compared to the corresponding  periods of last year. These
declines reflect the slow down in the economy, which has delayed the start-up of
certain engineering and construction projects.  Further, the continued down turn
in the economy has lowered margins realized on construction  projects  currently
in  progress.  This is  further  reflected  by a backlog of  approximately  $469
million at June 30, 2003, compared to $514 million at December 31, 2002 and $610
million at June 30, 2002.

Offsetting  the  results of the  Business  Solutions  group of  companies,  were
comparative  increases  in  earnings of $9.8  million and $11.8  million for the
three and six months ended June 30, 2003, respectively, associated with the Home
Energy  Services group of companies.  These  companies  provide  residential and
small commercial  customers with service and maintenance  contracts,  as well as
the retail  marketing  of natural  gas and  electricity.  Comparative  operating
income  reflects  losses incurred during the three and six months ended June 30,
2002,  resulting  from:  (i) the adverse impact of the down-turn in the economy;
(ii) the  non-renewal  of  appliance  service  contracts  due to the warm  first
quarter 2002 weather; and (iii) an increase in the provision for bad debts.

Other Matters

KeySpan Services, Inc., and its wholly- owned subsidiary, Paulus, Sokolowski and
Sartor,  LLC.,  have entered into an  agreement to acquire  Bard,  Rao + Athanas
Consulting  Engineers,  Inc.  (BR+A),  a  company  engaged  in the  business  of
providing  engineering services relating to mechanical,  electrical and plumbing
systems. The purchase price is expected to be approximately $35 million, plus up
to  $14.7  million  in  contingent  consideration  depending  on  the  financial
performance  of  BR+A  over  the  five-year  period  after  the  closing  of the
acquisition.  We have  received all  necessary  regulatory  approvals  and it is
anticipated that the closing of this transaction will occur in the third quarter
of 2003.

Energy Investments

The Energy  Investment  segment  consists of our gas  exploration and production
operations, certain other domestic and international energy-related investments,
as well as certain  technology  related  investments.  Our gas  exploration  and
production  subsidiaries,   Houston  Exploration  and  KeySpan  Exploration  and
Production  LLC  ("KES  E&P")  are  engaged  in  gas  and  oil  exploration  and
production,  and the development and acquisition of domestic natural gas and oil
properties.  In line  with our  strategy  of  monetizing  or  divesting  certain
non-core  assets,  in October  2002 we  monetized a portion of our assets in the
joint venture  drilling  program with Houston  Exploration that was initiated in


                                       44
<PAGE>

1999.  Further,  in February 2003, we reduced our ownership  interest in Houston
Exploration  to  approximately  56% (from the previous level of 66%) through the
repurchase,  by Houston  Exploration,  of three  million  shares of common stock
owned by KeySpan.  The net  proceeds of  approximately  $79 million  received in
connection  with this  repurchase  were  used to pay down  short-term  debt.  We
realized a $19.0  million  gain on this  transaction  that was recorded in Other
Income and Deductions in the Consolidated Statement of Income. Income taxes were
not provided on this  transaction,  since the  transaction  was  structured as a
return of capital.

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

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
                                                             Three Months Ended June 30,              Six Months Ended June 30,
(In Thousands of Dollars)                                     2003                2002                2003                2002
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>                  <C>                <C>                 <C>
Revenues                                                  $ 122,875            $ 90,563           $ 250,722           $ 167,489
Depletion and amortization expense                           49,475              44,440              96,918              85,885
Other operating expenses                                     23,252              16,668              48,066              32,324
--------------------------------------------------------------------------------------------------------------------------------
Operating Income                                          $  50,148            $ 29,455           $ 105,738           $ 49,280
--------------------------------------------------------------------------------------------------------------------------------
Natural gas and oil production (Mmcf)                        27,119              27,057              53,205              52,727
Natural gas (per Mcf) realized                            $    4.55            $   3.29           $    4.73           $    3.13
Natural gas (per Mcf) unhedged                            $    5.16            $   3.28           $    5.76           $    2.79
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>

*Operating  income above  represents  100% of our gas exploration and production
subsidiaries' results for the periods indicated. Gas reserves and production are
stated in BCFe and Mmcfe, which includes equivalent oil reserves.

The  increase in  operating  income of $20.7  million and $56.5  million for the
three and six months ended June 30, 2003, compared to the corresponding  periods
last year, reflects, in part, a significant increase in revenues offset, to some
extent, by an increase in operating  expenses  associated with higher production
volumes.  Revenues  for both the quarter and first six months of 2003  benefited
from the  significant  increase  in  comparative  average  realized  gas  prices
(average  wellhead  price received for  production  including  hedging gains and
losses). Average realized gas prices increased 38% and 51% for the three and six
months ended June 30, 2003,  compared with the corresponding  periods last year.
Revenues also  benefited  from a slight  increase in production  volumes for the
three and six months ended June 30, 2003, respectively.

The  average  realized  gas price for the second  quarter of 2003 was 88% of the
average  unhedged  natural  gas price,  resulting  in  revenues  that were $15.4
million  lower  than  revenues  that  would  have been  achieved  if  derivative
financial  instruments  had not been in place during the second quarter of 2003.
The average realized gas price for the six months ended June 30, 2003 was 82% of
the average  unhedged  natural gas price,  resulting in revenues that were $50.0
million  lower  than  revenues  that  would  have been  realized  if  derivative
financial instruments had not been in place during the first six months of 2003.
Houston Exploration hedged  approximately 70% of its 2003 second quarter and six
months production, principally through the use of costless collars.



                                       45
<PAGE>

The average realized gas price for the second quarter of 2002 was  substantially
the same as the average  unhedged  natural gas price.  The average  realized gas
price for the six months  ended June 30, 2002 was 112% of the  average  unhedged
natural gas price  resulting  in revenues  that were $17.0  million  higher than
revenues that would have been realized if derivative  financial  instruments had
not been employed during the first six months of 2002.

The derivative  instruments are designed to provide Houston  Exploration  with a
more predictable cash flow, as well as to reduce its exposure to fluctuations in
natural  gas  prices.  At June  30,  2003  Houston  Exploration  had  derivative
positions in place to hedge  approximately  67% of its  estimated  2003 and 2004
yearly production,  principally  through the use of collars.  (See Note 6 to the
Consolidated   Financial   Statements,   "Hedging   and   Derivative   Financial
Instruments" for further information on these derivative positions.)

The  depletion  rate was $1.79 per Mcf for the six months  ended June 30,  2003,
compared to $1.63 per Mcf for the same period in 2002.  The  depletion  rate has
increased as Houston Exploration  completed the evaluation of several properties
that were  classified  as  unproved  during the fourth  quarter of 2002.  As the
evaluation  is  completed,  the costs  associated  with  these  properties  were
reclassified into the amortization base without  incremental  reserve additions.
In addition, future development costs have increased from prior year estimates.

The table below  indicates the net proved  reserves of our gas  exploration  and
production subsidiaries at December 31, 2002.

-------------------------------------------------------------------
                                                  BCFe          %
-------------------------------------------------------------------
Houston Exploration                                650       96.7%
KSE E&P                                             22        3.3%
-------------------------------------------------------------------
Total                                              672      100.0%
-------------------------------------------------------------------


This segment also consists of KeySpan  Canada;  our 20% interest in Iroquois Gas
Transmission  System  LP  ("Iroquois");  and our  50%  interest  in the  Premier
Transmission Pipeline and 24.5% interest in Phoenix Natural Gas, both located in
Northern Ireland.





