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 March 31, 2005

              [ ] 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 April 13, 2005
  ---------------------                         -------------------------------
        $.01 par value                                   161,614,217

<PAGE>



                      KEYSPAN CORPORATION AND SUBSIDIARIES

                                      INDEX

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

Item 1. Financial Statements

            Consolidated Balance Sheet -
            March 31, 2005 and December 31, 2004                           3

            Consolidated Statement of Income -
            Three Months Ended March 31, 2005 and 2004                     5

            Consolidated Statement of Cash Flows -
            Three Months Ended March 31, 2005 and 2004                     6

            Notes to Consolidated Financial Statements                     7

Item 2. Management's Discussion and Analysis of Financial
            Condition and Results of Operations                           34

Item 3. Quantitative and Qualitative Disclosures
            About Market Risk                                             59

Item 4. Controls and Procedures                                           62

           Part II.   OTHER INFORMATION

Item 1. Legal Proceedings                                                 62

Item 6. Exhibits and Reports on Form 8-K                                  62

Signatures                                                                63


                                       2
<PAGE>


                           CONSOLIDATED BALANCE SHEET
                                   (Unaudited)


<TABLE>
<CAPTION>

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

(In Millions of Dollars)                                               March 31, 2005              December 31, 2004
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>                         <C>

ASSETS

Current Assets
    Cash and temporary cash investments                                               $ 223.0                     $ 922.0
    Accounts receivable                                                               1,160.3                       788.5
    Unbilled revenue                                                                    500.9                       591.4
    Allowance for uncollectible accounts                                                (85.5)                      (67.8)
    Gas in storage, at average cost                                                     212.2                       515.5
    Material and supplies, at average cost                                              127.6                       123.4
    Other                                                                               130.9                       162.7
    Assets of discontinued operations                                                     3.4                        42.9
                                                                ------------------------------ ---------------------------
                                                                                      2,272.8                     3,078.6
                                                                ------------------------------ ---------------------------

Investments and  Other                                                                  236.6                       272.9

Property
    Gas                                                                               6,938.7                     6,871.2
    Electric                                                                          2,433.7                     2,402.1
    Other                                                                               403.2                       398.6
    Accumulated depreciation                                                         (2,757.2)                   (2,702.3)
    Gas exploration and production, at cost                                             181.3                       187.1
    Accumulated depletion                                                              (105.7)                      (97.5)
    Property of discontinued operations                                                   3.2                         8.7
                                                                ------------------------------ ---------------------------
                                                                                      7,097.2                     7,067.9
                                                                ------------------------------ ---------------------------

Deferred Charges
    Regulatory assets                                                                   537.9                       555.4
    Goodwill and other intangible assets                                              1,666.7                     1,677.6
    Other                                                                               770.2                       711.7
                                                                ------------------------------ ---------------------------
                                                                                      2,974.8                     2,944.7
                                                                ------------------------------ ---------------------------

Total Assets                                                                       $ 12,581.4                  $ 13,364.1
                                                                ============================== ===========================

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



        See accompanying Notes to the Consolidated Financial Statements.

                                       3
<PAGE>



                           CONSOLIDATED BALANCE SHEET
                                   (Unaudited)

<TABLE>
<CAPTION>

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


(In Millions of Dollars)                                                        March 31, 2005               December 31, 2004
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>                           <C>

LIABILITIES AND CAPITALIZATION
Current Liabilities
    Accounts payable and other liabilities                                                  $ 777.9                       $ 906.7
    Commercial paper                                                                          470.9                         912.2
    Current redemption of long-term debt                                                        1.5                          16.1
    Current redemption of preferred stock                                                      75.0                          55.3
    Taxes accrued                                                                             247.4                         161.6
    Dividends payable                                                                          72.7                          74.1
    Customer deposits                                                                          41.7                          43.3
    Interest accrued                                                                           63.9                          48.8
    Liabilities of discontinued operations                                                      4.6                          64.2
                                                                      ------------------------------ -----------------------------
                                                                                            1,755.6                       2,282.3
                                                                      ------------------------------ -----------------------------

Deferred Credits and Other Liabilities
    Regulatory liabilities:
          Miscellaneous liabilities                                                           145.7                          74.0
          Removal cost recovered                                                              509.5                         496.5
    Deferred income tax                                                                     1,117.9                       1,124.1
    Postretirement benefits and other reserves                                                938.0                         901.3
    Other                                                                                     119.8                         139.1
                                                                      ------------------------------ -----------------------------
                                                                                            2,830.9                       2,735.0
                                                                      ------------------------------ -----------------------------

Commitments and Contingencies (See Note 6)                                                       -                             -

Capitalization
    Common stock                                                                           3,509.5                       3,502.0
    Retained earnings                                                                        953.3                         792.2
    Other comprehensive income                                                               (73.3)                        (54.3)
    Treasury stock                                                                          (322.2)                       (345.1)
                                                                     ------------------------------ -----------------------------
         Total common shareholders' equity                                                 4,067.3                       3,894.8
    Preferred stock                                                                              -                          19.7
    Long-term debt and capital leases                                                      3,914.2                       4,418.7
                                                                     ------------------------------ -----------------------------
Total Capitalization                                                                       7,981.5                       8,333.2
                                                                     ------------------------------ -----------------------------

Minority Interest in Subsidiary Companies                                                     13.4                          13.6
                                                                     ------------------------------ -----------------------------
Total Liabilities and Capitalization                                                    $ 12,581.4                    $ 13,364.1
                                                                     ============================== =============================

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

</TABLE>


        See accompanying Notes to the Consolidated Financial Statements.

                                       4
<PAGE>


                        CONSOLIDATED STATEMENT OF INCOME
                                   (Unaudited)

<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------------
                                                                                    Three Months Ended March 31,
(In Millions of Dollars, Except Per Share Amounts)                                   2005                    2004
---------------------------------------------------------------------------------------------------    ------------------
<S>                                                                                     <C>                   <C>

Revenues
     Gas Distribution                                                                    $ 2,025.5             $ 1,927.8
     Electric Services                                                                       400.4                 359.1
     Energy Services                                                                          44.5                  44.1
     Gas Exploration and Production                                                              -                 152.4
     Energy Investments                                                                       10.1                  27.2
                                                                             ----------------------    ------------------
Total Revenues                                                                             2,480.5               2,510.6
                                                                             ----------------------    ------------------
Operating Expenses
     Purchased gas for resale                                                              1,308.8               1,226.6
     Fuel and purchased power                                                                133.1                 101.6
     Operations and maintenance                                                              387.2                 407.0
     Depreciation, depletion and amortization                                                106.1                 171.2
     Operating taxes                                                                         111.9                 122.3
                                                                             ----------------------    ------------------
Total Operating Expenses                                                                   2,047.1               2,028.7
                                                                             ----------------------    ------------------
Income from equity investments                                                                 5.3                   5.7
                                                                             ----------------------    ------------------
Operating Income                                                                             438.7                 487.6
                                                                             ----------------------    ------------------
Other Income and (Deductions)
     Interest charges                                                                        (60.0)                (84.1)
     Gain on sale of investments                                                               4.1                     -
     Cost of debt redemption                                                                 (20.9)                    -
     Minority interest                                                                           -                 (20.3)
     Other                                                                                     9.1                   2.6
                                                                             ----------------------    ------------------
Total Other Income and (Deductions)                                                          (67.7)               (101.8)
                                                                             ----------------------    ------------------
Income Taxes
     Current                                                                                 128.8                 154.5
     Deferred                                                                                  6.5                 (16.8)
                                                                             ----------------------    ------------------
Total Income Taxes                                                                           135.3                 137.7
                                                                             ----------------------    ------------------
Earnings from continuing operations                                                          235.7                 248.1
Discontinued Operations
Loss from discontinued operations, net of tax                                                 (2.2)                 (0.4)
Gain on disposal, net of tax                                                                   2.2                     -
                                                                             ----------------------    ------------------
Loss from discontinued operations                                                                -                  (0.4)
                                                                             ----------------------    ------------------
Net Income                                                                                   235.7                 247.7
Preferred stock dividend requirements                                                          1.3                   1.5
                                                                             ----------------------    ------------------
Earnings for Common Stock                                                                  $ 234.4               $ 246.2
                                                                             ======================    ==================
Basic Earnings Per Share:
  Continuing Operations,
         less preferred stock dividends                                                     $ 1.45                $ 1.54
  Discontinued Operations                                                                        -                     -
                                                                             ----------------------    ------------------
Basic Earnings Per Share                                                                    $ 1.45                $ 1.54
                                                                             ======================    ==================
Diluted Earnings Per Share
  Continuing Operations,
         less preferred stock dividends                                                       1.44                $ 1.53
  Discontinued Operations                                                                        -                     -
                                                                             ----------------------    ------------------
Diluted Earnings Per Share                                                                  $ 1.44                $ 1.53
                                                                             ======================    ==================
Average Common Shares Outstanding (000)                                                    161,125               159,892
Average Common Shares Outstanding - Diluted (000)                                          162,245               161,164
-------------------------------------------------------------------------------------------------------------------------

</TABLE>

        See accompanying Notes to the Consolidated Financial Statements.

                                       5
<PAGE>


                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (Unaudited)

<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------------------
                                                                                   Three Months Ended March 31,
(In Millions of Dollars)                                                            2005                   2004
-------------------------------------------------------------------------------------------------   -------------------
<S>                                                                                     <C>                     <C>

Operating Activities
Net income                                                                               $ 235.7               $ 247.7
Adjustments to reconcile net income to net
      cash provided by (used in) operating activities
    Depreciation, depletion and amortization                                               106.1                 171.2
    Deferred income tax                                                                      6.5                 (16.8)
    Income from equity investments                                                          (5.3)                 (5.7)
    Dividends from equity investments                                                          -                   0.1
    Amortization of interest rate swap                                                     (11.7)                 (2.4)
    (Gain) on sale of investment                                                            (4.1)                    -
    Minority interest                                                                          -                  20.3
    Loss from discontinued operations                                                          -                   0.4
Changes in assets and liabilities
    Accounts receivable                                                                   (262.3)               (305.5)
    Materials and supplies, fuel oil and gas in storage                                    297.8                 336.3
    Accounts payable and other liabilities                                                (126.5)               (183.6)
    Taxes accrued                                                                           85.7                 151.1
    Interest accrued                                                                        15.0                  38.4
    Captive insurance                                                                          -                  43.2
    Other                                                                                   46.5                  83.6
                                                                            ---------------------   -------------------
Net Cash Provided by Operating Activities                                                  383.4                 578.3
                                                                            ---------------------   -------------------
Investing Activities
    Construction expenditures                                                             (111.8)               (219.0)
    Cost of removal                                                                         (4.8)                 (6.2)
    Net proceeds from sale of property and investments                                      48.1                  13.1
                                                                            ---------------------   -------------------
Net Cash Used in Investing Activities                                                      (68.5)               (212.1)
                                                                            ---------------------   -------------------
Financing Activities
    Treasury stock issued                                                                   22.9                  11.8
    Issuance of long-term debt                                                                 -                  20.0
    Payment of long-term debt                                                             (515.0)                (94.9)
    Payment of commercial paper                                                           (441.4)               (187.8)
    Preferred stock dividends paid                                                          (1.3)                 (1.5)
    Common stock dividends paid                                                            (74.6)                (71.4)
    Other                                                                                   10.5                   9.2
                                                                            ---------------------   -------------------
Net Cash Used in Financing Activities                                                     (998.9)               (314.6)
                                                                            ---------------------   -------------------
Net Increase (Decrease) in Cash and Cash Equivalents                                      (684.0)                 51.6
Net Cash Flow from Discontinued Operations                                                 (15.0)                  1.9
Cash and Cash Equivalents at Beginning of Period                                           922.0                 203.4
                                                                            ---------------------   -------------------
Cash and Cash Equivalents at End of Period                                               $ 223.0               $ 256.9
                                                                            =====================   ===================

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



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

               See accompanying Notes to the Consolidated Financial Statements.

                                       6
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

KeySpan  Corporation  (referred to in the Notes to the  Financial  Statements as
"KeySpan,"  "we,"  "us" and "our") is a  registered  holding  company  under the
Public  Utility  Holding  Company  Act of 1935,  as amended  ("PUHCA").  KeySpan
operates six regulated  utilities that distribute  natural gas to  approximately
2.6 million  customers  in New York City,  Long  Island,  Massachusetts  and New
Hampshire,  making  KeySpan the fifth  largest gas  distribution  company in the
United States and the largest in the  Northeast.  We also own, lease and operate
electric  generating plants in Nassau and Suffolk Counties on Long Island and in
Queens County in New York City and are the largest electric  generation operator
in New York State. Under contractual  arrangements,  we provide power,  electric
transmission and distribution services,  billing and other customer services for
approximately 1.1 million electric  customers of the Long Island Power Authority
("LIPA").  KeySpan's other operating  subsidiaries are primarily involved in gas
exploration  and  production;  underground  gas storage;  liquefied  natural gas
storage; retail electric marketing; large energy-system ownership,  installation
and management;  service and maintenance of energy systems;  and engineering and
consulting  services.  We also  invest and  participate  in the  development  of
natural gas pipelines,  electric generation and other  energy-related  projects.
(See Note 2 "Business  Segments" for  additional  information  on each operating
segment.)

1. BASIS OF PRESENTATION

In our opinion,  the accompanying  unaudited  Consolidated  Financial Statements
contain all adjustments necessary to present fairly KeySpan's financial position
as of March 31, 2005,  and the results of operations  for the three months ended
March 31, 2005 and March 31,  2004,  as well as cash flows for the three  months
ended March 31, 2005 and March 31, 2004. The accompanying  financial  statements
should be read in conjunction  with the  consolidated  financial  statements and
notes  included  in  KeySpan's  Annual  Report  on Form 10K for the  year  ended
December 31, 2004. The December 31, 2004  financial  statement  information  has
been  derived from the 2004 audited  financial  statements.  Income from interim
periods may not be indicative of future results. Certain  reclassifications were
made  to  conform  prior  period  financial  statements  to the  current  period
financial statement presentation.

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

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

                                       7
<PAGE>



We have approximately 1.7 million common stock options  outstanding at March 31,
2005,  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.

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


<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------------------------------
                                                                                      Three Months Ended March 31,
(In Millions of Dollars, Except Per Share Amounts)                                     2005                  2004
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>                  <C>

Earnings for common stock                                                                    $ 234.4              $ 246.2
Interest savings on convertible preferred stock                                                    -                  0.1
Houston Exploration dilution                                                                       -                 (0.1)
--------------------------------------------------------------------------------------------------------------------------
Earnings for common stock - adjusted                                                         $ 234.4              $ 246.2
--------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding (000)                                                    161,125              159,892
Add dilutive securities:
Options                                                                                        1,120                1,050
Convertible preferred stock                                                                        -                  222
--------------------------------------------------------------------------------------------------------------------------
Total weighted average shares outstanding - assuming dilution                                162,245              161,164
--------------------------------------------------------------------------------------------------------------------------
Basic earnings per share                                                                      $ 1.45               $ 1.54
--------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share                                                                    $ 1.44               $ 1.53
--------------------------------------------------------------------------------------------------------------------------
</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 three to eight years
and power purchase  agreements  with remaining terms that range from eight to 22
years. The Electric Services segment also includes  subsidiaries that own, lease
and operate the 2,200 megawatt ("MW") Ravenswood  electric  generation  facility
("Ravenswood  Facility"),  located  in  Queens,  New  York,  as well as a 250 MW
combined  cycle electric  generating  facility  located at the  Ravenswood  site
("Ravenswood Expansion").  Collectively,  the Ravenswood Facility and Ravenswood
Expansion  are referred to as the  "Ravenswood  Generating  Station." All of the

                                       8
<PAGE>

energy,  capacity and ancillary  services  related to the Ravenswood  Generating
Station are sold to the New York  Independent  System Operator  ("NYISO") energy
markets.  The  Electric  Services  segment  also  provides  retail  marketing of
electricity to commercial customers.

The  Energy  Services   segment  includes   companies  that  provide   primarily
energy-related  services to customers  located primarily within the Northeastern
United States,  with concentrations in the New York City and Boston metropolitan
areas 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
operation  and  maintenance,  design,  engineering,  consulting  and fiber optic
services to commercial, institutional and industrial customers.

In  January  and  February  of 2005,  KeySpan  sold its  mechanical  contracting
subsidiaries.  The operating results and financial  position of these companies,
which were previously consolidated within the Energy Services segment, have been
reflected as discontinued  operations on the  Consolidated  Statement of Income,
Consolidated Balance Sheet and Consolidated Statement of Cash Flows.

