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

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

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

                  For the quarterly period ended March 31, 2007

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

             For the transition period from __________ to _________

                         Commission file number 1-14161

                               KEYSPAN CORPORATION
             (Exact Name of Registrant as Specified in its Charter)

                NEW YORK                                11-3431358
   (State or Other Jurisdiction of          (I.R.S. Employer Identification No.)
    Incorporation or Organization)
  One MetroTech Center, Brooklyn, New York                11201
175 East Old Country Road, Hicksville, New York           11801
   (Address of Principal Executive Offices)             (Zip Code)


                            (718) 403-1000 (Brooklyn)
                           (516) 755-6650 (Hicksville)
              (Registrant's telephone number, including area code)

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

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

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

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

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, 2007
   ---------------------------                  -----------------------------
         $.01 par value                                  175,762,812


<PAGE>


                      KEYSPAN CORPORATION AND SUBSIDIARIES

                                      INDEX
                                      -----

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

Item 1. Financial Statements (Unaudited)

        Consolidated Balance Sheet -
        March 31, 2007 and December 31, 2006                               3

        Consolidated Statement of Income -
        Three Months Ended March 31, 2007 and 2006                         5

        Consolidated Statement of Cash Flows -
        Three Months Ended March 31, 2007 and 2006                         6

        Notes to Consolidated Financial Statements                         7

Item 2. Management's Discussion and Analysis of Financial
        Condition and Results of Operations                               43

Item 3. Quantitative and Qualitative Disclosures About Market Risk        69

Item 4. Controls and Procedures                                           71

                           Part II. OTHER INFORMATION

Item 1. Legal Proceedings                                                 71

Item 1A. Risk Factors                                                     72

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds        73

Item 3. Defaults Upon Senior Securities                                   73

Item 4. Submission of Matters to a Vote of Security Holders               73

Item 5. Other Information                                                 73

Item 6. Exhibits                                                          74

Signatures                                                                75


                                       2
<PAGE>

<TABLE>
                           CONSOLIDATED BALANCE SHEET
                                   (Unaudited)

<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
(In Millions of Dollars)                                                       March 31, 2007                December 31, 2006
-------------------------------------------------------------------------------------------------------------------------------

ASSETS
<S>                                                                                <C>                              <C>
Current Assets
     Cash and temporary cash investments                                           $    326.5                       $    210.9
     Restricted cash                                                                      7.7                              7.9
     Accounts receivable                                                              1,278.9                            943.7
     Unbilled revenue                                                                   519.2                            531.2
     Allowance for uncollectible accounts                                               (81.7)                           (56.9)
     Gas in storage, at average cost                                                    328.4                            646.0
     Material and supplies, at average cost                                             146.7                            137.1
     Derivative contracts                                                                40.3                             54.1
     Prepayments                                                                        101.7                            236.2
     Other                                                                               89.3                             76.8
                                                                        -------------------------------------------------------
                                                                                      2,757.0                          2,787.0
                                                                        -------------------------------------------------------

Equity Investments and Other                                                            273.1                            269.7
                                                                        -------------------------------------------------------

Property
     Gas                                                                              7,710.2                          7,639.4
     Electric                                                                         2,591.9                          2,575.4
     Other                                                                              436.6                            441.5
     Accumulated depreciation                                                        (3,200.3)                        (3,151.2)
     Gas production and development, at cost                                            187.5                            186.9
     Accumulated depletion                                                             (115.2)                          (113.7)
                                                                        -------------------------------------------------------
                                                                                      7,610.7                          7,578.3
                                                                        -------------------------------------------------------

Deferred Charges
     Regulatory assets:
       Miscellaneous assets                                                             946.1                            937.5
       Derivative contracts                                                              37.7                            196.3
     Goodwill and other intangible assets, net of amortization                        1,666.3                          1,666.3
     Derivative contracts                                                               113.7                            127.3
     Other                                                                              880.6                            875.1
                                                                        -------------------------------------------------------
                                                                                      3,644.4                          3,802.5
                                                                        -------------------------------------------------------

Total Assets                                                                       $ 14,285.2                       $ 14,437.5
                                                                        =======================================================
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

        See accompanying Notes to the Consolidated Financial Statements.


                                       3
<PAGE>

<TABLE>
                           CONSOLIDATED BALANCE SHEET
                                   (Unaudited)
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
(In Millions of Dollars)                                                     March 31, 2007                  December 31, 2006
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>                               <C>
LIABILITIES AND CAPITALIZATION
Current Liabilities
      Accounts payable and other liabilities                                     $    815.9                         $  1,026.0
      Commercial paper                                                                    -                               85.0
      Current maturities of long-term debt and capital leases                         136.2                                1.2
      Taxes accrued                                                                   293.5                              200.8
      Dividends payable                                                                83.4                               83.3
      Customer deposits                                                                35.5                               33.5
      Interest accrued                                                                 83.3                               58.5
      Other current liability, derivative contracts                                    24.9                              219.7
                                                                       --------------------------------------------------------
                                                                                    1,472.7                            1,708.0
                                                                       --------------------------------------------------------

Deferred Credits and Other Liabilities
      Regulatory liabilities:
        Miscellaneous liabilities                                                      41.7                               43.4
        Removal costs recovered                                                       567.0                              556.2
        Derivative accounts                                                            86.9                              120.6
      Asset retirement obligations                                                     48.0                               47.3
      Deferred income tax                                                           1,124.5                            1,176.4
      Postretirement benefits and other reserves                                    1,672.2                            1,667.3
      Derivative contracts                                                             85.2                               43.1
      Other                                                                           212.3                              121.6
                                                                       --------------------------------------------------------
                                                                                    3,837.8                            3,775.9
                                                                       --------------------------------------------------------

Commitments and Contingencies (See Note 6)                                                -                                  -

Capitalization
      Common stock                                                                  3,999.4                            3,994.0
      Retained earnings                                                             1,103.6                              973.7
      Retained earnings - cumulative effect of FIN 48
        implementation (See Note 11)                                                   (5.2)                                 -
      Accumulated other comprehensive loss                                           (158.9)                            (175.3)
      Treasury stock                                                                 (263.4)                            (273.6)
                                                                       --------------------------------------------------------
         Total common shareholders' equity                                          4,675.5                            4,518.8
      Long-term debt and capital leases                                             4,283.3                            4,419.1
                                                                       --------------------------------------------------------
Total Capitalization                                                                8,958.8                            8,937.9
                                                                       --------------------------------------------------------

Minority Interest in Consolidated Companies                                            15.9                               15.7
                                                                       --------------------------------------------------------
Total Liabilities and Capitalization                                             $ 14,285.2                         $ 14,437.5
                                                                       ========================================================
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

        See accompanying Notes to the Consolidated Financial Statements.


                                       4
<PAGE>

<TABLE>
                        CONSOLIDATED STATEMENT OF INCOME
                                   (Unaudited)
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
                                                                                              Three Months Ended March 31,
(In Millions of Dollars, Except Per Share Amounts)                                         2007                          2006
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>                           <C>
Revenues
     Gas Distribution                                                                  $ 2,415.5                     $ 2,180.1
     Electric Services                                                                     384.4                         424.8
     Energy Services                                                                        52.6                          48.4
     Energy Investments                                                                     10.0                           7.8
                                                                    -----------------------------    --------------------------
Total Revenues                                                                           2,862.5                       2,661.1
                                                                    -----------------------------    --------------------------
Operating Expenses
     Purchased gas for resale                                                            1,672.7                       1,511.4
     Fuel and purchased power                                                              128.2                         130.0
     Operations and maintenance                                                            430.9                         406.0
     Depreciation, depletion and amortization                                              112.3                         110.3
     Operating taxes                                                                       122.6                         118.2
                                                                    -----------------------------    --------------------------
Total Operating Expenses                                                                 2,466.7                       2,275.9
                                                                    -----------------------------    --------------------------
Income from equity investments                                                               3.7                           3.4
Gain on sale of property                                                                       -                           0.5
                                                                    -----------------------------    --------------------------
Operating Income                                                                           399.5                         389.1
                                                                    -----------------------------    --------------------------
Other Income and (Deductions)
     Interest charges                                                                      (61.6)                        (66.2)
     Other                                                                                   8.2                          11.4
                                                                    -----------------------------    --------------------------
Total Other Income and (Deductions)                                                        (53.4)                        (54.8)
                                                                    -----------------------------    --------------------------
Income Taxes
     Current                                                                               177.2                         159.4
     Deferred                                                                              (44.5)                        (33.1)
                                                                    -----------------------------    --------------------------
Total Income Taxes                                                                         132.7                         126.3
                                                                    -----------------------------    --------------------------

                                                                    -----------------------------    --------------------------
Earnings for Common Stock                                                              $   213.4                     $   208.0
                                                                    =============================    ==========================

                                                                    -----------------------------    --------------------------
Basic Earnings Per Share                                                               $    1.22                     $    1.19
                                                                    =============================    ==========================

                                                                    -----------------------------    --------------------------
Diluted Earnings Per Share                                                             $    1.21                     $    1.18
                                                                    =============================    ==========================
Average Common Shares Outstanding (000)                                                  175,600                       174,704
Average Common Shares Outstanding - Diluted (000)                                        176,855                       175,743
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

        See accompanying Notes to the Consolidated Financial Statements.


