UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-Q
                                    ---------

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

                  For the quarterly period ended June 30, 2004
            [ ]   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 14, 2004
      ---------------------                 ----------------------------
         $.01 par value                            160,176,033




<PAGE>



                      KEYSPAN CORPORATION AND SUBSIDIARIES

                                      INDEX
                                      -----

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

Item 1. Financial Statements

            Consolidated Balance Sheet -
            June 30, 2004 and December 31, 2003                            3

            Consolidated Statement of Income - Three and
            Six Months Ended June 30, 2004 and 2003                        5

            Consolidated Statement of Cash Flows -
            Six Months Ended June 30, 2004 and 2003                        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                                           65

                           Part II. OTHER INFORMATION

Item 1. Legal Proceedings                                                 65

Item 4. Submission of Matters to a Vote of Security Holders               65

Item 5.  Other Events                                                     66
Item 6. Exhibits and Reports on Form 8-K                                  67

Signatures                                                                69


                                       2

<PAGE>


<TABLE>
<CAPTION>
                           CONSOLIDATED BALANCE SHEET
                                   (Unaudited)
-----------------------------------------------------------------------------------------------------------------
           (In Thousands of Dollars)                                 June 30, 2004            December 31, 2003
-----------------------------------------------------------------------------------------------------------------

ASSETS
<S>                                                                     <C>                          <C>
Current Assets
    Cash and temporary cash investments                                $    818,127                 $    205,751
    Accounts receivable                                                     977,499                    1,029,459
    Unbilled revenue                                                        272,890                      505,633
    Allowance for uncollectible accounts                                    (82,219)                     (79,184)
    Gas in storage and prepaid gas                                          371,781                      488,521
    Material and supplies at average cost                                   117,884                      121,415
    Other                                                                    44,783                      115,304
                                                       ----------------------------- ----------------------------
                                                                          2,520,745                    2,386,899
                                                       ----------------------------- ----------------------------

Investments and  Other                                                      499,157                      248,565

Property
    Gas                                                                   6,688,175                    6,522,251
    Electric                                                              2,323,247                    2,636,537
    Other                                                                   434,329                      425,576
    Accumulated depreciation                                             (2,649,641)                  (2,610,876)
    Gas exploration and production, at cost                                 181,927                    3,088,242
    Accumulated depletion                                                  (102,588)                  (1,167,427)
                                                       ----------------------------- ----------------------------
                                                                          6,875,449                    8,894,303
                                                       ----------------------------- ----------------------------

Deferred Charges
    Regulatory assets                                                       544,393                      578,383
    Goodwill and other intangible assets                                  1,811,243                    1,809,712
    Other                                                                   707,869                      722,320
                                                       ----------------------------- ----------------------------
                                                                          3,063,505                    3,110,415
                                                       ----------------------------- ----------------------------

Total Assets                                                           $ 12,958,856                 $ 14,640,182
                                                       ============================= ============================
</TABLE>


        See accompanying Notes to the Consolidated Financial Statements.


                                       3
<PAGE>


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

--------------------------------------------------------------------------------------------------------------------
                                                                        June 30, 2004             December 31, 2003
--------------------------------------------------------------------------------------------------------------------


<S>                                                                         <C>                          <C>
Current redemption of long-term debt                                      $     16,474                 $      1,471
Accounts payable and other liabilities                                         738,145                    1,141,597
Commercial paper                                                                40,000                      481,900
Dividends payable                                                               72,054                       72,289
Taxes accrued                                                                   90,460                       46,580
Customer deposits                                                               41,251                       40,370
Interest accrued                                                                62,328                       64,609
                                                         ------------------------------ ----------------------------
                                                                             1,060,712                    1,848,816
                                                         ------------------------------ ----------------------------


Regulatory liabilities:
      Miscellaneous liabilities                                                104,824                      104,034
      Removal cost recovered                                                   473,720                      450,034
Deferred income tax                                                          1,092,322                    1,278,341
Postretirement benefits and other reserves                                     915,603                      961,962
Other                                                                          113,738                      121,790
                                                         ------------------------------ ----------------------------
                                                                             2,700,207                    2,916,161
                                                         ------------------------------ ----------------------------

                                                                                     -                            -


Common stock                                                                 3,490,056                    3,487,645
Retained earnings                                                              854,559                      621,430
Accumulated other comprehensive loss                                           (64,370)                     (59,932)
Treasury stock                                                                (363,861)                    (378,487)
                                                         ------------------------------ ----------------------------
     Total common shareholders' equity                                       3,916,384                    3,670,656
Preferred stock                                                                 83,342                       83,568
Long-term debt                                                               5,182,652                    5,611,432
                                                         ------------------------------ ----------------------------
                                                                             9,182,378                    9,365,656
                                                         ------------------------------ ----------------------------

                                                                                15,559                      509,549
                                                         ------------------------------ ----------------------------
                                                                          $ 12,958,856                 $ 14,640,182
                                                         ============================== ============================
</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)               2004              2003                  2004              2003
                                                    -------------------------------------------------------------------------------
<S>                                                            <C>               <C>                  <C>               <C>
Revenues
     Gas Distribution                                          $ 676,363          $ 732,036          $ 2,604,142       $ 2,564,737
     Electric Services                                           433,763            392,345              792,899           790,045
     Energy Services                                             129,877            132,268              258,936           261,333
     Energy Investments                                          125,768            151,503              305,367           304,562
                                                    -------------------------------------------------------------------------------
Total Revenues                                                 1,365,771          1,408,152            3,961,344         3,920,677
                                                    -------------------------------------------------------------------------------
Operating Expenses
     Purchased gas for resale                                    363,130            424,300            1,589,703         1,620,465
     Fuel and purchased power                                    130,347            102,476              231,959           199,998
     Operations and maintenance                                  477,511            509,636              969,977         1,007,825
     Depreciation, depletion and amortization                    189,403            142,290              361,088           287,261
     Operating taxes                                              90,484             95,251              212,763           219,964
                                                    -------------------------------------------------------------------------------
Total Operating Expenses                                       1,250,875          1,273,953            3,365,490         3,335,513
                                                    -------------------------------------------------------------------------------

Income from Equity Investments                                     8,416              4,030               14,132             9,759
                                                    -------------------------------------------------------------------------------

Operating Income                                                 123,312            138,229              609,986           594,923
                                                    -------------------------------------------------------------------------------
Other Income and (Deductions)
     Interest charges                                            (88,475)           (79,198)            (172,540)         (148,137)
     Gain (loss) on subsidiary stock transactions                172,894            (30,345)             172,894           (11,325)
     Cost of debt redemption                                           -             (5,900)                   -           (24,094)
     Minority interest                                           (16,661)           (13,000)             (36,954)          (30,358)
     Other                                                        19,382               (246)              22,143            14,455
                                                    -------------------------------------------------------------------------------
Total Other Income and (Deductions)                               87,140           (128,689)             (14,457)         (199,459)
                                                    -------------------------------------------------------------------------------

Income Taxes
     Current                                                       8,364              4,017              163,503           133,592
     Deferred                                                     71,351             11,461               53,592            24,719
                                                    -------------------------------------------------------------------------------
Total Income Taxes                                                79,715             15,478              217,095           158,311
                                                    -------------------------------------------------------------------------------

Earnings (Loss) Before Change in Accounting Principle            130,737             (5,938)             378,434           237,153
Cummulative Change in Accounting Principle                             -                  -                    -               174
                                                    --------------------------------------------------------------------------------

Net Income (Loss)                                                130,737             (5,938)             378,434           237,327
Preferred stock dividend requirements                              1,459              1,461                2,920             2,922
                                                    -------------------------------------------------------------------------------
Earnings (Loss) for Common Stock                               $ 129,278          $  (7,399)         $   375,514       $   234,405
                                                    ===============================================================================
Basic Earnings (Loss) Per Share:
  Before Change in Accounting Principle                             0.81              (0.05)                2.35              1.49
  Change in Accounting Principle                                       -                  -                    -                 -
                                                    -------------------------------------------------------------------------------
Basic Earnings (Loss) Per Share                                $    0.81          $   (0.05)         $      2.35       $      1.49
                                                    ===============================================================================
Diluted Earnings (Loss) Per Share:
  Before Change in Accounting Principle                             0.80              (0.05)                2.33              1.48
  Change in Accounting Principle                                       -                  -                    -                 -
                                                    -------------------------------------------------------------------------------
Diluted Earnings (Loss) Per Share                              $    0.80          $   (0.05)         $      2.33       $      1.48
                                                    ===============================================================================
Average Common Shares Outstanding (000)                          160,167            157,943              160,030           157,414
Average Common Shares Outstanding - Diluted (000)                161,433            158,757              161,256           158,464
-----------------------------------------------------------------------------------------------------------------------------------
</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)                                                                          2004                 2003
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                             <C>                  <C>
Operating Activities
Net income                                                                                      $ 378,434            $ 237,327
Adjustments to reconcile net income to net
      cash provided by (used in) operating activities
    Depreciation, depletion and amortization                                                      361,088              287,261
    Deferred income tax                                                                            53,592               24,719
    Income from equity investments                                                                (14,132)              (9,759)
    Dividends from equity investments                                                                 104                    -
    Amortization of interest rate swap                                                             (4,895)              (4,930)
    (Gain) Loss on subsidiary stock transactions                                                 (172,894)              15,048
    (Gain) on settlement of treasury lock                                                         (12,656)                   -
    Amortization of prepayments                                                                    46,489               46,706
    Minority interest                                                                              36,954               30,358
Changes in assets and liabilities
    Accounts receivable                                                                            85,087               54,237
    Materials and supplies, fuel oil and gas in storage                                           112,806               18,231
    Accounts payable and other liabilities                                                       (112,166)               7,292
    Interest accrued                                                                               (2,281)             (17,865)
    Captive insurance reserve                                                                      43,214                    -
    Property tax prepayments                                                                            -              (47,478)
    Other                                                                                         (12,411)             (63,130)
                                                                                -----------------------------------------------
Net Cash Provided by Operating Activities                                                         786,333              578,017
                                                                                -----------------------------------------------
Investing Activities
    Construction expenditures                                                                    (413,247)            (434,052)
    Cost of removal                                                                               (14,606)             (12,640)
    Proceeds from sale of property                                                                 13,138                    -
    Net proceeds from sale/leaseback transaction                                                  383,716                    -
    Net proceeds from subsidiary stock transactions                                               512,065              198,553
                                                                                -----------------------------------------------
Net Cash Provided by (Used In) Investing Activities                                               481,066             (248,139)
                                                                                -----------------------------------------------
Financing Activities
    Treasury stock issued                                                                          14,626               57,441
    Equity issuance                                                                                     -              473,573
    Issuance of long-term debt                                                                     49,142              599,684
    Payment of long-term debt                                                                    (153,884)            (377,174)
    Payment of commercial paper                                                                  (441,900)            (484,697)
    Redemption of promissory notes                                                                      -             (447,005)
    Gain on settlement of treasury lock                                                            12,656                    -
    Preferred stock dividends paid                                                                 (2,920)              (2,922)
    Common stock dividends paid                                                                  (142,622)            (133,435)
    Other                                                                                           9,879                9,708
                                                                                -----------------------------------------------
Net Cash (Used in) Financing Activities                                                          (655,023)            (304,827)
                                                                                -----------------------------------------------
Net Increase in Cash and Cash Equivalents                                                       $ 612,376            $  25,051
Cash and Cash Equivalents at Beginning of Period                                                  205,751              170,617
                                                                                -----------------------------------------------
Cash and Cash Equivalents at End of Period                                                      $ 818,127            $ 195,668
                                                                                ===============================================
</TABLE>

Cash equivalents are short-term  marketable securities purchased with maturities
of six 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 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;  underground gas storage;  liquefied natural gas storage; retail
electric marketing;  appliance service; plumbing;  heating,  ventilation and air
conditioning  and other  mechanical  services;  large  energy-system  ownership,
installation and management;  and engineering and consulting  services.  We also
invest and  participate in the  development  of natural gas pipelines,  electric
generation and other  energy-related  projects.  (See Note 2 "Business Segments"
for additional information on each operating segment.)

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, 2004,  and the results of operations for the three and six months
ended June 30, 2004 and June 30, 2003,  as well as cash flows for the six months
ended June 30, 2004 and June 30, 2003.  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, 2003. The December 31, 2003  financial  statement  information  has
been  derived from the 2003 audited  financial  statements.  Income from interim
periods may not be indicative of future results. Certain  reclassifications were
made  to  conform  prior  period  financial  statements  to the  current  period
financial statement presentation.

Consolidated  earnings are seasonal in nature  primarily due to the  significant
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
the fiscal year.

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 3.6 million common stock options  outstanding at June 30,
2004 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.


                                       7
<PAGE>

<TABLE>

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

------------------------------------------------------------------------------------------------------------------------------------
                                                                    Three Months Ended June 30,            Six Months Ended June 30,
(In Thousands of Dollars, Except Per Share Amounts)                  2004                  2003              2004            2003
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>                   <C>               <C>              <C>
Earnings (loss) for common stock                                 $ 129,278              $ (7,399)        $ 375,514        $ 234,405
Interest savings on convertible preferred stock                        129                     -               514              265
Houston Exploration dilution                                           (76)                  (57)             (158)            (144)
------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) for common stock - adjusted                      $ 129,331              $ (7,456)        $ 375,870        $ 234,526
------------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding (000)                          160,167               157,943           160,030          157,414
Add dilutive securities:
Options                                                              1,045                   814             1,005              822
Convertible preferred stock                                            221                     -               221              228
------------------------------------------------------------------------------------------------------------------------------------
Total weighted average shares outstanding - assuming dilution      161,433               158,757           161,256          158,464
------------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss )per share                                  $    0.81              $  (0.05)        $    2.35        $    1.49
------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share                                $    0.80              $  (0.05)        $    2.33        $    1.48
------------------------------------------------------------------------------------------------------------------------------------
</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 six to eleven years and
power  purchase  agreements  having  remaining  terms of 23 years.  The Electric
Services  segment also includes  subsidiaries  that own or lease and operate the
2,450 megawatt  ("MW")  Ravenswood  electric  generation  facility  ("Ravenswood
facility"),  located in Queens,  New York, which includes the recently completed
250 MW  combined-cycle  electric  generating unit located at the Ravenswood site
("Ravenswood  Expansion").  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.  The Electric Services segment also conducts
retail  marketing of electricity to commercial  customers.


                                       8
<PAGE>


The Energy  Services  segment  includes  companies  that provide  energy-related
services to customers  primarily located within the Northeastern  United States,
with  concentrations  in the New York  City  metropolitan  area,  including  New
Jersey, as well as Rhode Island, Pennsylvania,  Massachusetts and New Hampshire,
through  the  following  lines of  business:  (i) Home  Energy  Services,  which
provides residential and small commercial customers with service and maintenance
of energy systems and appliances;  and (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.

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  include our 23.5%
interest  in  The  Houston  Exploration   Company  ("Houston   Exploration")  an
independent natural gas and oil exploration company, as well as our wholly-owned
subsidiaries KeySpan Exploration and Production,  LLC ("KeySpan  Exploration and
Production"),  which is engaged in a joint venture with Houston Exploration,  as
well as Seneca-Upshur Petroleum, Inc ("Seneca-Upshur").

On June 2,  2004,  KeySpan  exchanged  10.8  million  shares of common  stock of
Houston Exploration for 100% of the stock of Seneca-Upshur,  previously a wholly
owned subsidiary of Houston  Exploration.  This transaction reduced our interest
in Houston  Exploration  from 55% to the current level of 23.5%. As part of this
transaction,  Houston  Exploration  retired 4.6 million of its common shares and
issued  6.8  million  new  shares  in  a  public  offering.   Based  on  Houston
Exploration's  announced  offering  price of $48.00 per  share,  Seneca-Upshur's
shares  were  valued at the  equivalent  of $449  million,  or $41.57 per share.
Seneca-Upshur's  assets consist of West Virginia gas producing properties valued
at $60 million, and $389 million in cash. This transaction resulted in a gain to
KeySpan of $150.1 million.  Effective June 1, Houston Exploration's earnings and
our ownership  interest in Houston  Exploration  have been  accounted for on the
equity basis of accounting.  The deconsolidation of Houston Exploration required
the recognition of certain deferred taxes on our remaining  investment resulting
in a net deferred tax expense of $44.1 million.  Therefore,  the net gain on the
share  exchange less the deferred tax  provision was $106 million,  or $0.66 per
share.

Subsidiaries in this segment also hold a 20% equity interest in the Iroquois Gas
Transmission  System  LP, a  pipeline  that  transports  Canadian  gas supply to
markets in the  Northeastern  United  States and a 50%  interest  in the Premier
Transmission  Pipeline  in  Northern  Ireland.  Further,  KeySpan  has  a  17.4%
ownership  interest in KeySpan Canada,  a subsidiary with natural gas processing
plants and gathering facilities in Western Canada.

On April 1, 2004, KeySpan and KeySpan Facilities Income Fund (the "Fund"), which
previously owned a 39.09% interest in KeySpan Canada,  consummated a transaction
whereby the Fund sold 15.617  million  units of the Fund at a price of CDN$12.60
per unit for gross  total  proceeds  of  approximately  CDN$196.8  million.  The
proceeds of the offering were used by the Fund to acquire an  additional  35.91%
interest  in  KeySpan   Canada  from  KeySpan.   We  received  net  proceeds  of
approximately  CDN$186.3  million  (or  approximately  US$135  million),   after


                                       9
<PAGE>


commissions and expenses.  The Fund's ownership in KeySpan Canada increased from
39.1% to 75%,  and  KeySpan's  ownership  of KeySpan  Canada  decreased  to 25%.
KeySpan recorded a gain of $22.8 million ($10.1 million after-tax,  or $0.06 per
share) on this transaction. Effective April 1, KeySpan Canada's earnings and our
ownership interest in KeySpan Canada have been accounted for on the equity basis
of accounting.

On July 2, 2004, the Fund issued an additional 10.7 million units,  the proceeds
of which were used to fund the  acquisition  of the midstream  assets of Chevron
Canada  Midstream  Inc.  This  transaction  had the effect of  further  diluting
KeySpan's ownership of KeySpan Canada to 17.4%.

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. As a result of the Houston  Exploration
stock  transaction,  the total assets  associated  with our gas  exploration and
production operations, including cash from the transaction, were $640 million at
June 30,  2004,  compared to $1.5  billion at December  31,  2003.  Total assets
associated with KeySpan's other  energy-related  investments were  approximately
$600 million at June 30, 2004  compared to $900 million at December 31, 2003, as
a result of the KeySpan Canada transaction.

In the first  quarter  of 2004 we  reclassified  the  operating  results  of our
electric  marketing  subsidiary from the Energy Services segment to the Electric
Services  segment.  As a result we  reclassified  the financial  results for all
periods of 2003. The reportable segment information is as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
                                                                              Energy Investments
                                                                         --------------------------
                                                                             Gas
                                       Gas         Electric    Energy      Exploration      Other
(InThousands of Dollars)           Distribution    Services   Services   and Production   Investments   Eliminations  Consolidated
----------------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>           <C>        <C>         <C>             <C>             <C>          <C>
Three Months Ended June 30, 2004
Unaffiliated revenue                  676,363       433,763    129,877     118,926         6,842                -       1,365,771
Intersegment revenue                        -             -      4,147           -         1,278           (5,425)              -
Operating income (Loss)                35,065        67,912     (4,906)     11,388         5,480            8,373         123,312

Three Months Ended June 30, 2003
Unaffiliated revenue                  732,036       392,345    132,268     122,875        28,628                -       1,408,152
Intersegment revenue                        -            26      1,542           -         1,252           (2,820)              -
Operating income (Loss)                31,616        52,100    (10,463)     50,148         9,074            5,754         138,229
----------------------------------------------------------------------------------------------------------------------------------
</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, 2004 and 2003
represent approximately 15% of our consolidated revenues in both periods.