                                       46
<PAGE>



Selected  financial data and operating  statistics for our other  energy-related
investments are set forth in the following table for the periods indicated.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
                                                     Three Months Ended June 30,                     Six Months Ended June30,
(In Thousands of Dollars)                            2003                   2002                   2003                    2002
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>                    <C>                     <C>                    <C>
Revenues                                          $ 29,880               $ 21,942                $ 56,344               $ 39,575
Operation and maintenance expense                   19,390                 19,768                  36,034                 33,826
Other operating expenses                             5,410                  5,545                  10,763                  8,572
Equity earnings                                      3,994                  3,224                   9,651                  7,378
---------------------------------------------------------------------------------------------------------------------------------
Operating Income                                  $  9,074               $   (147)               $ 19,198               $  4,555
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

The  increase in  operating  income for both the three and six months ended June
30,  2003  compared  to the same  periods  last year  primarily  reflects  lower
comparative losses associated with certain  technology-related  investments,  as
well as  higher  operating  income  associated  with our  Canadian  investments,
primarily KeySpan Canada.  KeySpan Canada experienced higher unit sales, as well
as higher  quantities  of sales of natural gas  liquids in 2003,  as a result of
increasing oil prices. The pricing of natural gas liquids is directly related to
oil prices.

We do not  consider  certain  businesses  contained  in the  Energy  Investments
segment to be part of our core asset  group.  We have stated in the past that we
may sell or  otherwise  dispose of all or a portion of our non-core  assets.  As
previously  indicated,  on May 30, 2003 we  monetized  39.09% of our interest in
KeySpan  Canada,  a company with  natural gas  processing  plants and  gathering
facilities in Western  Canada.  These assets  include 14  processing  plants and
associated gathering systems that can process  approximately 1.5 BCFe of natural
gas daily and provide  associated natural gas liquids  fractionation.  We sold a
portion of our  interest  in KeySpan  Canada  through  the  establishment  of an
open-ended  income fund trust (the "Fund")  organized under the laws of Alberta,
Canada.  The Fund  acquired  the 39.09%  ownership  interest  of KeySpan  Canada
through an indirect  subsidiary,  and then issued 17 million  trust units to the
public  through an  initial  public  offering.  Each  trust  unit  represents  a
beneficial  interest in the Fund and is registered on the Toronto Stock Exchange
(KEY.UN).  Additionally, we sold our 20% interest in Taylor NGL LP that owns and
operates  two  extraction  plants  also in Canada to AltaGas  Services,  Inc. We
received cash proceeds of $119.4 million  associated with these transactions and
recorded  a  pre-tax  loss of $30.3  million  ($34.1  million  after-tax).  This
investment is now expected to provide an annual cash  dividend of  approximately
$20 million.

Based on current market conditions,  however, we cannot predict when, or if, any
other sales or dispositions of our non-core assets may take place, or the effect
that any such sale or disposition may have on our financial position, results of
operations or cash flows.

Allocated Costs

We are subject to the  jurisdiction  of the SEC under the Public Utility Holding
Company Act ("PUHCA").  As part of the regulatory  provisions of PUHCA,  the SEC
regulates various transactions among affiliates within a holding company system.
In  accordance  with the SEC's  regulations  under  PUHCA and the New York State
Public Service Commission ("NYPSC") requirements, we have service companies that
provide:  (i) traditional  corporate and administrative  services;  (ii) gas and
electric  transmission and distribution  systems  planning,  marketing,  and gas
supply planning and procurement; and (iii) engineering and surveying services to
subsidiaries.


                                       47
<PAGE>

Liquidity

Cash flow from  operations  for the six  months  ended June 30,  2003  decreased
$102.8  million,  compared  to the  same  period  last  year,  primarily  due to
fluctuating  natural gas prices and the seasonal nature of our gas  distribution
operations.  We incur significant cash expenditures  during the summer and early
fall to purchase and inject gas into our storage  facilities.  We recover  these
costs in subsequent  periods as the gas is removed from storage and delivered to
our  customers,  primarily  during  the  winter,  for  space  heating  purposes.
Significant  cash  flows are  generated  during  the first two  quarters  of the
subsequent  fiscal year as we receive  payment from  customers  for such heating
season use.  Due to higher gas  storage  injection  costs  during the summer and
early fall of 2001 compared to the same period in 2002, gas cost  recoveries for
the six months  ended June 30, 2002 were greater  than such  recoveries  for the
same period this year. Further,  the significantly  higher gas prices during the
six months ended June 30, 2003,  compared with this time last year, coupled with
the  colder  weather,   resulted  in  significantly   higher  customer  accounts
receivable  balances,  as well as higher cash expenditures  required to maintain
natural gas inventory levels. The higher accounts  receivable  reflect, in part,
cash  expenditures  for the  purchase  of natural  gas that was  consumed by our
customers during the winter, but have not yet been recovered through revenues.

At June 30, 2003, we had cash and temporary cash  investments of $195.7 million.
During  the six  months  ended  June 30,  2003,  we  repaid  $484.7  million  of
commercial  paper and, at June 30, 2003,  $431.0 million of commercial paper was
outstanding at a weighted average annualized  interest rate of 1.28%. We had the
ability to borrow up to an additional  $869 million at June 30, 2003,  under the
terms of our credit facility.

On June 27, 2003,  KeySpan renewed its $1.3 billion  revolving  credit facility,
which was  syndicated  among  sixteen  banks.  The  facility  is used to support
KeySpan's  commercial  paper  program,  and  consists  of  two  separate  credit
facilities  with  different  maturities  but  substantially  similar  terms  and
conditions:  a $450  million  facility  that  extends  for 364 days,  and a $850
million  facility that is committed for three years. The fees for the facilities
are subject to a ratings-based  grid, with an annual fee of 0.10% on the 364-day
facility and 0.125% on the three-year facility. Both credit agreements allow for
KeySpan  to  borrow  using  several  different  types  of  loans;  specifically,
Eurodollar loans,  Adjustable Bank Rate (ABR) loans, or competitively bid loans.
Eurodollar  loans are based on the  Eurodollar  rate plus a margin of 0.625% for
loans up to 33% of the total facility,  and an additional  0.125% for loans over
33% of the total facility. ABR loans are based on the highest 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. In addition, the 364-day facility has a one-year term out option, which
would cost an  additional  0.25% if  utilized.  We do not  anticipate  borrowing
against this facility;  however,  if the credit rating on our  commercial  paper
program were to be downgraded, it may be necessary to do so.



                                       48
<PAGE>

The  credit  facility  contains  certain   affirmative  and  negative  operating
covenants,  including  restrictions  on KeySpan's  ability to mortgage,  pledge,
encumber  or  otherwise  subject its  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
64%.  Violation of this covenant  could result in the  termination of the credit
facility and the required repayment of amounts borrowed  thereunder,  as well as
possible cross defaults under other debt agreements.

Under the terms of the credit facility,  KeySpan's debt-to-total  capitalization
ratio  reflects  80% equity  treatment  for the MEDS Equity  Units issued in May
2002. In addition,  the $425 million Ravenswood Master Lease is treated as debt.
At June 30, 2003,  consolidated  indebtedness,  as calculated under the terms of
the credit  facility and  reflecting  the  redemption  of Houston  Exploration's
senior subordinated notes, was 57.2% of consolidated capitalization. (See Note 5
to the Consolidated  Financial Statements  "Long-term Debt and Commercial Paper"
for an explanation of the  redemption,  and the  discussion  under  "Off-Balance
Sheet Arrangements" for an explanation of the Ravenswood Master Lease.)

The  credit  facility  also  requires  that net cash  proceeds  from the sale of
significant  subsidiaries  be  applied  to  reduce  consolidated   indebtedness.
Further,  an acceleration of indebtedness of KeySpan or one of its  subsidiaries
for borrowed  money in excess of $25 million in the  aggregate,  if not annulled
within 30 days after written notice,  would create an event of default under the
Indenture  dated  November  1,  2000,   between  KeySpan   Corporation  and  the
JPMorganChase Bank as Trustee.  At June 30, 2003, KeySpan was in compliance with
all covenants.