                                       5
<PAGE>

<TABLE>
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (Unaudited)
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
                                                                                               Three Months Ended March 31,
(In Millions of Dollars)                                                                   2007                           2006
--------------------------------------------------------------------------------------------------------------------------------
Operating Activities
<S>                                                                                      <C>                            <C>
Net income                                                                               $ 213.4                        $ 208.0
Adjustments to reconcile net income to net
      cash provided by (used in) operating activities
    Depreciation, depletion and amortization                                               112.3                          110.3
    Deferred income tax                                                                    (44.5)                         (33.1)
    Income from equity investments                                                          (3.7)                          (3.4)
    Dividends from equity investments                                                        2.3                              -
    Amortization of financing fees / interest rate swap                                      2.2                            2.1
    Amortization of property taxes                                                          26.0                           33.4
Changes in assets and liabilities
    Accounts receivable                                                                   (423.2)                          12.3
    Materials and supplies, fuel oil and gas in storage                                    387.9                          283.5
    Accounts payable and other liabilities                                                (136.4)                        (308.1)
    Taxes accrued                                                                          158.5                          166.0
    Interest accrued                                                                        24.7                           19.6
    Environmental payments                                                                 (11.5)                         (10.0)
    Other                                                                                   41.2                           63.3
                                                                             --------------------    ---------------------------
Net Cash Provided by Operating Activities                                                  349.2                          543.9
                                                                             --------------------    ---------------------------
Investing Activities
    Construction expenditures                                                             (107.4)                        (122.2)
    Cost of removal                                                                        (12.2)                          (6.7)
    Derivative margin call                                                                  41.6                              -
    Return of investment                                                                     7.6                              -
                                                                             --------------------    ---------------------------
Net Cash Used in Investing Activities                                                      (70.4)                        (128.9)
                                                                             --------------------    ---------------------------
Financing Activities
    Common/Treasury stock issued                                                             5.7                           15.5
    Payment of commercial paper                                                            (85.0)                        (160.8)
    Payment of long-term debt                                                               (0.6)                             -
    Common stock dividends paid                                                            (83.3)                         (81.1)
                                                                             --------------------    ---------------------------
Net Cash Used in Financing Activities                                                     (163.2)                        (226.4)
                                                                             --------------------    ---------------------------
Net Increase in Cash and Cash Equivalents                                                  115.6                          188.6
Cash and Cash Equivalents at Beginning of Period                                           210.9                          124.5
                                                                             --------------------    ---------------------------
Cash and Cash Equivalents at End of Period                                               $ 326.5                        $ 313.1
                                                                             ====================    ===========================
Interest Paid                                                                            $  39.1                        $  42.6
Income Tax Paid                                                                          $   9.7                        $  13.1
--------------------------------------------------------------------------------------------------------------------------------
</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)

INTRODUCTION TO THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------

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

On February 25, 2006,  KeySpan entered into an Agreement and Plan of Merger (the
"Merger   Agreement"),   with  National  Grid  plc,  a  public  limited  company
incorporated  under the laws of England and Wales  ("Parent")  and National Grid
US8, Inc., a New York Corporation  ("Merger Sub"),  pursuant to which Merger Sub
will merge with and into KeySpan (the "Merger"),  with KeySpan continuing as the
surviving  company and thereby becoming an indirect  wholly-owned  subsidiary of
the  Parent.  Pursuant to the Merger  Agreement,  at the  effective  time of the
Merger,  each  outstanding  share of KeySpan  common stock,  par value $0.01 per
share of KeySpan (the  "Shares"),  other than treasury shares and shares held by
the Parent and its  subsidiaries,  shall be canceled and shall be converted into
the right to receive $42.00 in cash,  without  interest.  As contemplated in the
Merger   Agreement,   National  Grid  plc  has  provided  notice  extending  the
termination date of the Merger Agreement through August 25, 2007.

Consummation of the Merger is subject to various closing  conditions,  including
but not limited to the receipt of requisite  regulatory  approvals  from certain
United States federal and state public utility,  antitrust and other  regulatory
authorities,  many of which have been filed or obtained.  Specifically, we filed
our  application for approval of the Merger pursuant to the Federal Power Act in
May 2006 and in  October  2006 the  requisite  approval  was  obtained  from the
Federal Energy Regulatory  Commission  ("FERC").  In early July 2006, we cleared
review by the Federal Trade  Commission  under the  Hart-Scott-Rodino  Antitrust
Improvement  Act  ("HSR"),  which  provides a one year  period to  complete  the
Merger.  Depending on the timing of the closing,  KeySpan and National  Grid plc
may  be  required  to  re-file  an  application  under  HSR.  We  also  received


                                       7
<PAGE>


notification that the Committee on Foreign Investment in the U.S. has determined
that  there  are no  issues  of  national  security  sufficient  to  warrant  an
investigation of the  transaction.  On July 20, 2006 we filed an application for
approval of the  transaction  with the New York State Public Service  Commission
("NYPSC").  In October 2006,  the State of New Jersey Board of Public  Utilities
approved  a change of control of KeySpan  Communication  Corp.,  which  provides
telecommunications  services in New Jersey.  KeySpan also sought approval of the
Merger from the New Hampshire  Public  Utility  Commission  ("NHPUC").  In April
2007, the staff of the NHPUC advised the NHPUC that KeySpan,  National Grid plc,
the New  Hampshire  Office of Consumer  Advocate  and the staff of the NHPUC had
reached  a  settlement  in  principle  that  would,  upon  finalization  of  the
settlement  documents,  resolve  all  issues  in  the  pending  Merger  approval
application  before the NHPUC.  The filing of testimony  and the  scheduling  of
hearings   has  been   postponed   pending   finalization   of  the   settlement
documentation,  the timing and resolution of which cannot yet be determined.  In
addition,  the Merger was approved by our  shareholders at our Annual Meeting on
August 17, 2006. Shareholders of National Grid plc approved the transaction at a
meeting held on July 31, 2006.

On April 6, 2007,  the Attorney  General of the  Commonwealth  of  Massachusetts
filed a petition with the  Massachusetts  Department of  Telecommunications  and
Energy  ("MADTE") to initiate an oversight  investigation  related to the Merger
between KeySpan and National Grid plc. The petition does not  specifically  seek
MADTE  approval of the Merger,  which under current law has been  interpreted as
not being required in connection with mergers of utility holding companies which
only indirectly  affect the ownership of utility  subsidiaries  operating within
the Commonwealth of Massachusetts.  Rather, the petition requests that the MADTE
investigate the impact of the Merger on rates and service quality of the utility
subsidiaries  owned  and  operated  by  KeySpan  and  National  Grid  plc in the
Commonwealth of  Massachusetts.  On April 13, 2007 KeySpan and National Grid plc
filed a response to the  Attorney  General's  petition  agreeing to cooperate in
such a proceeding  and  recommending  a proposed  procedural  schedule.  KeySpan
cannot  predict the  outcome of this  proceeding  or its impact,  if any, on the
Merger.

For a  discussion  on the impact of the Merger on KeySpan's  service  agreements
with  LIPA,  see Note 10 to the  Consolidated  Financial  Statements  "2006 LIPA
Settlement."

In addition to seeking  approval of the Merger,  the application  filed with the
NYPSC also contained a proposed  ten-year rate plan for KeySpan Energy  Delivery
of New York ("KEDNY") and KeySpan Energy Delivery of Long Island  ("KEDLI"),  as
well  as  proposals  concerning   corporate   structure,   affiliate  rules  and
transactions   and  the  rate  treatment  for   contemplated   synergy  savings.
Specifically,  the rate plan proposal provides for, among other things, a freeze
of base delivery  rates for KEDNY and KEDLI for 18 months.  Thereafter,  KEDNY's
and  KEDLI's  gas  adjustment  clause  would  be  increased  to  recover,  on  a
prospective  basis, gas  commodity-related  costs of $68.6 million for KEDNY and
$28.7  million  for KEDLI that would no longer be  included  in base  rates.  In
addition,  KEDNY and KEDLI base delivery  rates would be increased by an average
of 2.5% ($62.4 million) and 2.3% ($39.4 million),  respectively in years 3, 5, 7
and 9 of the rate plan.  The  proposed  rate plan also  contemplates  an allowed
return on equity of 11.0% for each  entity.  Cumulative  earnings  above  11.75%
would be shared  between  gas sales  customers  and  KeySpan  over the rate plan


                                       8
<PAGE>


period. On October 3, 2006,  National Grid plc filed testimony and exhibits with
the  NYPSC  that  further  explains  the  exhibits  and  attachments  that  were
previously submitted as part of the July 20, 2006 petition.

Separately  from the merger  application,  on  October 3, 2006,  KEDNY and KEDLI
filed with the NYPSC  individual  applications  for proposed annual increases in
revenues,   which  applications   assumed  that  KEDNY  and  KEDLI  remained  as
stand-alone companies. The proposed revenue increases are for approximately 9.1%
and 10.9% for KEDNY and KEDLI,  respectively.  KEDNY's  last base rate  increase
took effect  October 1, 1993 and since then base rates have been reduced twice -
once in 1996 and again in 1998.  KEDLI's  last base rate  increase  took  effect
December 1, 1995.  Since that time,  KEDLI's  base rates were  reduced  twice in
1998. The principal  factors  creating the need for rate relief are increases in
operating and maintenance  expenses,  increases in rate base, increased property
taxes and depreciation  expense, and the need to commence recovery of previously
deferred  costs  such as pension  and post  retirement  benefits,  environmental
expenditures and property taxes.

The total projected increase in revenues is comprised of two components;  (i) an
increase in base rates of $180.7  million for KEDNY and $145  million for KEDLI;
and (ii)  projected  increases of $32.8  million and $13.6 million for KEDNY and
KEDLI, respectively, for gas related expenses that will be recovered through the
gas adjustment clause and/or transportation adjustment clause. The proposed rate
of return on equity is 11.0% for both KEDNY and KEDLI.

The NYPSC has suspended the  implementation  of the proposed  tariff changes for
eleven months,  which would mean, absent other intervening  events, an effective
date of September 3, 2007 for new rates.  Although  KEDNY and KEDLI proposed the
new rates described  above in these tariff filings,  it will not be necessary to
implement the rate increases  proposed  therein if the NYPSC approves the Merger
between  National  Grid plc and KeySpan and approves the related  ten-year  rate
plan previously noted, or some variation thereof.