                                       10
<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                Energy Investments
                                                                          ---------------------------
                                                                               Gas
                                       Gas          Electric    Energy     Exploration        Other
(In Thousands of Dollars)          Distribution     Services   Services   and Production   Investments   Eliminations   Consolidated
------------------------------------------------------------------------------------------------------------------------------------
<S>                                 <C>             <C>        <C>           <C>            <C>           <C>            <C>
Six Months Ended June 30, 2004
Unaffiliated revenue                 2,604,142       792,899    258,936       271,345        34,022              -        3,961,344
Intersegment revenue                         -             -      7,583             -         2,543        (10,126)               -
Operating income (Loss)                414,717       115,111    (23,380)       73,496        18,402         11,640          609,986

Six Months Ended June 30, 2003
Unaffiliated revenue                 2,564,737       790,045    261,333       250,722        53,840              -        3,920,677
Intersegment revenue                         -            51      2,968             -         2,504         (5,523)               -
Operating income (Loss)                396,554        91,744    (19,585)      105,738        19,198          1,274          594,923
------------------------------------------------------------------------------------------------------------------------------------
</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, 2004 and 2003
represent approximately 10% of our consolidated revenues for both periods.

3. COMPREHENSIVE INCOME
<TABLE>

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

------------------------------------------------------------------------------------------------------------------------------------
                                                                         Three Months Ended June 30,       Six Months Ended June 30,
(In Thousands of Dollars)                                                    2004           2003              2004           2003
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>             <C>               <C>            <C>
Earnings (loss) for common stock                                         $ 129,278       $ (7,399)         $ 375,514      $ 234,405
------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax
Reclassification adjustments for loss (gains) realized in net income         5,502          8,817             16,531         11,171
Foreign currency translation adjustments                                   (15,167)        17,773            (17,063)        27,526
Unrealized gains (losses) on marketable securities                              29          5,405                542          2,249
Premiums on derivative financial instruments                                     -         (3,437)             3,437         (3,437)
Deconsolidation of certain subsidiaries                                     (6,711)             -             (6,711)             -
Unrealized gain (losses) on derivative financial instruments                41,285         (6,184)            (1,173)       (20,933)
------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax                               24,938         22,374             (4,437)        16,576
------------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income                                                     $ 154,216       $ 14,975          $ 371,077      $ 250,981
------------------------------------------------------------------------------------------------------------------------------------
Related tax (benefit) expense
Reclassification adjustments for loss (gains) realized in net income         2,963          4,748              8,902          6,015
Foreign currency translation adjustments                                    (8,167)         9,570             (9,188)        14,822
Unrealized gains (losses) on marketable securities                              16          2,910                290          1,211
Premiums on derivative financial instruments                                     -         (1,851)             1,851         (1,851)
Deconsolidation of certain subsidiaries                                      5,016              -              5,016              -
Unrealized gain (losses) on derivative financial instruments                22,231         (3,329)              (631)       (11,271)
------------------------------------------------------------------------------------------------------------------------------------
Total Tax (Benefit) Expense                                              $  22,059       $ 12,048          $   6,240      $   8,926
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>



                                       11
<PAGE>


4. HEDGING AND DERIVATIVE FINANCIAL INSTRUMENTS

Financially-Settled  Commodity Derivative Instruments - Hedging Activities: From
time  to  time,  KeySpan   subsidiaries  have  utilized   derivative   financial
instruments,  such as futures, options and swaps, for the purpose of hedging the
cash flow variability  associated with changes in commodity  prices.  KeySpan is
exposed to commodity price risk primarily with regard to its gas exploration and
production  activities and its electric generating  facilities at the Ravenswood
site.  Derivative  financial  instruments are employed by Houston Exploration to
hedge cash flow variability associated with forecasted sales of natural gas. The
Ravenswood facility uses derivative financial instruments to hedge the cash flow
variability  associated  with the  purchase  of natural gas and oil that will be
consumed  during the generation of  electricity.  The  Ravenswood  facility also
hedges the cash flow  variability  associated with a portion of on-peak electric
energy sales.

The majority of these derivative financial instruments are cash flow hedges that
qualify  for  hedge   accounting  under  SFAS  133  "Accounting  for  Derivative
Instruments  and  Hedging  Activities,"  as  amended by SFAS 149  "Amendment  of
Statement 133 on Derivative  Instruments and Hedging  Activities,"  collectively
SFAS 133, and are not considered held for trading purposes as defined by current
accounting  literature.  Accordingly,  we  carry  the fair  market  value of our
derivative  instruments on the Consolidated Balance Sheet as either a current or
deferred asset or liability, as appropriate,  and defer the effective portion of
unrealized  gains or losses in accumulated  other  comprehensive  income.  Since
Houston  Exploration  is no longer a  consolidated  subsidiary,  the fair market
value of their outstanding  derivative instruments are not reflected on the June
30, 2004  Consolidated  Balance Sheet.  Gains and losses are  reclassified  from
accumulated other comprehensive  income to the Consolidated  Statement of Income
in the period  the hedged  transaction  affects  earnings.  Gains and losses are
reflected as a component of either revenue or fuel and purchased power depending
on the hedged transaction. Hedge ineffectiveness results from changes during the
period in the price  differentials  between  the index  price of the  derivative
contract  and the  index  price at the  point of sale for the cash  flow that is
being hedged, and is recorded directly to earnings.

With respect to price exposure associated with fuel purchases for the Ravenswood
facility,  KeySpan employs standard NYMEX natural gas futures contracts to hedge
the cash flow variability for 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 for 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 forecasted purchases
of natural gas and fuel oil is through April 2006. We use standard NYMEX futures
prices to value the gas futures  contracts and market quoted  forward  prices to
value oil swap contracts.  The fair market value of these derivative instruments
at June 30, 2004 was $0.4  million.  A substantial  portion of these  derivative
instruments,  which are reported in other comprehensive  income, are expected to
be reclassified into earnings over the next twelve months.


                                       12
<PAGE>


We have also engaged in the use of  cash-settled  swap  instruments to hedge the
cash flow  variability  associated with a portion of forecasted  electric energy
sales  from  the  Ravenswood   facility.   Our  hedging  strategy  is  to  hedge
approximately 50% of forecasted  on-peak summer season electric energy sales and
a portion of forecasted electric energy sales for the remainder of the year. The
maximum  length of time over  which we have  hedged  cash  flow  variability  is
through  December  2005.  We use market  quoted  forward  prices to value  these
outstanding  derivatives.  The fair market value of these derivative instruments
at June 30, 2004 was $1.4 million. 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 $1.5 million, or approximately $1.0 million after-tax.

The table below  summarizes  the fair value of  outstanding  financially-settled
commodity  derivative  instruments that qualify for hedge accounting at June 30,
2004 and the  related  line item on the  Consolidated  Balance  Sheet.  As noted
earlier,  derivative  instruments  employed by Houston Exploration are no longer
reflected on KeySpan's  Consolidated  Balance Sheet. Fair value is the amount at
which derivative instruments could be exchanged in a current transaction between
willing parties, other than in a forced liquidation sale.
<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------
(In Thousands of Dollars)                                  June 30, 2004        December 31, 2003
-----------------------------------------------------------------------------------------------------
<S>                                                              <C>                       <C>
Gas Contracts:
  Other current assets                                        $      12                   $   3,458
  Accounts payable and other liabilities                              -                     (35,592)
  Other deferred liabilities                                        (16)                     (4,734)

Oil Contracts:
  Other current assets                                              382                           -
  Other deferred charges                                            (20)                        385

Electric Contracts:
  Other current assets                                            1,501                           -
  Other deferred liabilities                                       (123)                        259
----------------------------------------------------------------------------------------------------
                                                              $   1,736                   $ (36,224)
----------------------------------------------------------------------------------------------------
</TABLE>


Financially-Settled  Commodity  Derivative  Instruments  that Do Not Qualify for
Hedge  Accounting:  KeySpan  subsidiaries also have employed a limited number of
financial  derivatives that did not qualify for hedge accounting treatment under
SFAS 133.  In 2003,  we sold a  "swaption"  to hedge  the cash flow  variability
associated  with 50 MW of forecasted  2004 summer electric energy sales from the
Ravenswood  facility.  The swaption is an option that gives the counterparty the
right, but not the obligation,  to enter into a swap transaction with KeySpan in
the future at a given strike price.  This swaption was converted  into a swap at
the election of the  counterparty  in June 2004. The resulting  premium  payment
KeySpan  received  was  recorded  into  income  at the  time  the  swaption  was
exercised.  The swap  qualifies  for hedge  accounting  treatment and its market
value at June 30, 2004 is reflected in the above table.


                                       13
<PAGE>


Firm Gas Sales Derivative  Instruments - Regulated Utilities:  We use derivative
financial  instruments to reduce the cash flow  variability  associated with the
purchase price for a portion of future natural gas purchases associated with our
Gas Distribution  operations.  Our strategy is to minimize  fluctuations in firm
gas sales prices to our regulated  firm gas sales  customers in our New York and
New England service territories. The accounting for these derivative instruments
is  subject  to  SFAS 71  "Accounting  for  the  Effects  of  Certain  Types  of
Regulation." Therefore, changes in the fair value of these derivatives have been
recorded as a  regulatory  asset or  regulatory  liability  on the  Consolidated
Balance  Sheet.  Gains  or  losses  on the  settlement  of these  contracts  are
initially  deferred and then  refunded to or  collected  from our firm gas sales
customers  consistent  with  regulatory  requirements.  At June 30, 2004,  these
derivatives  had a net fair market  value of $28 million and are  reflected as a
regulatory liability on the Consolidated Balance Sheet.

Physically-Settled  Commodity  Derivative  Instruments:   SFAS  133  establishes
criteria that must be satisfied in order for option contracts, forward contracts
with  optionality  features,  or contracts that combine a forward contract and a
purchase  option  contract to be exempted as normal  purchases and sales.  Based
upon a continuing  review of our  physical gas  contracts,  we  determined  that
certain  contracts for the physical  purchase of natural gas associated with our
regulated gas utilities are not exempt as normal purchases from the requirements
of SFAS 133.  Since these  contracts are for the purchase of natural gas sold to
regulated  firm gas sales  customers,  the  accounting  for these  contracts  is
subject to SFAS 71.  Therefore,  changes in the market value of these  contracts
have  been  recorded  as a  regulatory  asset  or  regulatory  liability  on the
Consolidated  Balance Sheet. At June 30, 2004 these contracts had a net negative
fair  market  value  of  $3.5  million,  and  are  reflected  as a $3.9  million
regulatory  asset and $0.4  million  regulatory  liability  on the  Consolidated
Balance Sheet.

Interest Rate Derivative Instruments: In May 2003, we entered into interest rate
swap  agreements  in which we swapped  $250  million of 7.25% 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 our swap  counterparties  a
variable  interest rate based on LIBOR,  that was reset on a semi-annual  basis.
These swaps were  designated as fair-value  hedges and qualified for "short-cut"
hedge accounting treatment under SFAS 133. In the first quarter of 2004, we paid
our counterparty an average interest rate of 6.44%, and as a result, we realized
interest savings of $0.5 million.

On April 7, 2004 we terminated  these swap  agreements and received $1.2 million
from our swap  counterparties,  of which $0.7 million  represented  accrued swap
interest.  The  difference  between the  termination  settlement  amount and the
amount of accrued  interest,  $0.5  million,  will be recorded as a reduction to
interest expense over the remaining life of the bonds.

KeySpan  has  a  leveraged  lease  financing  arrangement  associated  with  the
Ravenswood  Expansion.  In May 2004,  the facility was acquired by a lessor from
our subsidiary,  KeySpan Ravenswood, LLC, and simultaneously leased back to that
subsidiary. In connection with this sale/leaseback transaction, KeySpan utilized
a $275  million  treasury  lock (at  4.2%)  to hedge  the  10-year  US  Treasury
component of the underlying notes issued by the lessor to purchase the facility.
The  treasury  lock was in effect for a five-week  period  during which time the
10-year US Treasury  increased 70 basis  points.  KeySpan did not  designate the


                                       14
<PAGE>


derivative  instrument  as a hedge for  accounting  purposes.  The treasury lock
settled in May 2004 and KeySpan  received  cash  proceeds of $12.6 million which
was recorded in other income and (deductions) in the  Consolidated  Statement of
Income.  (See Note 6. "Financial  Guarantees and  Contingencies"  for additional
information regarding the sale/leaseback transaction.)

Weather  Derivatives:  The utility tariffs associated with KEDNE's operations do
not contain weather normalization  adjustments.  As a result,  fluctuations from
normal weather may have a significant positive or negative effect on the results
of these operations.  In October 2003, we entered into  heating-degree  day call
and put options to mitigate the effect of  fluctuations  from normal  weather on
KEDNE's  financial  position  and cash flows for the  2003/2004  winter  heating
season - November  2003 through  March 2004.  With respect to sold call options,
KeySpan was required to make a payment of $27,500 per heating  degree day to its
counterparties  when actual weather experienced during this time frame was above
4,440 heating degree days,  which equates to approximately 2% colder than normal
weather,  based on the then most recent 20-year average for normal weather.  The
maximum  amount  KeySpan was  required to pay on its sold call  options was $5.5
million.  With respect to purchased  put options,  KeySpan would have received a
$27,500  per  heating  degree day payment  from its  counterparties  when actual
weather was below 4,266  heating  degree days, or  approximately  2% warmer than
normal.  The maximum  amount  KeySpan  would have  received on its purchased put
options  was $11  million.  The net  premium  cost for  these  options  was $0.4
million.  We account for these derivatives  pursuant to the requirements of EITF
99-2, "Accounting for Weather Derivatives." In this regard, such instruments are
accounted for using the "intrinsic  value method" as set forth in such guidance.
During the first quarter of 2004, weather,  as measured in heating  degree-days,
was 9.4% colder than  normal  and,  as a result $4.1  million was  recorded as a
reduction to revenues.

Derivative  contracts  are  primarily  used to manage  exposure  to market  risk
arising from changes in commodity  prices,  interest  rates and weather.  In the
event of non-performance by a counterparty to a derivative contract, the desired
impact  may  not be  achieved.  The  risk  of  counterparty  non-performance  is
generally  considered a credit risk and is actively  managed by  assessing  each
counterparty credit profile and negotiating appropriate levels of collateral and
credit  support.  We believe that our credit risk related to the above mentioned
derivative financial instruments is no greater than the risk associated with the
primary  contracts which they hedge and that the elimination of a portion of the
price risk reduces  volatility in our reported results of operations,  financial
position and cash flows and lowers overall business risk.

5. RECENT ACCOUNTING PRONOUNCEMENTS

In March 2004, the Financial  Accounting  Standards Board ("FASB") issued,  as a
proposal,   FASB  Staff  Position  ("FSP")  106-b   "Accounting  and  Disclosure
Requirements  Related  to  the  Medicare  Prescription  Drug,   Improvement  and
Modernization  Act of 2003." When issued in final,  this guidance will supersede
FSP  106-1  issued  in 2003 and  will  clarify  the  accounting  and  disclosure
requirements for employers with  postretirement  benefit plans that have been or


                                       15
<PAGE>


will be affected by the passage of the Medicare  Prescription  Drug  Improvement
and  Modernization  Act of 2003 ("the Act"). The Act introduces two new features
to Medicare that an employer  needs to consider in measuring its  obligation and
net  periodic  postretirement  benefit  costs.  The  effective  date for the new
requirements is the first interim or annual period beginning after June 15, 2004
or for KeySpan's purposes the third quarter of 2004.

KeySpan's  retiree health benefit plan  currently  includes a prescription  drug
benefit that is provided to retired  employees.  The  implementation  of the new
requirements is not expected to have a material  impact on KeySpan's  results of
operations and cash flows

6. FINANCIAL GUARANTEES AND CONTINGENCIES

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

The  initial  term  of the  Master  Lease  expired  on  June  20,  2004  and was
automatically  extended  until June 20, 2009 pursuant to the terms of the Master
Lease. On all future semi-annual payment dates, we have the right to: (i) either
purchase the facility for the original  acquisition  cost of $425 million,  plus
the present  value of the lease  payments  that would  otherwise  have been paid
through  June  2009;  or (ii)  terminate  the  Master  Lease and  dispose of the
facility.  In June 2009, when the Master Lease  terminates,  we may purchase the
facility  in an  amount  equal to the  original  acquisition  cost,  subject  to
adjustment, or surrender the facility to the lessor. If we elect not to purchase
the  property,  the  Ravenswood  facility  will be sold by the  lessor.  We have
guaranteed  to the lessor 84% of the residual  value of the original cost of the
property.

We have  classified  the Master Lease as $412.3 million of long-term debt on the
Consolidated  Balance Sheet based on our current status as primary  beneficiary.
Further,  we have an asset  on the  Consolidated  Balance  Sheet  for an  amount
substantially  equal  to the  fair  market  value of the  leased  assets  at the
inception of the lease, less depreciation since that date, or approximately $383
million.  Under the terms of our  credit  facility,  the  Master  Lease has been
considered debt in the ratio of debt-to-total capitalization since the inception
of the lease.  If our subsidiary  that leases the  Ravenswood  facility were not
able to fulfill  its  payment  obligations  with  respect  to the  Master  Lease
payments,  then the maximum amount KeySpan would be exposed to under its current
guarantees would be $425 million,  plus the present value of the remaining lease
payments through June 20, 2009.


                                       16
<PAGE>


Sale/leaseback Transaction:  KeySpan has a leveraged lease financing arrangement
associated with the Ravenswood Expansion.  In May 2004, the unit was acquired by
a lessor from our subsidiary, KeySpan Ravenswood, LLC, and simultaneously leased
back to that  subsidiary.  All the obligations of KeySpan  Ravenswood,  LLC have
been  unconditionally  guaranteed by KeySpan.  This lease transaction  generated
cash proceeds of $385 million,  which  approximates the fair market value of the
facility, as determined by a third-party appraiser.  The cash proceeds from this
transaction were initially used to redeem  outstanding  commercial  paper.  This
lease transaction  qualifies as an operating lease under SFAS 98 "Accounting for
Leases:  Sale/Leaseback Transactions Involving Real Estate; Sales-Type Leases of
Real Estate;  Definition  of the Lease Term;  an Initial  Direct Costs of Direct
Financing Leases, an amendment of FASB Statements No.13, 66, 91 and a rescission
of FASB  Statement  No. 26 and Technical  Bulletin No.  79-11." The lease has an
initial  term of 36  years  and  the  yearly  operating  lease  expense  will be
approximately  $17 million per year.  Lease payments will fluctuate from year to
year, but are substantially paid over the first 16 years.

Asset Retirement Obligations: In 2003, KeySpan adopted SFAS 143, "Accounting for
Asset  Retirement  Obligations."  SFAS 143 required us to record a liability and
corresponding   asset  representing  the  present  value  of  legal  obligations
associated  with the retirement of tangible,  long-lived  assets that existed at
the inception of the obligation. At the time of implementation, KeySpan recorded
an asset retirement obligation related to its investment in Houston Exploration.
Since Houston  Exploration's  operations are no longer consolidated in KeySpan's
financial  statements,  this  liability  is no  longer  reflected  on  KeySpan's
Consolidated Balance Sheet.