In regard  to the  January  2005  transactions,  KeySpan  received  proceeds  of
approximately  $16  million,  approximately  $5  million  of which is to be paid
within a three  year  period.  In  addition,  KeySpan  retained a portion of its
previously  incurred surety  indemnity  support  obligations  related to certain
performance  and  payment  bonds  issued  for the  benefit of  KeySpan's  former
subsidiaries  prior to closing.  The current estimated cost to complete projects
supported by such indemnity obligations is approximately $20 million. The buyers
have agreed to complete the projects for which such indemnity  obligations  were
incurred  and to  indemnify  and  hold  KeySpan  harmless  with  respect  to its
liabilities in connection with such bonds.

In connection  with the February 2005  transaction,  KeySpan paid or contributed
approximately  $26  million to its former  subsidiary  prior to closing the sale
transaction in exchange for, among other things,  the disposition of outstanding
shares in the former subsidiary and the settlement of intercompany  advances and
replacement  of a  performance  and  payment  bond issued for the benefit of its
former  subsidiary  with  respect  to a  pending  project,  which  bond had been
supported  by a $150  million  indemnity  obligation  of KeySpan.  In  addition,
KeySpan received from its former  subsidiary an indemnity bond issued by a third
party surety company,  the purpose of which is to reimburse KeySpan in an amount
up to $80  million  in the  event it is  required  to  perform  under  all other
indemnity  obligations  previously  incurred by KeySpan to support the remaining
bonded  projects of its former  subsidiary  as of the  closing.  As of March 31,
2005, the total cost to complete such remaining  bonded projects is estimated to
be approximately  $65 million.  The  aforementioned  guarantees are reflected in
Note 6 "Financial Guarantees and Contingencies." KeySpan's former subsidiary has
also agreed to complete the projects for which such indemnity  obligations  were
incurred and indemnify and hold KeySpan harmless with respect to any liabilities
in connection with such bonds.

                                       9
<PAGE>

In  the  fourth  quarter  of  2004,   KeySpan's  investment  in  its  mechanical
contracting subsidiaries was written-down to fair value.

The Energy  Investments  segment  consists of our gas exploration and production
investments,  as well as  certain  other  domestic  energy-related  investments.
KeySpan's gas exploration  and production  activities  include its  wholly-owned
subsidiaries  Seneca  Upshur  Petroleum,  Inc.   ("Seneca-Upshur")  and  KeySpan
Exploration  and  Production,  LLC  ("KeySpan  Exploration").  Seneca-Upshur  is
engaged in gas exploration and production activities primarily in West Virginia.
KeySpan  Exploration is engaged in a joint venture with The Houston  Exploration
Company ("Houston Exploration"),  an independent natural gas and oil exploration
company  located in Houston,  Texas.  During the first quarter of 2004,  our gas
exploration  and production  investments  also included a 55% equity interest in
Houston  Exploration,  the  operations  of  which  were  fully  consolidated  in
KeySpan's Consolidated Financial Statements.  Houston Exploration's revenues and
operating  income were $152.4 million and $62.1 million,  respectively,  for the
first quarter of 2004. In the fourth  quarter of 2004 KeySpan sold its remaining
interests in Houston Exploration.

This segment is also  engaged in pipeline  development  activities.  KeySpan and
Duke Energy  Corporation  each own a 50% interest in the Islander  East Pipeline
Company,  LLC  ("Islander  East").  Islander  East was  created  to  pursue  the
authorization  and  construction  of an interstate  pipeline  from  Connecticut,
across Long Island Sound,  to a terminus  near  Shoreham,  Long Island.  Once in
service,  the  pipeline is expected to  transport up to 260,000 DTH daily to the
Long  Island  and New York  City  energy  markets.  Further,  KeySpan  has a 21%
interest in the Millennium Pipeline project which is expected to transport up to
500,000 DTH of natural gas a day from Corning to Ramapo, New York, where it will
connect to an existing pipeline. Additionally, subsidiaries in this segment hold
a 20% equity  interest in the  Iroquois Gas  Transmission  System LP, a pipeline
that  transports  Canadian  gas  supply to markets  in the  Northeastern  United
States.   These   subsidiaries  are  accounted  for  under  the  equity  method.
Accordingly, equity income from these investments is reflected as a component of
operating income in the Consolidated Statement of Income.

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

During the first quarter of 2004, we also had an  approximate  61% investment in
certain  midstream  natural gas assets in Western Canada through  KeySpan Energy
Canada  Partnership  ("KeySpan  Canada").  These assets  included 14  processing
plants and associated gathering systems that produced  approximately 1.5 BCFe of
natural gas daily and  provided  associated  natural gas liquids  fractionation.
These  operations were fully  consolidated in KeySpan's  Consolidated  Financial
Statements.  KeySpan  Canada's  revenues and operating income were $22.2 million
and $8.6  million,  respectively,  for the first  quarter of 2004. In the fourth
quarter of 2004 KeySpan sold its remaining interests in KeySpan Canada.

                                       10
<PAGE>

In the  first  quarter  of  2005,  KeySpan  sold  its 50%  interest  in  Premier
Transmission Limited ("PTL"), a gas pipeline from southwest Scotland to Northern
Ireland.  On February 25, 2005,  KeySpan  entered into a Share Sale and Purchase
Agreement with BG Energy  Holdings  Limited and Premier  Transmission  Financing
Public  Limited  Company  ("PTFPL"),  pursuant  to which all of the  outstanding
shares  of PTL were to be  purchased  by PTFPL.  On March 18,  2005 the sale was
completed and generated cash proceeds of  approximately  $48.1  million.  In the
fourth quarter of 2004, KeySpan recorded a pre-tax non-cash impairment charge of
$26.5 million  reflecting the difference  between the anticipated  cash proceeds
from the sale of PTL  compared  to its  carrying  value.  The final  sale of PTL
resulted  in a pre-tax  gain of $4.1  million  reflecting  the  difference  from
earlier estimates.

The  accounting  policies  of the  segments  are the same as those  used for the
preparation of the Consolidated Financial Statements. The segments are strategic
business units that are managed separately because of their different  operating
and regulatory environments.  Operating results of our segments are evaluated by
management on an operating  income basis. At March 31, 2005, the total assets of
each reportable  segment have not changed  materially from those levels reported
at December 31, 2004. As mentioned,  the  mechanical  contracting  subsidiaries,
included in Energy Services,  are reported as discontinued  operations for March
31, 2004. The reportable segment information is as follows:


<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------------------------------
                                                                                  Energy Investments
                                                                                ------------------------
                                                                                  Gas
                                                                                Exploration
                                          Gas           Electric    Energy        and          Other
(In Millions of Dollars)               Distribution     Service     Services    Production   Investments  Eliminations  Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>          <C>           <C>        <C>           <C>          <C>        <C>

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

Three Months Ended March 31, 2004
Unaffiliated revenue                        1,927.8      359.1         44.1        152.4         27.2           -       2,510.6
Intersegment revenue                              -          -          2.5            -          1.3        (3.8)            -
Operating Income                              379.7       47.2        (17.5)        62.1         12.9         3.2         487.6

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

</TABLE>


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

Because of the nature of our Electric Services  business,  electric revenues are
derived  from two  large  customers  - the NYISO  and  LIPA.  Electric  Services
revenues from these customers of $371.0 million and $345.6 million for the three
months ended March 31, 2005 and 2004, respectively,  represent  approximately15%
and 13%, respectively of our consolidated revenues in both periods.


                                       11
<PAGE>




3. COMPREHENSIVE INCOME

The table below indicates the components of comprehensive income:

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------
                                                                                        Three Months Ended March 31,
(In Millions of Dollars)                                                                2005                    2004
------------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>                    <C>

Net Income                                                                               $ 235.7                $ 247.7
------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax
Net losses (gains) on derivative instruments                                                (4.8)                  11.0
Foreign currency translation adjustments                                                    (5.0)                  (1.8)
Unrealized gains (losses) on marketable securities                                          (1.8)                   0.5
Settlement of derivative premiums                                                              -                    3.4
Unrealized losses on derivative financial instruments                                       (7.3)                 (42.5)
------------------------------------------------------------------------------------------------------------------------
Other comprehensive loss, net of tax                                                       (18.9)                 (29.4)
------------------------------------------------------------------------------------------------------------------------
Comprehensive Income                                                                     $ 216.8                $ 218.3
------------------------------------------------------------------------------------------------------------------------
Related tax (benefit) expense
Net losses (gains) on derivative instruments                                                (0.5)                   5.9
Foreign currency translation adjustments                                                    (2.7)                  (1.0)
Unrealized gains (losses) on marketable securities                                          (1.0)                   0.3
Settlement of derivative premiums                                                              -                    1.9
Unrealized losses on derivative financial instruments                                       (6.7)                 (22.9)
------------------------------------------------------------------------------------------------------------------------
Total Tax (Benefit) Expense                                                              $ (10.9)               $ (15.8)
------------------------------------------------------------------------------------------------------------------------

</TABLE>

4. HEDGING AND DERIVATIVE FINANCIAL INSTRUMENTS

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

Derivative financial instruments are employed by our gas distribution operations
to reduce the cash flow  variability  associated  with the purchase  price for a
portion  of  future  natural  gas  purchases  for our  regulated  firm gas sales
customers.  The  accounting  for these  derivative  instruments  is  subject  to
Statement of Financial  Accounting  Standards  ("SFAS") 71  "Accounting  for the
Effects of Certain Types of  Regulation."  See the caption below "Firm Gas Sales
Derivative  Instruments - Regulated Utilities" for a further discussion of these
derivatives.  Certain  derivative  instruments  employed by our gas distribution
operations  are not subject to SFAS 71.  Utility  tariffs  applicable to certain
large-volume  customers  permit  gas to be sold at  prices  established  monthly
relative  to a  prevailing  alternate  fuel price but limited to the cost of gas
plus the tail block rate. KEDNY uses over-the-counter ("OTC") natural gas swaps,
with offsetting  positions in OTC fuel oil swaps of equivalent  energy value, to
hedge the cash-flow variability of specified portions of gas purchases and sales
associated with these  customers.  The maximum length of time over which we have
hedged cash flow variability  associated with forecasted  purchases and sales of
natural  gas is  through  October  2005.  We use  standard  New York  Mercantile

                                       12
<PAGE>

Exchange ("NYMEX") futures prices to value the gas and heating oil positions. At
March 31, 2005, the fair value of gas swap contracts was $4.4 million;  the fair
value  of the oil  swap  contracts  was a  liability  of  $13.8  million.  These
derivative  balances are expected to be  reclassified  from other  comprehensive
income into earnings over the next twelve months.

Seneca-Upshur  utilizes OTC natural gas swaps to hedge the cash flow variability
associated with forecasted sales of a portion of its natural gas production.  At
March 31, 2005, Seneca-Upshur has hedge positions in place for approximately 85%
of its estimated 2005 through 2007 gas  production,  net of gathering  costs. We
use market  quoted  forward  prices to value these swap  positions.  The maximum
length of time over which Seneca-Upshur has hedged such cash flow variability is
through December 2007. The fair value of these  derivative  instruments at March
31,  2005 was a  liability  of $8.3  million.  The  estimated  amount  of losses
associated  with  such  derivative   instruments  that  are  reported  in  other
comprehensive income and that are expected to be reclassified into earnings over
the next twelve months is $3.8 million, or approximately $2.5 million after-tax.

The Ravenswood Generation Station 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
Generation  Station  also  hedges the cash flow  variability  associated  with a
portion of electric energy sales.

With respect to price exposure associated with fuel purchases for the Ravenswood
Generation  Station,  KeySpan employs 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 by the  Ravenswood  Generation  Station.  We use standard NYMEX
futures  prices to value the gas futures  contracts  and market  quoted  forward
prices to value oil swap  contracts.  The  maximum  length of time over which we
have  hedged cash flow  variability  associated  with  forecasted  purchases  of
natural  gas is  through  September  2005.  The fair  value of these  derivative
instruments  at March 31, 2005 was  negligible.  The maximum length of time over
which we have hedged cash flow variability  associated with forecasted purchases
of  fuel  oil is  through  April  2006.  The  fair  value  of  these  derivative
instruments at March 31, 2005 was $1.0 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.


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  Generation Station.  Our hedging strategy is to hedge
at least 50% of forecasted  on-peak  summer season  electric  energy sales and a
portion of forecasted  electric  energy sales for the remainder of the year. The
maximum  length of time over  which we have  hedged  cash  flow  variability  is
through  March  2006.  We use  market  quoted  forward  prices  to  value  these
outstanding derivatives. The fair value of these derivative instruments at March
31,  2005  was a  liability  of $2.0  million  all of which  is  expected  to be

                                       13
<PAGE>

reclassified into earnings over the next twelve months.  The after-tax impact is
anticipated to be $1.3 million.

The above  noted  derivative  financial  instruments  are cash flow  hedges that
qualify  for  hedge   accounting  under  SFAS  133  "Accounting  for  Derivative
Instruments  and  Hedging  Activities,"  as  amended by SFAS 149  "Amendment  of
Statement 133 on Derivative  Instruments and Hedging  Activities,"  collectively
SFAS 133, and are not considered held for trading purposes as defined by current
accounting  literature.  Accordingly,  we carry the fair value of our derivative
instruments  on the  Consolidated  Balance Sheet as either a current or deferred
asset  or  liability,  as  appropriate,  and  defer  the  effective  portion  of
unrealized gains or losses in accumulated other comprehensive  income. Gains and
losses are  reclassified  from  accumulated  other  comprehensive  income to the
Consolidated  Statement of Income in the period the hedged  transaction  affects
earnings.  Gains and losses are  reflected as a component  of either  revenue or
fuel  and  purchased   power   depending  on  the  hedged   transaction.   Hedge
ineffectiveness,  which was negligible during the first quarter of 2005, results
from  changes  during the period in the price  differentials  between  the index
price of the  derivative  contract and the price of the purchase or sale for the
cash flow that is being hedged, and is recorded directly to earnings.

The table below  summarizes  the fair value of  outstanding  financially-settled
commodity derivative  instruments that qualify for hedge accounting at March 31,
2005 and December 31, 2004 and the related line item on the Consolidated Balance
Sheet.  Fair  value is the  amount  at  which  derivative  instruments  could be
exchanged in a current  transaction  between  willing  parties,  other than in a
forced liquidation sale.

<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------------
(In Millions of Dollars)                                           March 31, 2005      December 31, 2004
--------------------------------------------------------------------------------------------------------
<S>                                                                      <C>                     <C>

Gas Contracts:
  Other current assets                                                    $ 4.5                   $ 0.2
  Accounts payable and other liabilities                                   (3.8)                   (6.2)
  Other deferred liabilities                                               (4.5)                   (0.8)

Oil Contracts:
  Other current assets                                                      1.0                     7.7
  Accounts payable and other liabilities                                  (13.8)                      -

Electric Contracts:
  Other current assets                                                        -                     0.4
  Accounts payable and other liabilities                                   (2.0)                      -
--------------------------------------------------------------------------------------------------------
                                                                        $ (18.6)                  $ 1.3
--------------------------------------------------------------------------------------------------------

</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 do not qualify for hedge accounting  treatment under
SFAS 133. In 2004,  we purchased a series of call options on the spread  between
the price of heating oil and the price of natural  gas.  The  options  cover the
period  February 2005 through  October 2005 and further  complement  our hedging
strategy  noted above  regarding  sales to certain  large-volume  customers.  As
stated,  we sell gas to certain  large-volume  customers  at prices  established

                                       14
<PAGE>

monthly relative to a prevailing alternate fuel price but limited to the cost of
gas plus the tail block rate. Utility tariffs, however, establish an upper limit
on the price KeySpan can charge for the sale of natural gas to these  customers.
These  options  are  intended to limit  KeySpan's  exposure to heating oil price
spikes.  These options do not qualify for hedge accounting  treatment under SFAS
133. We recorded a $3.1 million  benefit in other income and  deductions  on the
Consolidated  Statement  of Income to reflect  the  change in the  market  value
associated  with this  derivative  instrument  for the first quarter of 2005. In
addition,  the Ravenswood Generation Station sold a three year option for 30-day
peaking gas service.  The 30-day peaking gas service is for the following  three
winter seasons: October 2004 - March 2005, October 2005 - March 2006 and October
2006 -  March  2007.  For  each  of  the  winter  seasons  just  mentioned,  the
counterparty  can call on the  Ravenswood  Generation  Station to supply no more
than  30,000  Mdth of a gas a day for no more than 30 days.  We  recorded a $3.3
million benefit in other income and deductions on the Consolidated  Statement of
Income to reflect the change in the market value associated with this derivative
instrument for the first quarter of 2005.