On February  20,  2007,  NYPSC Staff  filed its direct  testimony  in the Merger
proceeding.  NYSPSC  Staff  opposed  the  current  terms of the Merger on policy
grounds,   but  suggested  that  it  could  support  the  Merger  under  certain
circumstances.  KeySpan and National Grid plc submitted testimony  responding to
the positions taken by Staff. In addition,  on January 29, 2007, Staff filed its
direct  testimony in the rate case  proceedings  and our rebuttal  testimony was
filed on February 21, 2007.  Settlement  discussions have been ongoing. In order
to  accommodate  the  settlement  discussions,  KeySpan  agreed  to a  one-month
extension  of the rates  suspension  period,  if  required.  In the event that a
settlement  is not reached,  the  administrative  law judge ("ALJ") will issue a
decision after conducting  adjudicatory  hearings.  Any settlement would also be
subject to approval by the NYPSC after conducting a public hearing.  Ultimately,
the NYPSC may accept, reject, or modify all or any part of the settlement or any
ALJ decision regarding the Merger or rate approval applications.

KeySpan and National Grid plc will continue to pursue all required approvals and
continue to anticipate that the Merger will be consummated in mid-2007. However,
we are unable to predict  the  outcome of these  regulatory  proceedings  and no
assurance  can be  given  that  the  Merger  will  occur  or the  timing  of its
completion.


                                       9
<PAGE>


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, 2007,  and the results of operations  for the three months ended
March 31, 2007 and March 31,  2006,  as well as cash flows for the three  months
ended March 31, 2007 and March 31, 2006. The accompanying  financial  statements
should be read in conjunction  with the  consolidated  financial  statements and
notes  included  in  KeySpan's  Annual  Report on Form  10-K for the year  ended
December 31, 2006. The December 31, 2006  financial  statement  information  has
been derived from the 2006 audited financial statements.

Income  from  interim   periods  may  not  be  indicative  of  future   results.
Consolidated  earnings are seasonal in nature  primarily due to the  significant
contributions to earnings of the gas distribution  operations.  As a result,  we
expect to earn most of our annual earnings in the first and fourth quarters.

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


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

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                                                    Three Months Ended March 31,
(In Millions of Dollars, Except Per Share Amounts)                                  2007                   2006
-------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>                    <C>
Earnings for common stock                                                      $    213.4             $    208.0
-------------------------------------------------------------------------------------------------------------------

Weighted average shares outstanding (000)                                         175,600                174,704
Add dilutive securities:
Options                                                                             1,051                    828
Performance shares                                                                    204                    211
-------------------------------------------------------------------------------------------------------------------
Total weighted average shares outstanding - assuming dilution                     176,855                175,743
-------------------------------------------------------------------------------------------------------------------
Basic earnings per share                                                       $     1.22             $     1.19
-------------------------------------------------------------------------------------------------------------------
Diluted earnings per share                                                     $     1.21             $     1.18
-------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       10
<PAGE>


2. BUSINESS SEGMENTS

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

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

The Electric Services segment consists of subsidiaries that operate the electric
transmission and distribution  system owned by LIPA; own and provide capacity to
and  produce  energy  for LIPA from our  generating  facilities  located on Long
Island;  and manage fuel  supplies  for LIPA to fuel our Long Island  generating
facilities.  These services are provided in accordance  with existing  long-term
service  contracts  having  remaining terms that range from one to six years and
power  purchase  agreements  having  remaining  terms  that range from six to 20
years. On February 1, 2006, KeySpan and LIPA agreed to extend, amend and restate
these  contractual  arrangements.  (See Note 10,  "2006 LIPA  Settlement"  for a
further  discussion of these  agreements.)  The Electric  Services  segment also
includes  subsidiaries  that own or lease and  operate  the 2,200 MW  Ravenswood
Facility located in Queens,  New York, and the 250 MW combined-cycle  Ravenswood
Expansion.  Collectively  the Ravenswood  Facility and Ravenswood  Expansion are
referred to as the "Ravenswood Generating Station." All of the energy,  capacity
and ancillary services related to the Ravenswood  Generating Station are sold to
the New York Independent  Systems Operator ("NYISO") energy markets.  To finance
the purchase and/or construction of the Ravenswood  Generating Station,  KeySpan
entered into a leasing  arrangement  for each  facility.  The Electric  Services
segment also conducts retail  marketing of electricity to commercial  customers.
(See Note 6 "Financial  Guarantees and Contingencies" for further details on the
leasing arrangements.)

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

The Energy  Investments  segment  consists of our gas production and development
investments,  as well as  certain  other  domestic  energy-related  investments.
KeySpan's gas production and  development  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 production and development activities primarily in West Virginia.
KeySpan   Exploration   is  involved  in  a  joint  venture  with  Merit  Energy
Corporation.


                                       11


<PAGE>


This segment is also  engaged in pipeline  development  activities.  KeySpan and
Spectra 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 26.25%
interest in the Millennium Pipeline Company LLC, the developer of the Millennium
pipeline  project,  which is expected to have the  capacity to  transport  up to
525,000 DTH of natural  gas a day from  Corning,  New York to Ramapo,  New York,
where it will connect to an existing  pipeline.  Additionally,  subsidiaries  in
this segment hold a 20% equity interest in the Iroquois Gas Transmission  System
LP,  a  pipeline  that  transports   Canadian  gas  supply  to  markets  in  the
northeastern United States. These investments are accounted for under the equity
method.  Accordingly,  equity  income from these  investments  is reflected as a
component of operating income in the Consolidated Statement of Income.

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

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, 2007, the total assets of
each reportable  segment have not changed  materially from those levels reported
at December 31, 2006. The reportable segment information is as follows:


                                       12
<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                            Gas             Electric       Energy        Energy
(In Millions of Dollars)                Distribution        Services      Services     Investments    Eliminations      Consolidated
------------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>               <C>            <C>           <C>               <C>             <C>
Three Months Ended March 31, 2007
Unaffiliated revenue                        2,415.5           384.4          52.6          10.0                -             2,862.5
Intersegment revenue                              -             3.9           2.1           1.3             (7.3)                  -
Operating Income                              402.5            (1.5)          1.4           5.1             (8.0)              399.5

Three Months Ended March 31, 2006
Unaffiliated revenue                        2,180.1           424.8          48.4           7.8                -             2,661.1
Intersegment revenue                              -               -           2.5           1.3             (3.8)                  -
Operating Income                              336.4            65.0          (0.4)          3.0            (14.9)              389.1

------------------------------------------------------------------------------------------------------------------------------------
</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 $337.7 million and $422.7 million for the three
months ended March 31, 2007 and 2006, respectively,  represent approximately 12%
and 16%, respectively of our consolidated revenues in these periods.

3. COMPREHENSIVE INCOME

The table below indicates the components of comprehensive income:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
                                                                                        Three Months Ended March 31,
(In Thousands of Dollars)                                                              2007                     2006
----------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>                      <C>
Net Income                                                                           $ 213.4                  $ 208.0
----------------------------------------------------------------------------------------------------------------------
Other comprehensive income, net of tax
Reclassification of (gains) losses included in net income                                6.5                    (35.7)
Unrealized (losses) gains on derivative financial instruments                           (3.1)                    45.9
Unrealized gains (losses) on marketable securities                                      (0.1)                     0.4
Accrued underfunded pension and other postretirement obligation(1)                      13.1                        -
----------------------------------------------------------------------------------------------------------------------
Other comprehensive income, net of tax                                                  16.4                     10.6
----------------------------------------------------------------------------------------------------------------------
Comprehensive Income                                                                 $ 229.8                  $ 218.6
----------------------------------------------------------------------------------------------------------------------
Related tax (benefit) expense
Reclassification of (gains) losses included in net income                            $   4.2                  $ (19.2)
Unrealized (losses) gains on derivative financial instruments                           (1.9)                    25.4
Unrealized gains (losses) on marketable securities                                      (0.1)                     0.2
----------------------------------------------------------------------------------------------------------------------
Total Tax Expense                                                                    $   2.2                  $   6.4
----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)  For the three months ended March 31, 2007, KeySpan recorded a $13.1 million
     increase in other comprehensive  income, with a corresponding  reduction to
     deferred income taxes to properly  reflect the deferred tax benefit arising
     from the  implementation  of Statement of  Financial  Accounting  Standards
     ("SFAS") 158 "Employers'  Accounting for Defined Benefit Pensions and Other
     Postretirement  Benefit Plans,  an amendment of FASB Statements No. 87, 88,
     106 and 132(R)" at December  31,  2006.  This  correction  has no impact on
     KeySpan's  Consolidated  Statements  of Income and Cash Flows for the three
     months ended March 31, 2007. KeySpan believes this correction is immaterial
     to its current and prior year's Financial Statements.

4. HEDGING AND DERIVATIVE FINANCIAL INSTRUMENTS

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  production  and  development   activities  and  its  electric

                                       13
<PAGE>


generating  facilities at the  Ravenswood  Generating  Station.  As discussed in
greater  detail below,  certain  derivative  financial  instruments  employed by
KeySpan are  accounted  for as  cash-flow  hedges and receive  hedge  accounting
treatment  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.  However,  KeySpan
also  employs  derivative  financial  instruments  that do not qualify for hedge
accounting  treatment.  Additionally,  certain derivative financial  instruments
employed by our Gas  Distribution  operations are subject to SFAS 71 "Accounting
for the Effects of Certain Types of Regulation."