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 was 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 such obligation.

Environmental Matters

New York Sites:  Within the State of New York we have  identified  43 historical
manufactured gas plant ("MGP") sites and related facilities, which were owned or
operated by KeySpan subsidiaries or such companies' predecessors.

We have  identified 28 of these sites as being  associated  with the  historical
operations of KEDNY. One site has been fully remediated.  The remaining 27 sites
will  be  investigated  and,  if  necessary,  remediated  under  the  terms  and
conditions  of  Administrative  Orders on  Consent  ("ACO"),  Voluntary  Cleanup
Agreements  ("VCA")  or  Brownfield  Cleanup  Agreements  ("BCA").  Expenditures
incurred to date by us with respect to KEDNY MGP-related  activities total $44.8
million.


                                       17
<PAGE>


We have identified 15 of these sites as being associated with the historical
operations of KEDLI. Expenditures incurred to date by us with respect to KEDLI
MGP-related activities total $35.3 million. One site has been fully investigated
and requires no further action. The remaining sites will be investigated and, if
necessary, remediated under the conditions of ACOs, VCAs or BCAs.

We presently  estimate  the  remaining  cost of our KEDNY and KEDLI  MGP-related
environmental  remediation  activities will be $217.0 million,  which amount has
been  accrued by us as a reasonable  estimate of probable  cost for known sites.
Expenditures incurred to date by us with respect to these MGP-related activities
total $80.1 million.

With  respect to  remediation  costs,  the KEDNY and KEDLI rate plans  generally
provide for the recovery from customers of investigation and remediation  costs.
At June 30, 2004, we have reflected a regulatory asset of $237.7 million for our
KEDNY/KEDLI  MGP  sites.  In  accordance  with New  York  State  Public  Service
Commission   ("NYPSC")  policy,   KeySpan  records  a  reduction  to  regulatory
liabilities as costs are incurred for environmental clean-up activities. At June
30,  2004,  these  previously  deferred  regulatory  liabilities  totaled  $49.1
million.  In October 2003, KEDNY and KEDLI filed a joint petition with the NYPSC
seeking rate treatment for additional  environmental  costs that may be incurred
in the future.

We are  also  responsible  for  environmental  obligations  associated  with the
Ravenswood  facility,  purchased  from  Consolidated  Edison in 1999,  including
remediation  activities  associated with its historical  operations and those of
the MGP facilities  that formerly  operated at the site. We are not  responsible
for  liabilities  arising from disposal of waste at off-site  locations prior to
the  acquisition  closing  and any  monetary  fines  arising  from  Consolidated
Edison's pre-closing conduct. We presently estimate the remaining  environmental
clean up activities  for this site will be $3.2  million,  which amount has been
accrued by us. Expenditures incurred to date total $1.8 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 of
these sites. A subsidiary of National Grid USA ("National  Grid"),  formerly New
England Electric System, has assumed  responsibility for remediating 11 of these
sites,  subject  to a limited  contribution  from  Boston Gas  Company,  and has
provided  full  indemnification  to Boston Gas Company  with  respect to 8 other
sites.  In  addition,  Boston Gas Company,  Colonial Gas Company,  and Essex Gas
Company have each assumed  responsibility for remediating 3 sites. At this time,
it is uncertain as to whether Boston Gas Company,  Colonial Gas Company or Essex
Gas Company have or share responsibility for remediating any of the other sites.
No notice of  responsibility  has been  issued to us for any of these sites from
any governmental environmental authority.


                                       18
<PAGE>


We  presently  estimate  the  remaining  cost  of  these   Massachusetts   KEDNE
MGP-related environmental cleanup activities will be $22.8 million, which amount
has been  accrued by us as a  reasonable  estimate  of  probable  cost for known
sites.  Expenditures  incurred  by KeySpan  with  respect  to these  MGP-related
activities total $15.8 million.

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

We  presently   estimate  the   remaining   cost  of   EnergyNorth   MGP-related
environmental  cleanup  activities will be $12.5 million,  which amount has been
accrued  by us as a  reasonable  estimate  of  probable  cost for  known  sites.
Expenditures incurred by KeySpan,  with respect to these MGP-related  activities
total $8.5 million.

By rate orders, the Massachusetts  Department of  Telecommunications  and Energy
("DTE") and the New Hampshire Public Utility  Commission  ("NHPUC")  provide for
the recovery of site  investigation and remediation costs and,  accordingly,  at
June 30, 2004,  we have  reflected a regulatory  asset of $49.6  million for the
KEDNE MGP sites.  Colonial  Gas Company and Essex Gas Company are not subject to
the  provisions  of SFAS 71 and therefore  have  recorded no  regulatory  asset.
However,  rate plans currently 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  KeySpan  New  England,  LLC for  which  we may  have or  share
environmental  remediation or ongoing  maintenance  responsibility.  These three
sites,  located  in  Philadelphia,  Pennsylvania,  New  Haven,  Connecticut  and
Everett, Massachusetts, were associated with historical operations involving the
production of coke and related industrial  processes.  Honeywell  International,
Inc.  and Beazer East,  Inc.  (both former  owners  and/or  operators of certain
facilities at Everett (the  "Everett  Facility")  together  with  KeySpan,  have
entered  into  an  ACO  with  the  Massachusetts   Department  of  Environmental
Protection for the investigation and development of a remedial response plan for
a portion of that site.  KeySpan,  Honeywell and Beazer East have entered into a
cost-sharing  agreement  under which each company has agreed to pay one-third of
the costs of compliance with the consent order,  while  preserving any claims it
may have against the other  companies for, among other things,  reallocation  of
proportionate liability.


                                       19
<PAGE>


We presently estimate the remaining cost of our environmental cleanup activities
for the three  non-utility  sites will be  approximately  $24.1  million,  which
amount has been  accrued by us as a  reasonable  estimate of probable  costs for
known sites.  Expenditures incurred by KeySpan with respect to these sites total
$8.7 million.

We believe that in the aggregate,  the accrued liability for these MGP sites and
related  facilities  identified  above are reasonable  estimates of the probable
cost for the  investigation  and remediation of these sites and  facilities.  As
circumstances  warrant,  we  periodically  re-evaluate  the accrued  liabilities
associated  with  MGP  sites  and  related  facilities.  We may be  required  to
investigate  and, if necessary,  remediate each site previously  noted, or other
currently  unknown former sites and related facility sites, the cost of which is
not  presently  determinable  but may be  material  to our  financial  position,
results of  operations  or cash  flows.  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, 2003
Note 7 to those  Consolidated  Financial  Statements  "Contractual  Obligations,
Financial Guarantees and Contingencies" for further information on environmental
matters.

Legal Matters

From time to time we are subject to various legal proceedings arising out of the
ordinary  course of our  business.  Except as described  below,  or in KeySpan's
Annual  Report on Form 10-K for the year  ended  December  31,  2003,  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.

As previously  reported,  KeySpan and certain of its current and former officers
and directors are defendants in a consolidated class action lawsuit filed in the
United States District Court for the Eastern  District of New York. This lawsuit
alleges,  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.
In June 2004,  the  parties  reached an  agreement  in  principle  to settle the
consolidated class action lawsuit.  The proposed settlement provides for KeySpan
to make  certain  payments  to  plaintiffs,  all of which is to be funded by the
insurance  carrier  providing  liability  coverage for  KeySpan's  directors and
officers.  While  KeySpan  continues  to deny any  wrongdoing,  we  believe  the
proposed settlement is in the best interest of KeySpan and its shareholders. The
settlement  is subject  to court  approval  and  finalization  of all  necessary
documentation, the timing of which cannot be determined.

Also, as previously  reported two shareholder  derivative actions were commenced
in the same court as the class action lawsuit against certain current and former
officers and directors of KeySpan,  alleging,  among other  things,  breaches of
fiduciary  duty,  violations  of the  New  York  Business  Corporation  Law  and


                                       20
<PAGE>


violations  of Section  20(a) of the  Exchange  Act.  Each of these  proceedings
sought  monetary  damages in an  unspecified  amount.  In April 2004,  the court
dismissed both derivative actions without prejudice  following the withdrawal of
such actions by the plaintiffs.

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  ("LILCO") and others.  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 are  recoverable  from LIPA  through the Power  Supply  Agreement
("PSA") between LIPA and KeySpan.

KeySpan  is  unable  to  determine  the  outcome  of  the  outstanding  asbestos
proceedings,  but does not believe 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  PSA,  its
indemnification  rights against third parties and its insurance  coverage (above
applicable  deductible  limits)  cover its  exposure  for  asbestos  liabilities
generally.

Financial Guarantees

KeySpan has issued  financial  guarantees in the normal  course of business,  on
behalf of its subsidiaries,  to various third party creditors. At June 30, 2004,
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
Nature of Guarantee (In Thousands of Dollars)                                            Exposure     Expiration Dates
--------------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>                   <C>              <C>
Medium-Term Notes - KEDLI                                          (i)                 $   525,000        2008-2010
Industrial Development Revenue Bonds                               (ii)                    128,000          2027
Ravenswood - Master Lease                                          (iii)                   425,000          2019
Ravenswood - Sale/leaseback                                        (iv)                    385,000          2040
Surety Bonds                                                       (v)                     269,000        Revolving
Commodity Guarantees and Other                                     (vi)                     64,000          2005
Letters of Credit                                                  (vii)                    74,000          2005
--------------------------------------------------------------------------------------------------------------------------
                                                                                       $ 1,870,000
--------------------------------------------------------------------------------------------------------------------------
</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.


                                       21
<PAGE>


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

(iii)KeySpan has guaranteed all payment and  performance  obligations of KeySpan
     Ravenswood, LLC, the lessee under the Master Lease. The initial term of the
     Master Lease expired on June 20, 2004 and was automatically  extended until
     June 20, 2009. The Master Lease is classified as $412.3  million  long-term
     debt on the Consolidated Balance Sheet.

(iv) KeySpan has guaranteed all payment and  performance  obligations of KeySpan
     Ravenswood, LLC, the lessee under the sale/leaseback transaction associated
     with the 250 MW Ravenswood Expansion site. The initial term of the lease is
     for 36 years.  As noted  previously,  this lease  qualifies as an operating
     lease and is therefore not reflected on the Consolidated Balance Sheet.

(v)  KeySpan  has  agreed  to  indemnify  the  issuers  of  various  surety  and
     performance bonds associated with certain  construction  projects 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 contract, 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.

(vi) KeySpan  has  guaranteed  commodity-related  payments  for  certain  of its
     subsidiaries.  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, 2004.

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


                                       22
<PAGE>


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 any such  defaults  may have on our  consolidated
results of operations, financial condition or cash flows.

Other  Contingencies:  We derive a  substantial  portion of our  revenues in our
Electric  Services  segment from a series of  agreements  with LIPA  pursuant to
which we manage  LIPA's  transmission  and  distribution  system  and supply the
majority of LIPA's  customers'  electricity  needs. The agreements  terminate at
various dates between  December 31, 2008 and May 28, 2013,  and at this time, we
can provide no assurance that any of the agreements will be renewed or extended,
or if they were to be renewed or extended,  the terms and conditions thereof. In
addition, given the complexity of these agreements,  disputes arise from time to
time between  KeySpan and LIPA  concerning  the rights and  obligations  of each
party to make and receive  payments  as required  pursuant to the terms of these
agreements. As a result, KeySpan is unable to determine what effect, if any, the
ultimate  resolution of these  disputes  will have on its  financial  condition,
results of operations or cash flows.

7. 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.
(Beginning in 2004, KeySpan officers that serve on the Houston Exploration Board
of Directors do not receive Houston Exploration stock options.) In 2003, KeySpan
and  Houston  Exploration  adopted  the  prospective  method  of  transition  of
accounting for stock option expense in accordance  with SFAS 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure." Accordingly, compensation
expense has been recognized by employing the fair value  recognition  provisions
of SFAS 123 "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,
net income and earnings per share would have decreased to the pro-forma  amounts
indicated  below.  The 2004  pro-forma  impact of  Houston  Exploration's  stock
options are reflected for the five month period ended May 31, 2004.


                                       23
<PAGE>

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
                                                                    Three Months Ended June 30,          Six Months Ended June 30,
(In Thousands of Dollars, Except Per Share Amounts)                   2004            2003                 2004            2003
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>             <C>                  <C>             <C>
Earnings available for common stock:                               $ 129,278       $ (7,399)            $ 375,514       $ 234,405
As reported
     Add: recorded stock-based compensation expense, net of tax        1,390          1,132                 2,794           1,990
     Deduct: total stock-based compensation expense, net of tax       (2,371)        (2,969)               (4,959)         (6,070)
----------------------------------------------------------------------------------------------------------------------------------
Pro-forma earnings                                                 $ 128,297       $ (9,236)            $ 373,349       $ 230,325
----------------------------------------------------------------------------------------------------------------------------------
Earnings per share:
     Basic - as reported                                           $    0.81       $  (0.05)            $    2.35       $    1.49
     Basic - pro-forma                                             $    0.80       $  (0.06)            $    2.33       $    1.46

     Diluted - as reported                                              0.80       $  (0.05)            $    2.33       $    1.48
     Diluted - pro-forma                                                0.79       $  (0.06)            $    2.32       $    1.45
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


8. POSTRETIREMENT BENEFITS

Pension  Plans:  The  following  information  represents  the  consolidated  net
periodic  pension  cost for the six months  ended June 30, 2004 and 2003 for our
noncontributory  defined  benefit  pension plans which cover  substantially  all
employees. Benefits are based on years of service and compensation.  Funding for
pensions is in  accordance  with  requirements  of federal law and  regulations.
KEDLI and  Boston  Gas  Company  are  subject  to  certain  deferral  accounting
requirements  mandated by the NYPSC and DTE,  respectively for pension costs and
other postretirement benefit costs. Further, KeySpan's electric subsidiaries are
subject to certain  "true-up"  provisions  in  accordance  with the LIPA service
agreements.

The calculation of net periodic pension cost is as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
                                                                        Six Months Ended June 30,
(In Thousands of Dollars)                                             2004                     2003
-------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>                     <C>
Service cost, benefits earned during the period                $      26,454             $    23,766
Interest cost on projected benefit obligation                         72,121                  69,135
Expected return on plan assets                                       (79,134)                (65,278)
Net amortization and deferral                                         31,654                  33,475
-------------------------------------------------------------------------------------------------------------
Total pension cost                                             $      51,095             $    61,097
-------------------------------------------------------------------------------------------------------------
</TABLE>


Other  Postretirement   Benefits:   The  following  information  represents  the
consolidated net periodic other  postretirement  benefit cost for the six months
ended  June 30,  2004 and 2003 for our  noncontributory  defined  benefit  plans
covering certain health care and life insurance  benefits for retired employees.
We have been funding a portion of future benefits over employees' active service
lives  through  Voluntary  Employee  Beneficiary  Association  ("VEBA")  trusts.
Contributions  to  VEBA  trusts  are  tax  deductible,  subject  to  limitations
contained in the Internal Revenue Code.


                                       24
<PAGE>


Net  periodic   other   postretirement   benefit  cost  included  the  following
components:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
                                                                              Six Months Ended June 30,
(In Thousands of Dollars)                                                   2004                    2003
-----------------------------------------------------------------------------------------------------------
<S>                                                                       <C>                     <C>
Service cost, benefits earned during the period                           $ 10,060                $  9,413
Interest cost on accumulated
   postretirement benefit obligation                                        37,006                  34,902
Expected return on plan assets                                             (16,946)                (13,765)
Net amortization and deferral                                               23,398                  17,908
-----------------------------------------------------------------------------------------------------------
Other postretirement cost                                                 $ 53,518                $ 48,457
-----------------------------------------------------------------------------------------------------------
</TABLE>


In 2004,  KeySpan is expected  to  contribute  approximately  $89 million to its
pension plans and approximately $58 million to its other postretirement  benefit
plans,  which are the same funding levels as reported in KeySpan's Annual Report
on Form 10-K for the Year Ended December 31, 2003. For the six months ended June
30, 2004, $115.4 million has been contributed.

9. LONG-TERM DEBT and COMMERCIAL PAPER

At June 30, 2004,  KeySpan had $460 million of MEDS Equity Units  outstanding at
8.75% consisting of a three-year  forward purchase contract for our common stock
and a six-year note. The purchase  contract commits us, in May 2005, three years
after the date of issuance of the MEDS Equity Units,  to issue and the investors
to  purchase,  a number of shares of our common stock based on a formula tied to
the market price of our common stock at that time.  The 8.75% coupon is composed
of interest  payments on the six-year  note of 4.9% and premium  payments on the
three-year  equity  forward  contract  of  3.85%.  These  instruments  have been
recorded as long-term  debt on the  Consolidated  Balance Sheet.  Further,  upon
issuance  of the MEDS  Equity  Units,  we  recorded a direct  charge to retained
earnings of $49.1  million,  which  represents  the present value of the forward
contract's premium payments.

There were 9.2 million MEDS Equity units issued which are subject to  conversion
upon execution of the three-year forward purchase contract. The number of shares
to be issued depends on the average closing price of KeySpan's common stock over
the 20 day trading period ending on the third trading day prior to May 16, 2005.
If the  average  closing  price  over this  time  frame is less than or equal to
$35.30 of  KeySpan's  common  stock,  13 million  shares will be issued.  If the
average  closing  price over this time frame is greater than or equal to $42.36,
10.9  million  shares  will be issued.  The  number of shares  issued at a price
between  $35.30 and $42.36 will be between  10.9  million and 13 million  shares
based upon a sliding scale.

These  securities  are  currently not  considered  convertible  instruments  for
purposes of applying SFAS 128 "Earnings Per Share" calculations, unless or until
such time as the market  value of  KeySpan's  common  stock  reaches a threshold
appreciation  price ($42.36 per share) that is higher than the current per share
market value. Interest payments do, however,  reduce net income and earnings per
share.


                                       25
<PAGE>


In June 2004, KeySpan completed the restructuring of its credit  facilities.  We
entered into a new $640 million five year revolving  credit  facility to replace
the $450  million,  364 day facility  which expired in June. We also amended our
existing  three year $850 million  facility due June 2006 to reduce  commitments
thereunder  by $190  million  to a new  level of $660  million.  The two  credit
facilities total $1.3 billion and are each syndicated among sixteen banks. These
facilities  continue to support  KeySpan's  commercial paper program for working
capital needs.

The fees for these  facilities  are  subject to a  ratings-based  grid,  with an
annual fee of 0.08% on the new  five-year  facility  and 0.125% on the  existing
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 in the
five-year  facility are based on the Eurodollar  rate plus a margin of 0.40% for
loans up to 33% of the total five-year  facility,  and an additional  0.125% for
loans  over 33% of the total  five-year  facility.  In the  three-year  facility
Eurodollar  loans are based on the  Eurodollar  rate plus a margin of 0.625% for
loans up to 33% of the total three-year  facility,  and an additional 0.125% for
loans  over 33% of the  total  three-year  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.  We do not anticipate  borrowing  against
these facilities;  however, if the credit rating on our commercial paper program
were to be downgraded, it may be necessary to do so.

The facilities  contain certain  affirmative and negative  operating  covenants,
including  restrictions on KeySpan's  ability to mortgage,  pledge,  encumber or
otherwise  subject  its  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% until the
expiration of the existing three-year facility in 2006, at which time it will be
lowered to 62%.  Violation of this covenant  could result in the  termination of
the facilities and the required  repayment of amounts  borrowed  thereunder,  as
well as possible cross defaults under other debt agreements.