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. Therefore, changes in the fair value of these derivatives
have  been  recorded  as a  regulatory  asset  or  regulatory  liability  on the
Consolidated Balance Sheet. Gains or losses on the settlement of these contracts
are initially deferred and then refunded to or collected from our firm gas sales
customers  consistent with  regulatory  requirements.  At March 31, 2005,  these
derivatives  had a fair value of $78.6 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.  Certain
contracts for the physical purchase of natural gas associated with our regulated
gas utilities are not exempt as normal  purchases from the  requirements of SFAS
133. Since these contracts are for the purchase of natural gas sold to regulated
firm gas sales customers,  the accounting for these contracts is subject to SFAS
71. Therefore, changes in the market value of these contracts have been recorded
as a regulatory asset or regulatory liability on the Consolidated Balance Sheet.
At March 31,  2005,  these  derivatives  had a net  negative  fair value of $3.2
million  and are  reflected  as a  regulatory  liability  of $4.8  million and a
regulatory asset of $8.0 on the Consolidated Balance Sheet.

Interest Rate Derivative  Instruments:  In January 2005,  KeySpan  redeemed $500
million  of  outstanding  debt - 6.15%  Notes  due  2006,  and  accelerated  the
amortization of approximately $11.2 million of previously  unamortized  benefits
associated  with an  interest  rate  swap on these  bonds  that  was  previously
settled.  The accelerated  amortization  was recorded as a reduction to interest
expense. (See Note 9 "Long-term Debt and Commercial Paper for additional details

                                       15
<PAGE>

regarding  the  debt  redemption.)   There  were  no  interest  rate  derivative
instruments outstanding at March 31, 2005.

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 2004, we entered into  heating-degree  day put options to mitigate the effect
of fluctuations from normal weather on KEDNE's financial position and cash flows
for the  2004/2005  winter  heating  season - November  2004 through March 2005.
These put options  would have paid KeySpan up to $40,000 per heating  degree day
when  the  actual   temperature   was  below  4,130  heating   degree  days,  or
approximately  5% warmer than normal,  based on the most recent 20-year  average
for normal  weather.  The maximum  amount  KeySpan  would have received on these
purchased put options is $16 million. The net premium cost for these options was
$1.6 million and was amortized over the heating season. Unlike previous years if
weather was colder than normal KeySpan would have no financial obligation. Since
weather  was colder than  normal  during the first  quarter of 2005 there was no
earnings  impact  associated  with these financial  derivative  instruments.  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.

Derivative  contracts  are  primarily  used to manage  exposure  to market  risk
arising  from changes in commodity  prices and interest  rates.  In the event of
non-performance by a counterparty to a derivative  contract,  the desired impact
may not be  achieved.  The risk of  counterparty  non-performance  is  generally
considered a credit risk and is actively managed by assessing each  counterparty
credit  profile and  negotiating  appropriate  levels of  collateral  and credit
support.  In instances  where  counterparties'  credit quality has declined,  or
credit  exposure  exceeds  certain  levels,  we may limit our credit exposure by
restricting  new  transactions   with   counterparties,   requiring   additional
collateral or credit support and  negotiating  the early  termination of certain
agreements.  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 2004, the Financial  Accounting  Standards  Board ("FASB")  issued FASB Staff
Position ("FSP") 106-2  "Accounting and Disclosure  Requirements  Related to the
Medicare  Prescription  Drug,  Improvement and  Modernization Act of 2003." This
guidance clarified the accounting and disclosure requirements for employers with
postretirement  benefit  plans  that have been  affected  by the  passage of the
Medicare  Prescription  Drug  Improvement  and  Modernization  Act of 2003 ("the
Act"). The Act introduced two new features to Medicare that an employer needs to
consider in measuring its  obligation  and net periodic  postretirement  benefit
costs.  KeySpan's retiree health benefit plan currently  includes a prescription

                                       16
<PAGE>

drug  benefit that is provided to retired  employees.  KeySpan  implemented  the
requirements of FSP 106-2 in September 2004.

In  January  2005,  the  Department  of Health  and Human  Services/Centers  for
Medicare and Medicaid  Services (CMS) released final  regulations with regard to
the  implementation  of the major  provisions  of the Medicare  Act.  KeySpan is
currently  reviewing the new  provisions and believes that the new guidance will
not have a material impact on its results of operations or cash flows.

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

6. FINANCIAL GUARANTEES AND CONTINGENCIES

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

                                       17
<PAGE>


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

We have  classified  the Master Lease as $412.3 million of long-term debt on the
Consolidated  Balance Sheet based on our current status as primary  beneficiary.
Further,  we have an asset  on the  Consolidated  Balance  Sheet  for an  amount
substantially  equal  to the  fair  market  value of the  leased  assets  at the
inception of the lease, less depreciation since that date, or approximately $336
million.

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

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

Asset Retirement Obligations: 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.  KeySpan's  only asset  retirement  obligation
("ARO") relates to its investment in Seneca-Upshur  and was  approximately  $1.9
million at March 31, 2005.

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

                                       18
<PAGE>

perpetuity  and cannot be measured,  no liability has been 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.  These former
sites,  some of which are no longer owned by us, have been identified to the New
York  State  Public   Service   Commission   ("NYPSC")  and  the  Department  of
Environmental   Conservation   ("DEC")  for   inclusion  on   appropriate   site
inventories.  Administrative  Orders on  Consent  ("ACO") or  Voluntary  Cleanup
Agreements  have been  executed  with the DEC to address the  investigation  and
remediation   activities   associated  with  certain  sites.  KeySpan  submitted
applications to the DEC for each of the remaining sites in August 2004 under the
DEC's Brownfield Cleanup Program ("BCP").  As a result of a recent United States
Supreme  Court  decision,  KeySpan  withdrew its  applications  in the DEC's BCP
program and will resubmit  applications  for individual  sites under various DEC
cleanup programs on a case-by-case basis.

We have  identified 28 of these sites as being  associated  with the  historical
operations of KEDNY. One site has been fully  remediated.  Subject to the issues
described  in  the  preceding   paragraph,   the  remaining  27  sites  will  be
investigated  and, if necessary,  remediated  under the terms and  conditions of
various types of DEC cleanup  orders.  Expenditures  incurred to date by us with
respect to KEDNY MGP-related activities total $50.0 million.

The  remaining  15 sites  have  been  identified  as being  associated  with the
historical operations of KEDLI. Expenditures incurred to date by us with respect
to KEDLI  MGP-related  activities  total $44.7 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 various types
of DEC cleanup orders.

We presently  estimate  the  remaining  cost of our KEDNY and KEDLI  MGP-related
environmental  remediation  activities will be $202.4 million,  which amount has
been  accrued by us as a reasonable  estimate of probable  cost for known sites.
However,  remediation  costs for each site may be materially  higher than noted,
depending upon changing technologies and regulatory standards,  selected end use
for each site, and actual environmental conditions encountered.

With  respect to  remediation  costs,  the KEDNY and KEDLI rate plans  generally
provide for the recovery from customers of investigation  and remediation  costs
of certain  sites.  At March 31, 2005, we have  reflected a regulatory  asset of
$225.8 million for our  KEDNY/KEDLI  MGP sites. In accordance with NYPSC policy,
KeySpan records a reduction to regulatory  liabilities as costs are incurred for
environmental  cleanup activities.  At March 31, 2005, these previously deferred
regulatory  liabilities  totaled $31.2 million. In October 2003, KEDNY and KEDLI

                                       19
<PAGE>

filed a joint  petition  with the NYPSC seeking rate  treatment  for  additional
environmental  costs that may be incurred at all of our New York MGP sites. That
petition is still pending.

We are  also  responsible  for  environmental  obligations  associated  with the
Ravenswood  Facility,  purchased  from  Consolidated  Edison in 1999,  including
remediation  activities  associated with its historical  operations and those of
the MGP facilities  that formerly  operated at the site. We are not  responsible
for  liabilities  arising from disposal of waste at off-site  locations prior to
the  acquisition  closing  and any  monetary  fines  arising  from  Consolidated
Edison's pre-closing conduct. We presently estimate the remaining  environmental
clean up activities  for this site will be $2.3  million,  which amount has been
accrued by us. Expenditures incurred to date total $2.7 million.

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

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

We  presently  estimate  the  remaining  cost  of  these   Massachusetts   KEDNE
MGP-related environmental cleanup activities will be $14.9 million, which amount
has been  accrued by us as a  reasonable  estimate  of  probable  cost for known
sites,  however  remediation  costs for each site may be materially  higher than
noted,  depending upon changing technologies and regulatory standards,  selected
end  use  for  each  site,  and  actual  environmental  conditions  encountered.
Expenditures  incurred since November 8, 2000, the date KeySpan acquired Eastern
Enterprises, with respect to these MGP-related activities total $24.1 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
so-called Nashua River Asbestos Site, adjacent to the Nashua MGP site.


                                       20
<PAGE>

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 however,
remediation costs for each site may be materially  higher than noted,  depending
upon changing technologies and regulatory  standards,  selected end use for each
site, and actual environmental  conditions  encountered.  Expenditures  incurred
since November 8, 2000, with respect to these MGP-related activities total $10.3
million.

By rate orders, the Massachusetts  Department of  Telecommunications  and Energy
("MADTE") and the New Hampshire Public Utility Commission  ("NHPUC") provide for
the recovery of site  investigation and remediation costs and,  accordingly,  at
December 31, 2004, we have reflected a regulatory asset of $44.0 million for the
KEDNE MGP sites.  As  previously  mentioned,  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  orders  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,  a  successor  company to Eastern
Enterprises, for which we may have or share environmental remediation or ongoing
maintenance   responsibility.   These  three  sites,  located  in  Philadelphia,
Pennsylvania, New Haven, Connecticut and Everett, Massachusetts, were associated
with  historical  operations  involving  the  production  of  coke  and  related
industrial processes. Honeywell International,  Inc. and Beazer East, Inc. (both
former  owners and/or  operators of certain  facilities at Everett ("the Everett
Facility")   together  with   KeySpan,   have  entered  into  an  ACO  with  the
Massachusetts  Department of Environmental  Protection for the investigation and
development  of a remedial  response  plan for a portion of that site.  KeySpan,
Honeywell and Beazer East have entered into a cost-sharing agreement under which
each  company has agreed to pay  one-third of the costs of  compliance  with the
consent  order,  while  preserving  any  claims  it may have  against  the other
companies for, among other things, reallocation of proportionate liability.

We presently estimate the remaining cost of our environmental cleanup activities
for the three  non-utility  sites will be  approximately  $18.9  million,  which
amount has been  accrued by us as a  reasonable  estimate of probable  costs for
known sites however,  remediation  costs for each site may be materially  higher
than noted,  depending  upon changing  technologies  and  regulatory  standards,
selected end use for each site, and actual environmental conditions encountered.
Expenditures  incurred since November 8, 2000, with respect to these sites total
$13.9 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.

                                       21
<PAGE>

See  KeySpan's  Annual  Report on Form 10K for the year ended  December 31, 2004
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 10K for the year  ended  December  31,  2004,  we do not
consider  any of such  proceedings  to be material to our  business or likely to
result in a material  adverse  effect on our  results of  operations,  financial
condition or cash flows.

On February 9, 2005,  KeySpan was served with a  shareholder  derivative  action
asserting  claims on behalf of KeySpan based upon breach of fiduciary  duty. The
complaint, which was filed in the New York State Supreme Court for the County of
Kings,  relates to the 2001 Roy Kay related  losses and alleges  that  KeySpan's
directors and certain senior officers  breached their fiduciary duties when they
placed  their own  personal  interests  above the  interests of KeySpan by using
material  non-public  information  (the losses at Roy Kay) to sell securities at
artificially inflated prices.

This new complaint asserts  essentially the same allegations as contained in two
prior federal  shareholder  derivative  actions which were  commenced in October
2001 and June 2002.  On March 15, 2004,  KeySpan and the  individual  defendants
filed a motion to dismiss those earlier federal  complaints.  On April 14, 2004,
the plaintiffs filed a notice of voluntary withdrawal of their actions. On April
23, 2004, the federal court  dismissed both actions without  prejudice.  KeySpan
intends to file a motion to dismiss this new complaint. While KeySpan denies any
wrongdoing, the outcome of this proceeding cannot be determined as yet.

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.

                                       22
<PAGE>

Financial Guarantees

KeySpan  has  issued  financial  guarantees  in the normal  course of  business,
primarily on behalf of its  subsidiaries,  to various third party creditors.  At
March 31, 2005,  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>

-----------------------------------------------------------------------------------------------------------------------------
   Nature of Guarantee (In Thousands of Dollars)                               Amount of Exposure       Expiration Dates
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>              <C>                <C>

Guarantees for Subsidiaries
   Medium-Term Notes - KEDLI                                        (i)                  $ 525,000        2008-2010
   Industrial Development Revenue Bonds                             (ii)                   128,000          2027
   Ravenswood - Master Lease                                        (iii)                  425,000          2009
   Ravenswood - Sale/leaseback                                      (iv)                   385,000          2040
   Surety Bonds                                                     (v)                    126,000       2005 - 2008
   Commodity Guarantees and Other                                   (vi)                    58,000          2005
   Letters of Credit                                                (vii)                   74,000          2005
--------------------------------------------------------------------------------------------------------------------------
                                                                                       $ 1,721,000
--------------------------------------------------------------------------------------------------------------------------

</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.  The face value of
     these notes is  included  in  long-term  debt on the  Consolidated  Balance
     Sheet.

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

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

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

                                       23
<PAGE>

(v)  KeySpan  has  agreed  to  indemnify  the  issuers  of  various  surety  and
     performance bonds associated with certain  construction  projects currently
     being  performed  by certain  current  and former  subsidiaries  within the
     Energy  Services  segment.   In  the  event  that  the  current  or  former
     subsidiaries fail to perform their obligations under contracts, the injured
     party may demand that the surety make  payments or provide  services  under
     the bond.  KeySpan  would then be obligated to reimburse the surety for any
     expenses or cash outlays it incurs.  Although  KeySpan is not  guaranteeing
     any new  bonds  for any of the  former  subsidiaries,  KeySpan's  indemnity
     obligation supports the contractual obligations of these current and former
     subsidiaries. It is contemplated that the majority of the current contracts
     will be  completed  by the end of 2005.  In  addition,  a  performance  and
     payment bond issued for the benefit of a former  subsidiary with respect to
     a  pending  project,  which  bond  had  been  supported  by a $150  million
     indemnity obligation,  has been replaced.  KeySpan has also received from a
     former  subsidiary  an  indemnity  bond issued by a third  party  insurance
     company,  the purpose of which is to  reimburse  KeySpan in an amount up to
     $80  million  in the  event it is  required  to  perform  under  all  other
     indemnity  obligations  previously  incurred  by KeySpan  to  support  such
     company's bonded projects existing prior to divestiture.

(vi) KeySpan has guaranteed  commodity-related  payments for subsidiaries within
     the Energy  Services  segment,  as well as KeySpan  Ravenswood,  LLC. These
     guarantees  are  provided  to third  parties  to  facilitate  physical  and
     financial  transactions  involved in the  purchase of natural  gas, oil and
     other petroleum products for electric production and marketing  activities.
     The guarantees cover actual purchases by these  subsidiaries that are still
     outstanding as of March 31, 2005.

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

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


                                       24
<PAGE>


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
May 28, 2006 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.

In addition,  LIPA is in the process of performing a long-term  strategic review
initiative regarding its future direction. It has engaged a team of advisors and
consultants and has been conducting  public hearings to develop  recommendations
to be submitted to the LIPA Trustees. Some of the strategic options that LIPA is
considering  include  whether  LIPA  should  continue  its  operations  as  they
presently  exist,  fully  municipalize  or privatize,  sell some, but not all of
their assets and become a regulator of rates and  services.  LIPA was  initially
required to make a determination by May 2005 as to whether it would exercise its
option to purchase our Long Island  generating  plants  pursuant to the terms of
the Generation Purchase Rights Agreement.  KeySpan and LIPA have mutually agreed
to extend the date by which LIPA must make this  determination  to December  15,
2005. At the time, we are unable to determine what the outcome of this strategic
review  will have on our  financial  condition,  results of  operations  or cash
flows.  Any action  that may be taken will have to take into  consideration  the
long-term nature of our existing contracts.