Commodity  Derivative  Instruments - Hedge  Accounting:  Our Energy  Investments
subsidiary, Seneca-Upshur, utilizes OTC natural gas swaps to hedge the cash flow
variability associated with the forecasted sales of a portion of its natural gas
production.  At March 31, 2007,  Seneca-Upshur  has hedge positions in place for
approximately  70% of its  estimated  2007 through 2009 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  2009.  The  fair  value of these
derivative  instruments  at March 31, 2007 was a liability of $6.9 million.  The
estimated amount of losses associated with such derivative  instruments that are
reported in accumulated other  comprehensive  income and that are expected to be
reclassified  into  earnings  over  the  next  twelve  months  is $3.5  million.
Ineffectiveness   associated  with  these   outstanding   derivative   financial
instruments was immaterial for the three months ended March 31, 2007.

Certain derivative  instruments employed by our gas distribution  operations are
not  subject  to SFAS  71 and  thus  are  not  subject  to  deferral  accounting
treatment. KeySpan uses OTC natural gas swaps to hedge the cash-flow variability
of gas purchases associated with certain large-volume gas sales customers. These
gas swaps are  accounted  for as cash-flow  hedges.  KeySpan uses market  quoted
forward  prices to value these swap  positions.  The maximum length of time over
which we have hedged such cash flow  variability  is through  October 2007.  The
fair  value  of  these  derivative   instruments  was  immaterial  to  KeySpan's
consolidated financial statements at March 31, 2007.  Ineffectiveness associated
with these  outstanding  derivative  financial  instruments was immaterial as of
March 31, 2007.

The above noted derivative  financial  instruments are cash flow hedges that are
accounted for as hedges under 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 record 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 on settled  transactions
are  reflected  as a component  of either  revenue or gas cost  depending on the
hedged transaction. Hedge ineffectiveness results from changes during the period
in the price  differentials  between the index price of the derivative  contract
and the price of the  purchase  or sale for the cash flow that is being  hedged,
and is recorded directly to earnings.


                                       14
<PAGE>


Commodity  Derivative  Instruments  that are not  Accounted  for as Hedges:  The
Ravenswood  Generating  Station  financially  hedges  the cash flow  variability
associated  with a portion of  electric  energy  sales and fuel  purchases.  Our
strategy  is to  financially  hedge  up to 50% of the  on-peak  capacity  of the
Ravenswood  Generating Station. The maximum length of time over which derivative
financial  instruments are in-place is through  December 2008. To accomplish our
stated   risk   management   strategy,   KeySpan   employs   financially-settled
electric-power  swap  contracts  with  offsetting  financially-settled  oil swap
contracts,  physical natural gas forward contracts and OTC natural gas swaps. We
use market quoted forward prices to value the electric-power swap contracts. The
fair value of the electric power derivative  instruments at March 31, 2007 was a
liability of $5.4 million.  We use market quoted forward prices to value the oil
swap  contracts and natural gas  contracts.  The fair value of these  derivative
instruments at March 31, 2007 was $0.3 million.

On  January  18,  2006,  KeySpan  entered  into an  International  SWAP  Dealers
Association  Master Agreement for a fixed for float unforced capacity  financial
swap (the "Swap  Agreement")  with Morgan  Stanley  Capital Group Inc.  ("Morgan
Stanley").  The Swap  Agreement has a three year term that began on May 1, 2006.
The notional  quantity was  1,800,000kW  (the  "Notional  Quantity")  of In-City
Unforced Capacity and the fixed price is $7.57/kW-month ("Fixed Price"), subject
to adjustment upon the occurrence of certain events. Cash settlement occurs on a
monthly basis based on the In-City  Unforced  Capacity  price  determined by the
relevant  New York  Independent  System  Operator  ("NYISO")  Spot Demand  Curve
Auction Market ("Floating Price"). For each monthly settlement period, the price
difference  equals  the Fixed  Price  minus the  Floating  Price.  If such price
difference is less than zero, Morgan Stanley will pay KeySpan an amount equal to
the product of (a) the  Notional  Quantity  and (b) the  absolute  value of such
price  difference.  Conversely,  if such price  difference is greater than zero,
KeySpan  will pay  Morgan  Stanley  an amount  equal to the  product  of (a) the
Notional  Quantity and (b) the  absolute  value of such price  difference.  This
derivative instrument does not qualify for hedge accounting treatment under SFAS
133. The recognized fair value  associated with this instrument is immaterial to
the  consolidated  financial  statements at March 31, 2007. As noted,  this is a
financial  derivative  instrument and is unrelated to any physical production of
electricity.

The NYPSC,  Consolidated  Edison and other load serving  entities  ("LSEs") have
proposed price mitigation  measures for in-City capacity that would apply to the
Ravenswood  Generating  Station.  These price  mitigation  measures  essentially
proposed to reduce the capacity bid price that the Ravenswood Generating Station
could bid into the NYISO energy market.  However,  the FERC found that the NYISO
filing  failed to meet the  burden of proof  required  to support  revisions  to
market rules.  Nevertheless,  on its own motion,  FERC initiated a proceeding to
investigate and consider the justness and  reasonableness of the NYISO's in-City
capacity  market,  including  whether and how market  rules should be revised to
provide a fair level of compensation that will attract and retain needed


                                       15
<PAGE>


infrastructure.  This  matter  has  been  referred  to a  settlement  judge  and
settlement  discussions are on-going. At this time, we are unable to predict the
outcome of this proceeding and what effect it may have on the potential  revenue
that could be realized  from physical  sales of in-City  capacity or on the Swap
Agreement.

Commodity  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 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,  the fair value of these derivatives is recorded
as current  or  deferred  assets  and  liabilities,  with  offsetting  positions
recorded as regulatory  assets and regulatory  liabilities  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, 2007 the fair
value of these derivative instruments was $8.7 million.

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 qualify for the
normal  purchases  and  sales  exception.  Certain  contracts  for the  physical
purchase of natural gas  associated  with our  regulated  gas  utilities  do not
qualify for normal  purchases  under 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. At March 31, 2007,  these
derivatives had a net fair value of $72.2 million.

KeySpan has a  management  contract  with  Merrill  Lynch  Trading,  under which
KeySpan and Merrill Lynch Trading will share the  responsibilities  for managing
KeySpan's upstream gas distribution assets associated with its Massachusetts gas
distribution subsidiaries, as well as providing city-gate delivered supply. This
contract allows for both KeySpan and Merrill Lynch Trading to employ  derivative
instruments  to  maximize  the  profitability  of  KeySpan's  portfolio  of  gas
distribution assets. Profits associated with these activities are shared between
KeySpan,  Merrill  Lynch  Trading and KeySpan's  Massachusetts  ratepayers.  The
accounting  for this  contract  is  subject  to SFAS 71 since the  contract  was
executed by KeySpan's regulated gas distribution  utilities.  At March 31, 2007,
KeySpan's proportionate share of the fair value associated with these derivative
instruments amounted to $26.2 million,  $18.6 million of which has been deferred
for future sharing among the alliance members and Massachusetts ratepayers.  The
remaining  amount was recorded as a benefit to revenues  since the  inception of
the contract.  KeySpan  provides these services  internally for its New York and
New Hampshire gas distribution subsidiaries.

The  table  below  summarizes  the fair  value of all of the  above  outstanding
derivative  instruments  at March 31, 2007 and December 31, 2006 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.


                                       16
<PAGE>


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
(In Millions of Dollars)                               March 31, 2007              December 31, 2006
------------------------------------------------------------------------------------------------------
<S>                                                             <C>                           <C>
Gas Contracts:
  Other current assets                                            38.8                          30.7
  Other deferred charges                                         113.6                         127.1
  Regulatory asset                                                37.7                         196.3
  Other current liability                                        (18.3)                       (211.7)
  Other deferred liabilities                                     (84.5)                        (42.1)
  Regulatory liability                                           (86.9)                       (120.6)

Oil Contracts:
  Other current assets                                             0.4                           0.3
  Other current liability                                         (1.0)                         (7.2)
  Other deferred liabilities                                      (0.1)                         (0.5)

Electric Contracts:
  Other current assets                                             1.1                          23.2
  Other deferred charges                                           0.1                           0.3
  Other current liability                                         (5.6)                         (0.8)
  Other deferred liabilities                                      (0.7)                         (0.6)

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


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 2006, 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  2006/2007  winter  heating  season - November  2006 through March 2007.
These put options  would have paid KeySpan  $37,500 per heating  degree day when
the actual  temperature was below 4,159 heating degree days, or approximately 5%
warmer than normal, based on the most recent 20-year average for normal weather.
The maximum  amount  KeySpan would have received on these  purchased put options
was $15 million. The net premium cost for these options was $1.7 million and was
amortized over the heating  season.  Since weather was warmer than normal during
the fourth quarter of 2006,  KeySpan recorded a $9.1 million benefit to earnings
associated with the weather derivative.  However,  weather for the first quarter
of 2007 was colder than normal.  Therefore, for the entire winter heating season
-November 2006 through March 2007 - weather was slightly colder than normal.  As
a result, in the first quarter of 2007 KeySpan reversed the $9.1 million accrual
recorded  in the  fourth  quarter  of 2006.  We  account  for these  derivatives
pursuant to the requirements of EITF 99-2, "Accounting for Weather Derivatives."
In this regard,  such  instruments are accounted for using the "intrinsic  value
method" as set forth in such guidance.

Credit  and  Collateral:  Derivative  contracts  are  primarily  used to  manage
exposure to market risk arising  from  changes in commodity  prices and interest
rates.  In the  event  of  non-performance  by a  counterparty  to a  derivative
contract,  the  desired  impact may not be  achieved.  The risk of  counterparty


                                       17
<PAGE>


non-performance is generally considered a credit risk and is actively managed by
assessing each counterparty credit profile and negotiating appropriate levels of
collateral and credit  support.  In instances where the  counterparties'  credit
quality has declined,  or credit exposure  exceeds certain levels,  we may limit
our  credit  exposure  by  restricting  new  transactions  with  counterparties,
requiring  additional  collateral or credit  support and  negotiating  the early
termination of certain agreements.  At March 31, 2007, KeySpan has received $7.7
million  from its  counterparties  as  collateral  associated  with  outstanding
derivative contracts.  This amount has been recorded as restricted cash, with an
offsetting position in current liabilities on the Consolidated Balance Sheet. At
March 31,  2007,  KeySpan has $1.3  million of  outstanding  margin calls to its
counterparties for open derivative  instruments  associated with its strategy to
minimize  fluctuations  in gas  sales  prices  to its  regulated  firm gas sales
customers.