10. GAS EXPLORATION and PRODUCTION PROPERTY - DEPLETION

As  described  in  Note 2  "Business  Segments",  KeySpan's  investments  in gas
exploration and production  activities  consists of its 23.5% ownership interest
in Houston  Exploration,  as well as KeySpan's  wholly-owned  subsidiary KeySpan
Exploration  and Production,  which is engaged in a joint drilling  program with
Houston  Exploration.  Further  KeySpan's  investments in these  activities also
includes its wholly owned subsidiary  Seneca-Upshur.  These assets are accounted
for under the full cost method of accounting.  Under the full cost method, costs
of acquisition,  exploration and development of natural gas and oil reserves are
capitalized into a "full cost pool" as incurred. Unproved properties and related
costs  are  excluded  from  the  depletion   and   amortization   base  until  a
determination  as to the existence of proved  reserves.  Properties are depleted
and charged to  operations  using the unit of  production  method  using  proved
reserve quantities.


                                       26
<PAGE>


To the extent that such  capitalized  costs (net of accumulated  depletion) less
deferred taxes exceed the present value (using a 10% discount rate) of estimated
future net cash flows from proved  natural gas and oil reserves and the lower of
cost or fair value of unproved  properties,  less  deferred  taxes,  such excess
costs are  charged to  operations,  but would not have an impact on cash  flows.
Once  incurred,  such  impairment of gas properties is not reversible at a later
date even if gas prices  increase.  The ceiling test is calculated using natural
gas and oil prices in effect as of the balance  sheet  date,  held flat over the
life of the reserves.

As a result of the stock transaction previously mentioned,  KeySpan now accounts
for its investment in Houston  Exploration on the equity  method,  i.e.  Houston
Exploration's operations are not consolidated with KeySpan's other subsidiaries.
Therefore,  we are now  required  to  calculate  the  ceiling  test  on  KeySpan
Exploration and Production's and Seneca-Uphsur's assets independently of Houston
Exploration's  assets.  Based on a report  furnished by an indpendent  reservoir
engineer,  it was determined that the remaining proved  undeveloped oil reserves
held in the joint venture required a substantial investment in order to develop.
Therefore,  KeySpan and  Houston  Exploration  elected not to develop  these oil
reserves. As a result, in the second quarter of 2004 we recorded a $48.2 million
non-cash  impairment  charge to write down our  wholly-owned gas exploration and
production  subsidiaries'  assets.  This charge was  recorded  in  depreciation,
depletion and amortization on the Consolidated Statement of Income.

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 the parent,
KeySpan  Corporation.  On February 1, 2000,  KEDLI issued $400 million of 7.875%
Medium-Term  Notes due 2010.  In January 2001,  KEDLI issued an additional  $125
million of Medium-Term  Notes at 6.9% due January 2008. The following  condensed
financial  statements  are required to be disclosed by SEC  regulations  and set
forth those of KEDLI,  KeySpan Corporation as guarantor of the Medium-Term Notes
and our other subsidiaries on a combined basis.


                                       27

<PAGE>


<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                               Statement of Income
-----------------------------------------------------------------------------------------------------------------------------------
                                                                         Three Months Ended June 30, 2004
(In Thousands of Dollars)                       Guarantor       KEDLI         Other Subsidiaries       Eliminations    Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>             <C>                <C>                 <C>              <C>
Revenues                                      $     160        $ 181,373          $ 1,184,398          $    (160)      $ 1,365,771
                                       --------------------------------------------------------------------------------------------
Operating Expenses
  Purchased gas                                       -           96,907              266,223                  -           363,130
  Fuel and purchased power                            -                -              130,347                  -           130,347
  Operations and maintenance                     (3,429)          33,724              447,216                  -           477,511
  Intercompany expense                                -            1,432               (1,432)                                   -
  Depreciation and amortization                       -           18,408              170,995                  -           189,403
  Operating taxes                                     -           12,733               77,751                  -            90,484
                                       --------------------------------------------------------------------------------------------
Total Operating Expenses                         (3,429)         163,204            1,091,100                  -         1,250,875
                                       --------------------------------------------------------------------------------------------
Income from equity investments                        -                -                8,416                  -             8,416
                                       --------------------------------------------------------------------------------------------
Operating Income (Loss)                           3,589           18,169              101,714               (160)          123,312
                                       --------------------------------------------------------------------------------------------

Interest charges                                (53,278)         (14,833)             (69,486)            49,122           (88,475)
Other income and (deductions)                   177,853              159              175,732           (178,129)          175,615
                                       --------------------------------------------------------------------------------------------
Total Other Income and (Deductions)             124,575          (14,674)             106,246           (129,007)           87,140
                                       --------------------------------------------------------------------------------------------

Income Taxes (Benefit)                           (4,573)           2,343               81,945                  -            79,715

                                       --------------------------------------------------------------------------------------------
Net Income                                    $ 132,737        $   1,152          $   126,015          $(129,167)      $   130,737
                                       ============================================================================================
</TABLE>

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

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


                                       28
<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                               Statement of Income
------------------------------------------------------------------------------------------------------------------------------------
                                                                         Six Months Ended June 30, 2004
(In Thousands of Dollars)                    Guarantor          KEDLI          Other Subsidiaries        Eliminations   Consolidated
------------------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>             <C>                <C>                  <C>                <C>
Revenues                                    $     313        $ 652,456          $ 3,308,888          $     (313)        $ 3,961,344
                                    ------------------------------------------------------------------------------------------------
Operating Expenses
  Purchased gas                                     -          387,996            1,201,707                   -           1,589,703
  Fuel and purchased power                          -                -              231,959                   -             231,959
  Operations and maintenance                   (3,060)          66,941              906,096                   -             969,977
  Intercompany expense                              -            2,787               (2,787)                  -                   -
  Depreciation and amortization                     -           48,249              312,839                   -             361,088
  Operating taxes                                   -           32,276              180,487                   -             212,763
                                    ------------------------------------------------------------------------------------------------
Total Operating Expenses                       (3,060)         538,249            2,830,301                   -           3,365,490
                                    ------------------------------------------------------------------------------------------------

Income from equity investments                                       -               14,132                   -              14,132
                                    ------------------------------------------------------------------------------------------------
Operating Income (Loss)                         3,373          114,207              492,719                (313)            609,986
                                    ------------------------------------------------------------------------------------------------

Interest charges                             (106,766)         (30,696)            (140,960)            105,882            (172,540)
Other income and (deductions)                 475,382              533              173,782            (491,614)            158,083
                                    ------------------------------------------------------------------------------------------------
Total Other Income and (Deductions)           368,616          (30,163)              32,822            (385,732)            (14,457)
                                    ------------------------------------------------------------------------------------------------

Income Taxes (Benefit)                        (10,435)          25,053              202,477                   -             217,095

                                    ------------------------------------------------------------------------------------------------
Net Income                                  $ 382,424        $  58,991          $   323,064          $ (386,045)        $   378,434
                                    ================================================================================================
</TABLE>

<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 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>


                                       29
<PAGE>


<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet
------------------------------------------------------------------------------------------------------------------------------------
                                                                                     June 30, 2004
                                                                                        Other
                                                 Guarantor         KEDLI             Subsidiaries      Eliminations    Consolidated
                                          ------------------------------------------------------------------------------------------
<S>                                             <C>             <C>                  <C>               <C>              <C>
ASSETS
Current Assets
   Cash and temporary cash investments         $   526,211     $    (1,164)        $    293,080       $          -     $    818,127
   Accounts receivable, net                          1,226         140,688            1,026,256                  -        1,168,170
   Other current assets                              3,281         101,074              430,093                  -          534,448
                                          ------------------------------------------------------------------------------------------
                                                   530,718         240,598            1,749,429                  -        2,520,745
                                          ------------------------------------------------------------------------------------------

Investments                                      4,771,429             963              405,526         (4,678,761)         499,157
                                          ------------------------------------------------------------------------------------------
Property
   Gas                                                   -       1,946,261            4,741,914                  -        6,688,175
   Other                                                 -               -            2,939,503                  -        2,939,503
   Accumulated depreciation and
     depletion                                           -        (324,889)          (2,427,340)                 -       (2,752,229)
                                          ------------------------------------------------------------------------------------------
                                                         -       1,621,372            5,254,077                  -        6,875,449
                                          ------------------------------------------------------------------------------------------

Intercompany Accounts Receivable                 2,118,880               -            1,802,882         (3,921,762)               -

Deferred Charges                                   375,350         224,180            2,463,975                  -        3,063,505

                                          ------------------------------------------------------------------------------------------
Total Assets                                   $ 7,796,377     $ 2,087,113         $ 11,675,889       $ (8,600,523)    $ 12,958,856
                                          ==========================================================================================

LIABILITIES AND CAPITALIZATION
Current Liabilities
   Accounts payable                            $    40,108     $   146,882         $    567,629       $          -     $    754,619
   Commercial paper                                 40,000               -                    -                  -           40,000
   Other current liabilities                       166,453          (2,304)             101,944                  -          266,093
                                          ------------------------------------------------------------------------------------------
                                                   246,561         144,578              669,573                  -        1,060,712
                                          ------------------------------------------------------------------------------------------
Intercompany Accounts Payable                            -          12,626            2,397,570         (2,410,196)               -
                                          ------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Deferred income tax                                (46,080)        265,495              872,907                  -        1,092,322
Other deferred credits and liabilities             499,905         172,296              935,684                  -        1,607,885
                                          ------------------------------------------------------------------------------------------
                                                   453,825         437,791            1,808,591                  -        2,700,207
                                          ------------------------------------------------------------------------------------------
Capitalization
Common shareholders' equity                      3,962,536         841,214            3,791,395         (4,678,761)       3,916,384
Preferred stock                                     83,342                                    -                  -           83,342
Long-term debt                                   3,050,113         650,904            2,993,201         (1,511,566)       5,182,652
                                          ------------------------------------------------------------------------------------------
Total Capitalization                             7,095,991       1,492,118            6,784,596         (6,190,327)       9,182,378
                                          ------------------------------------------------------------------------------------------
Minority Interest in Subsidiary Companies                -               -               15,559                  -           15,559
                                          ------------------------------------------------------------------------------------------
Total Liabilities & Capitalization             $ 7,796,377     $ 2,087,113         $ 11,675,889       $ (8,600,523)    $ 12,958,856
                                          ==========================================================================================
</TABLE>


                                       30
<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet
------------------------------------------------------------------------------------------------------------------------------------
                                                                               December 31, 2003
                                                                                      Other
                                                   Guarantor         KEDLI         Subsidiaries    Eliminations       Consolidated
                                            ----------------------------------------------------------------------------------------
<S>                                               <C>            <C>                <C>             <C>                  <C>
ASSETS
Current Assets
   Cash and temporary cash investments           $    97,567    $     1,554       $    106,630     $          -        $    205,751
   Accounts receivable, net                            3,298        209,151          1,243,459                -           1,455,908
   Other current assets                                3,250        130,994            590,996                -             725,240
                                            ----------------------------------------------------------------------------------------
                                                     104,115        341,699          1,941,085                -           2,386,899
                                            ----------------------------------------------------------------------------------------

Investments and Other                              4,475,949          1,123            153,520       (4,382,027)            248,565
                                            ----------------------------------------------------------------------------------------
Property
   Gas                                                     -      1,899,375          4,622,876                -           6,522,251
   Other                                                   -              -          6,150,355                -           6,150,355
   Accumulated depreciation and depletion                  -       (312,204)        (3,466,099)               -          (3,778,303)
                                            ----------------------------------------------------------------------------------------
                                                           -      1,587,171          7,307,132                -           8,894,303
                                            ----------------------------------------------------------------------------------------

Intercompany Accounts Receivable                   3,105,571              -          1,274,293       (4,379,864)                  -

Deferred Charges                                     374,076        237,870          2,498,469                -           3,110,415

                                            ----------------------------------------------------------------------------------------
Total Assets                                     $ 8,059,711    $ 2,167,863       $ 13,174,499     $ (8,761,891)       $ 14,640,182
                                            ========================================================================================

LIABILITIES AND CAPITALIZATION
Current Liabilities
   Accounts payable                              $   125,892    $   165,613       $    850,092     $          -        $  1,141,597
   Commercial paper                                  481,900              -                  -                -             481,900
   Other current liabilities                         129,168         16,125             80,026                -             225,319
                                            ----------------------------------------------------------------------------------------
                                                     736,960        181,738            930,118                -           1,848,816
                                            ----------------------------------------------------------------------------------------
Intercompany Accounts Payable                              -        116,197          2,679,101       (2,795,298)                  -
                                            ----------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Deferred income tax                                  (48,059)       256,882          1,069,518                -           1,278,341
Other deferred credits and liabilities               532,062        179,919            925,839                -           1,637,820
                                            ----------------------------------------------------------------------------------------
                                                     484,003        436,801          1,995,357                -           2,916,161
                                            ----------------------------------------------------------------------------------------
Capitalization
Common shareholders' equity                        3,707,785        782,223          3,562,675       (4,382,027)          3,670,656
Preferred stock                                       83,568              -                  -                -              83,568
Long-term debt                                     3,047,395        650,904          3,497,699       (1,584,566)          5,611,432
                                            ----------------------------------------------------------------------------------------
Total Capitalization                               6,838,748      1,433,127          7,060,374       (5,966,593)          9,365,656
                                            ----------------------------------------------------------------------------------------
Minority Interest in Subsidiary Companies                  -              -            509,549                -             509,549
                                            ----------------------------------------------------------------------------------------
Total Liabilities & Capitalization               $ 8,059,711    $ 2,167,863       $ 13,174,499     $ (8,761,891)       $ 14,640,182
                                            ========================================================================================
</TABLE>


                                       31
<PAGE>


<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
Statement of Cash Flows
----------------------------------------------------------------------------------------------------------------------------
                                                                     Six Months Ended June 30, 2004
                                                             ---------------------------------------------------------------
                                                                 Guarantor       KEDLI      Other Subsidiaries  Consolidated
                                                             ---------------------------------------------------------------
<S>                                                             <C>             <C>                <C>            <C>
Operating Activities
Net Cash Provided by Operating Activities                       $  (8,282)     $ 152,747           $ 641,868      $ 786,333
                                                             ---------------------------------------------------------------
Investing Activities
   Capital expenditures                                                 -        (51,212)           (362,035)      (413,247)
   Proceeds from the sale of subsidiary investments                     -           (682)            (13,924)       (14,606)
   Net proceeds from subsidiary stock transactions                      -                            512,065        512,065
   Net proceeds from sale/leaseback transaction                         -                            383,716        383,716
   Proceeds from sale of property                                       -                             13,138         13,138
                                                             ---------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities                     -        (51,894)            532,960        481,066
                                                             ---------------------------------------------------------------
Financing Activities
   Treasury stock issued                                           14,626              -                   -         14,626
   Payment of debt, net                                          (441,900)             -            (104,742)      (546,642)
   Common and preferred stock dividends paid                     (145,542)             -                   -       (145,542)
   Gain on settlement of treasury lock                             12,656              -                   -         12,656
   Other                                                           10,389              -                (510)         9,879
   Net intercompany accounts                                      986,691       (103,571)           (883,120)             -
                                                                                                                          -
                                                             ---------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities               436,920       (103,571)           (988,372)      (655,023)
                                                             ---------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents            $ 428,638      $  (2,718)          $ 186,456      $ 612,376
Cash and Cash Equivalents at Beginning of Period                   97,567          1,554             106,630        205,751
                                                             ---------------------------------------------------------------
Cash and Cash Equivalents at End of Period                      $ 526,205      $  (1,164)          $ 293,086      $ 818,127
                                                             ===============================================================
</TABLE>


<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
Statement of Cash Flows
-------------------------------------------------------------------------------------------------------------------------------
                                                                                Six Months Ended June 30, 2003
                                                        -----------------------------------------------------------------------
                                                              Guarantor        KEDLI        Other Subsidiaries     Consolidated
                                                        -----------------------------------------------------------------------
<S>                                                           <C>            <C>                   <C>               <C>
Operating Activities
Net Cash Provided by Operating Activities                     $ 138,174      $ 88,770              $ 351,073         $ 578,017
                                                        -----------------------------------------------------------------------
Investing Activities
   Capital expenditures                                               -       (49,875)              (384,177)         (434,052)
   Cost of removal                                                    -        (1,039)               (11,601)          (12,640)
   Proceeds from the sale of subsidiary investments              79,200             -                119,353           198,553
                                                        -----------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities              79,200       (50,914)              (276,425)         (248,139)
                                                        -----------------------------------------------------------------------
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)     $   (978)             $  98,901         $  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      $  5,494              $ 174,738         $ 195,668
                                                        =======================================================================
</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, 2004,  compared to the three and six months ended June 30,
2003.  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,
                                                                    2004              2003                2004              2003
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>               <C>                <C>               <C>
Gas Distribution                                                $  35,065          $ 31,616           $ 414,717         $ 396,554
Electric Services                                                  67,912            52,100             115,111            91,744
Energy Services                                                    (4,906)          (10,463)            (23,380)          (19,585)
Energy Investments -
     Operations                                                    65,058            59,222             140,088           124,936
     Ceiling test write-down                                      (48,190)                -             (48,190)                -
Eliminations and other                                              8,373             5,754              11,640             1,274
----------------------------------------------------------------------------------------------------------------------------------
Operating Income                                                  123,312           138,229             609,986           594,923
Interest charges                                                  (88,475)          (79,198)           (172,540)         (148,137)
Gain on Houston Exploration transaction                           150,070                 -             150,070            19,020
Gain (loss) on sale of KeySpan Canada                              22,824           (30,345)             22,824           (30,345)
Other income and (deductions)                                       2,721           (19,146)            (14,811)          (39,997)
Income taxes                                                       79,715            15,478             217,095           158,311
----------------------------------------------------------------------------------------------------------------------------------
Income (Loss) before change in accounting principle               130,737            (5,938)            378,434           237,153
Cumulative effect of a change
   in accounting principle                                              -                 -                   -               174
----------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss)                                                 130,737            (5,938)            378,434           237,327
Preferred stock dividend requirements                               1,459             1,461               2,920             2,922
----------------------------------------------------------------------------------------------------------------------------------
Earnings (Loss) for Common Stock                                $ 129,278          $ (7,399)          $ 375,514         $ 234,405
----------------------------------------------------------------------------------------------------------------------------------
Basic Earnings per Share
   Income (loss) before change in accounting principle          $    0.81          $  (0.05)          $    2.35         $    1.49
   Change in accounting principle                                       -                 -                   -                 -
----------------------------------------------------------------------------------------------------------------------------------
                                                                $    0.81          $  (0.05)          $    2.35         $    1.49
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>



                                       33
<PAGE>



KeySpan's financial results for the three and six months ended June 30, 2004 and
2003 reflect a number of events that had a  significant  impact on earnings.  On
June 2, 2004,  KeySpan exchanged 10.8 million shares of The Houston  Exploration
Company  common  stock  ("Houston  Exploration"-  our  previously  55% owned gas
exploration and production  subsidiary)  for 100% of the stock of  Seneca-Upshur
Petroleum,  Inc.,  a  wholly  owned  subsidiary  of  Houston  Exploration.  This
transaction reduced our interest in Houston Exploration to 23.5% and resulted in
a  gain  to  KeySpan  of  $150.1  million.   Effective  June  1,  2004,  Houston
Exploration's  earnings and our ownership  interest in Houston  Exploration have
been accounted for on the equity method of accounting.  The  deconsolidation  of
Houston  Exploration  required the recognition of certain  deferred taxes on our
remaining  investment  resulting  in a deferred  tax  expense of $44.1  million.
Therefore,  the net gain on the share  exchange,  less the  deferred  tax on the
remaining investment, was $106.0 million, or $0.66 per share. (See Note 2 to the
Consolidated  Financial Statements "Business Segments" for a detailed discussion
of this transaction.)