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 exercise
periods from five to ten years. In 2003,  KeySpan 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  continues  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

                                       25
<PAGE>

grant dates for awards under the plans  consistent with SFAS 123, our net income
and earnings per share would have decreased to the pro-forma  amounts  indicated
below:


<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------
                                                                                Three Months Ended March 31,
(In Millions of Dollars, Except Per Share Amounts)                                2005                     2004
------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>                      <C>

Earnings available for common stock:
As reported                                                                     $ 234.4                  $ 246.2
     Add: recorded stock-based compensation expense, net of tax                     2.9                      1.5
     Deduct: total stock-based compensation expense, net of tax                    (3.4)                    (2.9)
------------------------------------------------------------------------------------------------------------------
Pro-forma earnings                                                              $ 233.9                  $ 244.8
------------------------------------------------------------------------------------------------------------------
Earnings per share:
     Basic - as reported                                                         $ 1.45                   $ 1.54
     Basic - pro-forma                                                           $ 1.45                   $ 1.53

     Diluted - as reported                                                       $ 1.44                   $ 1.53
     Diluted - pro-forma                                                         $ 1.44                   $ 1.52
------------------------------------------------------------------------------------------------------------------
</TABLE>


8. POSTRETIREMENT BENEFITS

Pension  Plans:  The  following  information  represents  the  consolidated  net
periodic pension cost for the three months ended March 31, 2005 and 2004 for our
noncontributory  defined  benefit  pension plans which cover  substantially  all
employees. Benefits are based on years of service and compensation.  Funding for
pensions is in  accordance  with  requirements  of federal law and  regulations.
KEDLI and  Boston  Gas  Company  are  subject  to  certain  deferral  accounting
requirements mandated by the NYPSC and the MADTE, respectively for pension costs
and other postretirement benefit costs. Further, KeySpan's electric subsidiaries
are subject to certain "true-up"  provisions in accordance with the LIPA service
agreements.

The calculation of net periodic pension cost is as follows:

<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------------------------------------
                                                                                           Three Months Ended March 31,
(In Millions of Dollars)                                                                  2005                         2004
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>                          <C>

Service cost, benefits earned during the period                                         $ 15.0                       $ 13.1
Interest cost on projected benefit obligation                                             37.4                         36.0
Expected return on plan assets                                                          (42.9)                       (36.5)
Net amortization and deferral                                                             18.9                         16.9
--------------------------------------------------------------------------------------------------------------------------------
Total pension cost                                                                      $ 28.4                       $ 29.5
--------------------------------------------------------------------------------------------------------------------------------

</TABLE>


Other  Postretirement   Benefits:   The  following  information  represents  the
consolidated net periodic other postretirement benefit cost for the three months
ended  March 31, 2005 and 2004 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.

                                       26
<PAGE>

Contributions  to  VEBA  trusts  are  tax  deductible,  subject  to  limitations
contained in the Internal Revenue Code.

Net  periodic   other   postretirement   benefit  cost  included  the  following
components:

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------
                                                                                      Three Months Ended March 31,
(In Millions of Dollars)                                                                    2005                        2004
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>                        <C>

Service cost, benefits earned during the period                                              $ 6.3                      $ 5.4
Interest cost on accumulated
   postretirement benefit obligation                                                          19.9                       18.5
Expected return on plan assets                                                                (9.1)                      (7.7)
Net amortization and deferral                                                                 16.5                       11.3
------------------------------------------------------------------------------------------------------------------------------
Other postretirement cost                                                                    $33.6                      $27.5
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
>


During the first quarter of 2005,  KeySpan has  contributed  $4.0 million to its
pension  plans and $9.0  million  to its  other  postretirement  benefit  plans.
Subsequent to March 31, 2005, KeySpan contributed an additional $94.5 million to
its pension plans. At the present time, KeySpan does not anticipate contributing
any  additional  funds to its pension plans for the remainder of 2005.  However,
KeySpan  anticipates  contributing  an  additional  $17  million  to  its  other
postretirement  benefit  plans  during the  remainder of 2005.  These  estimated
contribution  levels  are  subject  to change  based on future  market  returns,
interest rates and certain other measurements. Actual contributions,  therefore,
may vary from these levels.

9. LONG-TERM DEBT and COMMERCIAL PAPER

On January 14, 2005,  KeySpan  redeemed $500 million of outstanding debt - 6.15%
Notes due 2006.  KeySpan  incurred  $20.9 million in call premiums and wrote-off
$1.3  million  of  previously  deferred  costs.   Further,  we  accelerated  the
amortization of approximately $11.2 million of previously  unamortized  benefits
associated  with  an  interest  rate  swap  on  these  bonds.   The  accelerated
amortization was recorded as a reduction to interest expense.

At December 31, 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  required us, three years from
the date of issuance of the MEDS Equity  Units,  May 16, 2005,  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 was
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%.

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 our common stock over the
20 day trading  period ending on the third trading day prior to May 16, 2005. If
the average closing price of KeySpan's common stock over this time frame is less
than or equal to $35.30,  then 13 million shares will be issued.  If the average

                                       27
<PAGE>

closing price over this time frame is greater than or equal to $42.36, then 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  based upon a
sliding scale.

In 2005, KeySpan was required to remarket the note component of the Equity Units
between  February  2005 and May 2005 and  reset  the  interest  rate to the then
current market rate of interest;  however,  the reset interest rate could not be
set below 4.9%. In March 2005,  KeySpan  remarketed the note component of $394.9
million of the Equity Units at the reset  interest  rate of 4.9%  through  their
maturity date of May 2008. The balance of the notes ($65.1 million) were held by
the  original  MEDS  equity  holders  in  accordance  with  their  terms and not
remarketed.  KeySpan then  exchanged  $300 million of the  remarketed  notes for
$307.2 million of new 30 year notes bearing an interest rate of 5.8%. Therefore,
at March 31, 2005  KeySpan  had $160  million of 4.9% notes  outstanding  with a
maturity date of May 2008 and $307.2  million of 5.8% notes  outstanding  with a
maturity date of April 2035.

The cash proceeds  generated by the remarketing have been deposited in a special
trust that will be used by the original  MEDS Equity  Units  holders to purchase
KeySpan common stock on May 16, 2005 under the formula  described  earlier.  The
note holders who did not  remarket  their notes were  required to post  treasury
securities  into the special trust as well.  The funds in the trust will accrete
to $460 million which will be provided to KeySpan on May 16, 2005 to satisfy the
MEDS  purchase  contracts.  Currently,  KeySpan  has no legal right to the funds
currently  deposited in the special trust and  therefore has not reflected  this
cash on its Consolidated Balance Sheet.

KeySpan  applied  the  accounting  requirements  of  Emerging  Issues Task Force
("EITF")  96-19  "Debtor's  Accounting  for a  Modification  or Exchange of Debt
Instruments"  to  account  for these  transactions  and,  as a result,  recorded
charges of $4.1 million  representing the remaining balance of prior unamortized
issuance  costs,  as well as fees paid to the prior note  holders.  KeySpan also
deferred $2.7 million of issuance costs associated with the exchange.

The MEDS Equity Units were 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  reached  a  threshold
appreciation price of $42.36 per share, which did not occur.

KeySpan  currently  has two credit  facilities  totaling  $1.3  billion - a $640
million five year revolving  credit facility due June 2009 and a three year $660
million facility due June 2006. 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  five-year  facility  and  0.125% on the  three-year
facility.  Both  credit  agreements  allow for KeySpan to borrow  using  several
different  types  of  loans;  specifically,  Eurodollar  loans,  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 facility,
and an additional  0.125% for loans over 33% of the 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 facility,  and an additional  0.125% for loans
over 33% of the facility.  ABR loans are based on the highest of the Prime Rate,

                                       28
<PAGE>

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.

At  March  31,  2005,  consolidated   indebtedness  was  51.4%  of  consolidated
capitalization.  Assuming the equity issuance  expected to occur on May 16, 2005
as noted above, the consolidated  indebtedness at March 31, 2005 would have been
48.8%.

At March 31, 2005,  $470.9  million of  commercial  paper was  outstanding  at a
weighted average annualized interest rate of 2.83%. We had the ability to borrow
up to an additional  $829.1 million at March 31, 2004 under the commercial paper
program.

10. KEYSPAN GAS EAST CORPORATION SUMMARY FINANCIAL INFORMATION

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


                                       29
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                           Statement of Income
-----------------------------------------------------------------------------------------------------------------------------------
                                                                      Three Months Ended March 31, 2005
(In Millions of Dollars)                         Guarantor         KEDLI        Other Subsidiaries     Eliminations    Consolidated
------------------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>           <C>                  <C>                  <C>            <C>

Revenues                                           $ 0.2         $ 503.6              $ 1,976.9            $ (0.2)        $ 2,480.5
                                            ----------------------------------------------------------------------------------------
Operating Expenses
  Purchased gas                                        -           314.1                  994.7                 -           1,308.8
  Fuel and purchased power                             -               -                  133.1                 -             133.1
  Operations and maintenance                         6.3            32.5                  348.4                 -             387.2
  Intercompany expense                                 -             1.3                   (1.3)                                  -
  Depreciation and amortization                        -            26.5                   79.6                 -             106.1
  Operating taxes                                      -            17.0                   94.9                 -             111.9
                                            ----------------------------------------------------------------------------------------
Total Operating Expenses                             6.3           391.4                1,649.4                 -           2,047.1
                                            ----------------------------------------------------------------------------------------
Income from equity investments                         -               -                    5.3                 -               5.3
                                            ----------------------------------------------------------------------------------------
Operating Income (Loss)                             (6.1)          112.2                  332.8              (0.2)            438.7
                                            ----------------------------------------------------------------------------------------

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

Income Taxes (Benefit)                              (9.8)           34.1                  111.0                 -             135.3

Discontinued Operations                                -               -                      -                 -                 -
                                          ------------------------------------------------------------------------------------------
Net Income                                       $ 235.7          $ 63.4                $ 171.9          $ (235.3)          $ 235.7
                                          ==========================================================================================


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


<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                        Statement of Income
-----------------------------------------------------------------------------------------------------------------------------------
                                                                     Three Months Ended March 31, 2004
(In Millions of Dollars)                        Guarantor         KEDLI        Other Subsidiaries     Eliminations     Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>           <C>                  <C>                 <C>            <C>

Revenues                                           $ 0.2         $ 471.1              $ 2,039.5           $ (0.2)        $ 2,510.6
                                         ------------------------------------------------------------------------------------------
Operating Expenses
  Purchased gas                                        -           291.1                  935.5                -           1,226.6
  Fuel and purchased power                             -               -                  101.6                -             101.6
  Operations and maintenance                         0.4            33.2                  373.4                -             407.0
  Intercompany expense                                 -             1.4                   (1.4)                                 -
  Depreciation and amortization                        -            29.8                  141.4                -             171.2
  Operating taxes                                      -            19.6                  102.7                -             122.3
                                         ------------------------------------------------------------------------------------------
Total Operating Expenses                             0.4           375.1                1,653.2                -           2,028.7
                                         ------------------------------------------------------------------------------------------
Income from equity investments                         -               -                    5.7                -               5.7
                                         ------------------------------------------------------------------------------------------
Operating Income (Loss)                             (0.2)           96.0                  392.0             (0.2)            487.6
                                         ------------------------------------------------------------------------------------------

Interest charges                                   (53.5)          (15.9)                 (71.5)            56.8             (84.1)
Other income and (deductions)                      297.5             0.4                   (2.1)          (313.5)            (17.7)
                                                                    ---------------------------------------------------------------
Total Other Income and (Deductions)                244.0           (15.5)                 (73.6)          (256.7)           (101.8)
                                         ------------------------------------------------------------------------------------------

Income Taxes (Benefit)                              (5.9)           22.7                  120.9                -             137.7
                                         ------------------------------------------------------------------------------------------
Earnings from Continuing Operations                249.7            57.8                  197.5           (256.9)            248.1
Discontinued Operations                                -               -                   (0.4)               -              (0.4)
                                         ------------------------------------------------------------------------------------------
Net Income                                       $ 249.7          $ 57.8                $ 197.1         $ (256.9)          $ 247.7
                                         ==========================================================================================


-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
                                       30
<PAGE>


<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------------------------
Balance Sheet
-----------------------------------------------------------------------------------------------------------------------------
                                                                               March 31, 2005
(In Millions of Dollars)                            Guarantor       KEDLI     Other Subsidiaries   Eliminations Consolidated
-----------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>             <C>             <C>              <C>          <C>
ASSETS
Current Assets
   Cash & temporary cash investments                  $ 82.7         $ (5.2)         $ 145.5             $ -       $ 223.0
   Accounts receivable, net                              1.5          202.9          1,371.3               -       1,575.7
   Other current assets                                  3.2          138.8            328.7               -         470.7
   Assets of discontinued operations                       -              -              3.4               -           3.4
                                               ------------------------------------------------------------------------------
                                                        87.4          336.5          1,848.9               -       2,272.8
                                               ------------------------------------------------------------------------------

Equity Investments                                   4,510.1            0.8            138.0        (4,412.3)        236.6
                                               ------------------------------------------------------------------------------
Property
   Gas                                                     -        2,015.3          4,923.4               -       6,938.7
   Other                                                   -              -          3,018.2               -       3,018.2
   Accumulated depreciation and depletion                  -         (391.0)        (2,471.9)              -      (2,862.9)
   Property of discontinued operations                     -              -              3.2               -           3.2
                                               ------------------------------------------------------------------------------
                                                           -        1,624.3          5,472.9               -       7,097.2
                                               ------------------------------------------------------------------------------

Intercompany Accounts Receivable                     2,349.5           24.5          1,774.2        (4,148.2)            -
                                                           -
Deferred Charges                                       376.9          231.6          2,366.3               -       2,974.8

                                               ------------------------------------------------------------------------------
Total Assets                                       $ 7,323.9      $ 2,217.7       $ 11,600.3      $ (8,560.5)   $ 12,581.4
                                               ==============================================================================

LIABILITIES AND CAPITALIZATION
Current Liabilities
   Accounts payable                                   $ 47.0         $ 92.6          $ 638.3             $ -       $ 777.9
   Commercial paper                                    470.9              -                -               -         470.9
   Other current liabilities                           322.1          108.4             71.7               -         502.2
   Liabilities of discontinued operations                  -              -              4.6               -           4.6
                                               ------------------------------------------------------------------------------
                                                       840.0          201.0            714.6               -       1,755.6
                                               ------------------------------------------------------------------------------
Intercompany Accounts Payable                           51.3           57.3          1,906.8        (2,015.4)            -
                                               ------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Deferred income tax                                    (78.6)         301.8            894.7               -       1,117.9
Other deferred credits and liabilities                 574.3          127.7          1,011.0               -       1,713.0
                                               ------------------------------------------------------------------------------
                                                       495.7          429.5          1,905.7               -       2,830.9
                                               ------------------------------------------------------------------------------
Capitalization
Common shareholders' equity                          4,087.5          879.0          3,513.1        (4,412.3)      4,067.3
Long-term debt                                       1,849.4          650.9          3,546.7        (2,132.8)      3,914.2
                                               ------------------------------------------------------------------------------
Total Capitalization                                 5,936.9        1,529.9          7,059.8        (6,545.1)      7,981.5
                                               ------------------------------------------------------------------------------
Minority Interest in Subsidiary Companies                  -              -             13.4               -          13.4
                                               ------------------------------------------------------------------------------
Total Liabilities & Capitalization                 $ 7,323.9      $ 2,217.7       $ 11,600.3      $ (8,560.5)   $ 12,581.4
                                               ==============================================================================

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


                                       31
<PAGE>
<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------------------------------
Balance Sheet
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                 December 31, 2004
(In Millions of Dollars)                       Guarantor         KEDLI         Other Subsidiaries      Eliminations    Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>             <C>                 <C>               <C>               <C>

ASSETS
Current Assets
   Cash & temporary cash investments             $ 580.7          $ (0.9)             $ 342.2               $ -            $ 922.0
   Accounts receivable, net                          0.8           223.6              1,087.7                 -            1,312.1
   Other current assets                              4.5           146.5                650.6                 -              801.6
   Assets of discontinued operations                   -               -                 42.9                 -               42.9
                                         ------------------------------------------------------------------------------------------
                                                   586.0           369.2              2,123.4                 -            3,078.6
                                         ------------------------------------------------------------------------------------------

Investments and Other                            4,567.3             2.0                169.1          (4,465.5)             272.9
                                         ------------------------------------------------------------------------------------------
Property
   Gas                                                 -         1,998.5              4,872.7                 -            6,871.2
   Other                                               -               -              2,987.8                 -            2,987.8
   Accumulated depreciation
        and depletion                                  -          (334.4)            (2,465.4)                -           (2,799.8)
   Property of discontinued
         operations                                    -               -                  8.7                 -                8.7
                                         ------------------------------------------------------------------------------------------
                                                       -         1,664.1              5,403.8                 -            7,067.9
                                         ------------------------------------------------------------------------------------------