5. RECENT ACCOUNTING PRONOUNCEMENTS

In February  2007, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of  Financial  Accounting  Standards  ("SFAS") No. 159 "The Fair Value
Option for Financial Assets and Financial  Liabilities."  This statement permits
entities to choose to measure many financial instruments and certain other items
at fair value that are not currently  required to be measured at fair value. The
objective  is to improve  financial  reporting by  providing  entities  with the
opportunity  to mitigate  volatility  in reported  earnings  caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting  provisions.  This  statement  requires a  business  entity to report
unrealized  gains and losses on items for which the fair  value  option has been
elected in  earnings at each  subsequent  reporting  date.  An entity may decide
whether to elect the fair value  option for each  eligible  item on its election
date, subject to certain requirements described in the statement. This statement
shall be effective as of the beginning of each  reporting  entity's first fiscal
year that begins after  November 15, 2007.  KeySpan is currently  reviewing  the
requirements  of this statement and, at this point in time, we cannot  determine
the impact,  if any, that this  statement may have on results of operations  and
financial position.

In  September  2006,  the FASB issued SFAS 157 "Fair Value  Measurements."  This
statement  defines fair value,  establishes a framework for measuring fair value
in generally accepted  accounting  principles and expands disclosures about fair
value.  SFAS 157 expands the disclosures  about the use of fair value to measure
assets and  liabilities  in interim  and annual  periods  subsequent  to initial
recognition. The disclosures focus on the inputs used to measure fair value, the
recurring fair value measurements using significant  unobservable inputs and the
effect of the measurement on earnings (or changes in net assets) for the period.
The  guidance  in SFAS 157 also  applies  for  derivatives  and other  financial
instruments   measured  at  fair  value  under  Statement  133  "Accounting  for
Derivative Instruments and Hedging Activities" at initial recognition and in all
subsequent periods. This Statement is effective for fiscal years beginning after
November 15, 2007,  and interim  periods  within those fiscal years.  KeySpan is


                                       18
<PAGE>


currently  reviewing  the  requirements  of SFAS 157,  and at this point in time
cannot  determine  what  impact,  if any,  SFAS 157 will have on its  results of
operations or financial  position.  This  Statement  will have no impact on cash
flow.

In July 2006, the FASB issued  Interpretation No. 48 "Accounting for Uncertainty
in Income Taxes - An  Interpretation  of FASB Statement No. 109" ("FIN 48"). FIN
48 clarifies the  accounting for  uncertainty  in income taxes  recognized in an
entity's  financial  statements  in  accordance  with FASB  Statement  No.  109,
"Accounting  for Income  Taxes"  and  prescribes  a  recognition  threshold  and
measurement attributes for financial statement disclosure of tax positions taken
or expected to be taken on a tax return.  KeySpan  adopted the provisions of FIN
48 on January 1, 2007. See Note 11, "Adoption of FASB Interpretation  Number 48"
for  additional  details  on the  impact  of this  implementation  on  KeySpan's
financial statements.

6. FINANCIAL GUARANTEES AND CONTINGENCIES

Variable  Interest Entity:  KeySpan has an arrangement with a variable  interest
entity through which it leases 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 a lease agreement (the
"Master Lease") with a variable  interest,  unaffiliated  financing  entity that
acquired a portion of the facility,  or three steam generating  units,  directly
from  Consolidated  Edison and leased it to our subsidiary,  KeySpan  Ravenswood
LLC. 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 KeySpan  Ravenswood,  LLC, under the
Master Lease.  Monthly lease payments  substantially  equal the monthly interest
expense on such debt securities.

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


                                       19
<PAGE>


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 $304
million.  If  KeySpan  Ravenswood  LLC,  was not  able to  fulfill  its  payment
obligations  with respect to the Master Lease payments,  then the maximum amount
KeySpan would be exposed to under its current  guarantees  would be $425 million
plus the present value of the remaining lease payments through June 20, 2009.

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

Asset Retirement  Obligations:  KeySpan has various asset retirement obligations
primarily   associated  with  its  gas  distribution  and  electric   generation
activities.   These  obligations  have  remained  substantially  unchanged  from
December 31, 2006,  except for normal accretion  adjustments and costs incurred.
Generally,  KeySpan's largest asset retirement  obligations relate to: (i) legal
requirements to cut (disconnect from the gas distribution system),  purge (clean
of  natural  gas  and  PCB  contaminants)  and  cap  gas  mains  within  its gas
distribution and transmission system when mains are retired in place; or dispose
of sections of gas main when removed from the pipeline system; (ii) cleaning and
removal  requirements  associated  with storage tanks  containing  waste oil and
other waste  contaminants;  and (iii) legal requirements to remove asbestos upon
major renovation or demolition of structures and facilities.  At March 31, 2007,
these obligations total $48.0 million.  See KeySpan's Annual Report on Form 10-K
for the year ended  December  31,  2006,  Note 7 to the  Consolidated  Financial
Statements "Contractual Obligations, Financial Guarantees and Contingencies" for
additional information regarding these obligations.

Environmental Matters

New York Sites:  Within the State of New York we have  identified  43 historical
manufactured gas plant ("MGP") sites and related  facilities which were owned or
operated by KeySpan subsidiaries or such companies'  predecessors.  These former
sites, some of which are no longer owned by KeySpan, have been identified to the
Department of  Environmental  Conservation  ("DEC") for inclusion on appropriate
site inventories. Administrative Orders on Consent ("ACO") or Voluntary Cleanup


                                       20
<PAGE>


Agreements  ("VCA") have been executed with the DEC to address the investigation
and/or remediation activities associated with certain sites and one waterway. In
February  2007,  KeySpan  entered  into an ACO for  fourteen  of these sites and
continues to evaluate how to proceed with respect to  participation in the DEC's
remediation programs for the other sites.

KeySpan has identified 28 of these sites as being associated with the historical
operations of KEDNY. One site has been fully  remediated.  Subject to the issues
described  in  the  preceding   paragraph,   the  remaining  27  sites  will  be
investigated  and, if necessary,  remediated  under the terms and  conditions of
ACOs, VCAs, or Brownfield Cleanup Agreements ("BCA").  Expenditures  incurred to
date by us with respect to KEDNY MGP-related activities total $84.8 million.

The  remaining  15 sites  have  been  identified  as being  associated  with the
historical  operations  of  KEDLI.  One  site has been  fully  investigated  and
requires no further action.  The remaining  sites will be  investigated  and, if
necessary,  remediated  under the terms and  conditions of ACOs,  VCAs, or BCAs.
Expenditures incurred to date by us with respect to KEDLI MGP-related activities
total $65.4 million.

KeySpan  presently   estimates  the  remaining  cost  of  its  KEDNY  and  KEDLI
MGP-related  environmental  remediation activities will be $317.8 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, KEDNY and KEDLI rate plans generally provide
for the  recovery  from  customers of  investigation  and  remediation  costs of
certain sites. At March 31, 2007, we have reflected a regulatory asset of $367.7
million for  KEDNY/KEDLI  MGP sites.  KeySpan has filed  proposed rate plans for
KEDNY and KEDLI with the NYPSC as part of its  application  for  approval of the
KeySpan / National  Grid plc Merger,  as well as individual  applications  for a
proposed  annual  increase in revenues for KEDNY and KEDLI.  Among other things,
these filings seek recovery of deferred expenses  associated with remediation of
MGP  sites,  as  well as  recovery  of  ongoing  remediation  expenses.  See the
"Introduction  to  the  Notes  to the  Consolidated  Financial  Statements"  for
additional details on the filings.

KeySpan is 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.  KeySpan  is  not
responsible for liabilities arising from disposal of waste at off-site locations


                                       21
<PAGE>


prior  to  the   acquisition   closing  and  any  monetary  fines  arising  from
Consolidated  Edison's  pre-closing conduct. We presently estimate the remaining
environmental  clean up  activities  for this site will be $1.4  million,  which
amount has been accrued by us. Expenditures incurred to date total $3.6 million.

New England Sites: Within the Commonwealth of Massachusetts and the State of New
Hampshire, we are aware of 74 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 64 of
these sites.  A subsidiary of National Grid USA,  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.

KeySpan  presently  estimates  the  remaining  cost of the  Massachusetts  KEDNE
MGP-related  environmental cleanup activities will be $7.9 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  acquisition  date of these
subsidiaries, with respect to these MGP-related activities total $35.6 million.

KeySpan may have or share responsibility under applicable environmental laws for
the  remediation  of 10 MGP sites and  related  facilities  associated  with the
historical  operations of EnergyNorth in New Hampshire.  At four of these sites,
KeySpan has entered into cost sharing  agreements  with other  parties who share
responsibility for remediation of these sites.  EnergyNorth also 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.
The Nashua River Asbestos Site now has been fully remediated.

KeySpan  presently  estimates  the  remaining  cost of  EnergyNorth  MGP-related
environmental  cleanup  activities will be $24.7 million,  which amount has been
accrued as a  reasonable  estimate of probable  cost for known  sites,  however,
remediation costs for each site may be materially  higher than noted,  depending


                                       22
<PAGE>


upon changing technologies and regulatory  standards,  selected end use for each
site and actual  environmental  conditions  encountered.  Expenditures  incurred
since November 8, 2000, the acquisition date of this subsidiary, with respect to
the MGP-related activities total $23.7 million.