Houston  Exploration has a revolving  credit facility with a commercial  banking
syndicate that provides  Houston  Exploration with a commitment of $300 million,
which can be  increased  at its option to a maximum of $350  million  with prior
approval from the banking syndicate. The credit facility is subject to borrowing
base  limitations,  initially  set at $300  million  and  will be  re-determined
semi-annually.  Up to $25 million of the  borrowing  base is  available  for the
issuance of letters of credit.  The credit facility matures on July 15, 2005, is
unsecured and ranks senior to all existing debt of Houston Exploration.

Under the Houston  Exploration  credit facility,  interest on base rate loans is
payable at a fluctuating rate, or base rate, equal to the sum of (a) the greater
of the  federal  funds  rate  plus  0.50% or the  bank's  prime  rate plus (b) a
variable  margin  between 0% and 0.50%,  depending  on the amount of  borrowings
outstanding  under the credit facility.  Interest on fixed rate loans is payable
at a fixed rate equal to the sum of (a) a quoted  reserve  adjusted  LIBOR rate,
plus (b) a variable  margin between 1.25% and 2.00%,  depending on the amount of
borrowings outstanding under the credit facility.

Financial  covenants  require Houston  Exploration  to, among other things,  (i)
maintain an interest  coverage ratio of at least 3.00 to 1.00 of earnings before
interest,  taxes and depreciation  ("EBITDA") to cash interest;  (ii) maintain a
total  debt to EBITDA  ratio of not more than 3.50 to 1.00;  and (iii)  hedge no
more than 70% of natural gas production  during any 12-month period. At June 30,
2003, Houston Exploration was in compliance with all financial covenants.


                                       49
<PAGE>

During the six months  ended June 30,  2003,  Houston  Exploration  borrowed $53
million under its credit facility and repaid $185 million. At June 30, 2003, $20
million of borrowings  remained  outstanding  at a weighted  average  annualized
interest  rate of 3.49%.  Also,  $9.4 million was  committed  under  outstanding
letters of credit  obligations.  At June 30, 2003,  $270.6  million of borrowing
capacity was available.

In June 2003, KeySpan Canada replaced its two outstanding credit facilities with
one facility with three tranches that combined allow KeySpan Canada to borrow up
to  approximately  $125 million.  These  facilities  mature as follows:  (i) $50
million  matures in 180 days;  (ii) $37.5 million matures in 364 days; and (iii)
$37.5 million  matures in two years.  At the time of the partial sale of KeySpan
Canada,  net proceeds from the sale of $119.4  million plus an additional  $45.7
million  drawn under the new credit  facilities  were used to pay down  existing
outstanding  debt of $160.4  million.  For the six months  ended June 30,  2003,
KeySpan  Canada  borrowed  $71.4 million from its credit  facilities  and repaid
$191.0  million.  At June 30, 2003 $50.5  million is  outstanding  under the new
credit facilities and $74.5 million remains available to be borrowed. KeySpan is
not a guarantor of this credit facility.

On January 17, 2003,  KeySpan  sold 13.9  million  shares of common stock on the
open market and realized net proceeds of approximately $473 million.  All shares
were offered by KeySpan pursuant to the effective shelf  registration  statement
filed  with the SEC.  Net  proceeds  from the  equity  sale  were used to call a
portion  of  outstanding  promissory  notes to LIPA as is further  explained  in
"Capital Expenditures and Financing" below. In addition, as previously noted, we
used the net proceeds of approximately  $79 million received in February 2003 in
connection  with  the  partial  monetization  of  Houston  Exploration  to repay
short-term debt.

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 customers.

We  satisfy  our  seasonal  working  capital   requirements   primarily  through
internally generated funds and the issuance of commercial paper. We believe that
these  sources of funds are  sufficient  to meet our  seasonal  working  capital
needs. In addition,  we currently use treasury stock to satisfy the requirements
of our dividend reinvestment and employee benefit plans.







                                       50
<PAGE>


Capital Expenditures and Financing

Construction Expenditures

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

--------------------------------------------------------------------------
                                              Six Months Ended June 30,
(In Thousands of Dollars)                   2003                    2002
--------------------------------------------------------------------------
Gas Distribution                         $ 165,690              $ 183,588
Electric Services                          113,880                225,051
Energy Investments                         149,009                161,155
Energy Services and other                    5,473                 10,109
--------------------------------------------------------------------------
                                         $ 434,052              $ 579,903
--------------------------------------------------------------------------


Construction  expenditures related to the Gas Distribution segment are primarily
for the renewal and  replacement  of mains and services and for the expansion of
the gas distribution system. Construction expenditures for the Electric Services
segment  reflect costs to: (i) maintain our generating  facilities;  (ii) expand
the  Ravenswood  facility;  and  (iii)  construct  new  Long  Island  generating
facilities as previously noted. The decrease in Electric  Services  construction
expenditures  for the six months ended June 30, 2003 compared to the same period
last year reflects the fact that construction of the Glenwood and Port Jefferson
peaking  facilities was substantially  completed by June 30, 2002.  Construction
expenditures  related to the Energy Investments  segment primarily reflect costs
associated  with gas  exploration  and  production  activities.  These costs are
related to the exploration  and development of properties  primarily in Southern
Louisiana and in the Gulf of Mexico. Expenditures also include development costs
associated  with the joint  venture with Houston  Exploration,  as well as costs
related to KeySpan Canada's gas processing facilities.

At June 30, 2003, total expenditures associated with the siting,  permitting and
construction of the Ravenswood  expansion  project,  the siting,  permitting and
procurement  of equipment for the Long Island 250MW  combined  cycle  generation
plant,  and the siting and permitting of the Islander East pipeline project were
$297 million.

Financing

On June 10, 2003,  Houston  Exploration  closed on a private  placement issue of
$175 million of 7.0%, senior subordinated notes due 2013. Interest payments will
begin on December  15, 2003,  and will be paid semi-  annually  thereafter.  The
notes will mature on June 15, 2013. Houston  Exploration has the right to redeem
the  notes as of June 15,  2008,  at a price  equal to the  issue  price  plus a
specified redemption premium.  Until June 15, 2006, Houston Exploration may also
redeem up to 35% of the notes at a redemption price of 107 percent with proceeds
from an equity offering. Houston Exploration incurred approximately $4.5 million
of debt  issuance  costs on this private  placement.  On July 11, 2003,  Houston
Exploration  used a portion of the net proceeds  from the issuance to redeem all
of its outstanding $100 million  principal amount of 8.625% senior  subordinated
notes due 2008 at a price of 104.313 percent of par plus interest accrued to the
redemption date. Debt redemption costs totaled  approximately $5.9 million.  The
remaining  net  proceeds  from the  offering  were used to reduce  debt  amounts
associated with Houston Exploration's revolving bank credit facility.


                                       51
<PAGE>


In April 2003, we issued $300 million of  medium-term  and long-term  debt.  The
debt was issued in the  following  two series:  (i) $150 million 4.65% Notes due
2013; and (ii) $150 million 5.875% Notes due 2033. The proceeds of this issuance
were used to pay down outstanding commercial paper.

In connection with the KeySpan/LILCO  business combination,  KeySpan and certain
of its  subsidiaries  issued  promissory  notes to LIPA to support  certain debt
obligations assumed by LIPA. At December 31, 2002 the remaining principal amount
of promissory notes issued to LIPA was approximately  $600 million.  Under these
promissory notes,  KeySpan is required to obtain letters of credit to secure its
payment obligations if its long-term debt is not rated at least in the "A" range
by at least two nationally recognized  statistical rating agencies. In an effort
to mitigate the dilutive effect of the equity issuance previously mentioned,  in
March 2003, we called  approximately $447 million aggregate  principal amount of
such  promissory  notes at the  applicable  redemption  prices plus  accrued and
unpaid interest  through the dates of redemption.  Interest  savings  associated
with this redemption are estimated to be $15.6 million  after-tax,  or $0.09 per
share, in 2003.