On April 1, 2004, KeySpan and KeySpan Facilities Income Fund (the "Fund"), which
previously owned a 39.09% interest in KeySpan Canada (a KeySpan  subsidiary with
natural gas  processing  plants and  gathering  facilities  in Western  Canada),
consummated  a  transaction  whereby the Fund sold 15.617  million  units of the
Fund. The Fund used the proceeds of the offering to acquire an additional 35.91%
interest in KeySpan  Canada from KeySpan.  As a result of the  transaction,  the
Fund's  ownership in KeySpan  Canada  increased  from 39.1% to 75% and KeySpan's
ownership of KeySpan Canada  decreased to 25%.  KeySpan recorded a gain of $22.8
million  ($10.1  million  after-tax,  or $0.06 per  share) on this  transaction.
Effective April 1, 2004, KeySpan Canada's earnings and our ownership interest in
KeySpan Canada have been accounted for on the equity method of accounting.

On July 2, 2004, the Fund issued an additional 10.7 million units,  the proceeds
of which were used to fund the  acquisition  of the midstream  assets of Chevron
Canada  Midstream  Inc.  This  transaction  had the effect of  further  diluting
KeySpan's  ownership of KeySpan Canada to 17.4%. (See Note 2 to the Consolidated
Financial  Statements  "Business  Segments"  for a detailed  discussion  of this
transaction.)

In addition,  asset  transactions  completed in 2003 had a significant impact on
comparative earnings.  These transactions included the monetization of a portion
of our  ownership  interests  in Houston  Exploration  and  KeySpan  Canada.  In
February 2003, we reduced our ownership interest in Houston Exploration from 66%
to approximately 55% following the repurchase,  by Houston  Exploration,  of six
million  shares of common  stock owned by  KeySpan.  We recorded a gain of $19.0
million on this transaction,  or $0.12 per share. Income taxes were not provided
on this  transaction,  since  the  transaction  was  structured  as a return  of
capital.

In June 2003,  we sold 39.09% of our  interest in KeySpan  Canada and recorded a
pre-tax loss of $30.3 million ($34.1 million after applying  applicable taxes or
$0.22 per share).  Additionally,  we sold our 20% interest in Taylor NGL LP that
owns and operates two extraction plants also in Canada.


                                       34
<PAGE>


As a result of these  asset  transactions,  net income for the  quarter  and six
months ended June 30, 2004 reflects a combined  after-tax gain of $116.1 million
or $0.72 per share.  Net income for the  quarter  and six months  ended June 30,
2003  reflects  after-tax  losses of $34.1  million or $0.22 per share and $15.1
million or $0.10 per share, respectively.

In  June  2004,   KeySpan's   wholly  owned  gas   exploration   and  production
subsidiaries,  recorded a non-cash  impairment  charge of $48.2  million  ($31.1
million  after-tax,  or $0.19 per share) to recognize  the reduced  valuation of
proved  reserves.  (See Note 10 to the  Consolidated  Financial  Statements "Gas
Exploration and Production  Property - Depletion for additional  details on this
transaction.)

Operating income, as indicated in the above table,  decreased $14.9 million,  or
11%, for the three months  ended June 30,  2004,  compared to the  corresponding
period last year  primarily  as a result of the  non-cash  impairment  charge of
$48.2  million.  For the six  months  ended  June  30,  2004,  operating  income
increased $15.1 million or 3% including the non-cash  impairment  charge.  Aside
from this charge, operating income in both periods reflects higher earnings from
the Gas Distribution, Energy Investments and Electric Services segments. The Gas
Distribution   segment   benefited   from  customer   additions  and  oil-to-gas
conversions throughout our service territories,  as well as from a rate increase
resulting  from the Boston Gas Company rate  proceeding  concluded last fall. In
the  Energy  Investments  segment,  higher  gas  production  volumes  and higher
realized gas prices resulted in an increase in operating income  associated with
gas exploration and production  activities,  while the Electric Services segment
benefited  from  higher net  electric  margins  associated  with the  Ravenswood
facility.  For the three months ended June 30, 2004, the Energy Services segment
benefited  from a slightly  better  business  climate,  improved  project profit
margins and cost reduction measures.  However, for the six months ended June 30,
2004, the Energy Services segment experienced higher operating expenses compared
to the same period last year.  (See the discussion  under the caption "Review of
Operating Segments" for further details on each segment.)

The increase in interest expense of $9.3 million,  or 12%, and $24.4 million, or
16% for the three and six months ended June 30, 2004, respectively,  compared to
the same  periods  last  year,  reflects  in part,  the  implementation  of FASB
Interpretation No. 46 ("FIN 46"),  "Consolidation of Variable Interest Entities,
an  Interpretation  of ARB No. 51." This  Interpretation  required us to,  among
other things,  consolidate  the  Ravenswood  Master Lease and classify the lease
obligation  as long-term  debt on the  Consolidated  Balance  Sheet based on our
current  status as  primary  beneficiary.  As a result of  implementing  FIN 46,
beginning January 1, 2004 lease payments have been reflected as interest expense
on the  Consolidated  Statement  of Income  resulting in an increase to interest
expense of $7.5  million and $15  million  for the quarter and six months  ended
June 30, 2004, respectively. (See Note 6 "Financial Guarantees and Contingencies
for further information on the Master Lease".)

Further,  comparative  interest expense for the six months reflects the benefits
realized in 2003  associated  with  interest  rate swaps.  In February  2003, we
terminated  an  interest  rate swap  agreement  with a  notional  amount of $270
million.  This swap was used to hedge a portion of outstanding  promissory notes
that were issued to the Long Island Power Authority  ("LIPA") in connection with


                                       35
<PAGE>


the  KeySpan/Long   Island  Lighting  Company  ("LILCO")  business   combination
completed in May 1998.  In March 2003, we called  approximately  $447 million of
the outstanding  promissory notes and recorded debt redemption  charges of $18.2
million in other income and (deductions). The cash proceeds from the termination
of the interest rate hedge were $18.4 million, of which $8.1 million represented
accrued swap interest.  The difference between the termination settlement amount
and the amount of accrued swap interest, $10.3 million, was recorded to earnings
(as an  adjustment  to  interest  expense)  in the  first  quarter  of 2003  and
effectively offset a portion of the redemption charges.

In addition to the asset sales previously  noted,  other income and (deductions)
for the three and six months ended June 30, 2004  reflects a $12.6  million gain
recorded on the settlement of a derivative  financial instrument entered into in
connection with the  sale/leaseback  transaction  associated with the Ravenswood
Expansion.  (See  Note 6 and Note 4 to the  Consolidated  Financial  Statements,
"Financial  Guarantees and Contingencies" and "Hedging and Derivative  Financial
Instruments",  for additional  information  regarding this financing arrangement
and  derivative  financial  instrument.)  Other  income  and  (deductions)  also
includes the effects of minority interest of $16.7 million and $37.0 million for
the three and six  months  ended  June 30,  2004  respectively,  related  to our
previous majority ownership interests in Houston Exploration and KeySpan Canada.

In addition to the items noted above,  other income and (deductions) for the six
months ended June 30, 2003 also  includes a $10.6  million  severance tax refund
for severance  taxes paid in 2002 and earlier  periods.  The effects of minority
interest of $13.0  million and $30.4  million for the three and six months ended
June 30, 2003 respectively, are also reflected in other income and (deductions).

Income tax expense  generally  reflects the level of pre-tax income and, for the
six months ended June 30, 2004, a $6.0 million benefit to income taxes resulting
from a revised appraisal associated with property that was disposed of in 2003.

Earnings  available for common stock for the three and six months ended June 30,
2004, increased by $136.7 million and $141.1 million, respectively,  compared to
the same periods last year.  Earnings per share increased by $0.86 per share for
both the three and six months ended June 30, 2004,  compared to the same periods
last year.  Average  common  shares  outstanding  for the quarter and six months
ended  June  30,  2004  increased  1%  and  2%,  respectively,   reflecting  the
re-issuance  of shares held in treasury  pursuant to dividend  reinvestment  and
employee benefit plans.

Consistent with our prior earnings guidance, KeySpan's consolidated earnings for
2004 are  forecasted  to be in the range of $2.55 to $2.75 per share,  excluding
special  items.  Earnings  from  continuing  core  operations  (defined for this
purpose as all continuing operations other than exploration and production, less
preferred  stock  dividends) are forecasted to be in the range of $2.20 to $2.30
per share.  Earnings from gas exploration and production  operations,  excluding
the impact of the gain on the sale of Houston  Exploration and the impact of the
non-cash  impairment charge, are forecasted to be in the range of $0.35 to $0.45
per share.  The original  non-core  earnings  forecast for gas  exploration  and
production  activities  remains in  effect,  as the  favorable  impact of higher
realized gas prices and production  levels are  offsetting  the lower  ownership
interest.


                                       36
<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 the fiscal year.


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

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

Gas Distribution

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

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







                                       37
<PAGE>


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                           Three Months Ended June 30,                  Six Months Ended June 30,
(In Thousands of Dollars)                                   2004                 2003                   2004                 2003
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>                  <C>                   <C>                 <C>
Revenues                                                 $ 676,363            $ 732,036             $ 2,604,142         $ 2,564,737
Cost of gas                                                363,130              417,484               1,589,703           1,571,616
Revenue taxes                                               10,294               17,269                  45,048              55,886
------------------------------------------------------------------------------------------------------------------------------------
Net Revenues                                               302,939              297,283                 969,391             937,235
------------------------------------------------------------------------------------------------------------------------------------
Operating Expenses
   Operations and maintenance                              168,141              163,124                 340,541             329,214
   Depreciation and amortization                            66,810               66,192                 143,750             137,009
   Operating taxes                                          32,923               36,351                  70,383              74,458
------------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses                                   267,874              265,667                 554,674             540,681
------------------------------------------------------------------------------------------------------------------------------------
Operating Income                                          $ 35,065             $ 31,616               $ 414,717           $ 396,554
------------------------------------------------------------------------------------------------------------------------------------
Firm gas sales and transportation (MDTH)                    57,152               56,048                 211,467             211,714
Transportation - Electric Generation (MDTH)                  8,634                9,145                  12,773              14,148
Other Sales (MDTH)                                          19,029               24,482                  71,986              78,151
Warmer (Colder) than Normal - New York                         14%                 (30%)                    (3%)               (13%)
Warmer (Colder) than Normal - New England                      (8%)                (45%)                    (9%)               (17%)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

Net Revenues

Net gas revenues  (revenues less the cost of gas and  associated  revenue taxes)
from our gas distribution  operations increased by $32.2 million, or 3%, for the
six months  ended June 30, 2004  compared to the same period last year.  Net gas
revenues benefited from customer additions and oil-to-gas  conversions,  as well
as from a rate increase  resulting from the Boston Gas Company's rate proceeding
that was concluded in the fourth  quarter of 2003. As measured in heating degree
days,  weather  for the six months  ended June 30,  2004 in our New York and New
England  service  territories  was  approximately  3% and 9% colder than normal,
respectively,  compared  to  approximately  13% and 17% colder  than normal last
year,  respectively.  Weather was  approximately 7% warmer than last year across
KeySpan's service territories.

Net revenues from firm gas customers  (residential,  commercial  and  industrial
customers) in our New York service  territory  increased by $5.4 million for the
six months ended June 30, 2004  compared to the same period last year.  Customer
additions and oil-to-gas conversions,  net of attrition and conservation,  added
$4.6 million to net gas revenues. Further, we realized a $3.5 million benefit to
net gas  revenues  as a result of an  additional  billing  day in the leap year.
Weather,  which was warmer  than last  year,  resulted  in an adverse  impact to
comparative net gas revenues of $3.6 million. 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.  Since  weather  was colder  than  normal we  refunded  to firm
customers  $8.7  million  through the  weather  normalization  adjustment.  Also
included in net gas revenues is the  recovery of property  taxes that added $1.0
million to net  revenues  during the period.  These  revenues,  however,  do not


                                       38
<PAGE>


impact net income  since the taxes they are  designed to recover are expensed as
amortization  charges  on  the  Consolidated   Statement  of  Income.  Firm  gas
distribution  rates for KEDNY and  KEDLI  during  the first six  months of 2004,
other than for the recovery of gas costs, have remained substantially  unchanged
from rates charged last year.

Net  revenues  from firm gas  customers  in our New  England  service  territory
increased by $25.7  million  during the first six months of 2004 compared to the
same period last year.  Customer  additions and oil-to-gas  conversions,  net of
attrition and conservation,  added $4.8 million to net gas revenues. Further, we
realized a $2.2 million benefit in net gas revenues as a result of an additional
billing  day for leap  year.  As  mentioned,  the  Massachusetts  Department  of
Telecommunications  and Energy ("DTE") approved a $27 million base rate increase
for the Boston Gas Company,  which became effective  November 1, 2003. This rate
increase  resulted in a benefit to net gas revenues of $20.7 million  during the
six months  ended June 30, 2004.  (See the caption  under  "Regulation  and Rate
Matters"  for  further   information   regarding   the  rate  filing.)  The  gas
distribution  operations  of our New England  based  subsidiaries  do not have a
weather  normalization  adjustment.  Weather,  which was warmer  than last year,
resulted in an adverse impact to  comparative  net gas revenues of $9.9 million.
To mitigate the effect of  fluctuations  in normal  weather  patterns on KEDNE's
results of operations and cash flows,  weather derivatives were in place for the
2003/2004 winter heating season (November  through March).  Since weather during
the first  quarter of 2004 was  approximately  9% colder  than normal in the New
England service territories, we recorded a $4.1 million reduction to revenues to
reflect  the  loss  on  these  derivative  transactions.  Similarly,  in 2003 we
recorded  an  $11.9  million  reduction  to  revenues.  As  a  result  of  these
transactions,  comparative net revenues were favorably  impacted by $7.8 million
(See Note 4 to the  Consolidated  Financial  Statements  "Hedging and Derivative
Financial Instruments" for further information).

In our large-volume  heating and other interruptible  (non-firm) markets,  which
include large apartment houses, government buildings and schools, gas service is
provided  under rates that are  designed to compete  with prices of  alternative
fuel,  including No. 2 and No. 6 grade heating oil. These "dual-fuel"  customers
can consume either natural gas or fuel oil for heating purposes. Net revenues in
these markets increased slightly during the first six months of 2004 compared to
the 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 36% of the residential and multi-family markets, and approximately
58% of the  commercial  market,  currently  use natural  gas for space  heating.
Further, we estimate that in our New England service  territories  approximately
53% of the residential and multi-family  markets,  and  approximately 63% of the
commercial market, currently use natural gas for space heating purposes. We will
continue to seek growth,  in our market  segments,  through the expansion of our
gas distribution  system, as well as through the conversion of residential homes
from oil-to-gas for space heating  purposes and the pursuit of  opportunities to
grow multi-family, industrial and commercial markets.


                                       39
<PAGE>


Firm Sales, Transportation and Other Quantities

Firm gas sales and  transportation  quantities for the six months ended June 30,
2004, were consistent with such quantities for same period in 2003. Net revenues
are not  affected by  customers  opting to purchase  their gas supply from other
sources, since delivery rates charged to transportation  customers generally are
the  same  as  delivery   rates  charged  to  full  sales   service   customers.
Transportation   quantities   related  to   electric   generation   reflect  the
transportation  of gas to our  electric  generating  facilities  located on Long
Island. Net revenues from these services are not material.

Other sales quantities include on-system  interruptible  quantities,  off-system
sales quantities  (sales made to customers  outside of our service  territories)
and related  transportation.  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 Trading, LP ("EKT"),  under which EKT 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 expire
on March 31, 2006.

Purchased Gas for Resale

The increase in gas costs for the six months ended June 30, 2004 compared to the
same period of 2003 of $18.1 million,  or 1%,  reflects an increase of 8% in the
price per dekatherm of gas  purchased,  and a 5% decrease in the quantity of gas
purchased.  The  current  gas  rate  structure  of each of our gas  distribution
utilities includes a gas adjustment clause, pursuant to which variations between
actual  gas costs  incurred  for resale to firm  sales  customers  and gas costs
billed to firm sales  customers  are deferred and refunded to or collected  from
customers in a subsequent period.

Operating Expenses

Operating  expenses during the second quarter of 2004 were  relatively  constant
with the same  quarter  last year.  Higher  employee  benefit  costs,  primarily
related  to  employee  severance  costs,  were  significantly  offset  by  lower
operating  taxes  resulting  from a recent  property  tax refund in our New York
service territory.

The  increase in  operating  expenses  of $14.0  million or 3% for the first six
months of 2004, compared to the same period last year, is attributable, in part,
to higher employee benefit costs  principally  pension and other  postretirement
benefits  and  employee   severance   costs.  The  cost  of  pension  and  other
postretirement   benefits,   net  of  amounts  subject  to  regulatory  deferral
treatment,  has risen  primarily  as a result of  increased  health  care costs.
Higher depreciation and amortization expense reflects the continued expansion of
the  gas  distribution  system.  These  increases  to  operating  expenses  were
partially offset by lower operating taxes resulting from the recent property tax
refund noted earlier.


                                       40
<PAGE>


Other Matters

In order to serve the  anticipated  market  requirements in our New York service
territories,  KeySpan and Duke Energy  Corporation formed Islander East Pipeline
Company,  LLC ("Islander  East") in 2000.  Islander East is owned 50% by KeySpan
and  50% by Duke  Energy,  and was  created  to  pursue  the  authorization  and
construction  of an  interstate  pipeline from  Connecticut,  across Long Island
Sound, to a terminus near Shoreham, Long Island.  Applications for all necessary
regulatory  authorizations  were filed in 2000 and 2001. 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.  The State of
Connecticut denied Islander East's  applications for coastal zone management and
Section 401 of the Clean Water Act  authorizations.  Islander  East appealed the
State of Connecticut's determination on the coastal zone management issue to the
United States Department of Commerce. On May 6, 2004, the Department of Commerce
overrode   Connecticut's   denial  and  granted  the  coastal  zone   management
authorization.  Islander East's petition for a declaratory order challenging the
denial of the Section 401  authorization  is pending  with  Connecticut's  State
Superior  Court.  Once in service,  the  pipeline is expected to transport up to
260,000 DTH daily to the Long Island and New York City  energy  markets,  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 this pipeline  construction are currently being evaluated.  At June
30, 2004, total  capitalized  costs associated with the siting and permitting of
the Islander East pipeline were $18.2 million.

Electric Services

The Electric  Services segment  primarily  consists of subsidiaries that own and
operate oil and gas fired  electric  generating  plants in the Borough of Queens
(including the "Ravenswood  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. The Electric
Services  segment also provides  retail  marketing of  electricity to commercial
customers, the earnings of which were previously reported in the Energy Services
segment.  Financial  results for 2003 have been  reclassified  to reflect  these
activities in the Electric Services segment.