By rate orders, the Massachusetts  Department of  Telecommunications  and Energy
("MADTE") and the New Hampshire Public Utility Commission  ("NHPUC") provide for
the recovery of site  investigation and remediation costs and,  accordingly,  at
March 31, 2007,  we have  reflected a regulatory  asset of $39.6 million for the
KEDNE MGP sites.  Colonial  Gas Company and Essex Gas Company are not subject to
the  provisions  of SFAS 71,  "Accounting  for the  Effects of Certain  Types of
Regulation"  and  therefore  have recorded no regulatory  asset.  However,  rate
orders  currently in effect for these  subsidiaries  provide for the recovery of
investigation and remediation costs.

KeySpan New  England,  LLC Sites:  KeySpan is aware of three  non-utility  sites
associated  with  KeySpan  New  England,  LLC,  a  successor  company to Eastern
Enterprises, for which it 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 entered into a cost-sharing agreement under which each
company  agreed to pay  one-third  of the costs of  compliance  with the consent
order,  while preserving any claims it may have against the other companies for,
among other things,  reallocation of proportionate  liability.  In 2002,  Beazer
East commenced an action in the U.S. District Court for the Southern District of
New York which sought a judicial  determination  on the  allocation of liability
for the Everett Facility.  A confidential  settlement  agreement was executed on
terms favorable to KeySpan and the Beazer lawsuit has been discontinued.

KeySpan  presently  estimates the remaining  cost of the  environmental  cleanup
activities for these three non-utility sites will be approximately $9.2 million,
which  amount has been accrued 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
$23.6 million.

KeySpan  believes  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


                                       23
<PAGE>


to investigate and, if necessary, remediate each site previously noted, or other
currently  unknown former sites and related facility sites, the cost of which is
not  presently  determinable  but may be  material  to our  financial  position,
results of operations or cash flows.

See KeySpan's  Annual  Report on Form 10-K for the year ended  December 31, 2006
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, we do not consider
any of such  proceedings to be material to our business or likely to result in a
material  adverse  effect on our results of operations,  financial  condition or
cash flows.

On March 20, 2006, a purported class action lawsuit was filed alleging breach of
fiduciary duty against KeySpan and its directors. The complaint, which was filed
in the New York  State  Supreme  Court for the  County of Kings  (the  "Court"),
related to the  execution of the Merger  Agreement  with  National  Grid plc and
alleged that the merger consideration which KeySpan's stockholders would receive
in connection  with the proposed  merger  transaction  was inadequate and unfair
because the transaction value of $42.00 for each share of KeySpan's common stock
outstanding did not provide its stockholders with a meaningful  premium over the
market price of the common  stock.  On April 19,  2006,  we moved to dismiss the
complaint  for  failure to state a cause of action  upon which  relief  could be
granted.  On May 26, 2006,  the  plaintiff  served an amended  complaint  adding
National Grid plc as a defendant.  The amended  complaint  alleged that National
Grid plc aided and  abetted  the alleged  breach of  fiduciary  duties and added
claims of  inadequate  disclosure  with respect to KeySpan's  preliminary  proxy
materials. In June 2006, the parties agreed in principle to settle the case, the
terms of which  provide for,  among other  things,  the  inclusion of additional
disclosures in our 2006 Annual Meeting Proxy Statement concerning the background
and principle  events leading to execution of the Merger  Agreement,  as well as
the payment of plaintiff's  counsel fees of up to $350,000  following closing of
the transaction.  In October 2006, definitive settlement documents were executed
by the parties and submitted to the Court.  The settlement  remains subject to a
number of conditions, including Court approval following notice to shareholders.

Several   lawsuits  have  been  filed  which  allege   damages   resulting  from
contamination associated with the historic operations of former manufactured gas
plants  located  in Bay Shore and  Staten  Island,  New York.  KeySpan  has been
conducting site  investigations  and remediations at these locations pursuant to
Orders on Consent with the DEC.  With respect to Bay Shore,  on July 12, 2006, a
purported class action and a separate complaint were filed. On November 27, 2006
and December 28, 2006, two other  lawsuits were filed by property  owners in the
Bay Shore area. In addition,  on October 31, 2006, a lawsuit was filed  alleging


                                       24
<PAGE>


damages in Staten  Island,  New York.  KeySpan  intends to contest each of these
proceedings  vigorously.  On February 8, 2007, we received a Notice of Intent to
File Suit  from the  Office of the  Attorney  General  for the State of New York
("AG") against  KeySpan and four other  companies in connection with the cleanup
of  historical  contamination  found in certain  lands  located  in  Greenpoint,
Brooklyn  and  in an  adjoining  waterway.  KeySpan  has  previously  agreed  to
remediate  portions of the  properties  referenced  in this notice and will work
cooperatively with the DEC and AG to address environmental conditions associated
with the  remainder of the  properties.  At this time,  we are unable to predict
what effect, if any, the outcome of these proceedings will have on our financial
condition, results of operation and cash flows.

Other  Contingencies:  We derive a  substantial  portion of our  revenues in the
Electric  Services  segment from a series of  agreements  with LIPA  pursuant to
which  we  manage  LIPA's   transmission  and  distribution  system  and  supply
approximately one half of LIPA's customers'  electricity needs. KeySpan and LIPA
have entered into  agreements to extend,  amend,  and restate these  contractual
arrangements.  Further,  following the  announcement  of the proposed  Merger of
KeySpan and National Grid plc,  LIPA,  National Grid plc and KeySpan  engaged in
discussions  concerning the impact of the transaction on LIPA's operations.  See
Note 10 "2006 LIPA  Settlement"  for  further  details of these  agreements  and
discussions.

Financial Guarantees

KeySpan has issued  financial  guarantees in the normal  course of business,  on
behalf of its subsidiaries, to various third party creditors. At March 31, 2007,
the  following  amounts  would  have to be  paid  by  KeySpan  in the  event  of
non-payment by the primary obligor at the time payment is due:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Amount of         Expiration
   Nature of Guarantee (In Millions of Dollars)                                                   Exposure            Dates
------------------------------------------------------------------------------------------------------------------------------------
<S>     <C>    <C>    <C>    <C>    <C>    <C>
Guarantees for Subsidiaries
   Medium-Term Notes - KEDLI                                                  (i)                $   525.0          2008-2010
   Industrial Development Revenue Bonds                                       (ii)                   128.3            2027
   Ravenswood - Master Lease                                                  (iii)                  425.0            2009
   Ravenswood - Sale/leaseback                                                (iv)                   403.5            2019
   Surety Bonds                                                               (v)                     70.2         2007 - 2010
   Commodity Guarantees and Other                                             (vi)                    52.7         2007 - 2009
   Letters of Credit                                                          (vii)                   76.6         2007 - 2010
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 $ 1,681.3
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       25
<PAGE>


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 current maturities of long-term debt and capital
     leases,   and  long-term  debt  on  the   Consolidated   Balance  Sheet  as
     appropriate.

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

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

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

(v)  KeySpan  has  agreed  to  indemnify  the  issuers  of  various  surety  and
     performance  bonds  associated  with certain  construction  projects  being
     performed by certain current and former subsidiaries. In the event that the
     subsidiaries fail to perform their obligations under contracts, the injured
     party may demand that the surety make  payments or provide  services  under
     the bond.  KeySpan  would then be obligated to reimburse the surety for any
     expenses or cash outlays it incurs.  Although  KeySpan is not  guaranteeing
     any new  bonds  for any of the  former  subsidiaries,  KeySpan's  indemnity
     obligation   supports   the   contractual   obligation   of  these   former
     subsidiaries.  KeySpan  has  also  received  from a  former  subsidiary  an
     indemnity bond issued by a third party  insurance  company,  the purpose of
     which is to  reimburse  KeySpan in an amount up to $80 million in the event
     it is required to perform under all other indemnity obligations  previously
     incurred by KeySpan to support  such  company's  bonded  projects  existing
     prior to  divestiture.  At March 31, 2007,  the total cost to complete such
     remaining bonded projects is estimated to be approximately $27.0 million.


                                       26
<PAGE>


(vi) KeySpan has guaranteed  commodity-related  payments for subsidiaries within
     the  Electric  Services  segment.  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, 2007.

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

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

7. STOCK BASED COMPENSATION

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

Under this Plan,  19,250,000  shares were  authorized  for issuance of which the
total shares awarded to date include 16.9 million stock options,  222,143 shares
of restricted  stock, and 891,555  performance  shares. At March 31, 2007, after
adjusting for  forfeitures,  there are  approximately  3.0 million  shares still
eligible to be granted under the Incentive  Plan.  In addition,  under  previous
plans,  there  were an  additional  1.7  million  shares  authorized  for  which
approximately 1.2 million stock options were awarded.


                                       27
<PAGE>


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

In January 2006,  KeySpan adopted SFAS 123 (revised 2004)  "Share-Based  Payment
("SFAS 123R")." The  implementation of this standard required KeySpan to expense
certain  stock  options  that  had  previously  been  accounted  for  under  the
requirements of APB Opinion 25 and related  Interpretations,  i.e. awards issued
prior to January 1, 2003. No  compensation  cost had been  recognized  for these
fixed stock  option plans in the  Consolidated  Financial  Statements  since the
exercise  prices and market  values  were  equal on the grant  dates.  All stock
option  awards  previously  accounted  for  under  APB 25 were  fully  vested by
December 31, 2006.