KeySpan had authorization  under PUHCA to issue up to $2.2 billion of securities
through December 31, 2003. Following the recent common stock offering previously
mentioned and shares of common stock expected to be issued for employee  benefit
and dividend reinvestment plans, we generally exhausted our ability to issue new
securities  under our current  PUHCA  authorization.  However,  the  issuance of
securities in connection with the redemption of existing  securities  (including
the  promissory  notes  discussed  previously)  is  permitted  under  our  PUHCA
authorization  notwithstanding the foregoing limit. We have filed an application
with the SEC  requesting  authorization  to, among other things,  issue up to an
additional $3 billion of securities through December 31, 2006. It is anticipated
that this  authorization  will be  obtained  before  the end of the  year.  This
request is intended to provide us with maximum flexibility to finance our future
capital requirements over the next three years.

During the  remainder  2003,  we intend to issue  approximately  $150 million of
either taxable or tax-exempt  long-term debt securities in a manner that will be
exempt  from  PUHCA  restrictions.  We  anticipate  that the  proceeds  from the
issuance will be used to re-pay the outstanding  commercial paper related to the
construction of the two Long Island peaking-power plants that became operational
in 2002.  We will  continue to  evaluate  our capital  structure  and  financing
strategy  for 2003 and beyond.  We believe  that our current  sources of funding
(i.e.,  internally  generated  funds,  the issuance of additional  securities as
noted above,  and the  availability of commercial  paper) are sufficient to meet
our anticipated working capital needs for the foreseeable future.


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<PAGE>


The following  table  represents  the ratings of our long-term  debt at June 30,
2003.  Currently,  these ratings are all on stable outlook with the exception of
Standard & Poor's rating on KeySpan Corporation, which is on negative outlook.

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


Off-Balance Sheet Arrangements

Guarantees

KeySpan has a number of  financial  guarantees  for its  subsidiaries  that have
remained  substantially  unchanged  since  December 31, 2002.  At June 30, 2003,
KeySpan  has fully and  unconditionally  guaranteed  certain  medium-term  notes
issued by KEDLI. The medium-term notes are reflected on the Consolidated Balance
Sheet. Further, KeySpan has guaranteed: (i) surety bonds associated with certain
construction  projects  currently  being  performed by  subsidiaries  within the
Energy  Services  segment;  (ii) certain supply  contracts,  margin accounts and
purchase orders for certain  subsidiaries,  as well as an unaffiliated  company;
(iii) the  obligations  of KeySpan  Ravenswood  LLC,  the lessee  under the $425
million Master Lease Agreement associated with the Ravenswood facility; and (iv)
certain subsidiary letters of credit.  KeySpan has also guaranteed a $25 million
line of credit for Hawkeye Electric, LLC, ("Hawkeye"), a non-affiliated company.
As part of a  settlement  agreement  with  Hawkeye,  such line of credit will be
reduced to $13 million and will  terminate in March 2004.  These  guarantees are
not recorded on the Consolidated  Balance Sheet. At this time, we have no reason
to believe that our subsidiaries or the  non-affiliated  company 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  8  to  the
Consolidated Financial Statements,  "Financial Guarantees and Contingencies" and
Note 9 "Variable Interest Entity" for additional information regarding KeySpan's
guarantees  and a description  of the leasing  arrangement  associated  with the
Ravenswood Master Lease Agreement.)


                                       53
<PAGE>


Variable Interest Entity

We have an arrangement with a variable  interest entity through which we lease a
portion of the  Ravenswood  facility.  We acquired the Ravenswood  facility,  in
part, through the variable interest entity from The Consolidated  Edison Company
of New York  ("Consolidated  Edison")  on June 18, 1999 for  approximately  $597
million.  In order to reduce the initial  cash  requirements,  we entered into a
lease  agreement  (the "Master  Lease") with a variable  interest,  unaffiliated
financing entity that acquired a portion of the facility, three steam generating
units,  directly from Consolidated Edison and leased it to a KeySpan 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). Monthly lease payments equal the
monthly  interest  expense on the debt  securities.  The Master Lease  currently
qualifies  as  an  operating  lease  for  financial   reporting  purposes  while
preserving  our  ownership  of the  facility  for federal  and state  income tax
purposes.

In January 2003, The Financial  Accounting  Standards Board (the "Board") issued
Interpretation No. 46 ("FIN 46"),  "Consolidation of Variable Interest Entities,
an  Interpretation  of ARB No. 51." This  Interpretation  requires us to,  among
other things,  consolidate  this variable  interest entity for the first interim
period  ending after June 15,  2003,  so long as the current  variable  interest
structure remains intact. FIN 46 will require us to classify the Master Lease as
debt on the Consolidated  Balance Sheet at an amount approximately equal to fair
market value.  As previously  mentioned,  under the terms of our credit facility
the Master Lease is considered debt in the ratio of debt-to-total capitalization
and  therefore,  implementation  of FIN 46 will  have no  impact  on our  credit
facility.  Further,  we will be required to record an asset on the  Consolidated
Balance Sheet for an amount equal to the fair market value of the leased assets.
The Interpretation contains certain other provisions that we will be required to
implement in 2003 and such provisions will impact future  earnings.  (See Note 9
to the Consolidated  Financial  Statements "Variable Interest Entity" for a more
detailed description of the Master Lease and FIN 46 implementation issues.)

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, 2002.  (For  additional  details  regarding  these
obligations see KeySpan's Annual Report on Form 10-K for the Year Ended December
31, 2002, Item 7 Management's Discussion and Analysis of Financial Condition and
Results  of  Operations,  Note  6 to  those  Consolidated  Financial  Statements
"Long-Term Debt", as well as Note 7 to those Consolidated  Financial  Statements
"Contractual Obligations, Financial Guarantees and Contingencies.")

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


                                       54
<PAGE>

operations  may vary  significantly  from expected  results if the judgments and
assumptions  underlying the estimates prove to be inaccurate.  At June 30, 2003,
KeySpan's   critical   accounting   policies  and   assumptions   have  remained
substantially  unchanged since December 31, 2002. Below is a brief discussion of
those  critical  accounting  policies  requiring such  subjectivity.  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, 2002,  Item 7.  Management's
Discussion  and  Analysis  of  Financial  Condition  and  Results of  Operations
"Discussion of Critical Accounting Policies and Assumptions."

Percentage of Completion Accounting

Percentage-of-completion  accounting is the prescribed  method of accounting for
long-term  construction  type contracts in accordance  with  Generally  Accepted
Accounting Principles and, accordingly,  the method used for revenue recognition
by the Energy Services segment.  Due to uncertainties  inherent within estimates
employed  to apply  percentage-of-completion  accounting,  it is  possible  that
estimates  will be revised  as project  work  progresses.  Changes in  estimates
resulting in additional  future costs to complete projects can result in reduced
margins or loss contracts.

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,  significant  reliance is placed upon estimated future cash flows requiring
broad  assumptions and significant  judgment by management.  Cash flow estimates
are determined  based upon future  commodity  prices,  customer rates,  customer
demand, operating costs, rate relief from regulators,  customer growth and other
items. A change in the fair value of our  investments  could cause a significant
change in the carrying value of goodwill.  While we believe that our assumptions
are reasonable,  actual results may differ from our projections. The assumptions
used to measure the fair value of our  investments are the same as those used by
us to prepare yearly operating  segment and consolidated  earnings and cash flow
forecasts.  In  addition,  these  assumptions  are used to set yearly  budgetary
guidelines.

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 NYPSC, the New Hampshire Public Utilities  Commission
("NHPUC"),  and the Massachusetts  Department of  Telecommunications  and Energy
("DTE").

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.



                                       55
<PAGE>

In separate  merger-related  orders issued by the DTE, the base rates charged by
Colonial  Gas Company and Essex Gas  Company  have been frozen at their  current
levels for  ten-year  periods  ending  2008 and 2009,  respectively.  Due to the
length of these base rate  freezes,  the  Colonial and Essex Gas  Companies  had
previously discontinued the application of SFAS 71.