                                       41
<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)                              2004                  2003                     2004                2003
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>                    <C>                    <C>                 <C>
Revenues                                            $ 433,763             $ 392,371               $ 792,899           $ 790,096
Purchased fuel                                        130,218               109,175                 231,707             248,596
--------------------------------------------------------------------------------------------------------------------------------
Net Revenues                                          303,545               283,196                 561,192             541,500
--------------------------------------------------------------------------------------------------------------------------------
Operating Expenses
   Operations and maintenance                         172,071               179,794                 319,256             344,195
   Depreciation                                        22,359                16,188                  43,965              32,808
   Operating taxes                                     41,203                35,114                  82,860              72,753
--------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses                              235,633               231,096                 446,081             449,756
--------------------------------------------------------------------------------------------------------------------------------
Operating Income                                    $  67,912             $  52,100               $ 115,111           $  91,744
--------------------------------------------------------------------------------------------------------------------------------
Electric sales (MWH)*                               1,647,531               995,433               2,630,637           1,762,782
Capacity(MW)*                                           2,450                 2,200                   2,450               2,200
Cooling degree days                                       300                   176                     300                  176
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
     *Reflects the operations of the Ravenswood facility only.


Net Revenues

Total  electric net  revenues  realized  during the second  quarter of 2004 were
$20.3  million,  or 7% higher  than such  revenues  realized  during  the second
quarter of 2003.  For the six months  ended June 30,  2004,  total  electric net
revenues were $19.7  million,  or 4% higher than the same period last year.  The
increase in both the quarter and six months ended June 30, 2004, is attributable
to the operations of the Ravenswood facility.

Net revenues from the Ravenswood facility increased $25.0 million, or 38% in the
second quarter of 2004 compared to the second quarter of 2003.  Comparative  net
revenues  reflect  higher  energy  margins of $17.5  million,  as well as higher
capacity revenues of $7.5 million.

For the six  months  ended  June 30,  2004,  net  revenues  from the  Ravenswood
facility  reflects a $25.1  million,  or 20% increase  over the same period last
year.  Comparative net revenues  reflect higher energy margins of $20.9 million,
as well as higher capacity revenues of $4.2 million.

The  increase  in energy  margins  for both the  quarter  and six months of 2004
reflects  a higher  level  of  megawatt  hours  ("MWh")  sold  into the New York
Independent   System  Operator  ("NYISO")  energy  market,  as  well  as  higher
"spark-spreads"  (the selling price of electricity  less the cost of fuel,  plus
hedging gains or losses). The increase in energy sales quantities  reflects,  in
part, the  operations of the Ravenswood  Expansion.  (See  discussion  under the
caption "Other Matters" for additional  information regarding the new facility.)
In addition,  energy sales quantities were favorably  impacted by warmer weather
in the second  quarter of 2004 compared to the same quarter of 2003. As measured
in cooling  degree-days,  weather was  approximately  70% warmer than last year.
Further,  energy  sales  quantities  in  2003  were  adversely  impacted  by the
scheduled  major  overhaul of our largest  electric  generating  unit during the
first quarter of 2003.


                                       42
<PAGE>


We  employ  derivative  financial  hedging  instruments  to hedge  the cash flow
variability  for a portion of  forecasted  purchases of natural gas and fuel oil
consumed at the  Ravenswood  facility.  Further,  we have  engaged in the use of
derivative  financial  hedging  instruments  to hedge the cash flow  variability
associated  with a portion of  forecasted  peak  electric  energy sales from the
Ravenswood  facility.  These derivative  instruments  resulted in hedging gains,
which are  reflected  in net electric  margins,  of $1.5 million for the quarter
ended June 30, 2004,  compared to hedging  gains of $1.8 million for the quarter
ended  June  30,  2003.  For the six  months  ended  June  30,  2004  derivative
instruments resulted in hedging losses of $2.9 million compared to hedging gains
of $3.5  million  for the same period in 2003.  (See Note 4 to the  Consolidated
Financial Statements "Hedging and Derivative  Financial  Instruments" as well as
Item 3.  Quantitative and Qualitative  Disclosures about Market Risk for further
information).

The increase in capacity  revenues for both the quarter and the first six months
of 2004  reflects  the  operations  of the  Ravenswood  Expansion,  as well as a
revision to the NYISO's capacity market  procurement  design.  In 2003, the FERC
approved a revised capacity market  procurement design with an effective date of
May 21, 2003.  This revised  capacity  market  procurement  design is based on a
demand  curve rather than relying on  deficiency  auctions to procure  necessary
capacity.  The  deficiency  auction with its associated  fixed minimum  capacity
requirements  was  replaced  with a spot  market  auction  that  pays  gradually
declining  prices as  additional  capacity is offered and  gradually  increasing
prices as capacity offers decrease.  This new market design recognizes the value
of capacity in excess of the minimum requirement and reduces price spikes during
periods of shortage.  Essentially,  the demand curve design  eliminates the high
and low cycles inherent in the deficiency auction market design. This new market
design also established  seasonal electric  generator specific price caps. Price
caps establish the maximum price per MW that capacity can be sold into the NYISO
by generating units like those at Ravenswood  (other than the new unit) divested
by  Consolidated  Edison Company of New York,  Inc. Prior to this design change,
one price cap was  established  for the entire  year and was  effective  for all
electric  generators.  Since the revised capacity market  procurement design did
not take effect until late in the second quarter of 2003 Ravenswood's structured
price cap for the second quarter of 2004 was higher than the price cap effective
during  most of the  second  quarter  of  2003,  resulting  in  higher  capacity
revenues.

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 over time.  Certain of these  mitigation
measures are 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 the
caption "Market and Credit Risk Management  Activities" for a further discussion
of these  matters.  Also see  KeySpan's  2003 Annual Report on Form 10-K for the
Year Ended  December 31, 2003 Item 7.  Management's  Discussion  and Analysis of
Financial  Condition  and Results of  Operations  under the caption  "Market and
Credit Risk Management Activities.)


                                       43
<PAGE>


Net revenues from the service agreements with LIPA, including the power purchase
agreements  associated  with two electric  peaking  facilities,  decreased  $3.2
million,  or 2% and $3.8 million,  or 1% for the three and six months ended June
30, 2004, respectively,  compared to the same periods last year. These decreases
reflect adjustments to the cost recovery mechanisms in the service agreements to
better  align  actual  costs  incurred  with  recovery  of  such  costs.   These
adjustments  to revenues  had little  impact on  operating  income  since actual
operating  costs  decreased by a like  amount.  (For a  description  of the LIPA
Agreements  and power purchase  agreements,  see KeySpan's 2003 Annual Report on
Form 10-K for the Year Ended December 31, 2003 Item 7.  Management's  Discussion
and Analysis of Financial  Condition and Results of Operations under the caption
"Electric Services - Revenue Mechanisms.")

The remaining decrease in total electric net revenues reflects the operations of
our electric  retail-marketing  subsidiary,  which has reduced its customer base
from last year.

Operating Expenses

Operating expenses increased $4.5 million,  or 2%, in the second quarter of 2004
compared to the same quarter of 2003.  This increase  primarily  reflects higher
property  taxes on our Long  Island  based  generating  units  (which  are fully
recoverable  from LIPA),  partially offset by the  implementation  of FIN 46 and
lower   operating   costs   associated   with  the  LIPA   service   agreements.
Implementation  of FIN 46 required  KeySpan to, among other things,  consolidate
the Ravenswood  Master Lease and classify the lease obligation as long-term debt
on the  Consolidated  Balance  Sheet.  Further,  an asset  was  recorded  on the
Consolidated  Balance Sheet for an amount substantially equal to the fair market
value of the leased  assets at the  inception  of the lease,  less  depreciation
since that date. As a result of implementing FIN 46, beginning  January 1, 2004,
lease  payments  have been  reflected  as interest  expense on the  Consolidated
Statement  of  Income  and  the  leased  assets  are  being   depreciated.   The
reclassification of lease payments to interest expense,  partially offset by the
higher  depreciation  expense,  resulted in a comparative  decrease to operating
expense of approximately $2.2 million. (See Note 6 to the Consolidated Financial
Statements "Financial  Guarantees and Contingencies" for additional  information
regarding the Ravenswood leasing arrangement.)

Operating  expenses  decreased $3.7 million,  or 1%, during the six months ended
June 30, 2004  compared to the same period of 2003.  This  decrease  reflects in
part the impact of implementing FIN 46. The  reclassification  of lease payments
to  interest  expense,  partially  offset by the  higher  depreciation  expense,
resulted in a comparative  decrease to operating  expense of approximately  $5.4
million. Further,  comparative operating expenses reflect lower costs associated
with the LIPA Service  Agreements.  These  benefits to operating  expenses  were
offset,  in part, by higher  property taxes on our Long Island based  generating
units

Other Matters

The Ravenswood  Expansion,  a 250 MW combined  cycle  generating  facility,  was
synchronized  to the electric grid in December  2003 and  commenced  operational
testing in January 2004. In March,  the facility  completed full load Dependable
Maximum Net Capacity  testing and in May 2004 the facility began full commercial
operations.  The entire  capacity and energy  produced  from this plant is being
sold into the NYISO markets.


                                       44
<PAGE>


To finance  this  facility,  KeySpan  entered into a leveraged  lease  financing
arrangement.  In May  2004,  the  facility  was  acquired  by a lessor  from our
subsidiary,  KeySpan Ravenswood,  LLC, and simultaneously leased back to it. All
the  obligations  of our  subsidiary  under the lease have been  unconditionally
guaranteed by KeySpan.  This lease  transaction  generated cash proceeds of $385
million, which approximates the fair market value of the facility, as determined
by a  third-party  appraiser.  The lease has an initial term of 36 years and the
yearly operating lease expense will be approximately $17 million per year. Lease
payments will fluctuate from year to year, but are  substantially  paid over the
first 16 years. (See Note 6 to the Consolidated Financial Statements, "Financial
Guarantees  and  Contingencies"  for  additional   information   regarding  this
financing arrangement.)

In 2003,  the New  York  State  Board  on  Electric  Generation  Siting  and the
Environment  issued  an  opinion  and  order  which  granted  a  certificate  of
environmental  capability  and public need for a 250 MW combined  cycle electric
generating  facility  in  Melville,   Long  Island,   which  is  now  final  and
non-appealable. Also in 2003, LIPA issued a Request for Proposal ("RFP") seeking
bids from  developers  to  either  build and  operate a Long  Island  generating
facility,  and/or a new cable that will link Long Island to  dedicated  off-Long
Island power of between 250 to 600 MW of electricity by no later than the summer
of 2007. KeySpan and American National Power Inc. ("ANP") filed a joint proposal
in  response  to LIPA's  RFP.  Under the  proposal,  KeySpan  and ANP would have
jointly  owned and  operated  two 250 MW electric  generating  facilities  to be
located on Long Island,  one of which is the Melville  site and the other in the
town of  Brookhaven  which also has received all permits and  approvals.  In May
2004,  LIPA  tentatively  selected  proposals  submitted by two other bidders in
response to the RFP.  KeySpan remains  committed to the Melville project and the
benefits to Long Island's energy future that this project would supply.  We will
continue  to explore all of our options  for this  facility.  At June 30,  2004,
total capitalized  costs associated with the siting,  permitting and procurement
of equipment for the Melville facility were approximately $57.4 million.

Energy Services

The Energy Services segment includes  subsidiaries  that provide  energy-related
services to customers  primarily located within the Northeastern  United States,
with concentrations in the New York City metropolitan area including New Jersey,
as well as Rhode Island, Pennsylvania,  Massachusetts and New Hampshire, through
the  following  lines of  business:  (i) Home Energy  Services,  which  provides
residential  and small  commercial  customers  with service and  maintenance  of
energy systems and appliances; (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.


                                       45
<PAGE>


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)                        2004             2003                 2004             2003
---------------------------------------------------------------------------------------------------------------
<S>                                            <C>              <C>                  <C>              <C>
Revenues                                      $ 134,024        $ 133,810            $ 266,519        $ 264,301
Less: cost of sales                             104,761          113,459              210,631          218,604
---------------------------------------------------------------------------------------------------------------
Gross profit                                     29,263           20,351               55,888           45,697
Operating expenses                              (34,169)         (30,814)             (79,268)         (65,282)
---------------------------------------------------------------------------------------------------------------
Operating (Loss)                              $  (4,906)       $ (10,463)           $ (23,380)       $ (19,585)
---------------------------------------------------------------------------------------------------------------
</TABLE>

The Energy Services segment  realized  operating losses of $4.9 million compared
to losses of $10.5  million  last year.  The  results  reflect  slightly  better
business  conditions,   improved  project  profit  margins  and  cost  reduction
measures.

For the six months ended June 30, 2004,  the Energy  Services  segment  realized
operating  losses of $23.4 million compared to $19.6 million for the same period
last year,  primarily  due to an  increase  in  operating  expenses.  The higher
expenses  principally  reflect the write-off of accounts receivable and contract
revenues on certain projects that were determined to be  uncollectible,  as well
as the write-down of inventory  balances.  Total backlog for the Energy Services
group of companies  increased to $635 million at June 30, 2004  compared to $469
million  at June 30,  2003,  due in part to the  recent  award of a  significant
long-term  contract,  as  well  as  from  the  Bard,  Rao +  Athanas  Consulting
Engineering acquisition completed in the third quarter of 2003.

The  operating  results  of this  segment  continue  to be  below  expectations.
Management  will continue to monitor the operating  performance  of this segment
and  will  take  appropriate  action  as  determined  necessary.   In  addition,
management  will conduct a review of the carrying  value of goodwill  during the
remainder of the year. The recorded  goodwill for this segment is  approximately
$173 million.  At this point in time,  we are unable to predict what effect,  if
any, the outcome of this review will have on the carrying  value of our goodwill
or on financial position or our results of operations.

Energy Investments

The Energy  Investment  segment  consists of our gas  exploration and production
operations,  as well as certain other domestic and international  energy-related
investments.  Our gas exploration and production  subsidiaries include our 23.5%
ownership interest in The Houston Exploration  Company ("Houston  Exploration"),
as well as our wholly-owned  subsidiaries KeySpan Exploration and Production LLC
("KeySpan Exploration and Production") and Seneca-Upshur  Petroleum,  Inc. These
companies  are  engaged  in gas  and oil  exploration  and  production,  and the
development and acquisition of domestic natural gas and oil properties.

As mentioned earlier,  on June 2, 2004, KeySpan exchanged 10.8 million shares of
Houston  Exploration  common  stock  for  100%  of the  stock  of  Seneca-Upshur
Petroleum,  Inc., then a wholly owned  subsidiary of Houston  Exploration.  This
transaction  reduced our interest in Houston Exploration from 55% to the current
level of 23.5%. As part of this transaction,  Houston  Exploration,  retired 4.6
million of its common  shares  and  issued  6.8  million  new shares in a public
offering.  Based on Houston Exploration's announced offering price of $48.00 per


                                       46
<PAGE>


share,  Seneca-Upshur's shares were valued at the equivalent of $449 million, or
$41.57 per share.  Seneca-Upshur's  assets  consist of West  Virginia  producing
properties  valued at $60 million,  and $389 million in cash.  This  transaction
resulted in a gain to KeySpan of $150.1 million. Effective June 1, 2004, Houston
Exploration's  earnings and our ownership  interest in Houston  Exploration have
been accounted for on the equity method of accounting.  The  deconsolidation  of
Houston  Exploration  required the recognition of certain  deferred taxes on our
remaining  investment  resulting  in a deferred  tax  expense of $44.1  million.
Therefore,  the net gain on the share exchange,  less the deferred tax provision
on the remaining investment, was $106.0 million, or $0.66 per share.

Selected  financial data and operating  statistics for our gas  exploration  and
production  activities  are set forth in the  following  table  for the  periods
indicated.  Operating  income below  represents  100% of our gas exploration and
production  subsidiaries' results for the five months ended May 31, 2004 and one
month of equity earnings for our 23.5% interest in Houston Exploration.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
                                                         Three Months Ended June 30,                Six Months Ended June 30,
(In Thousands of Dollars)                                 2004                 2003                  2004               2003
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                  <C>                   <C>                <C>
Revenues                                               $ 118,926            $ 122,875             $ 271,345          $ 250,722
Less: Depletion and amortization expense                  44,538               49,475               106,459             96,918
         Full cost ceiling test write-down                48,190                    -                48,190                  -
         Other operating expenses                         17,355               23,252                45,745             48,066
Plus: Equity earnings                                      2,545                    -                 2,545                  -
-------------------------------------------------------------------------------------------------------------------------------
Operating Income                                       $  11,388            $  50,148             $  73,496          $ 105,738
-------------------------------------------------------------------------------------------------------------------------------
Natural gas and oil production (Mmcf)                     32,076               27,119                62,449             53,205
Natural gas (per Mcf) realized                            $ 5.39               $ 4.55                $ 5.19             $ 4.73
Natural gas (per Mcf) unhedged                            $ 5.85               $ 5.16                $ 5.65             $ 5.76
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Gas reserves and production volumes are stated in BCFe and Mmcfe, which includes
equivalent oil reserves.

The decline in operating income of $38.8 million for the three months ended June
30, 2004 and $32.2  million for the six months ended June 30, 2004,  compared to
the  same  periods  of 2003,  is  attributable  to the  $48.2  million  non-cash
impairment  charge  recorded  by  KeySpan's  wholly-owned  gas  exploration  and
production  subsidiaries  to reflect the reduced  valuation of proved  reserves.
Excluding this non-cash charge,  operating income for the second quarter of 2004
benefited from an 18% increase in both production  volumes and average  realized
gas prices  (average  wellhead price received for production  including  hedging
gains and  losses).  Operating  income  for the six months  ended June 30,  2004
benefited  from a 17%  increase  in  production  volumes  and a 10%  increase in
average  realized  gas  prices.  (See  Note  10 to  the  Consolidated  Financial
Statements  "Gas  Exploration  and Production  Property - Depletion" for further
details on the impairment charge.)

Derivative  financial hedging instruments are employed by Houston Exploration to
provide  more  predictable  cash  flow,  as well as to reduce  its  exposure  to
fluctuations in natural gas prices. The average realized gas price for the three
months  ended June 30, 2004 was 92% of the average  unhedged  natural gas price,
resulting in revenues  that were $13.9  million  lower than  revenues that would
have been achieved if derivative  financial  instruments  had not been in place.
Houston  Exploration  has hedge positions in place for slightly less than 70% of
its estimated 2004 production,  principally through the use of costless collars.
The  average  realized  gas price for the second  quarter of 2003 was 88% of the


                                       47
<PAGE>


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.  Houston Exploration hedged almost
70% of its 2003 production, principally through the use of costless collars.

The average realized gas price for the six months ended June 30, 2004 was 92% of
the average  unhedged  natural gas price,  resulting in revenues that were $26.5
million  lower  than  revenues  that  would  have been  achieved  if  derivative
financial  instruments had not been in place. 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 $50.4  million lower than revenues that
would have been achieved if  derivative  financial  instruments  had not been in
place.

The decrease in depletion  expense  during the three months ended June 30, 2004,
primarily reflects the deconsolidation of Houston  Exploration.  The increase in
depletion  for the six months ended June 30, 2004 is  primarily  due to a higher
depletion rate experienced. For the six months ended June 30, 2004 the depletion
rate was  $2.06  per Mcf,  compared  to $1.78  per Mcf  experienced  during  the
corresponding  period in 2003.  The increase in the depletion rate is the result
of additional costs to the depreciation base with fewer additions for reserves.