Intercompany Accounts Receivable                 2,485.7               -              1,292.2          (3,777.9)                 -

Deferred Charges                                   381.3           221.4              2,342.0                 -            2,944.7

                                         ------------------------------------------------------------------------------------------
Total Assets                                   $ 8,020.3       $ 2,256.7           $ 11,330.5        $ (8,243.4)        $ 13,364.1
                                        ===========================================================================================

LIABILITIES AND CAPITALIZATION
Current Liabilities
   Accounts payable                               $ 48.4         $ 111.6              $ 746.7               $ -            $ 906.7
   Commercial paper                                912.2               -                    -                 -              912.2
   Other current liabilities                       294.7           167.2                (62.7)                -              399.2
   Liabilities of discontiuned operation               -               -                 64.2                 -               64.2
                                        -------------------------------------------------------------------------------------------
                                                 1,255.3           278.8                748.2                 -            2,282.3
                                        -------------------------------------------------------------------------------------------
Intercompany Accounts Payable                          -           101.3              2,147.8          (2,249.1)                 -
                                        -------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Deferred income tax                                (83.2)          298.1                909.2                 -            1,124.1
Other deferred credits and liabilities             534.5           112.0                964.4                 -            1,610.9
                                        -------------------------------------------------------------------------------------------
                                                   451.3           410.1              1,873.6                 -            2,735.0
                                        -------------------------------------------------------------------------------------------
Capitalization
Common shareholders' equity                      3,940.5           815.6              3,604.2          (4,465.5)           3,894.8
Preferred stock                                     19.7               -                    -                 -               19.7
Long-term debt                                   2,353.5           650.9              2,943.1          (1,528.8)           4,418.7
                                        -------------------------------------------------------------------------------------------
Total Capitalization                             6,313.7         1,466.5              6,547.3          (5,994.3)           8,333.2
                                        -------------------------------------------------------------------------------------------
Minority Interest in
        Subsidiary Companies                           -               -                 13.6                 -               13.6
                                        -------------------------------------------------------------------------------------------
Total Liabilities & Capitalization             $ 8,020.3       $ 2,256.7           $ 11,330.5        $ (8,243.4)        $ 13,364.1
                                        ===========================================================================================

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

                                       32
<PAGE>

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------
Statement of Cash Flows
------------------------------------------------------------------------------------------------------------------------------
                                                                                Three Months Ended March 31, 2005
                                                        ----------------------------------------------------------------------
(In Millions of Dollars)                                       Guarantor        KEDLI       Other Subsidiaries    Consolidated
------------------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>           <C>                   <C>               <C>

Operating Activities
Net Cash Provided by Operating Activities                       $ 33.4        $ 81.6                $ 268.4           $ 383.4
                                                        ----------------------------------------------------------------------
Investing Activities
   Capital expenditures                                              -         (17.0)                 (94.8)           (111.8)
   Cost of removal                                                   -          (0.3)                  (4.5)             (4.8)
   Proceeds from sale of investment                                  -             -                   48.1              48.1
                                                        ----------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities                  -         (17.3)                 (51.2)            (68.5)
                                                        ----------------------------------------------------------------------
Financing Activities
   Treasury stock issued                                          22.9             -                      -              22.9
   Payment of debt, net                                         (941.4)            -                  (15.0)           (956.4)
   Common and preferred stock dividends paid                     (75.9)            -                      -             (75.9)
   Other                                                          10.5             -                      -              10.5
   Intercompany dividend payments                                265.0                               (265.0)                -
   Net intercompany accounts                                     187.5         (68.6)                (118.9)                -

                                                        ----------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities             (531.4)        (68.6)                (398.9)           (998.9)
                                                        ----------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents          $ (498.0)       $ (4.3)              $ (181.7)         $ (684.0)
Net Cash Flow from Discontinued Operations                           -             -                  (15.0)            (15.0)
Cash and Cash Equivalents at Beginning of Period                 580.7          (0.9)                 342.2             922.0
                                                        ----------------------------------------------------------------------
Cash and Cash Equivalents at End of Period                      $ 82.7        $ (5.2)               $ 145.5           $ 223.0
                                                        ======================================================================

------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Statement of Cash Flows
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                 Three Months Ended March 31, 2004
                                                             ----------------------------------------------------------------------
(In Millions of Dollars)                                        Guarantor         KEDLI        Other Subsidiaries     Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>            <C>                   <C>               <C>
Operating Activities
Net Cash Provided by (Used in) Operating Activities               $ 95.1          $ 91.2                $ 392.0          $ 578.3
                                                             ----------------------------------------------------------------------
Investing Activities
   Capital expenditures                                                -           (24.4)                (194.6)          (219.0)
  Cost of removal                                                      -            (0.4)                  (5.8)            (6.2)
  Proceeds from sale of property                                       -               -                   13.1             13.1
                                                             ----------------------------------------------------------------------
Net Cash Used in Investing Activities                                  -           (24.8)                (187.3)          (212.1)
                                                             ----------------------------------------------------------------------
Financing Activities
   Treasury stock issued                                            11.8               -                      -             11.8
   Payment of debt, net                                           (187.8)              -                  (74.9)          (262.7)
   Common and preferred stock dividends paid                       (72.9)              -                      -            (72.9)
   Other                                                             9.5               -                   (0.3)             9.2
   Net intercompany accounts                                       128.4           (67.9)                 (60.5)               -
                                                                                                                               -
                                                             ----------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities               (111.0)          (67.9)                (135.7)          (314.6)
                                                             ----------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents               (15.9)           (1.5)                  69.0             51.6
Net Cash Flow from Discontinued Operations                             -               -                    1.9              1.9
Cash and Cash Equivalents at Beginning of Period                    97.6             1.6                  104.2            203.4
                                                             ----------------------------------------------------------------------
Cash and Cash Equivalents at End of Period                        $ 81.7           $ 0.1                $ 175.1          $ 256.9
                                                             ======================================================================

-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
                                       33
<PAGE>

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

Executive Summary of Results

The following is a summary of transactions  affecting  comparative  earnings for
the three months ended March 31, 2005,  compared to the three months ended March
31, 2004. 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.

The table below  summarizes the KeySpan's  results of operations for the periods
indicated.

<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------------------------------
                                                        Three Months Ended                         Three Months Ended
(In Millions of Dollars,                                   March 31, 2005                             March 31, 2004
   Except Per Share Amounts)                         Earnings            E.P.S.                 Earnings             E.P.S.
---------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>               <C>                       <C>              <C>

Earnings from core operations,
   less preferred stock dividends                      $ 234.4          $ 1.45                    $ 222.8           $ 1.39
Non-core earnings                                            -               -                       23.8             0.15
Discontinued operations                                      -               -                       (0.4)               -

---------------------------------------------------------------------------------------------------------------------------
Earnings for common stock                              $ 234.4          $ 1.45                    $ 246.2           $ 1.54
---------------------------------------------------------------------------------------------------------------------------
</TABLE>


KeySpan's  earnings  for common  stock for the three months ended March 31, 2005
were $234.4 million, or $1.45 per share, compared to $246.2 million or $1.54 per
share realized during the  corresponding  period last year. In the first quarter
of 2004, KeySpan held a 55% equity ownership interest in The Houston Exploration
Company ("Houston Exploration"),  an independent natural gas and oil exploration
company  located in Houston,  Texas.  Further,  KeySpan held an approximate  61%
investment in certain  midstream  natural gas assets in Western  Canada  through
KeySpan Energy Canada  Partnership  ("KeySpan  Canada").  The operations of both
Houston  Exploration  and KeySpan  Canada were fully  consolidated  in KeySpan's
Consolidated Financial Statements during the first quarter of 2004. KeySpan sold
its ownership  interest in these  non-core  operations in the fourth  quarter of
2004.  During the three months ended March 31,  2004,  the combined  earnings of
Houston  Exploration  and KeySpan  Canada were $23.8 million or $0.15 per share.
Additionally,  for  March  31,  2004  we have  reclassified  the  operations  of
KeySpan's former mechanical contracting  subsidiaries as discontinued operations
as these  companies were  discontinued in the fourth quarter of 2004 and sold in
early  2005.  In  the  fourth  quarter  of  2004,  KeySpan's  investment  in its
mechanical contracting subsidiaries was written-down to fair value.

                                       34
<PAGE>

As indicated in the above table,  KeySpan's earnings from core operations,  less
preferred  stock  dividends  increased  $11.5  million or $0.06 per share in the
first  quarter  of  2005,  primarily  reflecting  higher  earnings  from our gas
distribution  operations,  as well as lower interest  charges.  Gas distribution
earnings  were   favorably   impacted  by  customer   additions  and  oil-to-gas
conversions, net of attrition and conservation,  as well as from higher revenues
associated  with the large  volume  heating  market.  The  decrease  in interest
expense  resulted  from the  benefits  attributable  to lower  outstanding  debt
resulting  from debt  redemptions  in the  fourth  quarter of 2004 and the first
quarter of 2005,  as well as from the sale of Houston  Exploration  and  KeySpan
Canada. See the discussion under the caption "Review of Operating Segments " for
additional details on KeySpan's operating results.

Consolidated Review of Results

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

<TABLE>
<CAPTION>

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

Quarter Ended March 31,                                                 2005                2004
----------------------------------------------------------------------------------------------------
<S>                                                                    <C>                 <C>

Gas Distribution                                                        $ 391.9             $ 379.7
Electric Services                                                          51.0                47.2
Energy Services                                                            (2.8)              (17.5)
Energy Investments                                                          6.4                75.0
Eliminations and other                                                     (7.8)                3.2
----------------------------------------------------------------------------------------------------
Operating Income                                                          438.7               487.6
Interest charges                                                          (60.0)              (84.1)
Other income and (deductions)                                              (7.7)              (17.7)
Income taxes                                                              135.3               137.7
----------------------------------------------------------------------------------------------------
Earnings from continuing operations                                       235.7               248.1
Discontinued operations                                                       -                (0.4)
----------------------------------------------------------------------------------------------------
Net Income                                                                235.7               247.7
Preferred stock dividend requirements                                       1.3                 1.5
----------------------------------------------------------------------------------------------------
Earnings for Common Stock                                               $ 234.4             $ 246.2
----------------------------------------------------------------------------------------------------
Basic Earnings per Share
   Continuing operations, less preferred
      stock dividends                                                    $ 1.45              $ 1.54
   Discontinued operations                                                    -                   -
----------------------------------------------------------------------------------------------------
                                                                         $ 1.45              $ 1.54
----------------------------------------------------------------------------------------------------
</TABLE>


As indicated in the above table,  operating income  decreased $49.0 million,  or
10% for the quarter ended March 31, 2005,  compared to the corresponding  period
last year. The decrease in operating income  primarily  reflects lower operating
results  associated  with the Energy  Investments  segment of $68.6 million.  As
noted  earlier,  during the first  quarter of 2004 KeySpan held a 55%  ownership
interest in Houston  Exploration  and an approximate  61% ownership  interest in
KeySpan  Canada.  For the three  months  ended  March  31,  2004,  the  combined
operating income of Houston Exploration and KeySpan Canada was approximately $71

                                       35
<PAGE>

million. KeySpan sold its ownership interest in these non-core operations in the
fourth quarter of 2004.

KeySpan's  continuing  businesses  posted an increase in operating income of $22
million  primarily  as a result of  higher  earnings  from the Gas  Distribution
segment of $12.2 million and better  results from the Energy  Services  segment.
The Gas Distribution  results reflect an increase in net gas revenues  (revenues
less the cost of gas and associated  revenue taxes) while the operating  results
of the Energy Services segment benefited from lower operating expenses. (See the
discussion under the caption "Review of Operating  Segments" for further details
on each segment.)

Interest  expense  decreased  $24.0  million,  or 29%  reflecting  the  benefits
attributable to lower  outstanding debt resulting from recent debt  redemptions,
as well as the sale of Houston  Exploration and KeySpan  Canada.  In addition to
debt  redemptions  in 2004, on January 14, 2005,  KeySpan  redeemed $500 million
6.15% Series due 2006 of  outstanding  debt.  KeySpan  incurred $20.9 million in
call premiums and wrote-off $1.3 million of previously deferred financing costs.
Further,  KeySpan accelerated the amortization of approximately $11.2 million of
previously  unamortized  benefits associated with an interest rate swap on these
bonds. The accelerated  amortization of the interest rate swap and the write-off
of previously  deferred  financing costs were recorded to interest  expense.  At
March 31, 2005  KeySpan had $3.9  billion of debt  outstanding  compared to $5.5
billion outstanding at March 31, 2004.

In  addition  to the debt  redemption  charge  noted  above,  other  income  and
(deductions)  for the first quarter of 2005 includes a number of other items. In
the first quarter of 2005, KeySpan sold its 50% interest in Premier Transmission
Limited ("PTL"),  a gas pipeline from southwest Scotland to Northern Ireland and
realized cash proceeds of approximately  $48.1 million. In the fourth quarter of
2004,  KeySpan  recorded a pre-tax non-cash  impairment  charge of $26.5 million
reflecting the difference between the anticipated cash proceeds from the sale of
PTL compared to its carrying value.  The final sale of PTL resulted in a pre-tax
gain of $4.1 million reflecting the difference from earlier estimates. (See Note
2 to the Consolidated  Financial  Statements  "Business Segments" for additional
details.)  Further,  other income and  (deductions)  reflects a $6.4 million non
cash  gain  reflecting  the  fair  value  of  outstanding  derivative  financial
instruments that do not qualify for hedge accounting  treatment.  (See Note 4 to
the  Consolidated  Financial  Statements,   "Hedging  and  Derivative  Financial
Instruments"  for  additional  details.)  For the quarter  ended March 31, 2004,
other income and (deductions)  included the minority  interest impact associated
with our ownership  interests in Houston Exploration and KeySpan Canada of $20.3
million.

Income tax expense for the first quarter of 2005 and 2004 generally reflects the
level of pre-tax  income.  Further,  income tax expense for the first quarter of
2004 includes a $6.0 million  benefit from a revised  appraisal  associated with
property that was disposed of in 2003.



Earnings for common  stock for the three months ended March 31, 2005,  decreased

                                       36
<PAGE>

$11.9  million,  or $0.09  per  share  compared  to the same  period  last  year
reflecting the items  previously  noted - specifically  the comparative  adverse
impact to earnings from the sale of Houston  Exploration  and KeySpan  Canada in
2004,  offset by higher  earnings  from the Gas  Distribution  segment and lower
interest charges.

Consistent with our prior earnings guidance, KeySpan's consolidated earnings for
2005 are  forecasted  to be in the range of $2.30 to $2.40 per share,  excluding
special  items.  Since we sold the majority of our non-core  assets in 2004, the
earnings  forecast  represents  earnings  from all  continuing  operations  less
preferred  stock  dividends.   Further,   the  earnings  forecast  includes  the
anticipated  dilutive  impact  from  the  conversion  of the MEDS  Equity  Units
scheduled  for May of  this  year.  (See  Note 9 to the  Consolidated  Financial
Statements  "Long-Term Debt and Commercial Paper" for an explanation of the MEDS
Equity Units.)

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

Review of Operating Segments

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

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.


                                       37
<PAGE>


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

<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------------------------------
                                                                                              Three Months Ended March 31,
(In Millions of Dollars)                                                                      2005                     2004
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>                    <C>

Revenues                                                                                   $ 2,025.5              $ 1,927.8
Cost of gas                                                                                  1,313.4                1,226.6
Revenue taxes                                                                                   24.8                   34.8
----------------------------------------------------------------------------------------------------------------------------
Net Revenues                                                                                   687.3                  666.4
----------------------------------------------------------------------------------------------------------------------------
Operating Expenses
   Operations and maintenance                                                                  181.8                  172.4
   Depreciation and amortization                                                                76.8                   76.9
   Operating taxes                                                                              36.8                   37.4
----------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses                                                                       295.4                  286.7
----------------------------------------------------------------------------------------------------------------------------
Operating Income                                                                             $ 391.9                $ 379.7
----------------------------------------------------------------------------------------------------------------------------
Firm gas sales and transportation (MDTH)                                                     152,556                154,316
Transportation - Electric Generation (MDTH)                                                    2,840                  4,139
Other Sales (MDTH)                                                                            56,540                 52,956
Warmer (Colder) than Normal - New York                                                          (2.7)%                 (6.0)%
Warmer (Colder) than Normal - New England                                                       (6.6)%                 (9.4)%
----------------------------------------------------------------------------------------------------------------------------

</TABLE>

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

Executive Summary

Operating  income  increased  $12.2 million for the three months ended March 31,
2005 compared to the same period last year,  primarily due to an increase in net
gas revenues  (revenues  less the cost of gas and  associated  revenue taxes) of
$20.9 million  resulting from customer  additions and oil-to-gas  conversions in
our firm gas  sales  market,  as well as from  higher  net gas  revenues  in our
large-volume heating markets.  Partially offsetting the increase in net revenues
were higher operating expenses of $8.7 million,  primarily due to an increase of
$5.2 million in the provision for uncollectible  accounts receivable as a result
of higher gas costs.