Rate  regulation is undergoing  significant  change as regulators  and customers
seek lower  prices for  utility  service and greater  competition  among  energy
service  providers.  In the event  that  regulation  significantly  changes  the
opportunity  for us to  recover  costs in the  future,  all or a portion  of our
regulated operations may no longer meet the criteria for the application of SFAS
71.  In  that  event,  a  write-down  of  our  existing  regulatory  assets  and
liabilities could result. In management's  opinion,  our regulated  subsidiaries
that  currently  are subject to the  provisions  of SFAS 71 will  continue to be
subject to SFAS 71 for the foreseeable future.

As is further  discussed  under the caption  "Regulation  and Rate Matters," the
rate plans previously in effect for KEDNY, KEDLI and Boston Gas Company have all
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 filed a base rate case and a  performance  based  rate plan for
Boston Gas  Company on April 16,  2003.  Further,  we are  currently  evaluating
various  options  that may be  available  to us  including,  but not limited to,
proposing  new rate 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.

Historically,  we have funded our pension plans in excess of the amount required
to satisfy  minimum ERISA funding  requirements.  At December 31, 2002, we had a
funding  balance in excess of the ERISA minimum  funding  requirements  and as a
result  KeySpan  will not be  required to make any  contribution  to its pension
plans in 2003. However, although we presently exceed ERISA funding requirements,
our pension plans,  on an actuarial  basis,  are currently  underfunded.  Future
funding  requirements are heavily dependent on the actual return on plan assets.
Therefore,  if the actual  return on plan assets  continues to be  significantly


                                       56
<PAGE>

below the expected returns,  we may elect to fund the pension plans in 2003. (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,  2002,  see  also  Note 4 to those  Consolidated  Financial
Statements, "Postretirement Benefits.")

Full Cost Accounting

Our gas  exploration  and  production  subsidiaries  use the full cost method to
account for their natural gas and oil  properties.  Under full cost  accounting,
all costs incurred in the acquisition,  exploration,  and development of natural
gas and oil reserves are capitalized into a "full cost pool".  Capitalized costs
include costs of all unproved  properties,  internal costs  directly  related to
natural gas and oil activities, and capitalized interest.

Under full cost  accounting  rules,  total  capitalized  costs are  limited to a
ceiling equal to the present  value of future net  revenues,  discounted at 10%,
plus the lower of cost or fair  value of  unproved  properties  less  income tax
effects (the  "ceiling  limitation").  A quarterly  ceiling test is performed to
evaluate  whether  the net book value of the full cost pool  exceeds the ceiling
limitation. If capitalized costs (net of accumulated depreciation, depletion and
amortization)  less deferred  taxes are greater than the  discounted  future net
revenues or ceiling limitation, a write-down or impairment of the full cost pool
is required.

Natural gas and oil reserve quantities represent estimates only. Under full cost
accounting,  reserve  estimates  are used to  determine  the full  cost  ceiling
limitation  as well as the depletion  rate.  Houston  Exploration  estimates its
proved  reserves and future net revenues  using sales prices  estimated to be in
effect as of the date it makes the reserve estimates.  Natural gas prices, which
have fluctuated  widely in recent years,  affect estimated  quantities of proved
reserves and future net revenues.  Any estimates of natural gas and oil reserves
and their values are  inherently  uncertain,  including  many factors beyond our
control.

Valuation of Derivative Instruments

We employ derivative instruments to hedge a portion of our exposure to commodity
price risk and interest rate risk, to partially hedge the cash flow  variability
associated  with our  electric  energy and  capacity  sales from the  Ravenswood
facility, as well as to economically hedge certain other commodity exposures. In
addition, KeySpan Canada has used swap instruments to lock-in the purchase price
on the purchase of electricity  needed to operate its gas processing plants. All
of our derivative instruments,  except for certain weather derivatives, meet the
SFAS 133 definition of a derivative.  Further, none of our currently outstanding
derivatives  qualify  as  "energy  trading  contracts"  as  defined  by  current
accounting literature.

When available, quoted market prices are used to record a contract's fair value.
However,  market  values for  certain  derivative  contracts  may not be readily
available  or  determinable.  A  number  of  our  commodity  related  derivative
instruments are exchange traded and,  accordingly,  fair value  measurements are


                                       57
<PAGE>

generally based on standard New York Mercantile  Exchange  ("NYMEX")  quotes. We
use  industry-published  indices,  NYISO location zone indices, as well as other
local published indices to value contracts for commodities that are not exchange
traded,  such as No. 6 grade  fuel oil and  electricity.  The fair  value of our
electric  capacity hedges is based on published  NYISO capacity  bidding prices.
Further, if no active market exists for a commodity, fair values may be based on
pricing models.  (See Note 6 to the Consolidated  Financial  Statements "Hedging
and  Derivative  Financial  Instruments"  for a further  description  of all our
derivative instruments.)

Regulation and Rate Matters

Gas Matters

As of June 30, 2003, the rate agreements for KEDNY, KEDLI and Boston Gas Company
have all 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. Regarding the Boston Gas Company, we filed
a base rate case and  performance  based  rate  plan on April  16,  2003,  to be
effective in the fourth quarter of 2003.  The filing  requests an annual revenue
increase  of  approximately  $62  million,  a 12.18%  return  on  equity,  and a
performance based rate plan with a term of five years.  Proceedings with the DTE
are currently ongoing.

For an  additional  information  regarding  our  current gas  distribution  rate
agreements, see KeySpan's Annual Report on Form 10-K for the Year Ended December
31, 2002, Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations "Regulation and Rate Matters."

Securities and Exchange Commission Regulation

KeySpan and its  subsidiaries  are subject to the  jurisdiction of the SEC under
PUHCA. The rules and regulations under PUHCA generally limit the operations of a
registered  holding company to a single integrated  public utility system,  plus
additional  energy-related  businesses.  In addition,  the principal  regulatory
provisions of PUHCA: (i) regulate certain transactions among affiliates within a
holding company system  including the payment of dividends by such  subsidiaries
to a holding company;  (ii) govern the issuance,  acquisition and disposition of
securities and assets by a holding company and its subsidiaries; (iii) limit the
entry by registered  holding  companies and their  subsidiaries  into businesses
other than electric and/or gas utility businesses; and (iv) require SEC approval
for certain utility mergers and acquisitions.

The SEC's order issued on November 8, 2000, in connection  with our  acquisition
of Eastern  Enterprises and EnergyNorth  Inc. as amended on December 6, 2002 and
February 14, 2003, provides us with, among other things, authorization to do the
following through December 31, 2003 (the "Authorization Period"): (a) subject to
an aggregate amount of $5.8 billion, (i) maintain existing financing agreements,
(ii) issue and sell up to $2.2 billion of  additional  securities  in compliance
with certain defined  parameters,  (iii) issue  additional  guarantees and other
forms of credit  support in an  aggregate  amount of $2.0 billion at any time in


                                       58
<PAGE>

addition to any such  securities,  guarantees and credit support  outstanding or
existing as of November 8, 2000, and (iv) amend,  renew,  extend,  supplement or
replace any of the foregoing; (b) issue shares of common stock or reissue shares
of common stock held in treasury under  dividend  reinvestment  and  stock-based
management incentive and employee benefit plans; (c) maintain existing and enter
into additional hedging transactions with respect to outstanding indebtedness in
order to manage and minimize  interest rate costs; (d) invest up to $2.2 billion
in  exempt  wholesale  generators;  and (e) pay  dividends  out of  capital  and
unearned   surplus  as  well  as   paid-in-capital   with   respect  to  certain
subsidiaries, subject to certain limitations.