This segment also consists of KeySpan  Canada;  our 20% interest in Iroquois Gas
Transmission  System LP ("Iroquois");  our wholly owned 600,000 barrel liquefied
natural  gas ("LNG")  storage and  receiving  facility  located in Rhode  Island
("KeySpan LNG"); and our 50% interest in Premier Transmission Limited located in
Northern Ireland.

On April 1, 2004,  KeySpan and KeySpan  Facilities Income Fund, which previously
owned  a  39.09%  interest  in  KeySpan  Canada,  (the  "Fund")  entered  into a
transaction whereby the Fund sold 15.617 million units of the Fund at a price of
CDN$12.60 per unit for gross total proceeds of approximately  CDN$196.8 million.
The  proceeds  of the  offering  were used by the Fund to acquire an  additional
35.91%  interest  in  KeySpan  Canada (a KeySpan  subsidiary  with  natural  gas
processing plants and gathering  facilities in Western Canada) from KeySpan.  We
received  net  proceeds of  approximately  CDN$186.3  million (or  approximately
US$135 million),  after commissions and expenses. As a result of the transaction
the Fund's  ownership  in KeySpan  Canada  was  increased  from 39.1% to 75% and
KeySpan's  ownership of KeySpan Canada decreased to 25%. KeySpan recorded a gain
of  $22.8  million  ($10.1  million  after-tax,  or  $0.06  per  share)  on this
transaction.  Effective  April  1,  2004,  KeySpan  Canada's  earnings  and  our
ownership  interest  in KeySpan  Canada  have been  accounted  for on the equity
method of accounting.

On July 2, 2004, the Fund issued an additional 10.7 million units,  the proceeds
of which were used to fund the  acquisition  of the midstream  assets of Chevron
Canada  Midstream  Inc.  This  transaction  had the effect of  further  diluting
KeySpan's ownership of KeySpan Canada to 17.4%.

Selected  financial  data and  operating  statistics  for  these  energy-related
investments  are set forth in the  following  table for the  periods  indicated.
Operating  income below  represents 100% of KeySpan  Canada's  results for three
months ended March 31, 2004 and three months of equity  earnings  since April 1,
2004.


                                       48
<PAGE>


<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
                                                          Three Months Ended June 30,              Six Months Ended June30,
(In Thousands of Dollars)                                  2004                2003                2004                2003
----------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>                <C>                 <C>                <C>
Revenues                                                 $ 8,120            $ 29,880            $ 36,565           $ 56,344
Operation and maintenance expense                          6,927              19,390              22,315             36,034
Other operating expenses                                   1,584               5,410               7,436             10,763
Equity earnings                                            5,871               3,994              11,588              9,651
----------------------------------------------------------------------------------------------------------------------------
Operating Income                                         $ 5,480            $  9,074            $ 18,402           $ 19,198
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

The decrease in comparative operating income for both the quarter and six months
ended June 30,  2004  compared  to same  periods  last year  reflects  our lower
ownership   interest  in  KeySpan  Canada.   Operating  income  from  our  other
energy-related investments in 2004 is substantially the same as 2003.

We have  stated in the past that we may sell or  otherwise  dispose  of  certain
Energy  Investments  assets.  Based on current market  conditions,  however,  we
cannot predict when, or if, additional sales or dispositions of these assets may
take place,  or the effect that any such additional 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 Securities  and Exchange  Commission
("SEC") under the Public Utility  Holding  Company Act ("PUHCA") as amended.  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,  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.  Operating income variations
reflected  in  "elimination  and  other"  associated  with  these  non-operating
subsidiaries  reflect expenses incurred in 2003 related to costs associated with
the  implementation of the Sarbanes-Oxley Act of 2002 that were not allocated to
the various  operating  subsidiaries.  Further,  operating income variations are
also due to the timing of certain corporate expenses.

Liquidity

Cash flow from operating  activities  increased $208.3 million,  or 36%, for the
first half of 2004  compared  to the same time last year,  reflecting  generally
higher cash earnings and higher cash flow from gas  exploration  and  production
activities.  In addition,  during the first quarter of 2004, we consolidated our
newly created "captive" insurance company,  which included $43.2 million of cash
and  short-term  marketable  securities.  Comparative  cash flow from  operating
activities also reflects the favorable  impact of the timing of certain property
tax payments.


                                       49
<PAGE>


At June 30, 2004, we had cash and temporary  cash  investments  of $818 million.
During  the six  months  ended  June 30,  2004,  we  repaid  $441.9  million  of
commercial  paper and, at June 30,  2004,  $40 million of  commercial  paper was
outstanding at a weighted-average  annualized  interest rate of 1.2%. We had the
ability to borrow up to an additional  $1.3 billion at June 30, 2004,  under the
terms of our credit facility.

In June 2004, KeySpan completed the restructuring of its credit  facilities.  We
entered into a new $640 million five year revolving  credit  facility to replace
the $450  million,  364 day facility  which expired in June. We also amended our
existing  three year $850 million  facility due June 2006 to reduce  commitments
thereunder  by $190  million  to a new  level of $660  million.  The two  credit
facilities total $1.3 billion and are each syndicated among sixteen banks. These
facilities  continue to support  KeySpan's  commercial paper program for working
capital needs.

The fees for these  facilities  are  subject to a  ratings-based  grid,  with an
annual fee of 0.08% on the new  five-year  facility  and 0.125% on the  existing
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 in the
five-year  facility are based on the Eurodollar  rate plus a margin of 0.40% for
loans up to 33% of the total five-year  facility,  and an additional  0.125% for
loans  over 33% of the total  five-year  facility.  In the  three-year  facility
Eurodollar  loans are based on the  Eurodollar  rate plus a margin of 0.625% for
loans up to 33% of the total three-year  facility,  and an additional 0.125% for
loans  over 33% of the  total  three-year  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.  We do not anticipate  borrowing  against
these facilities;  however, if the credit rating on our commercial paper program
were to be downgraded, it may be necessary to do so.

The facilities  contain certain  affirmative and negative  operating  covenants,
including  restrictions on KeySpan's  ability to mortgage,  pledge,  encumber or
otherwise  subject  its  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% until the
expiration of the existing three-year facility in 2006, at which time it will be
lowered to 62%.  Violation of this covenant  could result in the  termination of
the facilities and the required  repayment of amounts  borrowed  thereunder,  as
well as possible cross defaults under other debt agreements.

Under the terms of the credit agreements, KeySpan's debt-to-total capitalization
ratio  reflects  80% equity  treatment  for the MEDS Equity  Units issued in May
2002. At June 30, 2004, consolidated indebtedness, as calculated under the terms
of the credit agreements was 52.7% of consolidated capitalization


                                       50
<PAGE>


Houston  Exploration  and KeySpan Canada also have revolving  credit  facilities
with commercial banks. During the time period that Houston Exploration's results
were  consolidated  with  KeySpan's (the five months ended May 31, 2004) Houston
Exploration  borrowed  $49  million  under its credit  facility  and repaid $136
million. KeySpan Canada repaid $17.7 million under its facility during the first
three  months of 2004 (the time  period in which its results  were  consolidated
with   KeySpan's).   These   borrowings  and  repayments  are  included  in  the
Consolidated  Cash Flow Statement.  Cash borrowings and repayments under Houston
Exploration's and KeySpan Canada's credit facilities after the date of the stock
transactions are not reflected in the Consolidated Cash Flow Statement.

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.  Additionally,  our KEDNE gas
supply is concentrated with Entergy-Koch  Trading.  Accordingly,  our cash flows
are dependent  upon the timely  payment or delivery of amounts or commodity owed
to us by these counterparties.

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

Capital Expenditures and Financing

Construction Expenditures

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

-------------------------------------------------------------------------------
                                                    Six Months Ended June 30,
(In Thousands of Dollars)                           2004                2003
-------------------------------------------------------------------------------
Gas Distribution                                 $ 180,799           $ 165,690
Electric Services                                   73,732             113,880
Energy Investments                                 148,302             149,009
Energy Services and other                           10,414               5,473
-------------------------------------------------------------------------------
                                                 $ 413,247           $ 434,052
-------------------------------------------------------------------------------


Construction  expenditures related to the Gas Distribution segment are primarily
for  the  renewal,   replacement  and  expansion  of  the  distribution  system.
Construction  expenditures for the Electric  Services segment reflect costs: (i)
to maintain  our  generating  facilities;  and (ii) to complete  the  Ravenswood
Expansion.  Construction  expenditures related to the Energy Investments segment
primarily   reflect  costs   associated  with  gas  exploration  and  production
activities, including those of Houston Exploration through May 31, 2004, as well
as costs related to KeySpan Canada's gas processing  facilities through April 1,
2004.


                                       51
<PAGE>


Financing

During the second  quarter  of 2004,  KeySpan  entered  into a  leveraged  lease
financing arrangement associated with the Ravenswood Expansion. In May 2004, the
facility was acquired by a lessor from our subsidiary,  KeySpan Ravenswood, LLC,
and simultaneously leased back to that subsidiary. All of the obligations of our
subsidiary under the lease have been unconditionally guaranteed by KeySpan. This
lease transaction  generated cash proceeds of $385 million,  which  approximates
fair market value of the facility, as determined by a third-party appraiser. The
cash proceeds from this  transaction  were initially used to redeem  outstanding
commercial  paper.  (See  Note  6  to  the  Consolidated  Financial  Statements,
"Financial  Guarantees and Contingencies" for additional  information  regarding
this financing arrangement.)

In  August  2004,  KeySpan  and  certain  of its  subsidiaries  intend to redeem
approximately  $758 million of outstanding  debt ahead of scheduled  maturities.
Included in this  redemption are $700 million of medium-term  notes scheduled to
mature in 2005. The remaining debt was scheduled to mature in 2009 through 2027.
It is anticipated that we will incur  approximately $52 million in call premiums
and $9 million in accelerated  amortization of previously  recorded and deferred
debt discounts and expenses.  We will continue to evaluate our capital structure
and financing strategy for the remainder of 2004 and beyond. We believe that our
current   sources  of  funding  (i.e.,   internally   generated  funds  and  the
availability of commercial paper) are sufficient to meet our anticipated capital
needs for the foreseeable future.

The following  table  represents  the ratings of our long-term  debt at June 30,
2004.  Currently,  Standard & Poor's and Moody's  Investor  Services  ratings on
KeySpan's and its subsidiaries' long-term debt are on negative outlook.

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


Off-Balance Sheet Arrangements

Guarantees

KeySpan has a number of financial  guarantees  with its  subsidiaries  that have
remained  substantially  unchanged  since  December 31, 2003.  At June 30, 2004,
KeySpan  had  fully  and  unconditionally   guaranteed:   (i)  $525  million  of
medium-term  notes issued by KEDLI;  (ii) the obligations of KeySpan  Ravenswood
LLC, which is the lessee under the $425 million Master Lease associated with the
Ravenswood  facility and the lessee under the  sale/leaseback  transaction;  and
(iii) the payment  obligations  of our  subsidiaries  related to $128 million of


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<PAGE>


tax-exempt bonds issued through the Nassau County and Suffolk County  Industrial
Development Authorities for the construction of two electric-generation  peaking
facilities  on Long  Island.  The  medium-term  notes,  the Master Lease and the
tax-exempt  bonds  are  reflected  on  the   Consolidated   Balance  Sheet;  the
sale/leaseback  transaction is not recorded on the  Consolidated  Balance Sheet.
Further,  KeySpan  has  guaranteed:  (i) up to  $269  million  of  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  in an aggregate
amount of $64 million;  and (iii) $74 million of  subsidiary  letters of credit.
These  guarantees are not recorded on the  Consolidated  Balance Sheet.  At this
time, 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. (See Note 6 to the Consolidated
Financial  Statements,  "Financial  Guarantees and Contingencies" for additional
information regarding KeySpan's guarantees.)

Contractual Obligations

KeySpan has certain contractual obligations related to its outstanding long-term
debt,  outstanding  credit facility  borrowings,  outstanding  commercial  paper
borrowings,  operating and capital  leases,  and demand charges  associated with
certain commodity purchases.  Except for the recent  sale/leaseback  transaction
previously noted, these obligations have remained substantially  unchanged since
December  31,  2003.  Cash  obligations   associated  with  the   sale/leaseback
transaction  are  anticipated to be: (i) $2.7 million for the remainder of 2004;
(ii) $69.4 million for fiscal years 2005 through  2007;  (iii) $73.4 million for
fiscal years 2008 and 2009; and (iv) $465.1 million thereafter.  (For additional
details regarding these obligations see KeySpan's Annual Report on Form 10-K for
the Year Ended December 31, 2003, Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations,  Note 6 "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
operations  may vary  significantly  from expected  results if the judgments and
assumptions  underlying the estimates prove to be inaccurate.  At June 30, 2004,
KeySpan's   critical   accounting   policies  and   assumptions   have  remained
substantially  unchanged since December 31, 2003. 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, 2003,  Item 7.  Management's
Discussion  and  Analysis  of  Financial  Condition  and  Results of  Operations
"Discussion of Critical Accounting Policies and Assumptions."


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<PAGE>


Percentage of Completion Accounting

Percentage-of-completion  accounting  is a method of  accounting  for  long-term
construction  type contracts in accordance  with Generally  Accepted  Accounting
Principles  and,  accordingly,  the method used for  engineering  and mechanical
contracting  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 "Goodwill and Other Intangible Assets",  significant reliance is placed upon
a  number  of  estimates   regarding  future   performance  that  require  broad
assumptions and significant  judgment by management.  A change in the fair value
of our  investments  could cause a significant  change in the carrying  value of
goodwill.  The assumptions used to measure the fair value of our investments are
the  same  as  those  used  by  us  to  prepare  annual  operating  segment  and
consolidated  earnings and cash flow forecasts.  In addition,  these assumptions
are used to set annual budgetary guidelines.

Although  management   determined  that  the  fair  value  of  KeySpan's  assets
adequately  exceeded  their carrying value for the year ended December 31, 2003,
the operating  performance of the Energy Services segment  continues to be below
expectations.  Management will continue to monitor the operating  performance of
this segment and will conduct a review of the carrying value of goodwill  during
the remainder of the year. The recorded  goodwill for this segment,  as a result
of prior acquisitions,  is approximately $173 million. At this point in time, we
are unable to predict what effect,  if any, the outcome of this review will have
on the carrying value of our goodwill or on our financial position or results of
operations.

Management will continue to review and focus on its overall strategy for each of
KeySpan's  business units and accordingly will continue to evaluate the carrying
value of goodwill. While we believe that our assumptions are reasonable,  actual
results, however, may differ from our projections.

Accounting for the Effects of Rate Regulation on Gas Distribution Operations

The financial  statements of the Gas Distribution segment reflect the ratemaking
policies and orders of the New York State Public Service  Commission  ("NYPSC"),
the New Hampshire Public Utility Commission ("NHPUC"), and the DTE.


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

In separate  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 a ten-year  period ending 2009.  Due to the length of these base rate
freezes,  the Colonial and Essex Gas Companies had previously  discontinued  the
application of SFAS 71.

As is further  discussed  under the caption  "Regulation  and Rate Matters," the
rate plans previously in effect for KEDNY and KEDLI have expired.  The continued
application  of SFAS 71 to  record  the  activities  of  these  subsidiaries  is
contingent  upon the actions of regulators  with regard to future rate plans. We
are currently  evaluating various options that may be available to us including,
but not  limited  to,  proposing  new plans for KEDNY and  KEDLI.  The  ultimate
resolution  of any future  rate plans  could  have a  significant  impact on the
application  of SFAS 71 to these  entities  and,  accordingly,  on our financial
position,  results of operations and cash flows.  However,  management  believes
that currently available facts support the continued  application of SFAS 71 and
that all regulatory assets and liabilities are recoverable or refundable through
the  regulatory  environment.  It should be noted  that the DTE  approved a base
revenue  increase for the Boston Gas Company in the fourth quarter of 2003. (See
the discussion  under the caption  "Regulation  and Rate Matters" for additional
information regarding the DTE's rate decision.)

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.

Pension and Other Postretirement Benefits

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


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<PAGE>


Historically, we have funded our qualified pension plans in excess of the amount
required to satisfy minimum ERISA funding requirements. At June 30, 2004, we had
a funding  credit balance in excess of the ERISA minimum  funding  requirements.
Although we have  presently  exceeded  ERISA funding  requirements,  our pension
plans, on an actuarial basis, are currently  underfunded.  Therefore,  for 2004,
KeySpan expects to contribute a total of $147 million to its funded and unfunded
post-retirement  plans.  Future funding  requirements  are heavily  dependent on
actual return on plan assets and prevailing interest rates. (In addition to Item
7  Management's  Discussion  and Analysis of Financial  Condition and Results of
Operations in KeySpan's  Annual Report on Form 10-K for the Year Ended  December
31,  2003,  see  also  Note  4  of  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.  At  June  30,  2004  such  a  write-down  was  required  for  our
wholly-owned gas exploration and production  subsidiaries' full cost pool and we
recorded  a non-cash  impairment  charge of $48.2  million.  (See Note 10 to the
Consolidated  Financial  Statements "Gas  Exploration and Production  Property -
Depletion" for additional details regarding this charge.)

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.  Our gas  exploration  and production
subsidiaries estimate proved reserves and future net revenues using sales prices
estimated  to be in  effect  as of the  date it  makes  the  reserve  estimates.
Further,  our  subsidiaries  employ  independent   petroleum  engineers  in  the
preparation  of estimated  reserve  quantities.  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.

Accounting for Sales of Stock by a Subsidiary

KeySpan  applies the  accounting  principle of income  recognition  for gains or
losses associated with the sale of stock by its subsidiaries. As provided for in
Staff  Accounting  Bulletin  Topic 5-H ("SAB  51"),  the SEC  allows  for income
recognition  of gains or losses on subsidiary  stock  transactions  in instances


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<PAGE>


where  the  transaction  is  not  part  of a  broader  corporate  reorganization
contemplated  by the parent.  Provided  that no other capital  transactions  are
contemplated  with regard to the shares issued,  income  statement  treatment in
consolidation  for  issuance of stock by a  subsidiary  is  appropriate.  SAB 51
requires  that this  accounting  treatment,  if elected by the  parent,  must be
consistently  applied  to  all  subsidiary  stock  transactions  that  meet  the
conditions  for income  statement  recognition.  As noted  earlier,  KeySpan has
appropriately  applied this accounting  treatment to its recent subsidiary stock
transactions.

Regulation and Rate Matters

Gas Matters

As of June 30, 2004, the rate agreements for KEDNY and KEDLI have expired. Under
the terms of the KEDNY and KEDLI rate agreements, gas distribution rates and all
other provisions will remain in effect until changed by the NYPSC. At this time,
we  are  currently  evaluating  various  options  that  may be  available  to us
regarding  the  KEDNY  and KEDLI  rate  plans,  including  but not  limited  to,
proposing new rate plans.

Effective  November 1, 2003,  the DTE approved a $25.9 million  increase in base
revenues  for the Boston Gas Company  with an allowed  return on equity of 10.2%
reflecting  an equal  balance of debt and  equity.  On January  27, 2004 the DTE
issued  its  order  on  Boston   Gas   Company's   Motion   for   Recalculation,
Reconsideration  and  Clarification  that granted an additional  $1.1 million in
base revenues,  for a total of $27 million.  The DTE also approved a Performance
Based Rate Plan (the "Plan") for up to ten years.

For an additional  discussion of our current gas  distribution  rate agreements,
see KeySpan's  Annual Report on Form 10-K for the Year Ended  December 31, 2003,
Item 7 Management's  Discussion and Analysis of Financial  Condition and Results
of Operations "Regulation and Rate Matters."