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

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
                                                                                             Three Months Ended
                                                                                     March 31,                   March 31,
(In Millions of Dollars)                                                                2007                        2006
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>                          <C>
Performance shares                                                                    $  1.8                        $ 2.3
Restricted stock                                                                         0.7                          3.7
Stock options                                                                            0.7                          1.5
EDSPP discount                                                                           1.3                          1.5
--------------------------------------------------------------------------------------------------------------------------
Total stock-based compensation included in operations and
maintenance expense                                                                      4.5                          9.0
Income tax benefit                                                                      (1.6)                        (3.2)
--------------------------------------------------------------------------------------------------------------------------
Total stock based compensation expense, net of tax                                    $  2.9                        $ 5.8
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

SFAS 123R  requires  the  benefits  of tax  deductions  in excess of  recognized
compensation  expense to be reported as a financing cash flow, rather than as an
operating cash flow.  During the three months ended March 31, 2007 and 2006 cash
received  from stock  options  exercised  was $5.2  million  and $15.5  million,
respectively.  The tax benefit  realized for tax  deductions  from stock options
exercised  during the three  months  ended March 31, 2007 and 2006 was less than
the recognized  compensation  expense and  accordingly  there were no excess tax
deductions  reported in the financing  section of the Consolidated  Statement of
Cash Flows.


                                       28
<PAGE>


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

Performance shares

Performance  shares were awarded under the Incentive Plan in 2005 based upon the
attainment of overall corporate  performance goals. These performance shares are
measured  over a three  year  period by  comparing  KeySpan's  cumulative  total
shareholder return to the S&P Utilities Group. For actual  performance  achieved
at a threshold level, 50% of the award will be granted;  for actual  performance
achieved at a targeted level, 100% of the award will be granted;  and for actual
performance  achieved at the maximum  level,  150% of the award will be granted.
The 2005 award is being expensed ratably over its remaining performance period.

The 2006 performance share award reflects the new performance condition criteria
under SFAS 123R. In 2006, 315,900  performance shares were granted.  Performance
shares were  granted  with a  three-year  performance  period with a  threshold,
target and maximum performance level. The number of performance shares earned at
the end of the  performance  period  can  range  from  0% to 150% of the  shares
granted  and  will  be  linked  to  two  performance  measures:  the  percentage
improvement in return on invested capital,  or "ROIC," and KeySpan's  cumulative
three-year  total  stockholder  return,  or "TSR,"  relative  to the  cumulative
three-year  TSR for the  Standard  and Poor's  Utilities  Group,  using a matrix
approach that encompasses  both measures.  The ROIC goal will act as the primary
trigger.  If the ROIC goal  performance is below the threshold level, all shares
shall be forfeited without payment. Upon a change of control, performance shares
shall be distributed based upon the greater of the number of performance  shares
awarded  at  target  level or the  number  of  shares  earned  based  on  actual
performance  through the change of control date.  Performance  share awards were
priced at fair value on the date of grant. The unearned compensation as of March
31, 2007 associated with all of the performance share awards was $9.9 million.

There were no performance share awards granted in the first quarter of 2007.

Restricted Stock Awards

KeySpan has made certain grants of restricted  stock to officers,  directors and
certain  other  management   employees  under  the  Incentive  Plan.  Awards  of
restricted stock were made in 2002, 2005, 2006 and 2007. These awards may not be
sold or otherwise  transferred  until  certain  restrictions  have  lapsed.  The
unearned stock-based  compensation related to these awards is being amortized to
compensation  expense over the period in which the awards vest. The  share-based
expense for these awards was determined  based on the fair value of the stock at


                                       29
<PAGE>


the date of grant applied to the total number of shares that were anticipated to
fully vest.  Upon a change of control,  all  restricted  stock  awards will vest
immediately.  The unearned  compensation  as of March 31, 2007,  associated with
restricted stock was $6.8 million.

Employee Discount Stock Purchase Plan

KeySpan's  Employee  Discount  Stock  Purchase  Plan  ("EDSPP")  allows  KeySpan
employees to purchase shares of KeySpan stock at a 10% discount  through payroll
deductions. KeySpan is currently expensing the discount. The number of shares of
common stock  authorized  for issuance  under the EDSPP is 1,750,000  shares and
there are 299,977 shares remaining to be issued.

Stock Options

The stock option  component of the Incentive Plan entitles the  participants  to
purchase  shares of common stock at an exercise price per share which is no less
than the  closing  price of the  common  stock on the date of the  grant.  Stock
options  generally  vest over a  three-to-five  year period and have an exercise
period of ten years.  Upon a change of control,  all stock  options  granted and
outstanding  will vest  immediately.  The value of all stock  option  grants are
estimated on the date of the grant using the Black-Scholes option-pricing model.
There were no stock options granted in 2007 or 2006.

A summary of the status of our fixed stock option plans and changes is presented
below for the three months ended March 31, 2007:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
                                                                                     Weighted           Aggregate
                                                                                      Average         Intrinsic Value
                       Fixed Options                      Shares                  Exercise Price       (In Millions)
-------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                            <C>               <C>
Outstanding at beginning of period                       9,403,104                    $ 33.82
Exercised                                                 (150,102)                   $ 34.71
Forfeited                                                   (4,737)                   $ 38.26
-------------------------------------------------------------------------------------------------------------------------
Outstanding at end of period                             9,248,265                    $ 33.80           $ 66.2
-------------------------------------------------------------------------------------------------------------------------
Exercisable at end of period                             7,919,622                    $ 33.15           $ 61.9
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

The total intrinsic value of the options exercised during the three months ended
March  31,  2007 and 2006  was  approximately  $0.9  million  and $3.1  million,
respectively.


                                       30
<PAGE>


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                        Options                                                    Options
Remaining           Outstanding at      Weighted Average       Range of        Exercisable at    Weighted Average       Range of
Contractual Life     March 31, 2007      Exercise Price     Exercise Price      March 31, 2007     Exercise Price     Exercise Price
------------------------------------------------------------------------------------------------------------------------------------
<S>                   <C>                     <C>           <C>                   <C>                   <C>          <C>
 1 years                 185,000             $ 32.63             32.63               185,000           $ 32.63           32.63
 2 years                 671,430             $ 28.01         24.73 - 29.38           671,430           $ 28.01        24.73 - 29.38
 3 years                 381,741             $ 26.98         21.99 - 27.06           381,741           $ 26.98        21.99 - 27.06
 4 years                 954,537             $ 22.69         22.50 - 32.76           954,537           $ 22.69        22.50 - 32.76
 5 years               1,469,933             $ 39.50             39.50             1,469,933           $ 39.50           39.50
 6 years               1,712,230             $ 32.66             32.66             1,712,230           $ 32.66           32.66
 7 years               1,139,776             $ 32.40             32.40               940,496           $ 32.40           32.40
 8 years               1,394,490             $ 37.54             37.54               972,730           $ 37.54           37.54
 9 years               1,339,128             $ 39.25             39.25               631,525           $ 39.25           39.25
------------------------------------------------------------------------------------------------------------------------------------
                       9,248,265                                                   7,919,622
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

As of March 31, 2007, there are approximately 1.3 million options which have not
yet vested. The unearned  compensation cost related to these stock option awards
is $2.5 million which is expected to be recognized over the next two years.

8. POSTRETIREMENT BENEFITS

Pension  Plans:  The  following  information  represents  the  consolidated  net
periodic  pension cost for the three  months ended March 31, 2007 and 2006,  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)                                         2007                          2006
--------------------------------------------------------------------------------------------------------
<S>                                                             <C>                           <C>
Service cost, benefits earned during the period             $    15.7                      $   16.1
Interest cost on projected benefit obligation                    40.6                          38.6
Expected return on plan assets                                  (52.1)                        (47.0)
Net amortization and deferral                                    15.9                          21.9
--------------------------------------------------------------------------------------------------------
Total pension cost                                          $    20.1                      $   29.6
--------------------------------------------------------------------------------------------------------
</TABLE>

Other  Postretirement   Benefits:   The  following  information  represents  the
consolidated net periodic other postretirement benefit cost for the three months
ended  March 31, 2007 and 2006 for our  noncontributory  defined  benefit  plans
covering certain health care and life insurance  benefits for retired employees.
We have been funding a portion of future benefits over employees' active service
lives  through  Voluntary  Employee  Beneficiary  Association  ("VEBA")  trusts.
Contributions  to  VEBA  trusts  are  tax  deductible,  subject  to  limitations
contained in the Internal Revenue Code.


                                       31
<PAGE>


Net periodic other postretirement benefit cost included the following
components:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
                                                                Three Months Ended March 31,
(In Millions of Dollars)                                     2007                         2006
---------------------------------------------------------------------------------------------------
<S>                                                         <C>                          <C>
Service cost, benefits earned during the period           $   6.1                      $   6.9
Interest cost on accumulated
   postretirement benefit obligation                         19.4                         20.2
Expected return on plan assets                               (9.8)                        (9.1)
Net amortization and deferral                                12.2                         16.6
---------------------------------------------------------------------------------------------------
Other postretirement cost                                 $  27.9                      $  34.6
---------------------------------------------------------------------------------------------------
</TABLE>

During the first three months of 2007, KeySpan  contributed $18.0 million to its
pension plans. KeySpan anticipates  contributing an additional $113.0 million to
its other  postretirement  benefit plans during the remainder of 2007. 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. COMMERCIAL PAPER

At March 31, 2007,  KeySpan had two credit  facilities  totaling  $1.5 billion -
$920 million for five years through 2010, and $580 million  through 2009,  which
continue to support  KeySpan's  commercial  paper  program  for ongoing  working
capital needs. The fees for the facilities are based on KeySpan's current credit
ratings and are increased or decreased  based on a  downgrading  or upgrading of
our ratings. The current annual facility fee is 0.07% based on our credit rating
of A3 by Moody's Investor Services and A by Standard & Poor's for each facility.
Both credit facilities allow for KeySpan to borrow using several different types
of loans; specifically, Eurodollar loans, ABR loans, or competitively bid loans.
Eurodollar  loans are based on the Eurodollar rate plus a margin that is tied to
our applicable  credit  ratings.  ABR loans are based on the higher of the Prime
Rate,  the base CD rate plus 1%, or the Federal Funds  Effective Rate plus 0.5%.
Competitive  bid loans are based on bid results  requested  by KeySpan  from the
lenders.  We do not anticipate  borrowing against these facilities;  however, if
the credit rating on our commercial paper program were to be downgraded,  it may
be necessary to do so.