Net Revenues

Net gas  revenues  from  our gas  distribution  operations  increased  by  $20.9
million, or 3.1%, in the first quarter of 2005 compared to the same quarter last
year.  Net  gas  revenues  benefited  from  customer  additions  and  oil-to-gas
conversions in our firm gas sales market (residential, commercial and industrial
customers),  as well as from higher net gas revenues in our large-volume heating
and other interruptible  (non-firm) markets. As measured in heating degree days,
weather for the first  quarter of 2005 in our New York and New  England  service
territories was  approximately  2.7% and 6.6% colder than normal,  respectively,
and was  approximately  2% - 5% warmer than last year across  KeySpan's  service
territories.

                                       38
<PAGE>

Net  revenues  from firm gas  customers  increased  $9.3  million  for the first
quarter of 2005  compared to the same period last year.  Customer  additions and
oil-to-gas conversions,  net of attrition and conservation,  added $15.2 million
to net gas revenues.  Further, we realized a benefit of $1.0 million as a result
of the Boston Gas  Company's  Performance  Based Rate Plan (the "Plan") that was
approved  by the  Massachusetts  Department  of  Telecommunications  and  Energy
("MADTE")  in 2003.  The Plan  provides  for firm gas sales rates to be adjusted
each year based on an inflation factor offset by a productivity factor. (See the
caption under  "Regulation and Rate Matters" for further  information  regarding
the rate filing.)

Offsetting,  to some extent, the beneficial impact of the customer additions and
oil-to-gas  conversions  was the adverse impact to comparative  net gas revenues
from the  additional  billing day last year due to the leap year.  For the first
quarter of 2004,  KeySpan  realized $5.7 million in additional  net gas revenues
from the additional billing day.

Weather,  which was warmer  than last  year,  resulted  in an adverse  impact to
comparative net gas revenues of $5.3 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 $4.8 million through the weather  normalization  adjustment.  However,
the gas  distribution  operations of our New England based  subsidiaries  do not
have a weather normalization  adjustment. To mitigate the effect of fluctuations
in normal  weather  patterns on KEDNE's  results of  operations  and cash flows,
weather derivatives were in place for the 2004/2005 winter heating season. These
financial  derivatives  afforded  KeySpan some  protection  against  warmer than
normal  weather.  Unlike  in prior  years,  however,  KeySpan  had no  financial
obligation  to its  counterparties  if weather was colder than normal during the
2004/2005 winter heating season.  Since weather during the first quarter of 2005
was colder  than  normal in the New  England  service  territories  there was no
earnings impact associated with these derivative  instruments.  However,  in the
first  quarter of 2004,  we  recorded a $4.1  million  reduction  to revenues to
reflect  the  loss  on  derivative  positions  that  were  settled.   Therefore,
comparative  first  quarter 2005 net revenues  reflect a favorable  $4.1 million
variation.  (See Note 4 to the Consolidated  Financial  Statements  "Hedging and
Derivative Financial Instruments" for further information).

Firm gas distribution  rates for KEDNY,  KEDLI and KEDNE in 2005, other than for
the recovery of gas costs and as noted,  have remained  substantially  unchanged
from rates charged in 2004.

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 $11.6 million during the first quarter of 2005 compared
to the same period last year reflecting primarily higher pricing. Further, since
weather  during  January  2004 was  significantly  colder than  normal,  KeySpan
discontinued sales service to a segment of its dual-fuel  customers for a number
of days during the month,  as permitted under its tariff and directed by the New
York  State  Public  Service  Commission  to  ensure  reliable  service  to firm

                                       39

<PAGE>

customers.  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 as well as continued  growth in the New
York service territory. We estimate that on Long Island approximately 37% of the
residential and multi-family  markets,  and  approximately 55% of the commercial
market,  currently use natural gas for space heating.  Further, we estimate that
in our New England service territories  approximately 50% of the residential and
multi-family  markets,  as well as the commercial market,  currently use natural
gas for space  heating  purposes.  We will  continue to seek growth,  in all our
market segments,  through the expansion of our gas distribution  system, 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.

Firm Sales, Transportation and Other Quantities

Firm gas sales and  transportation  quantities  for the quarter  ended March 31,
2005  decreased  slightly (1%) compared to the same period in 2004 due primarily
to the warmer  weather this year compared to last year.  Customer  additions and
oil-to-gas  conversions  offset  the full  impact  of the  warmer  weather.  Net
revenues are not affected by customers  opting to purchase their gas supply from
other  sources,  since  delivery  rates  charged  to  transportation   customers
generally  are  the  same as  delivery  rates  charged  to  full  sales  service
customers.  Transportation quantities related to electric generation reflect the
transportation  of gas to our  electric  generating  facilities  located on Long
Island. Net revenues from these services are not material.

Other sales quantities include on-system  interruptible  quantities,  off-system
sales quantities  (sales made to customers  outside of our service  territories)
and related  transportation.  We had an  agreement  with Coral  Resources,  L.P.
("Coral"),  a subsidiary of Shell Oil Company, under which Coral assisted in the
origination, structuring, valuation and execution of energy-related transactions
on behalf of KEDNY and KEDLI. This agreement expired on March 31, 2005 and these
services  are now  performed  by  KeySpan  employees.  We also have a  portfolio
management  contract  with Merrill  Lynch  Trading,  under which  Merrill  Lynch
Trading  provides all of the city gate supply  requirements at market prices and
manages certain upstream capacity, underground storage and term supply contracts
for KEDNE.  This  agreement  expires  on March 31,  2006,  and we are  exploring
options with respect to the services under this contract.

Purchased Gas for Resale

The  increase in gas costs for the first  quarter of 2005  compared to the first
quarter of 2004 of $86.8 million, or 7%, reflects an increase of 8% in the price
per  dekatherm of gas  purchased,  and a slight  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


                                       40
<PAGE>

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 first quarter of 2005 compared to the same quarter
last year increased $8.7 million,  or 3%.  Operations  and  maintenance  expense
increased  $9.4  million,  or 5%, in 2005  compared to 2004  primarily due to an
increase of $5.2 million in the provision for uncollectible accounts as a result
of  increasing  gas  costs.  Further,  the timing of the  incurrence  of certain
insurance  costs and  regulatory  fees  resulted  in a  comparative  increase to
operations and maintenance expense.  Higher depreciation charges of $3.6 million
reflecting the continued expansion of the gas distribution system were offset by
lower regulatory amortization charges of $3.8 million.

Other Matters

In order to serve the  anticipated  market  requirements in our New York service
territories,  KeySpan and Duke Energy  Corporation formed Islander East Pipeline
Company,  LLC ("Islander  East") in 2000.  Islander East is owned 50% by KeySpan
and  50% by Duke  Energy,  and was  created  to  pursue  the  authorization  and
construction  of an  interstate  pipeline from  Connecticut,  across Long Island
Sound, to a terminus near Shoreham, Long Island.  Applications for all necessary
regulatory  authorizations  were  filed  in 2000  and  2001.  Islander  East has
received a final  certificate  from the  Federal  Energy  Regulatory  Commission
("FERC") which are  non-appealable  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.  In 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 being  evaluated.  At March
31, 2004, our investment in the Islander East pipeline was $21 million.

In addition,  in 2004 KeySpan acquired a 21% interest in the Millennium Pipeline
development  project  which is  anticipated  to  transport  up to 500,000 DTH of
natural gas a day to the  Algonquin  pipeline.  The project has been approved by
the  FERC  and,  pending  an  amendment  to  the  project's  FERC   certificate,
construction  could begin in the Spring of 2006, with service beginning in 2007.
Once  constructed,  KeySpan  anticipates  contracting for 150,000 DTH per day of
transportation  capacity from the Millennium  Pipeline  system.  As of March 31,
2005, our investment in this project was $8 million.

                                       41
<PAGE>


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  Generation  Station") 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.

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

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------
                                                            Three Months Ended March 31,
(In Millions of Dollars)                                    2005                     2004
------------------------------------------------------------------------------------------
<S>                                                      <C>                    <C>

Revenues                                                   $ 405.0                $ 359.1
Purchased fuel                                               133.0                  101.5
------------------------------------------------------------------------------------------
Net Revenues                                                 272.0                  257.6
------------------------------------------------------------------------------------------
Operating Expenses
   Operations and maintenance                                153.6                  147.1
   Depreciation                                               22.8                   21.6
   Operating taxes                                            44.6                   41.7
------------------------------------------------------------------------------------------
Total Operating Expenses                                     221.0                  210.4
------------------------------------------------------------------------------------------
Operating Income                                            $ 51.0                 $ 47.2
------------------------------------------------------------------------------------------
Electric sales (MWH)*                                    1,001,408                983,106
Capacity(MW)*                                                2,450                  2,200
Cooling degree days                                            N/A                    N/A
------------------------------------------------------------------------------------------
</TABLE>


            *Reflects the operations of the Ravenswood facility only.

Executive Summary

Operating  income  increased  $3.8  million for the three months ended March 31,
2005, compared to the same period last year, due primarily to an increase in net
revenues from the Ravenswood  Generation  Station of $8.8 million as a result of
improved  pricing,  as well as $3.5  million  of  incentives  earned on the LIPA
Service agreements.  These benefits to operating income were partially offset by
operating lease costs  associated with Ravenswood  Expansion of $4.5 million and
an increase of $3.6 million in plant  overhauls  for the  Ravenswood  Generation
Station.

                                       42
<PAGE>


Net Revenues

Total electric net revenues realized during the first quarter of 2005 were $14.4
million,  or 6% higher  than such  revenues  realized  during the  corresponding
period last year.

Net revenues from the Ravenswood  Generation Station increased $8.8 million,  or
15% for the three months ended March 31, 2005,  compared to the same period last
year reflecting  increased capacity revenues of $5.6 million,  as well as higher
energy  margins of $3.2  million.  The increase in capacity  revenues  primarily
reflects the  operation of the  Ravenswood  Expansion,  a 250 MW combined  cycle
generating facility that began full commercial operations in May 2004.

The  increase  in energy  margins for the first  quarter of 2005,  reflects a 2%
increase  in the  level  of  megawatt  hours  ("MWh")  sold  into  the New  York
Independent  System Operator  ("NYISO") energy market, as well as an increase of
13% in realized  "spark-spreads" (the selling price of electricity less the cost
of fuel, plus hedging gains or losses).  The increase in energy sales quantities
primarily reflects the operations of the Ravenswood Expansion.

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  Generation Station.  Further, we have engaged in the
use  of  derivative  financial  hedging  instruments  to  hedge  the  cash  flow
variability  associated with a portion of forecasted  electric energy sales from
the Ravenswood  Generation  Station.  These derivative  instruments  resulted in
hedging gains, which are reflected in net electric margins,  of $2.9 million for
the first  quarter of 2005  compared to hedging  losses of $4.6  million for the
first quarter of 2004.  The benefits  derived from  KeySpan's  hedging  strategy
contributed  to the  increase  in  realized  spark-spreads.  (See  Note 4 to the
Consolidated Financial Statements "Hedging and Derivative Financial Instruments"
for further information on KeySpan's hedging strategy.)

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

Net  revenues  for the first  quarter of 2005 from the service  agreements  with
LIPA,  including  the power  purchase  agreements  associated  with two electric
peaking facilities,  increased  approximately $8.3 million compared to the first
quarter  of 2004.  This  increase  reflects,  primarily,  the  timing of certain
incentives  earned  on  these  agreements  of $3.5  million.  KeySpan  currently
anticipates  earning  approximately  the same level of  incentives in 2005 as it
earned in 2004. The remaining increase is due, for the most part, to recovery of
depreciation costs and property taxes. (For a description of the LIPA Agreements
and power purchase agreements,  see KeySpan's 2004 Annual Report on Form 10K for
the Year Ended December 31, 2004 Item 7. Management's Discussion and Analysis of
Financial  Condition  and  Results of  Operations  under the  caption  "Electric
Services - Revenue Mechanisms.")

                                       43
<PAGE>

Offsetting,  to some  extent,  these  benefits to electric  net  revenues  was a
decrease  of  $2.7  million  in  revenues  associated  with  KeySpan's  electric
marketing activities.

Operating Expenses

Operating expenses increased $10.6 million, or 5%, for the first quarter of 2005
compared to the first quarter of 2004. Operations and maintenance expense posted
an increase of $6.5  million,  or 4% over last year  reflecting  $4.5 million in
operating  lease  costs  associated  with  our  financing  arrangement  for  the
Ravenswood Expansion, as well as an increase in overhaul costs at the Ravenswood
Generation  Station of $3.6 million,  partially  offset by lower  postretirement
costs.  The increase in overhaul costs are primarily  timing  related,  since we
anticipate  incurring  the same level of  overhaul  expenses  at the  Ravenswood
Generation  Station  in  2005  as we  incurred  in  2004.  (See  Note  6 to  the
Consolidated  Financial Statements  "Financial Guarantees and Contingencies" for
additional  information  regarding the financing  arrangement for the Ravenswood
Expansion.)  The increase in  depreciation  expense is associated with KeySpan's
Long Island based electric  generating units and is fully recoverable from LIPA.
The higher operating taxes primarily reflect an increase in property taxes which
are also fully recoverable from LIPA.

Other Matters

In 2003,  the New  York  State  Board  on  Electric  Generation  Siting  and the
Environment  issued  an  opinion  and  order  which  granted  a  certificate  of
environmental  capability  and public need for a 250 MW combined  cycle electric
generating  facility  in  Melville,   Long  Island,   which  is  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  filed a proposal in  response  to LIPA's  RFP. In 2004,  LIPA
selected  proposals  submitted  by two other  bidders  in  response  to the RFP.
KeySpan  remains  committed  to the  Melville  project and the  benefits to Long
Island's energy future that this project would supply.  The project has received
New  York  State  Article  X  approval  by  having  met  all   operational   and
environmental  permitting  requirements.  Further,  the project is strategically
located in close proximity to both the high voltage power  transmission grid and
the high pressure gas distribution network. At March 31, 2005, total capitalized
costs  associated  with the siting,  permitting and procurement of equipment for
the Melville facility were approximately $63 million.

LIPA is in the process of  performing a long-term  strategic  review  initiative
regarding  its future  direction.  Some of the  strategic  options  that LIPA is
considering  include  whether  LIPA  should  continue  its  operations  as  they
presently  exist,  fully  municipalize  or privatize,  sell some, but not all of
their assets and become a regulator of rates and  services.  LIPA was  initially
required to make a determination by May 2005 as to whether it would exercise its
option to purchase our Long Island  generating  plants  pursuant to the terms of
the Generation Purchase Rights Agreement.  KeySpan and LIPA have mutually agreed

                                       44
<PAGE>

to extend the date by which LIPA must make this  determination  to December  15,
2005.  At this  time,  we are  unable  to  determine  what the  outcome  of this
strategic  review  will  have on the  Melville  project,  or more  broadly,  our
Electric  Services  segment.  As part of our  growth  strategy,  we  continually
evaluate the possible  acquisition  and  development  of  additional  generating
facilities in the  Northeast.  However,  we are unable to predict when or if any
such  facilities  will be acquired and the effect any such  acquired  facilities
will have on our financial condition, results of operations or cash flows.

Energy Services

The Energy  Services  segment  includes  companies  that provide  energy-related
services to customers located  primarily within the Northeastern  United States,
with  concentrations in the New York City and Boston  metropolitan areas 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
operation  and  maintenance,  design,  engineering,  consulting  and fiber optic
services to commercial, institutional and industrial customers.

In  January  and  February  of 2005,  KeySpan  sold its  mechanical  contracting
subsidiaries.  The operating results and financial  position of these companies,
which were previously consolidated within the Energy Services segment, have been
reflected as discontinued  operations on the  Consolidated  Statement of Income,
Consolidated Balance Sheet and Consolidated Statement of Cash Flows.

In  the  fourth  quarter  of  2004,   KeySpan's  investment  in  its  mechanical
contracting  subsidiaries was written-down to fair value and,  therefore,  there
was no  earnings  impact  from the final  sale of these  companies  in the first
quarter of 2005. (See Note 2 to the Consolidated  Financial Statements "Business
Segments" for additional details on the sale of the mechanical companies.)