In addition,  we have committed that during the Authorization Period, our common
equity will be at least 30% of our consolidated  capitalization  and each of our
utility  subsidiaries'  common  equity  will be at  least  30% of such  entity's
capitalization.  At June 30, 2003, our  consolidated  common equity was 40.7% of
our  consolidated  capitalization,  including  commercial  paper  but  excluding
Houston  Exploration's  debt that was redeemed on July 11, 2003, and each of our
utility   subsidiaries  common  equity  was  at  least  35%  of  its  respective
capitalization.  As  previously  mentioned,  we  have  filed  a new  application
requesting  authorization  to, among other things,  issue up to an additional $3
billion of securities  through  December 31, 2006. It is  anticipated  that this
authorization will be obtained before the end of the year.

Environmental Matters

KeySpan  is  subject to  various  federal,  state and local laws and  regulatory
programs  related  to  the   environment.   Ongoing   environmental   compliance
activities,  which  have  not  been  material,  are  charged  to  operation  and
maintenance activities.  We estimate that the remaining cost of our manufactured
gas plant ("MGP")  related  environmental  cleanup  activities,  including costs
associated with the Ravenswood  facility,  will be approximately  $184.2 million
and we have recorded a related  liability for such amount. We have also recorded
an additional $39.2 million liability  representing the estimated  environmental
cleanup costs related to a former coal tar processing  facility.  Further, as of
June 30,  2003,  we have  expended  a total of $80.2  million  on  environmental
remediation.  (See Note 8 to the Consolidated  Financial Statements,  "Financial
Guarantees and Contingencies".)

Market and Credit Risk Management Activities

Market Risk: We are exposed to market risk arising from potential changes in one
or more market  variables,  such as energy  commodity price risk,  interest rate
risk,  foreign  currency  exchange rate risk,  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.  (See Note 6 to the  Consolidated
Financial  Statements  "Hedging  and  Derivative  Financial  Instruments"  for a
further explanation of derivative financial instruments.)


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<PAGE>

Credit Risk: We are 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 gas,  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, natural gas liquids,  oil and processing services to energy
marketing and oil and gas production companies.

We  have  regional   concentration  of  credit  risk  due  to  receivables  from
residential,  commercial and industrial customers in New York, New Hampshire and
Massachusetts,  although this credit risk is spread over a  diversified  base of
residential, commercial and industrial customers. Customers' payment records are
monitored and action is taken,  when  appropriate.  Companies  within the Energy
Services  segment have a concentration  of credit risk to large customers and to
the governmental and healthcare industries.

We also have concentrations of credit risk from LIPA, our largest customer,  and
from other energy companies.  Concentration of energy company counterparties 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.  Over the past year, the credit quality of certain energy companies
has declined. In instances where counterparties' credit quality has declined, 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.  These risks have not changed  substantially  since  December  31,
2002.  For additional  information  regarding  these risks see KeySpan's  Annual
Report on Form 10-K for the Year Ended  December 31, 2002,  Item 7  Management's
Discussion and Analysis of Financial Condition and Results of Operations "Market
and Credit Risk Management Activities".


Cautionary Statement Regarding Forward-Looking Statements

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


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<PAGE>

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:

-    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   reduce  our  cost  structure  and  operate
     efficiently;

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

-    implementation of new accounting standards;

-    inflationary trends and interest rates;

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

-    available sources and cost of fuel;

-    creditworthiness of counterparties to derivative  instruments and commodity
     contracts;

-    retention of key personnel;

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

-    the impact of federal and state utility  regulatory  policies 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 in general facing our unregulated  Energy Services  businesses,
     including but not limited to competition from other  mechanical,  plumbing,
     heating,  ventilation and air conditioning,  and engineering companies,  as
     well as, other utilities and utility  holding  companies that are permitted
     to engage in such activities;

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

-    changes in political conditions, acts of war or terrorism;


                                       61
<PAGE>

-    changes in rates of return on overall debt and equity markets could have an
     adverse impact on the value of pension assets;

-    changes in  accounting  standards or GAAP which may require  adjustment  to
     financial statements; 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" contained herein.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Financially-Settled  Commodity Derivative Instruments: From time to time KeySpan
has utilized  derivative  financial  instruments,  such as futures,  options and
swaps,  for the purpose of hedging exposure to commodity price risk and to hedge
the cash flow  variability  associated  with a portion of peak  electric  energy
sales.

Houston   Exploration  has  utilized  collars  and  put  options,   as  well  as
over-the-counter  ("OTC") swaps, to hedge the cash flow  variability  associated
with forecasted sales of a portion of its natural gas production. As of June 30,
2003, Houston Exploration has hedged approximately 67% of its estimated 2003 and
2004 gas production.  To value its outstanding derivatives,  Houston Exploration
used standard New York Mercantile  Exchange  ("NYMEX")  futures prices,  and, in
addition,  used  published  volatility  in  its  Black-Scholes  calculation  for
outstanding  options.  The maximum length of time over which Houston Exploration
has hedged such cash flow is through  December  2004.  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 $47.5 million, or $30.6 million after-tax.

With respect to price exposure associated with fuel purchases for the Ravenswood
facility,  KeySpan  employs  standard  NYMEX  natural gas futures  contracts and
over-the-counter  financially  settled natural gas basis swaps to hedge the cash
flow  variability of a portion of forecasted  purchases of natural gas.  KeySpan
also employs the use of financially-settled oil swap contracts to hedge the cash
flow  variability of a portion of forecasted  purchases of fuel oil that will be
consumed at the  Ravenswood  facility.  The maximum length of time over which we
have hedged cash flow variability  associated with: (i) forecasted  purchases of
natural gas is through September 2004; and (ii) forecasted purchases of fuel oil
is through April 2005. We used  standard  NYMEX futures  prices to value the gas
futures contracts and industry published oil indices for number 6 grade fuel oil
to value the oil swap contracts.  The estimated  amount of gains associated with
all 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 $1.5 million, or $1.0 million after-tax.


                                       62
<PAGE>

KeySpan Canada employs  natural gas swaps to lock-in a price for expected future
natural gas purchases.  As applicable,  we used relevant  natural gas indices to
value the outstanding  contracts.  The maximum length of time over which we have
hedged such cash flow  variability is through October 2004. 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 negligible at June 30, 2003.

We have also engaged in the use of  cash-settled  swap  instruments to hedge the
cash flow  variability  associated  with a portion of  forecasted  peak electric
energy sales from the Ravenswood facility. The maximum length of time over which
we  have  hedged  cash  flow  variability  is  through  December  2004.  We used
NYISO-location  zone published indices to value these  outstanding  derivatives.
The estimated amount of gains  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 $3.3 million,  or $2.2
million after-tax.

KeySpan Canada also employs  electricity  swap contracts to lock-in the purchase
price  of  electricity  needed  to  operate  its gas  processing  plants.  These
contracts are not exchange-traded and local published indices were used to value
these outstanding swap agreements. The maximum length of time over which we have
hedged such cash flow variability is through December 2003. 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 $0.7 million, or $0.5 million after-tax.

The following  tables set forth selected  financial data  associated  with these
derivative  financial  instruments noted above that were outstanding at June 30,
2003.