Electric Matters

KeySpan sells to LIPA all of the capacity and, to the extent  requested,  energy
conversion  services  from our  existing  Long  Island  based oil and  gas-fired
generating  plants.  Sales of capacity and energy  conversion  services are made
under rates approved by the Federal  Energy  Regulatory  Commission  ("FERC") in
accordance with the Power Supply Agreement  ("PSA") entered into between KeySpan
and LIPA in 1998. The prior FERC approved rates,  which had been in effect since
May 1998,  expired on December 31, 2003.  KeySpan filed with the FERC an updated
cost of service for the Long Island based generating plants in October 2003. The
rate filing included,  among other things, an annual revenue increase of 2.1% or
approximately  $6.4 million,  a return on equity of 11%,  updated  operating and
maintenance  expense  levels and recovery of certain other costs.  FERC approved
implementation  of new rates  starting  January  1,  2004,  subject  to  refund.
Settlement negotiations with LIPA are currently ongoing.


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<PAGE>


Securities and Exchange Commission Regulation

KeySpan and certain of 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. As a
result of the recent  transactions  with Houston  Exploration and KeySpan Canada
these entities are no longer subject to SEC jurisdiction under PUHCA

KeySpan has the authorization,  under PUHCA to do the following through December
31, 2006 (the "Authorization Period"): (a) to issue and sell up to an additional
amount  of  $3.0  billion  of  common  stock,  preferred  stock,  preferred  and
equity-linked   securities,   and  long-term  debt  securities  (the  "Long-Term
Financing Limit") in accordance with certain defined parameters; (b) in addition
to the Long-Term Financing Limit, to issue and sell up to an aggregate amount of
$1.3 billion of short-term  debt; (c) to issue up to 13 million shares of common
stock under  dividend  reinvestment  and  stock-based  management  incentive and
employee  benefit  plans;  (d) to maintain  existing  and enter into  additional
hedging transactions with respect to outstanding indebtedness in order to manage
and minimize  interest rate costs;  (e) to issue  guarantees  and other forms of
credit  support in an  aggregate  principal  amount not to exceed  $4.0  billion
outstanding  at any one time;  (f) to refund,  repurchase  (through  open market
purchases, tender offers or private transactions),  replace or refinance debt or
equity  securities  outstanding  during the  Authorization  Period  through  the
issuance  of  similar  or any other type of  authorized  securities;  (g) to pay
dividends out of capital and unearned  surplus as well as  paid-in-capital  with
respect to certain subsidiaries,  subject to certain limitations;  (h) to engage
in  preliminary   development   activities  and  administrative  and  management
activities  in  connection  with  anticipated  investments  in exempt  wholesale
generators, foreign utility companies and other energy-related companies; (i) to
organize  and/or  acquire the equity  securities of entities that will serve the
purpose of facilitating authorized financings;  (j) to invest up to $3.0 billion
in exempt  wholesale  generators and foreign  utility  companies;  (k) to create
and/or  acquire  the  securities  of  entities  organized  for  the  purpose  of
facilitating  investments in other  non-utility  subsidiaries;  and (l) to enter
into  certain  types  of  affiliate  transactions  between  certain  non-utility
subsidiaries involving cost structures above the typical "at-cost" limit.

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, 2004, KeySpan's  consolidated common equity was 43%
of its consolidated capitalization,  including commercial paper, and each of its
utility   subsidiaries  common  equity  was  at  least  31%  of  its  respective
capitalization.


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<PAGE>


Environmental Matters

KeySpan  is  subject to  various  federal,  state and local laws and  regulatory
programs related to the environment.  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
$255.5 million and we have recorded a related liability for such amount. We have
also recorded an additional $24.1 million  liability  representing the estimated
environmental  cleanup costs related to a former coal tar  processing  facility.
Further,  as of June 30,  2004,  we have  expended a total of $114.9  million on
environmental remediation. (See Note 6 to the Consolidated Financial Statements,
"Financial Guarantees and Contingencies".)

Market and Credit Risk Management Activities

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

Credit Risk:  KeySpan is exposed to credit risk arising from the potential  that
our counterparties fail to perform on their contractual obligations.  Our credit
exposures  are  created  primarily  through  the sale of gas and  transportation
services  to  residential,   commercial,  electric  generation,  and  industrial
customers and the provision of retail access  services to gas marketers,  by our
regulated gas  businesses;  the sale of commodities and services to LIPA and the
NYISO;  the sale of 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


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<PAGE>


derivative and other contractual arrangements,  and manage our level of exposure
accordingly.  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.

Equity  and Debt  Securities  Risk:  KeySpan  is  exposed  to price  risk due to
investments  in equity and debt  securities  held to fund  benefit  payments for
various employee pension and other  postretirement  benefit plans. To the extent
that the values of  investments  held  decline,  the effect will be reflected in
KeySpan's  recognition  of periodic cost of such employee  benefit plans and the
determination  of the amount of cash to be contributed  to the employee  benefit
plans.

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,
2003. Nevertheless, the rules and regulations for capacity, energy sales and the
sale of certain  ancillary  services  to the NYISO  market  continue  to evolve.
Certain of these mitigation measures are still subject to rehearing and possible
judicial review.  The following  discussion is an update to the ongoing judicial
review that has  previously  been  discussed in KeySpan's  Annual Report on Form
10-K for the Year Ended December 31, 2003.

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

The NYISO,  Con Edison,  Niagara Mohawk Power  Corporation and Rochester Gas and
Electric each  individually  appealed FERC's order to Federal court. The appeals
were  consolidated  into one case by the court.  On  November 7, 2003 the United
States Court of Appeals for the District of Columbia  (the  "Court")  issued its
decision  in the case of  Consolidated  Edison  Company  of New York,  Inc.,  v.
Federal Energy Regulatory Commission ("Decision").  Essentially, the Court found
errors in the Commission's decision and remanded some issues in the case back to
the Commission for further explanation and action. The FERC has not acted on the
remand.

On June 25,  2004,  the NYISO  submitted a motion to FERC  seeking  refunds as a
result of the Decision.  KeySpan and others  submitted  statements of opposition
opposing  the  refunds.  FERC has not acted on the remand or the NYISO's  refund
motion and we cannot predict the outcome of these proceedings.


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For additional  information regarding these risks see KeySpan's Annual Report on
Form 10-K for the Year Ended December 31, 2003,  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
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   manage  our  cost  structure  and  operate
     efficiently;

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

-    implementation of new accounting standards;

-    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;

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

-    retention of key personnel;


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<PAGE>


-    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 and conduct operations;

-    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  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;

-    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;

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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


                                       62
<PAGE>


cash flow variability  associated with forecasted sales of natural gas. However,
since Houston Exploration is no longer a consolidated  subsidiary its derivative
financial  instruments  are not  reflected  on the  June 30,  2004  Consolidated
Balance Sheet. The Ravenswood facility uses derivative financial  instruments to
hedge the cash flow variability  associated with the purchase of natural gas and
oil that will be consumed during the generation of  electricity.  The Ravenswood
facility also hedges the cash flow variability associated with a portion of peak
electric energy sales.

KeySpan uses standard  NYMEX futures  prices to value gas futures  contracts and
market  quoted  forward  prices to value  oil swap and  natural  gas basis  swap
contracts  associated  with its Ravenswood  facility.  We also use market quoted
forward  prices to value  electric  derivatives  associated  with the Ravenswood
facility.

The following  tables set forth selected  financial data  associated  with these
derivative  financial  instruments noted above that were outstanding at June 30,
2004.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                                Year of                                                                 Fair Value
       Type of Contract not updated             Maturity       Volumes mmcf   Fixed Price $      Current Price $          ($000)
-----------------------------------------------------------------------------------------------------------------------------------
                 Gas
<S>                                               <C>              <C>       <C>                  <C>                         <C>
Swaps/Futures - Long Natural Gas                   2004              40       5.11 - 6.75          6.16 - 6.17                  15
                                                   2005              60       4.95 - 6.42          5.82 - 5.89                 (19)

-----------------------------------------------------------------------------------------------------------------------------------
                                                                    100                                                         (4)
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
                                       Year of            Volumes        Fixed Price          Current Price          Fair Value
      Type of Contract                 Maturity           Barrels             $                     $                  ($000)
---------------------------------------------------------------------------------------------------------------------------------
           Oil
<S>                                      <C>               <C>         <C>                   <C>                        <C>
Swaps - Long Fuel Oil                     2004              67,000      24.85 - 34.40         31.70 - 33.44              195
                                          2005              84,000      24.65 - 34.40         32.89 - 34.67              210
                                          2006              12,000          34.40                 34.40                  (43)

---------------------------------------------------------------------------------------------------------------------------------
                                                           163,000                                                       362
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
                                     Year of                         Fixed Margin/                                Fair Value
        Type of Contract             Maturity          MWh              Price $           Current Price $           ($000)
-----------------------------------------------------------------------------------------------------------------------------
          Electricity
<S>                                   <C>          <C>              <C>                   <C>                       <C>
Swaps - Energy                         2004         1,084,800        16.00 - 102.35        19.77 - 100.50             2,770
                                       2005           684,800        16.64 - 72.00         20.74 - 72.71             (1,392)

-----------------------------------------------------------------------------------------------------------------------------
                                                    1,769,600                                                         1,378
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       63
<PAGE>


------------------------------------------------------------------------------
                                                                      2004
Change in Fair Value of Derivative Instruments                       ($000)
------------------------------------------------------------------------------
Fair value of contracts at January 1,                              $(36,224)
Losses on contracts realized                                         25,433
Derivative balance that has been de-consolidated                     14,331
(Decrease) in fair value of all open contracts                       (1,804)
------------------------------------------------------------------------------
Fair value of contracts outstanding at March 31,                   $  1,736
------------------------------------------------------------------------------

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
(In Thousands of Dollars)
---------------------------------------------------------------------------------------------------------------
                                                       Fair Value of Contracts
---------------------------------------------------------------------------------------------------------------
                                               Mature Within                                     Total
Sources of Fair Value                            12 Months              Thereafter            Fair Value
---------------------------------------------------------------------------------------------------------------
<S>                                               <C>                    <C>                  <C>
Prices actively quoted                           $    12                   (16)              $    (4)
Prices based on models and
    other valuation methods                            -                     -                     -
Local published indicies                           1,883                  (143)                1,740
---------------------------------------------------------------------------------------------------------------
                                                 $ 1,895                $ (159)              $ 1,736
---------------------------------------------------------------------------------------------------------------
</TABLE>


We measure the commodity  risk of our  derivative  hedging  instruments  using a
sensitivity analysis. Based on a sensitivity analysis as of June 30, 2004, a 10%
increase in  electricity  and fuel prices would  reduce the value of  derivative
instruments  maturing  in 2004 by $1.8  million,  while  the  value of  expected
physical  power  production  for the  remainder  of 2004 would be enhanced  $5.6
million (net benefit to KeySpan of $3.8 million).  A 10% decrease in electricity
and fuel prices would  enhance the value of derivative  instruments  maturing in
2004 by $1.9  million,  while the value of expected  physical  power  production
would be reduced $6.6 million (net cost to KeySpan of $4.7 million).

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


                                       64
<PAGE>


The following  table sets forth selected  financial data  associated  with these
derivative financial instruments that were outstanding at June 30, 2004.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
                                                                                                                      Fair
Type of          Year of      Volumes        Floor              Ceiling        Fixed Price        Current             Value
Contract         Maturity       mmcf          ($)                 ($)              ($)           Price ($)            ($000)
------------------------------------------------------------------------------------------------------------------------------
<S>               <C>        <C>         <C>                 <C>              <C>               <C>                  <C>
Options            2004        4,500      5.00 - 6.00         5.00 - 7.00                -       6.16 - 6.68             562
                   2005        5,160      5.00 - 6.00         5.00 - 7.00                -       5.82 - 6.81           1,138
Swaps              2004       14,760                -                   -      5.60 - 5.99       6.16 - 6.68          10,345
                   2005       24,000                -                   -      5.81 - 6.01       5.82 - 6.81          16,135
                   2006        1,030                -                   -      6.03 - 6.16       5.28 - 6.33             (50)
------------------------------------------------------------------------------------------------------------------------------
                              49,450                                                                                   28,130
------------------------------------------------------------------------------------------------------------------------------
</TABLE>


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

Item 4. Controls and Procedures

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, 2004 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 6 to the Consolidated  Financial Statements  "Financial  Guarantees and
Contingencies".


                                       65
<PAGE>


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

We held our  Annual  Meeting  of  Shareholders  on May 20,  2004,  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:

1.   Election of Ten 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>
            DIRECTOR                              VOTES            VOTES                   TOTAL
                                                   FOR            WITHHELD                 VOTES
           <S>                                 <C>               <C>                     <C>
            Robert B. Catell                    128,233,166       4,407,512               132,640,678
            Andrea S. Christensen               128,614,745       4,025,933               132,640,678
            Alan H. Fishman                     127,658,738       4,981,940               132,640,678
            J. Atwood Ives                      127,607,605       5,033,073               132,640,678
            James R. Jones                      128,359,642       4,281,036               132,640,678
            James L. Larocca                    128,597,354       4,043,324               132,640,678
            Gloria C. Larson                    129,358,881       3,281,797               132,640,678
            Stephen W. McKessy                  127,968,342       4,672,336               132,640,678
            Edward D. Miller                    128,868,484       3,772,194               132,640,678
            Vikki L. Pryor                      129,343,203       3,297,475               132,640,678
</TABLE>

2.   Ratification of Deloitte & Touche LLP, as Independent Public Accountants

Deloitte & Touche LLP  received a majority  of the votes cast by the  holders of
shares  entitled  to  vote  thereon,   and  were  accordingly  ratified  as  the
Independent  Public  Accountants of KeySpan for the fiscal year ending  December
31, 2004.

        DELOITTE & TOUCHE LLP                   VOTES CAST

             FOR                               128,736,744
             AGAINST                             2,505,960
             ABSTAIN                             1,397,974
             TOTAL                             132,640,678


                                       66
<PAGE>


3.   Shareholder Proposal

The shareholder  proposal on the Shareholder  Rights Plan 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                                 63,212,949
              AGAINST                             33,534,579
              NON-VOTES                           32,493,890
              ABSTAIN                              3,399,260
              TOTAL                              132,640,678

Item 5.           Other Information

KeySpan had adopted a Shareholder Right Plan (the "Plan") on March 30, 1999 with
a ten year expiration  date. In June 2004,  KeySpan's Board  determined to amend
the  Plan  to  provide  for  it  to  terminate  effective  September  30,  2004.
Additionally,  the Board also adopted a policy whereby the Corporation  will not
adopt and implement a new Plan (or similar type of plan), unless it submits such
Plan to a vote of the shareholders;  provided,  however, that the Board reserved
the right to adopt and implement such a Plan without shareholder  approval,  if,
under  the  circumstances  then  existing,  the  Board  in the  exercise  of its
fiduciary  responsibilities  deems  it  to  be  in  the  best  interest  of  the
Corporation and its  shareholders  to immediately  adopt such a Plan without the
delay associated with seeking shareholder approval. In such case, the Board will
seek shareholder  ratification of the Plan no later than 12 months from the date
of adoption of any new Plan.

Item 6.  Exhibits and Reports on Form 8-K

(a) Exhibits

4.1* Credit Agreement among KeySpan  Corporation,  the several Lenders, ABN AMRO
     Bank N.V. and Citibank,  N.A., as  co-syndication  agents,  The Bank of New
     York and The Royal Bank of Scotland plc, as  co-documentation  agents,  and
     JPMorgan Chase Bank, as administrative agent for $640 million,  dated as of
     June 30, 2004.

4.2* First Amendment to Credit Agreement dated as of June 27, 2003 among KeySpan
     Corporation,  the several Lenders, Citibank N.A., as Syndication Agent, The
     Bank of New York and The Royal Bank of Scotland  plc,  as  co-documentation
     agents,  and JPMorgan  Chase Bank,  as  administrative  agent to reduce the
     amount from $850 million to $660 million, dated as of June 25, 2004.

10.1*KeySpan  Guaranty  dated May 25,  2005  relating  to the 250 MW  Ravenswood
     expansion plant.

10.2*Facility  Lease  Agreement  dated as of May 25, 2004 between SE  Ravenswood
     Trust, a Delaware statutory trust and  KeySpan-Ravenswood,  LLC relating to
     the 250 MW Ravenswood expansion plant.

10.3*Site  Lease  and  Easement  Agreement  dated  as of May  25,  2004  between
     KeySpan-Ravenswood,  LLC and SE  Ravenswood  Trust  relating  to the 250 MW
     Ravenswood expansion plant.

10.4*Site  Sublease  dated as of May 25, 2004  between SE  Ravenswood  Trust and
     KeySpan-Ravenswood, LLC relating to the 250 MW Ravenswood expansion plant.


                                       67
<PAGE>


10.5 Distribution  Agreement  dated  June  2,  2004  by and  among  The  Houston
     Exploration Company, Seneca-Upshur Petroleum, Inc., THEC Holdings Corp. and
     KeySpan  Corporation  (filed as  Exhibit  99.2 to The  Houston  Exploration
     Company's Form 8-K dated as of June 3, 2004).

10.6 Asset  Contribution  Agreement  dated  June 2,  2004  between  The  Houston
     Exploration  Company and  Seneca-Upshur  Petroleum,  Inc. (filed as Exhibit
     99.3 to The  Houston  Exploration  Company's  Form 8-K  dated as of June 3,
     2004).

10.7 Tax  Matters  Agreement  dated  June  2,  2004  by and  among  The  Houston
     Exploration Company, Seneca-Upshur Petroleum, Inc., THEC Holdings Corp. and
     KeySpan  Corporation  (filed as  Exhibit  99.4 to The  Houston  Exploration
     Company's Form 8-K dated as of June 3, 2004).

10.8 Amended  and  Restated  Registration  Rights  Agreement  dated June 2, 2004
     between The Houston  Exploration  Company,  THEC Holdings Corp. and KeySpan
     Corporation  (filed as Exhibit  99.2 to The Houston  Exploration  Company's
     Form 8-K dated as of June 3, 2004).

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.

(b) Reports on Form 8-K

On April 30,  2004,  the  Company  reported  that it had issued a press  release
concerning,  among other things, its consolidated earnings for the quarter ended
March 31, 2004. It also reported that it would be hosting an earnings conference
call at 10:30 A.M.  EST on April 30, 2004 to discuss its  consolidated  earnings
for the quarter ended March 31, 2004.

On April 30, 2004,  the Company  reported  that  beginning  on May 2, 2004,  the
Company  would give a series of  presentations  at the American Gas  Association
("AGA") Financial Forum.


                                       68
<PAGE>


On May 24,  2004,  the  Company  reported  that it had  issued  a press  release
disclosing  that it planned to enter into an  agreement  to exchange  thirty one
percent  of its  shares  of  common  stock of The  Houston  Exploration  Company
("THEC") for a THEC subsidiary.

On May 27,  2004,  the  Company  reported  that it had  issued  a press  release
announcing the successful  pricing of an exchange  transaction  with The Houston
Exploration Company.

On June 2,  2004,  the  Company  reported  that it had  issued  a press  release
announcing the successful completion of an exchange transaction with The Houston
Exploration Company.

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




                      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 5, 2004                         /s/ Gerald Luterman
                                             -----------------------------
                                                 Gerald Luterman
                                                 Executive Vice President and
                                                 Chief Financial Officer





                                       69