The table below highlights selected financial information associated with Energy
Service's continuing businesses.


<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------
                                                                Three Months Ended March 31,
(In Millions of Dollars)                                         2005                    2004
-----------------------------------------------------------------------------------------------
<S>                                                            <C>                     <C>

Revenues                                                        $ 47.1                  $ 46.6
Operating expenses                                                49.9                    64.1
-----------------------------------------------------------------------------------------------
Operating (Loss)                                                $ (2.8)                 $(17.5)
-----------------------------------------------------------------------------------------------
</TABLE>


The Energy Services  segment  incurred an operating loss of $2.8 million for the
first quarter of 2005 compared to an operating loss of $17.5 million incurred in
the first  quarter of 2004.  The  improved  performance  reflects a reduction in
operating  expenses.  In the first  quarter of 2004,  the Home  Energy  Services
operations incurred charges associated with 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.  Except for the
charges  incurred in 2004,  the  operations of the  remaining  businesses in the

                                       45
<PAGE>

Energy Services  segment have remained  consistent  between the first quarter of
2005 and the first quarter of 2004.

Energy Investments

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

This segment is also  engaged in pipeline  development  activities.  KeySpan and
Duke Energy Corporation each own a 50% interest in Islander East.  Islander East
was  created to pursue  the  authorization  and  construction  of an  interstate
pipeline  from  Connecticut,  across  Long  Island  Sound,  to a  terminus  near
Shoreham,  Long Island.  Further,  KeySpan has a 21% interest in the  Millennium
Pipeline  project  which will  transport  up to 500,000 DTH of natural gas a day
from Corning to Ramapo, New York, where it will connect to an existing pipeline.
Additionally,  subsidiaries  in this segment  hold a 20% equity  interest in the
Iroquois Gas  Transmission  System LP, a pipeline that  transports  Canadian gas
supply to markets in the  Northeastern  United States.  These  subsidiaries  are
accounted for under the equity method of accounting.  Accordingly, equity income
from these  investments  is reflected as a component of operating  income in the
Consolidated  Statement of Income.  KeySpan also owns a 600,000 barrel liquefied
natural gas storage and receiving facility in Providence,  Rhode Island, through
its wholly  owned  subsidiary  KeySpan LNG,  the  operations  of which are fully
consolidated. The LNG facility is being upgraded to accept marine deliveries and
triple  its  vaporization   capacity,   pending  regulatory  approvals  and  the
resolution of certain litigations with respect to such approvals.

During the first quarter of 2004, we also had an  approximate  61% investment in
certain  midstream  natural gas assets in Western Canada through  KeySpan Energy
Canada  Partnership  ("KeySpan  Canada").  In the fourth quarter of 2004 KeySpan
sold its remaining interests in KeySpan Canada.








                                       46
<PAGE>

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


<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------------------
                                                                               Three Months Ended March 31,
(In Millions of Dollars)                                                         2005                   2004
--------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>                     <C>

Revenues                                                                       $ 10.1                  $ 28.5
Less: Operation and maintenance expense                                           6.5                    15.4
          Other operating expenses                                                2.5                     5.9
Add:  Equity earnings                                                             5.3                     5.7
--------------------------------------------------------------------------------------------------------------
Operating Income                                                                $ 6.4                  $ 12.9
--------------------------------------------------------------------------------------------------------------
</TABLE>


          Operating income above reflects 100% of KeySpan's Canada's results for
          the first quarter of 2004.

As  indicated in the above table,  operating  income for the Energy  Investments
segment  decreased  $6.5  million in the first  quarter of 2005  compared to the
corresponding  period last year primarily  reflecting the sale of KeySpan Canada
in 2004.  During the first quarter of 2004,  KeySpan Canada  realized  operating
income of $8.6  million.  The  remaining  activities  reflected  an  increase in
operating income of $2.1 million primarily  associated with lower overhead costs
and operating income from Seneca-Upshur.

In the  first  quarter  of  2005,  KeySpan  sold  its 50%  interest  in  Premier
Transmission Limited ("PTL"), a gas pipeline from southwest Scotland to Northern
Ireland.  In  February  2005,  KeySpan  entered  into a Share Sale and  Purchase
Agreement with BG Energy  Holdings  Limited and Premier  Transmission  Financing
Public  Limited  Company  ("PTFPL"),  pursuant  to which all of the  outstanding
shares  of PTL were to be  purchased  by PTFPL.  On March 18,  2005 the sale was
completed and generated cash proceeds of  approximately  $48.1  million.  In the
fourth quarter of 2004, KeySpan recorded a pre-tax non-cash impairment charge of
$26.5 million  reflecting the difference  between the anticipated  cash proceeds
from the sale of PTL  compared  to its  carrying  value.  The final  sale of PTL
resulted  in a pre-tax  gain of $4.1  million  reflecting  the  difference  from
earlier  estimates.  This gain was recorded in other income and  (deductions) on
the Consolidated Statement of Income.

During the first quarter of 2004, our gas exploration and production investments
also included a 55% equity  interest in Houston  Exploration,  the operations of
which were fully consolidated in KeySpan's Consolidated Financial Statements. In
the fourth  quarter of 2004,  KeySpan  sold its  remaining  interests in Houston
Exploration.





                                       47
<PAGE>



Selected financial data and operating statistics for Houston Exploration are set
forth in the following table for the first quarter of 2004.

<TABLE>
<CAPTION>

----------------------------------------------------------------
                                            Three Months Ended
                                               March 31,2004
(In Millions of Dollars)
----------------------------------------------------------------
<S>                                             <C>

Revenues                                         $ 152.4
Depletion and amortization expense                  61.9
Other operating expenses                            28.4
----------------------------------------------------------------
Operating Income                                  $ 62.1
----------------------------------------------------------------

</TABLE>

Other Matters

As noted  above,  KeySpan's  LNG  facility is being  upgraded  to accept  marine
deliveries and triple its vaporization capacity pending regulatory approvals and
the resolution of certain litigation regarding such approvals. In February 2005,
KeySpan LNG filed an action in Federal  District Court in Rhode Island seeking a
declaratory  judgment  that it is not  required  to obtain a "Category B Assent"
from the state of Rhode  Island and an  injunction  preventing  the Rhode Island
Costal Resource Management Council ("CRMC") from enforcing the Category B assent
requirements.  In March 2005,  the Rhode Island  Attorney  General  answered the
complaint and moved to substitute the State of Rhode Island as the defendant and
filed a counterclaim  seeking a declaratory judgment that the expansion requires
a Category B Assent.  In April,  the  parties  filed  cross  motions for summary
judgment  with respect to all issues  presented to the Court,  and the Court has
indicated  its  intention to issue a decision by August 2005. On April 14, 2005,
the  Attorney  General  also  filed on behalf of the State a  complaint  against
KeySpan LNG in Rhode Island State Superior Court raising  substantially the same
issues as the federal court action.  KeySpan LNG intends to vigorously  pursue a
favorable outcome of both court actions.

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
system planning,  marketing, and gas supply planning and procurement;  and (iii)
engineering  and  surveying  services  to  subsidiaries.  The  operating  income
variation as reflected in "elimination and other" is due primarily to the timing
of certain corporate expenses.

                                       48
<PAGE>

Liquidity

Cash flow from  operations  decreased of $194.9  million in the first quarter of
2005  compared  to  last  year  primarily  reflecting  the  absence  of  Houston
Exploration  which  contributed   approximately  $130  million  to  consolidated
operating  cash flow in 2004 and the one time  benefit of $43  million  from the
start-up of the  insurance  captive last year.  It should be noted that in prior
years  Houston   Exploration   funded  their  gas  exploration  and  development
activities, in part, from available cash flow from operations.

At March 31, 2005, we had cash and temporary  cash  investments of $223 million.
During the first quarter of 2005, we repaid $441.4  million of commercial  paper
and, at March 31, 2005,  $470.9 million of commercial paper was outstanding at a
weighted-average annualized interest rate of 2.83%. We had the ability to borrow
up to an  additional  $829.1  million at March 31, 2005,  under the terms of our
credit facility.

KeySpan  currently  has two credit  facilities  totaling  $1.3  billion - a $640
million five year revolving  credit facility due June 2009 and a three year $660
million facility due June 2006. 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  five-year  facility  and  0.125% on the  three-year
facility.  Both  credit  agreements  allow for KeySpan to borrow  using  several
different  types  of  loans;  specifically,  Eurodollar  loans,  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.

At  March  31,  2005,  consolidated   indebtedness  was  51.4%  of  consolidated
capitalization.  Assuming the equity issuance  expected to occur on May 16, 2005
as mentioned in Note 9 to the Consolidated  Financial Statements "Long-term Debt
and Commercial  Paper," the  consolidated  indebtedness  at March 31, 2005 would
have been 48.8%.

                                       49
<PAGE>

A substantial  portion of consolidated  revenues are derived from the operations
of businesses within the Electric  Services segment,  that are largely dependent
upon two large customers - LIPA and the NYISO.  Accordingly,  our cash flows are
dependent upon the timely payment of amounts owed to us by these counterparties.

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:


<TABLE>
<CAPTION>

------------------------------------------------------------------------
                                            Three Months Ended March 31,
(In Millions of Dollars)                      2005               2004
------------------------------------------------------------------------
<S>                                          <C>                <C>

Gas Distribution                              $ 71.6             $ 82.2
Electric Services                               31.1               36.6
Energy Investments                               6.6               97.2
Energy Services and other                        2.5                3.0
------------------------------------------------------------------------
                                             $ 111.8            $ 219.0
------------------------------------------------------------------------
</TABLE>



Construction  expenditures related to the Gas Distribution segment are primarily
for  the  renewal,   replacement  and  expansion  of  the  distribution  system.
Construction  expenditures  for the Electric  Services  segment reflect costs to
maintain  our  generating  facilities  and,  for  2004,  expand  the  Ravenswood
Generating Station.  Construction expenditures related to the Energy Investments
segment for 2004 primarily  reflect costs  associated  with gas  exploration and
production  activities  of  Houston  Exploration,  as well as costs  related  to
KeySpan Canada's gas processing facilities.

The decrease in capital  expenditures  for the three months ended March 31, 2005
compared to the same period last year of $107 million mainly reflects a decrease
in the Gas Distribution segment of over $10 million and a decrease in the Energy
Investments  segment of over $90 million.  The decrease in the Gas  Distribution
segment is due to a lower capital budget this year,  more  efficient  repair and
maintenance  processes,  as well as to an improved,  more timely billing process
related  to  billing  New  York  City  for  costs   associated  with  city/state
construction  projects.  The decrease in Energy Investments reflects the absence
of Houston Exploration's gas exploration and development activities.

                                       50
<PAGE>

Financing

On January 14, 2005,  KeySpan  redeemed $500 million of outstanding debt - 6.15%
Notes due 2006.  KeySpan  incurred  $20.9 million in call premiums and wrote-off
$1.3  million  of  previously  deferred  costs.   Further,  we  accelerated  the
amortization of approximately $11.2 million of previously  unamortized  benefits
associated  with  an  interest  rate  swap  on  these  bonds.   The  accelerated
amortization, as well as the write-off of previously deferred costs was recorded
to interest expense. Further, $55.3 million of 7.07% Series B preferred stock is
scheduled to be redeemed in May 2005. Additionally,  KeySpan intends to call for
optional  redemption $19.7 million of 7.17% Series C of preferred stock due 2008
during  the  second  quarter.  After  this  redemption,  KeySpan  will  have  no
outstanding preferred stock.

There are 9.2 million MEDS Equity  units issued which are subject to  conversion
upon execution of the three-year forward purchase contract. In 2005, KeySpan was
required to remarket the note  component of the Equity  Units  between  February
2005 and May 2005 and reset the interest rate to the then current market rate of
interest; however, the reset interest rate could not be set below 4.9%. In March
2005,  KeySpan  remarketed  the note  component of $394.9  million of the Equity
Units at the reset  interest  rate of 4.9% through  their  maturity  date of May
2008.  The balance of the notes ($65.1  million)  were held by the original MEDS
equity holders in accordance with their terms, and not remarketed.  KeySpan then
exchanged $300 million of the remarketed notes for $307.2 million of new 30 year
notes bearing an interest rate of 5.8%. Therefore, at March 31, 2005 KeySpan had
$160  million of 4.9%  notes  outstanding  with a maturity  date of May 2008 and
$307.2 million of 5.8% notes outstanding with a maturity date of April 2035.

The cash proceeds  generated by the remarketing have been deposited in a special
trust that will be used by the original  MEDS Equity  Units  holders to purchase
KeySpan common stock on May 16, 2005 under the formula  described  earlier.  The
note  holders who held their notes and did not  remarket  them were  required to
post treasury  securities into the special trust as well. The funds in the trust
will accrete to $460  million  which will be provided to KeySpan on May 16, 2005
to satisfy the MEDS purchase contracts. Currently, KeySpan has no legal right to
the  funds  currently  deposited  in the  special  trust and  therefore  has not
reflected  this  cash on its  Consolidated  Balance  Sheet.  (See  Note 9 to the
Consolidated  Financial  Statements  "Long-term  Debt and Commercial  Paper" for
additional details on the MEDs Equity Units.)

The following  table  represents  the ratings of our long-term debt at March 31,
2005. During the fourth quarter of 2004 Standard & Poor's reaffirmed its ratings
on  KeySpan's  and its  subsidiaries'  long-term  debt and removed its  negative
outlook. Moody's Investor Services,  however, continues to maintain its negative
outlook ratings on KeySpan's and its subsidiaries' long-term debt.

<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
KeySpan Generation                   A3                   A              N/A
--------------------------------------------------------------------------------

</TABLE>


                                       51
<PAGE>

Off-Balance Sheet Arrangements

Guarantees

KeySpan has a number of financial  guarantees with its subsidiaries at March 31,
2005.  KeySpan has fully and  unconditionally  guaranteed:  (i) $525  million of
medium-term  notes issued by KEDLI;  (ii) the obligations of KeySpan  Ravenswood
LLC, which is the lessee under the $425 million Master Lease associated with the
Ravenswood  Facility  and the  lessee  under  the  $385  million  sale/leaseback
transaction for the Ravenswood  Expansion;  and (iii) the payment obligations of
our subsidiaries  related to $128 million of tax-exempt bonds issued through the
Nassau County and Suffolk  County  Industrial  Development  Authorities  for the
construction of two  electric-generation  peaking facilities on Long Island. The
medium-term  notes,  the Master Lease and the tax-exempt  bonds are reflected on
the Consolidated  Balance Sheet; the sale/leaseback  transaction is not recorded
on the Consolidated Balance Sheet.  Further,  KeySpan has guaranteed:  (i) up to
$126  million of surety bonds  associated  with  certain  construction  projects
currently being performed by current and former  subsidiaries  within the Energy
Services segment;  (ii) certain supply  contracts,  margin accounts and purchase
orders for certain subsidiaries in an aggregate amount of $58 million; and (iii)
$74 million of subsidiary  letters of credit.  These guarantees are not recorded
on the Consolidated  Balance Sheet.  KeySpan's guarantees on certain performance
bonds relating to current construction  projects of the discontinued  mechanical
contracting  companies will remain in place throughout the  construction  period
for  these  projects.  It is  contemplated  that  the  majority  of the  current
contracts  will be  completed  by the  end of  2005.  KeySpan  has  received  an
indemnity bond issued by a third party to offset potential exposure related to a
significant portion of the continuing guarantee. At this time, we have no reason
to believe that our  subsidiaries or former  subsidiaries  will default on their
current obligations. However, we cannot predict when or if any defaults may take
place or the  impact  such  defaults  may have on our  consolidated  results  of
operations,  financial  condition or cash flows. (See Note 6 to the Consolidated
Financial  Statements,  "Financial  Guarantees and Contingencies" for additional
information regarding KeySpan's guarantees.)




Contractual Obligations

KeySpan has certain contractual obligations related to its outstanding long-term
debt,  outstanding  credit facility  borrowings,  outstanding  commercial  paper
borrowings,  operating and capital  leases,  and demand charges  associated with
certain  commodity  purchases.  These  obligations  have remained  substantially
unchanged  since December 31, 2004.  (For  additional  details  regarding  these
obligations see KeySpan's  Annual Report on Form 10K for the Year Ended December
31, 2004, 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.")


                                       52
<PAGE>

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.