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
                                   Year of      Volumes       Floor                         Fixed Price   Current Price   Fair Value
                Type of Contract   Maturity      (mmcf)        ($)            Ceiling ($)      ($)            ($)           ($000)
------------------------------------------------------------------------------------------------------------------------------------
                     Gas
<S>                                 <C>         <C>        <C>             <C>            <C>            <C>               <C>
Collars                              2003        27,600     3.48 - 3.49      4.91 - 4.95             -    5.29 - 5.82       (22,760)
                                     2004        64,100     3.75 - 4.50      5.05 - 7.00             -    4.87 - 5.92       (16,920)

Put Options - Short Natural Gas      2004         9,100     5.00                       -             -    5.66 - 5.92         4,228

Swaps/Futures - Short Natural Gas    2003         7,483               -                -   3.19 - 3.89    4.35 - 5.82       (17,161)

Swaps/Futures - Long Natural Gas     2003           410               -                -   3.22 - 5.72    5.41 - 5.48         1,215
                                     2004            50               -                -   5.11 - 5.13    4.87 - 4.89           (10)

------------------------------------------------------------------------------------------------------------------------------------
                                                108,743                                                                     (51,408)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       63
<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
                                              Year of      Volumes     Fixed Price           Current           Fair Value
         Type of Contract                     Maturity    (Barrels)        ($)              Price ($)            ($000)
------------------------------------------------------------------------------------------------------------------------
               Oil
<S>                                           <C>        <C>          <C>                 <C>                     <C>
Swaps - Short Fuel Oil                         2003        30,000              29.70       28.50 - 30.52            (25)

Swaps - Long Fuel Oil                          2003        66,195      20.60 - 30.88       29.15 - 31.99            253
                                               2004        76,548      20.50 - 29.95       27.05 - 30.37            141
                                               2005         9,000      24.65 - 26.28       26.60 - 26.85             17
------------------------------------------------------------------------------------------------------------------------
                                                          181,743                                                   386
------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
                                 Year of                         Fixed Margin/ Price         Current                Fair Value
        Type of Contract         Maturity             MWh               ($)                 Price ($)                  ($000)
-------------------------------------------------------------------------------------------------------------------------------
          Electricity
<S>                               <C>               <C>           <C>                     <C>                           <C>
Swaps - Energy                     2003              584,928       22.40 - 67.53           14.67 - 46.59                 2,477
                                   2004              308,000       14.00 - 26.50           13.13 - 24.04                   774

-------------------------------------------------------------------------------------------------------------------------------
                                                     892,928                                                             3,251
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
                                                                                             2003
Change in Fair Value of Derivative Instruments                                              ($000)
---------------------------------------------------------------------------------------------------
<S>                                                                                       <C>
Fair value of contracts at January 1,                                                    $ (32,628)
Net losses on contracts realized                                                            17,186
(Decrease) in fair value of all open contracts                                             (32,329)
---------------------------------------------------------------------------------------------------
Fair value of contracts outstanding at June 30,                                          $ (47,771)
---------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
(In Thousands of Dollars)
-------------------------------------------------------------------------------------------------------
                             Fair Value of Contracts
-------------------------------------------------------------------------------------------------------
                                                      Maturity          Maturity              Total
Sources of Fair Value                               In 12 Months       2004 - 2005          Fair Value
-------------------------------------------------------------------------------------------------------
<S>                                                  <C>                <C>                   <C>
Prices actively quoted                              $ (40,995)         $ (2,292)             $ (43,287)
Prices provided by external sources                       427                 2                    429
Prices based on models and
    other valuation methods                            (5,753)           (2,765)                (8,518)
Local published indicies                                2,961               644                  3,605
-------------------------------------------------------------------------------------------------------
                                                    $ (43,360)         $ (4,411)             $ (47,771)
-------------------------------------------------------------------------------------------------------
</TABLE>


                                       64
<PAGE>

NYMEX  futures  are also used to  economically  hedge the cash flow  variability
associated  with the  purchase  of fuel for a  portion  of our  fleet  vehicles.
Further,  KeySpan  Canada has a  portfolio  of  financially-settled  natural gas
collars and swap  transactions  for  natural gas  liquids.  Such  contracts  are
executed  by KeySpan  Canada to: (i) fix the price that is paid or  received  by
KeySpan  Canada for  certain  physical  transactions  involving  natural gas and
natural gas  liquids and (ii)  transfer  the price  exposure to  counterparties.
These derivative financial instruments do not qualify for hedge accounting under
SFAS 133. At June 30,  2003,  these  instruments  had a net fair market value of
$0.6 million, which was recorded on the Consolidated Balance Sheet. Based on the
non-hedge  designation  of these  instruments,  the gain was  recognized  in the
Consolidated Statement of Income.

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  Hampshire  service  territories.  Since these  derivative  instruments  are
employed to reduce the  variability  of the purchase  price of natural gas to be
sold to regulated firm gas sales customers,  the accounting for these derivative
instruments is subject to SFAS 71  "Accounting  for the Effects of Certain Types
of Regulation". Therefore, changes in the market 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.

The following  table sets forth selected  financial data  associated  with these
derivative financial instruments that were outstanding at June 30, 2003.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                       Year of         Volumes                                                                          Fair Value
Type of Contract       Maturity         mmcf     Floor $         Ceiling $       Fixed Price $    Current Price $           ($000)
-----------------------------------------------------------------------------------------------------------------------------------
<S>                     <C>            <C>      <C>              <C>             <C>               <C>                        <C>
Options                  2003            3,040   4.00 - 5.00      5.50 - 6.35               -                 -                 72
                         2004            3,560   4.00 - 5.00      5.37 - 6.00               -                 -                (87)
Swaps                    2003            9,690             -                -     5.09 - 6.23       5.36 - 5.90                 46
                         2004           11,440             -                -     4.42 - 6.23       4.52 - 5.83                 99
-----------------------------------------------------------------------------------------------------------------------------------
                                        27,730                                                                                 130
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


Physically-Settled  Commodity Derivative Instruments:  Derivative Implementation
Group  ("DIG") Issue C15 and C16 of Statement of Financial  Accounting  Standard
133, "Accounting for Derivative Instruments and Hedging Activities",  as amended
and  interpreted,  (SFAS 133")  establishes  criteria  that must be satisfied in
order for  option-type  and forward  contracts in  electricity to be exempted as
normal  purchases and sales,  and relates to the exemption (as normal  purchases
and normal sales) of contracts  that combine a forward  contract and a purchased
option  contract.  Based  upon a  continuing  review of our  physical  commodity
contracts,  we determined  that certain  contracts for the physical  purchase of
natural gas are not exempt as normal  purchases  from the  requirements  of SFAS
133. At June 30, 2003, the fair value of these contracts was $1.5 million. 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.

Interest Rate Derivative  Instruments:  In May 2003, we entered into an interest
rate swap  agreement  in which we swapped $250 million of 7.25 % fixed rate debt
to floating rate debt.  Under the terms of the  agreements,  we will receive the
fixed coupon rate associated with these bonds and pay our swap  counterparties a
variable  interest rate based on LIBOR,  that is reset on a  semi-annual  basis.
These swaps are  designated  as  fair-value  hedges and qualify for  "short-cut"
hedge accounting treatment under SFAS 133. During the second quarter of 2003, we
paid our  counterparty an interest rate of 6.43%,  and as a result,  we realized
interest savings of $0.3 million for the quarter.  The fair market value of this
derivative was $1.9 million at June 30, 2003.


                                       65
<PAGE>

During  2002,  we  had  interest  rate  swap  agreements  in  which  we  swapped
approximately  $1.3 billion of fixed rate debt to floating rate debt.  Under the
terms of the agreements, we received the fixed coupon rate associated with these
bonds and paid the swap  counterparties a variable  interest rate that was reset
on a quarterly  basis.  These swaps were  designated  as  fair-value  hedges and
qualified for "short-cut" hedge accounting treatment under SFAS 133. In 2002, we
terminated two of these interest rate swap agreements with an aggregate notional
amount of $1.0  billion.  The  remaining  swap,  which had a notional  amount of
$270.0  million,  was terminated on February 25, 2003. We received $18.4 million
from our swap  counterparties  as a result of the latter  termination,  of which
$8.1 million  represented  accrued swap  interest.  The  difference  between the
termination settlement amount and the amount of accrued interest, $10.3 million,
was  recorded to earnings  in the first  quarter of 2003.  This swap was used to
hedge a portion of our  outstanding  promissory  notes to LIPA.  As discussed in
Note 5 "Long-Term  Debt", we called a portion of these  promissory  notes during
the first quarter of 2003.

Additionally,  we had an interest rate swap  agreement that hedged the cash flow
variability  associated  with the forecasted  issuance of a series of commercial
paper offerings. This hedge expired in March 2003.