KeySpan  continually  evaluates  its critical  accounting  policies.  Based upon
current  facts and  circumstances  KeySpan has decided that  certain  accounting
policies that were  considered  "critical" at December 31, 2004 should no longer
be considered as critical accounting policies.  The accounting policies that are
no longer  considered  critical  are as  follows:  (i)  Percentage-of-completion
accounting is a method of accounting for long-term  construction  type contracts
in accordance with Generally  Accepted  Accounting  Principles.  This accounting
policy was used for engineering and mechanical  contracting  revenue recognition
by the Energy Services segment.  However,  since KeySpan has sold its mechanical
contracting  subsidiaries,  contracting  revenue  recognition  is  no  longer  a
significant  accounting  issue;  (ii) The full cost accounting method is used by
our gas exploration and production subsidiaries to account for their natural gas
and oil properties. Seneca-Upshur and KeySpan Exploration continue to apply this
accounting treatment.  However, since KeySpan has sold its ownership interest in
Houston Exploration, KeySpan's gas exploration and production activities are not
a significant aspect of its overall business operations and therefore, full cost
accounting is no longer a significant accounting policy.

Below is a discussion of KeySpan's critical  accounting policies and assumptions
at  March  31,  2005.  For a more  detailed  discussion  of these  policies  and
assumptions see KeySpan's  Annual Report on Form 10K for the Year Ended December
31, 2004, Item 7.  Management's  Discussion and Analysis of Financial  Condition
and Results of  Operations  "Discussion  of  Critical  Accounting  Policies  and
Assumptions."


Valuation of Goodwill

KeySpan records  goodwill on purchase  transactions,  representing the excess of
acquisition  cost over the fair value of net  assets  acquired.  In testing  for
goodwill impairment under Statement of Financial  Accounting  Standards ("SFAS")
142 "Goodwill and Other Intangible Assets",  significant reliance is placed upon
a  number  of  estimates   regarding  future   performance  that  require  broad
assumptions and significant  judgment by management.  A change in the fair value
of our  investments  could cause a significant  change in the carrying  value of
goodwill.  The assumptions used to measure the fair value of our investments are
the  same  as  those  used  by  us  to  prepare  annual  operating  segment  and


                                       53
<PAGE>

consolidated  earnings and cash flow forecasts.  In addition,  these assumptions
are used to set annual budgetary guidelines. At March 31, 2005, KeySpan has $1.7
billion  of  recorded  goodwill  and has  concluded  that the fair  value of the
business units that have recorded goodwill exceed their carrying value.

Accounting for the Effects of Rate Regulation on Gas Distribution Operations

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

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 2003, the MADTE approved a base revenue  increase for the Boston Gas Company,
as well as a  Performance  Based  Rate Plan (the  "Plan")  for up to ten  years.
EnergyNorth Natural Gas, Inc.'s base rates continue as set by the NHPUC in 1993.

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

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

Pension and Other Postretirement Benefits

KeySpan participates in both non-contributory  defined benefit pension plans, as
well   as   other   post-retirement   benefit   ("OPEB")   plans   (collectively
"postretirement plans").  KeySpan's reported costs of providing pension and OPEB
benefits  are  dependent  upon  numerous  factors  resulting  from  actual  plan
experience  and  assumptions  of  future  experience.  Pension  and  OPEB  costs
(collectively   "postretirement   costs")  are   impacted  by  actual   employee
demographics,  the level of  contributions  made to the plans,  earnings on plan
assets,  and health care cost trends.  Changes made to the  provisions  of these
plans may also impact current and future  postretirement  costs.  Postretirement

                                       54
<PAGE>

costs  may  also  be   significantly   affected  by  changes  in  key  actuarial
assumptions,  including  anticipated  rates of  return  on plan  assets  and the
discount  rates  used  in  determining  the  postretirement  costs  and  benefit
obligations. Actual results that differ from our assumptions are accumulated and
amortized over ten years.

Historically, we have funded our qualified pension plans in excess of the amount
required to satisfy  minimum ERISA funding  requirements.  At March 31, 2005, 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 2005,  KeySpan  expects to  contribute a total of $125 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 10K for the Year
Ended  December  31,  2004,  see  also  Note 4 of those  Consolidated  Financial
Statements, "Postretirement Benefits.")

Regulation and Rate Matters

Gas Matters

As of March 31,  2005,  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.

Regarding  the  Boston Gas  Company,  in 2003 the DTE  approved a $25.9  million
increase in base revenues with an allowed  return on equity of 10.2% assuming an
equal  balance of debt and equity.  On January 27, 2004 the DTE issued orders 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.  On October 29, 2004,  the MADTE  approved a base rate increase of
$4.6 million  under the Plan.  In  addition,  an increase of $7.9 million in the
local  distribution  adjustment clause was approved to recover pension and other
postretirement  costs. The DTE also approved a true-up mechanism for pension and
other postretirement benefit costs under which variations between actual pension
and other  postretirement  benefit costs and amounts used to establish rates are
deferred and collected from or refunded to customers in subsequent periods.

For an additional  discussion of our current gas  distribution  rate agreements,
see KeySpan's  Annual  Report on Form 10K for the Year Ended  December 31, 2004,
Item 7 Management's  Discussion and Analysis of Financial  Condition and Results
of Operations "Regulation and Rate Matters."

                                       55
<PAGE>

Electric Matters

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

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.

KeySpan has  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.

                                       56
<PAGE>


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 March 31, 2005,  KeySpan's  consolidated  common  equity was
47.7% of its consolidated  capitalization,  including commercial paper, and each
of its utility  subsidiaries  common  equity was at least 48% of its  respective
capitalization.

Environmental Matters

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

We estimate that the  remaining  cost of our MGP related  environmental  cleanup
activities,  including costs  associated with the Ravenswood  Facility,  will be
approximately  $232.1 million and we have recorded a related  liability for such
amount.   We  have  also  recorded  an  additional   $18.9  million   liability,
representing the estimated  environmental cleanup costs related to a former coal
tar  processing  facility.  As of March 31,  2005,  we have  expended a total of
$145.7 million on environmental  investigation and remediation activities.  (See
Note 6 to the  Consolidated  Financial  Statements,  "Financial  Guarantees  and
Contingencies.")

Market and Credit Risk Management Activities

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

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

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


                                       57
<PAGE>

energy  service  businesses;  entering  into  financial  and  energy  derivative
contracts with energy marketing  companies and financial  institutions;  and the
sale of gas, oil and  processing  services to energy  marketing  and oil and gas
production companies.

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

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

Regulatory Issues and Competitive  Environment:  We are subject to various other
risk  exposures  and   uncertainties   associated  with  our  gas  and  electric
operations.  The most significant  contingency involves the evolution of the gas
distribution  and electric  industries  towards more competitive and deregulated
environments.  The risks associated with KeySpan's gas  distribution  activities
have  not  changed   substantially  since  December  31,  2004.  For  additional
information  regarding  these risks see KeySpan's  Annual Report on Form 10K for
the Year Ended December 31, 2004, Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations "Market and Credit Risk Management
Activities."  The following is an update to certain  matters  related  KeySpan's
electric operations.

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 such reserves,  as well as requiring a refunding of so
called alleged "excess payments"  received by sellers,  including the Ravenswood
Facility. On May 31, 2000, FERC issued an order that granted approval of a $2.52
per MWh bid cap for 10  minute  non-spinning  reserves,  plus  payments  for the
opportunity cost of not making energy sales. The NYISO's other requests, such as
a bid cap for spinning reserves,  retroactive refunds,  recalculation of reserve
prices, etc. were rejected.

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

                                       58
<PAGE>


On June 25,  2004,  the NYISO  submitted a motion to FERC  seeking  refunds as a
result of the Decision.  KeySpan and others  submitted  statements of opposition
opposing  the  refunds.  On March 4, 2005 FERC  issued  an order  upholding  its
original decision and denied the NYISO's motion for refunds.  FERC also provided
the further  explanation  requested  by the Court and why refunds were not being
ordered.  The NYISO and other market  participants  have requested  rehearing of
FERC's latest order and that decision is still pending.

In a related  case, on March 4, 2005,  FERC issued a second order  requiring the
NYISO  to  reinstate  the  original  prices  from  May 8 and 9,  2000 and to pay
suppliers,  including the Ravenswood Facility,  accordingly.  In 2000, the NYISO
revised  prices  downward after it determined a market design flaw existed which
caused prices to be higher than what would occur in a competitive  market.  FERC
originally agreed with the NYISO, but reversed its original decision.

The NYISO and other market participants have requested a rehearing of this March
4, 2005 order. In addition,  the NYISO and  Consolidated  Edison  Solutions have
requested  that  FERC  stay  the  payment  of  refunds  claiming  it will  cause
irreparable  harm.  FERC has not issued an order in response to the rehearing or
stay request.

We cannot predict the final outcome of these proceedings or what effect, if any,
the outcome may have on our  financial  position,  results of operations or cash
flows.


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;

                                       59
<PAGE>

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

     -    inflationary trends and interest rates;

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

     -    available sources and cost of fuel;

     -    creditworthiness  of  counterparties  to  derivative  instruments  and
          commodity contracts;

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

     -    retention of key personnel;

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

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

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

     -    competition facing our unregulated Energy Services businesses;

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

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

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

     -    the outcome of LIPA's strategic business options study,  pertaining to
          its long-term future which include,  as stated by LIPA, whether or not
          LIPA will  continue its  operations  as they  presently  exist,  fully
          municipalize or privatize, sell some, but not all of its assets and/or
          become a regulator of rates and services. In addition,  LIPA must make
          a  determination  by December 15, 2005, as to whether it will purchase
          our interest in KeySpan  Generation  LLC, the owner of our Long Island
          (excluding  the  Glenwood  and Port  Jefferson  Energy  Center  units)
          generating  assets,  pursuant to the terms of the Generation  Purchase
          Rights Agreement; and

                                       60
<PAGE>


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

KeySpan  uses  standard  NYMEX  futures  prices to value gas  futures and market
quoted forward prices to value OTC swap contracts.

The following  tables set forth selected  financial data  associated  with these
derivative financial  instruments noted above that were outstanding at March 31,
2005.


<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
                                            Year of         Volumes                                           Fair Value
             Type of Contract               Maturity        mmcf       Fixed Price $      Current Price $    (In $ Millions)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>         <C>           <C>                 <C>                   <C>

                    Gas

Swaps/Futures - Long Natural Gas              2005          6,076               7.11         7.32 - 7.91           4.5

OTC Swaps - Short Natural Gas                 2005          1,320        6.58 - 6.70         7.96 - 8.85          (2.2)
                                              2006          1,884        6.17 - 6.29         7.50 - 9.10          (3.4)
                                              2007          1,812        5.86 - 5.97         6.95 - 8.38          (2.7)
------------------------------------------------------------------------------------------------------------------------------------
                                                           11,092                                                 (3.8)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>



                                       61
<PAGE>


<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------------------------------
                                   Year of       Volumes                                                     Fair Value
  Type of Contract                Maturity       Barrels      Fixed Price $         Current Price $         (In $ Millions)
---------------------------------------------------------------------------------------------------------------------------
<S>                                <C>        <C>           <C>                        <C>                   <C>

        Oil

Swaps - Long Fuel Oil               2005           78,000    24.65 - 37.21               43.24 - 45.13           0.9
                                    2006           12,000               34.40                    43.86           0.1

Swaps - Short Heating Oil           2005        1,035,102               54.79            67.29 - 69.62         (13.8)


---------------------------------------------------------------------------------------------------------------------------
                                                1,125,102                                                      (12.8)
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------
                           Year of                     Fixed Margin/                                Fair Value
    Type of Contract       Maturity        MWh             Price $            Current Price $      (In $ Millions)
-------------------------------------------------------------------------------------------------------------------
<S>                       <C>         <C>              <C>                    <C>                     <C>

     Electricity

Swaps - Energy             2005        1,299,200        29.95 - 113.50         36.60 - 118.42           (2.4)
                           2006          173,600        42.24 - 108.75          45.24 - 99.54            0.4

-------------------------------------------------------------------------------------------------------------------
                                       1,472,800                                                        (2.0)
-------------------------------------------------------------------------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------
                                                                           2005
Change in Fair Value of Derivative Instruments                        (In $ Millions)
----------------------------------------------------------------------------------------
<S>                                                                         <C>

Fair value of contracts at January 1, 2004                                     1.3
Net (gains) on contracts realized                                             (7.4)
(Decrease) in fair value of all open contracts                               (12.5)
----------------------------------------------------------------------------------------
Fair value of contracts outstanding at March 31,                             (18.6)
----------------------------------------------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------
(In Millions 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                        $ (9.3)                $ -              $ (9.3)
Local published indicies                        (4.8)               (4.5)               (9.3)
-----------------------------------------------------------------------------------------------------
                                              $(14.1)              $(4.5)             $(18.6)
-----------------------------------------------------------------------------------------------------

</TABLE>

                                       62
<PAGE>

We measure the commodity risk of our derivative hedging  instruments  (indicated
in the  above  table)  using a  sensitivity  analysis.  Based  on a  sensitivity
analysis  as of March 31,  2005,  a 10%  increase in heating oil and natural gas
prices would decrease the value of derivative  instruments  maturing in one year
by $1.6 million,  while the value of expected  physical  deliveries for one year
would be enhanced $2.1 million (net benefit to KeySpan of $0.5  million).  A 10%
decrease  in heating  oil and  natural  gas prices  would  enhance  the value of
derivative  instruments maturing in one year by $1.6 million, while the value of
expected  physical  deliveries for one year would be decreased $2.1 million (net
cost to KeySpan of $0.5 million).

Based on a  sensitivity  analysis  as of  March  31,  2005,  a 10%  increase  in
electricity  and fuel prices would decrease the value of derivative  instruments
maturing in one year by $6.0 million, while the value of expected physical power
production  for one year would be enhanced $14.2 million (net benefit to KeySpan
of $8.2  million).  A 10% decrease in  electricity  and fuel prices would have a
$6.2 million favorable impact on the value of derivative instruments maturing in
one year, while the value of expected physical power production would be reduced
$14.2 million (net cost to KeySpan of $8.0 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.

The following  table sets forth selected  financial data  associated  with these
derivative financial instruments that were outstanding at March 31, 2005.

<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------------------------------
                             Year of      Volunes       Floor         Ceiling         Fixed        Current       Fair Value
     Type of Contract        Maturity       mmcf          ($)            ($)         Price ($)     Price ($)   (In $ Millions)
-----------------------------------------------------------------------------------------------------------------------------------
<S>                          <C>         <C>         <C>            <C>            <C>            <C>                 <C>

Options                       2005        13,990      5.50 - 6.40    5.50 - 8.50              -    7.65 - 8.55           1.6
                              2006         7,910      5.50 - 6.40    5.50 - 8.50              -    7.18 - 7.87           5.5
Swaps                         2005        26,320                 -              -   6.54 - 6.68    7.65 - 8.55          37.1
                              2006        25,870                 -              -   6.90 - 7.23    7.18 - 7.87          34.4
-----------------------------------------------------------------------------------------------------------------------------------
                                          74,090                                                                        78.6
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


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

Item 4. Controls and Procedures

We maintain  disclosure  controls and  procedures (as defined under Exchange Act
Rule  13a-15(e)  and  15d-15(e))  that are  designed to ensure that  information
required  to be  disclosed  by us in the  reports  we file or  submit  under the
Exchange Act is recorded,  processed,  summarized  and reported  within the time
periods specified in the Securities and Exchange  Commission's  rules and forms,
and  that  such   information  is  accumulated  and  communicated  to  KeySpan's
management,  including our Chief Executive Officer and Chief Financial  Officer,
as appropriate,  to allow timely decisions  regarding required  disclosure.  Any
control  system,  no matter how well  designed  and  operated,  can provide only
reasonable   assurance  of  achieving  the  desired  control   objectives.   Our
management,  under  the  supervision  and with the  participation  of our  Chief
Executive Officer and Chief Financial  Officer,  has evaluated the effectiveness
of our disclosure  controls and procedures as of March 31, 2005. Based upon that
evaluation,  our Chief Executive  Officer and Chief Financial  Officer concluded
that the design and operation of our disclosure controls and procedures provided
reasonable  assurance that the disclosure  controls and procedures are effective
to accomplish their objectives.

                                       63
<PAGE>

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

PART II.  OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 6. Exhibits

10.1* Purchase Rights  Extension  Agreement  between KeySpan and the Long Island
Power Authority dated March 28, 2005.

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

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

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

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

* filed herewith



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







                                       64
<PAGE>



                      KEYSPAN CORPORATION AND SUBSIDIARIES
                                    SIGNATURE

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

                                                            KEYSPAN CORPORATION
                                                                  (Registrant)



Date: April 29, 2005                                      /s/ Gerald Luterman
                                                   ----------------------------
                                                           Gerald Luterman
                                                   Executive Vice President and
                                                   Chief Financial Officer





                                       65