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.  To  mitigate  a  substantial  portion  of the  effect  of
fluctuations  from normal weather on our financial  position and cash flows,  we
sold  heating  degree-day  call  options and  purchased  heating-degree  day put
options for the November  2002-March  2003 winter  season.  With respect to sold
call  options,  KeySpan  was  required  to make a payment of $40,000 per heating
degree day to its  counterparties  when actual  weather  experienced  during the
November 2002 - March 2003 time frame was above 4,470 heating degree days, which
equates  to  approximately  1% colder  than  normal  weather.  With  respect  to
purchased put options,  KeySpan  would receive a $20,000 per heating  degree day
payment  from its  counterparties  when actual  weather was below 4,150  heating
degree days, or approximately 7% warmer than normal.  Based on the terms of such
contracts,  we account for such instruments pursuant to the requirements of EITF
99-2,  "Accounting for Weather  Derivatives."  In this regard,  such instruments
were  accounted  for using the  "intrinsic  value  method"  as set forth in such
guidance.  During the first quarter of 2003,  weather was 10% colder than normal
and, as a result, $11.9 million has been recorded as a reduction to revenues.

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  credit risk and is actively  managed by assessing each  counterparty
credit  profile and  negotiating  appropriate  levels of  collateral  and credit
support.


                                       66
<PAGE>

Item 4. Controls and Procedures

KeySpan maintains "disclosure controls and procedures",  as such term is defined
under Exchange Act Rule 13a-15(e),  that are designed to ensure that information
required to be disclosed by KeySpan in the reports it files or submits under the
Securities  Exchange Act of 1934, as amended (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 its Chief
Executive  Officer and Chief Financial  Officer,  as appropriate to allow timely
decisions regarding required disclosure.

An  evaluation  of  the  effectiveness  of  KeySpan's  disclosure  controls  and
procedures as of June 30, 2003 was conducted  under the supervision and with the
participation of KeySpan's Chief Executive Officer and Chief Financial  Officer.
Based on that evaluation,  KeySpan's Chief Executive Officer and Chief Financial
Officer have concluded that KeySpan's  disclosure  controls and procedures  were
adequate and designed to ensure that  material  information  relating to KeySpan
and its  consolidated  subsidiaries  would be made known to the Chief  Executive
Officer  and  Chief   Financial   Officer  by  others  within  those   entities,
particularly during the periods when periodic reports under the Exchange Act are
being  prepared.  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 that has
materially  affected,  or is reasonably likely to materially  affect,  KeySpan's
internal  control  over  financial  reporting.  Refer to the  Certifications  by
KeySpan's Chief Executive  Officer and Chief Financial Officer filed as exhibits
31.1 and 31.2 to this report


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

Item 1. Legal Proceedings

See Note 8 to the Consolidated  Financial Statements  "Financial  Guarantees and
Contingencies."

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

We held our annual meeting of shareholders on May 8, 2003, at 10:00 a.m. Eastern
Time,  at KeySpan's  Auditorium  located at our  corporate  headquarters  at One
MetroTech  Center,  Brooklyn,  New  York to  consider  and  take  action  on the
following items:



                                       67
<PAGE>

1. Election of nine directors

The names of the persons who received a plurality of the votes cast by the
holders of shares entitled to vote thereon, and who were accordingly elected
Directors of KeySpan for a one year term or until their successors are duly
elected or chosen and qualified are as follows:

<TABLE>
<CAPTION>
                                                         VOTES                    VOTES                   TOTAL
                         DIRECTOR                         FOR                   WITHHELD                  VOTES
           <S>                                       <C>                       <C>                    <C>
            Robert B. Catell                          126,352,675               4,017,053              130,369,728

            Andrea S. Christensen                     126,524,919               3,844,809              130,369,728

            Alan H. Fishman                           126,383,916               3,985,812              130,369,728

            J. Atwood Ives                            127,466,357               2,903,371              130,369,728

            James R. Jones                            127,478,203               2,891,525              130,369,728

            James L. Larocca                          126,489,274               3,880,454              130,369,728

            Stephen W. McKessy                        126,496,857               3,872,871              130,369,728

            Edward D. Miller                          127,449,023               2,920,705              130,369,728

            Edward Travaglianti                       126,539,358               3,830,370              130,369,728
</TABLE>

2.   Ratification  of Deloitte & Touche LLP, as independent  public  accountants
     for the Company for the year ending December 31, 2003

Deloitte & Touche LLP  received a majority  of the votes cast by the  holders of
shares entitled to vote thereon, and was accordingly ratified Independent Public
Accountants of KeySpan for the fiscal year ending December 31, 2003.


                 DELOITTE & TOUCHE LLP                      VOTES CAST

                                   FOR                     125,225,051

                               AGAINST                       3,731,132

                               ABSTAIN                       1,413,545

                                 TOTAL                     130,369,728


3. Approval of amendments to the Employee Discount Stock Purchase Plan

The  management  proposal to amend the Employee  Discount  Stock  Purchase  Plan
received a majority of the votes cast by the holders of shares  entitled to vote
thereon, and was accordingly approved.

              EMPLOYEE DISCOUNT
            STOCK PURCHASE PLAN                     VOTES CAST

                            FOR                     123,314,234

                        AGAINST                       4,966,173

                        ABSTAIN                       2,089,321

                          TOTAL                     130,369,728


                                       68
<PAGE>


4. Consideration of a shareholder proposal on Shareholder Rights Plans

The shareholder proposal on Shareholder Rights received a majority of the votes
cast by the holders of shares entitled to vote thereon, and was accordingly
approved.

                 SHAREHOLDER
                 PROPOSAL                           VOTES CAST

                           FOR                      52,650,885

                       AGAINST                      47,400,706

                     NON-VOTES                      26,648,178

                       ABSTAIN                       3,669,959

                         TOTAL                     130,369,728

Item 6.  Exhibits and Reports on Form 8-K

(a)        Exhibits

3.1* Amended Bylaws dated as of June 25, 2003

4.1* Credit Agreement among KeySpan  Corporation,  the several Lenders, ABN AMRO
     Bank, N.V., as Syndication  Agent,  Bank One, N. A. and Wachovia Bank, N.A,
     as  Co-Documentation  Agents, and J.P. Morgan Chase Bank, as Administrative
     Agent for $450 million, dated as of June 27, 2003.

4.2* Credit Agreement among KeySpan Corporation,  the several Lenders,  Citibank
     N.A., as Syndication Agent, Bank of New York and The Royal Bank of Scotland
     PLC,  as   Co-Documentation   Agents,   and  J.P.  Morgan  Chase  Bank,  as
     Administrative Agent for $850 million, dated as of June 27, 2003.

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.


                                       69
<PAGE>

 (b) Reports on Form 8-K


In our report on Form 8-K dated April 4, 2003,  we disclosed  that we had issued
$150 million  4.650% Notes due 2013 and $150 million  5.875% Notes due 2033.

In our report on Form 8-K dated May 1, 2003, we reported that KeySpan had issued
a press release  concerning,  among other things,  its financial results for the
quarter ended March 31, 2003 and that KeySpan was hosting an earnings conference
call at 2:30 p.m.  EDT on May 1, 2003 to discuss the  financial  results for the
first quarter.

In our report on Form 8-K dated May 5, 2003,  we reported  that we were giving a
series of  presentations  on KeySpan at the  American  Gas  Association  ("AGA")
Financial Forum.


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










                                       70
<PAGE>






                      KEYSPAN CORPORATION AND SUBSIDIARIES
                                    SIGNATURE

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

                                          KEYSPAN CORPORATION
                                          -------------------
                                             (Registrant)



Date: August 6, 2003                      /s/ Gerald Luterman
                                          -----------------------------
                                          Gerald Luterman
                                          Executive Vice President and
                                          Chief Financial Officer



Date: August 6, 2003                      /s/ Joseph Bodanza
                                          ---------------------------
                                          Joseph Bodanza
                                          Senior Vice President
                                          and Chief Accounting Officer






                                       71