The facilities  contain certain  affirmative and negative  operating  covenants,
including  restrictions on KeySpan's  ability to mortgage,  pledge,  encumber or
otherwise subject its utility property to any lien, as well as certain financial
covenants  that  require us to,  among  other  things,  maintain a  consolidated
indebtedness  to  consolidated  capitalization  ratio of no more than 65% at the


                                       32
<PAGE>


last day of any fiscal quarter. Violation of these covenants could result in the
termination  of the facilities  and the required  repayment of amounts  borrowed
thereunder,  as well as possible cross defaults under other debt agreements.  At
March  31,  2007,   KeySpan's   consolidated   indebtedness  was  48.6%  of  its
consolidated capitalization and KeySpan was in compliance with all covenants.

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

At March 31, 2007, we had cash and temporary cash investments of $326.5 million.
During the first three  months of 2007,  we repaid $85.0  million of  commercial
paper and, at March 31, 2007, no commercial paper was outstanding.  At March 31,
2007,  KeySpan had the ability to issue up to an additional $1.5 billion,  under
its commercial paper program.

10. 2006 LIPA SETTLEMENT

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


                                       33
<PAGE>


On February 1, 2006,  KeySpan and LIPA  entered into (i) an amended and restated
Management  Services Agreement (the "2006 MSA"),  pursuant to which KeySpan will
continue to operate and  maintain  the electric T&D System owned by LIPA on Long
Island;  (ii) a new Option and  Purchase  and Sale  Agreement  (the "2006 Option
Agreement"),  to replace the Generation  Purchase Rights  Agreement (as amended,
the "GPRA"),  pursuant to which LIPA had the option,  through December 15, 2005,
to acquire  substantially  all of the electric  generating  facilities  owned by
KeySpan on Long Island;  and (iii) a Settlement  Agreement (the "2006 Settlement
Agreement")  resolving outstanding issues between the parties regarding the 1998
LIPA Agreements. The 2006 MSA, the 2006 Option Agreement and the 2006 Settlement
Agreement  are  collectively  referred to herein as the "2006 LIPA  Agreements."
Each of the 2006 LIPA Agreements will become effective retroactive to January 1,
2006, upon all of the 2006 LIPA Agreements  receiving the required  governmental
approvals;  otherwise none of the 2006 LIPA  Agreements  will become  effective.
These agreements will become effective  following approval by the New York State
Comptroller's Office and the New York State Attorney General.

Following the  announcement  of the proposed Merger of KeySpan and National Grid
plc, LIPA,  National Grid plc and KeySpan engaged in discussions  concerning the
impact of the  transaction  on LIPA's  operations.  On March 23, 2007,  KeySpan,
National Grid plc and LIPA  announced  that the parties  reached an agreement in
principle  pursuant  to which  LIPA  agreed  to waive its  contractual  right to
terminate  the  1998  LIPA   Agreements  and  the  2006  LIPA   Agreements  upon
consummation  of the Merger  between  KeySpan and National Grid plc, in exchange
for  enhancements  to  certain of the 2006 LIPA  Agreements  and  certain  other
considerations.  The amended  and  enhanced  agreements  become  effective  upon
completion of the Merger  between  KeySpan and National Grid plc and are subject
to approval by the LIPA Board of Trustees,  the New York State Attorney  General
and the New York State Comptroller.

2006 Settlement Agreement

Pursuant to the terms of the 2006 Settlement Agreement,  KeySpan and LIPA agreed
to resolve issues that have existed between the parties  relating to the various
1998 LIPA Agreements. In addition to the resolution of these matters,  KeySpan's
entitlement  to utilize  LILCO's  available tax credits and other tax attributes
will  increase from  approximately  $50 million to  approximately  $200 million.
These  credits  and  attributes  may be used  to  satisfy  KeySpan's  previously
incurred indemnity  obligation to LIPA for any federal income tax liability that
results  from the  settlement  with the IRS  regarding  the audit of LILCO's tax
returns for the years ended December 31, 1996 through March 31, 1999. On October
30, 2006, the IRS submitted the settlement provisions of the concluded IRS audit
to  the  Joint  Committee  on  Taxation  for  approval.  Key  provisions  of the
settlement  included the  resolution of the tax basis of assets  transferred  to
KeySpan  at the  time of the  KeySpan/LILCO  merger,  the tax  deductibility  of
certain merger related costs and the tax deductibility of certain  environmental
expenditures.  The settlement  enabled  KeySpan to utilize 100% of the available
tax  credits.  (See  KeySpan's  Annual  Report on Form  10-K for the year  ended
December 31, 2006 Note 3 to the Consolidated Financial Statements "Income Taxes"


                                       34
<PAGE>


for additional information of the settlement.) In recognition of these items, as
well as for the modification and extension of the 1998 MSA and the amendments to
the GPRA, upon  effectiveness of the Settlement  Agreement KeySpan will record a
contractual  asset  in the  amount  of  approximately  $160  million,  of  which
approximately  $110  million  will be  attributed  to the right to utilize  such
additional  credits  and  attributes  and  approximately  $50  million  will  be
amortized over the eight year term of the 2006 MSA. In order to compensate  LIPA
for the  foregoing,  KeySpan  will pay LIPA $69  million in cash and will settle
certain accounts  receivable in the amount of approximately $90 million due from
LIPA.

Generation Purchase Rights Agreement and 2006 Option Agreement.

Under an amended GPRA,  LIPA had the right to acquire  certain of KeySpan's Long
Island-based  generating assets formerly owned by LILCO, at fair market value at
the time of the exercise of such right.  LIPA was  initially  required to make a
determination  by May 2005,  but  KeySpan  and LIPA agreed to extend the date by
which LIPA was to make this  determination  to December 15, 2005. As part of the
2006  settlement  between  KeySpan and LIPA,  the parties  entered into the 2006
Option  Agreement  whereby LIPA had the option during the period January 1, 2006
to December 31, 2006 to purchase  only the steam  generating  units at KeySpan's
Far Rockaway  and/or E.F.  Barrett  Generating  Stations  (and  certain  related
assets) at a price  equal to the net book value of each  facility.  In  December
2006,  KeySpan and LIPA entered  into an amendment to the 2006 Option  Agreement
whereby the parties  agreed to extend the expiration of the option period to the
later of (i) December 31, 2007 or (ii) 180 days  following the effective date of
the 2006 Option  Agreement.  The 2006 Option  Agreement  replaces the GPRA,  the
expiration  of which  has been  stayed  pending  effectiveness  of the 2006 LIPA
Agreements.  In the event such  agreements do not become  effective by reason of
failure to secure any of the requisite governmental approvals,  the GPRA will be
reinstated  for a period of 90 days from the date such  approval  is denied.  If
LIPA were to  exercise  the option and  purchase  one or both of the  generation
facilities  (i) LIPA and KeySpan  will enter into an operation  and  maintenance
agreement,  pursuant to which KeySpan will continue to operate these facilities,
through May 28, 2013, for a fixed management fee plus  reimbursement for certain
costs;  and (ii) the 1998 PSA and 1998 EMA will be amended  to reflect  that the
purchased generating  facilities would no longer be covered by those agreements.
It is  anticipated  that  the  fees  received  pursuant  to  the  operation  and
maintenance agreement will offset the reduction in the operation and maintenance
expense  recovery  component of the 1998 PSA and the reduction in fees under the
1998 EMA.

Management Services Agreements

In place of the previous compensation  structure (whereby KeySpan was reimbursed
for budgeted  costs,  and earned a management  fee and certain  performance  and
cost-based incentives), KeySpan's compensation for managing the T&D System under
the 2006 MSA consists of two  components:  a minimum  compensation  component of
$224 million per year and a variable component based on electric sales. The $224


                                       35
<PAGE>


million  component  will  remain  unchanged  for three  years and then  increase
annually by 1.7%, plus inflation. The variable component, which will comprise no
more than 20% of  KeySpan's  compensation,  is based on  electric  sales on Long
Island  exceeding a base amount of 16,558 gigawatt hours,  increasing by 1.7% in
each year. Above that level,  KeySpan will receive  approximately 1.34 cents per
kilowatt hour for the first contract  year,  1.29 cents per kilowatt hour in the
second  contract  year  (plus an annual  inflation  adjustment),  1.24 cents per
kilowatt hour in the third contract year (plus an annual inflation  adjustment),
with the per  kilowatt  hour rate  thereafter  adjusted  annually by  inflation.
Subject to certain  limitations,  KeySpan will be able to retain all operational
efficiencies realized during the term of the 2006 MSA.

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

Upon approval, the 2006 LIPA Agreements will be effective retroactive to January
1, 2006. KeySpan's reported operating income and net income for the three months
ended March 31, 2007 and 2006 under the 2006 MSA are  substantially  the same as
they would have been if the terms and  provisions  of the 1998 MSA had continued
to be applied.  At this point in time,  KeySpan is unable to  estimate  what the
impact would be to its results of operations,  financial position and cash flows
if the 2006 LIPA Agreements do not become fully effective.

11. ADOPTION OF FASB INTERPRETATION NUMBER 48

On July  13,  2006  the  FASB  issued  Interpretation  No.  48  "Accounting  for
Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109" ("FIN
48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in an entity's  financial  statements in accordance with FASB Statement No. 109,
"Accounting  for Income  Taxes"  and  prescribes  a  recognition  threshold  and
measurement attributes for financial statement disclosure of tax positions taken
or  expected  to be  taken on a tax  return.  Under  FIN 48,  the  impact  of an
uncertain income tax position on the income tax return must be recognized at the
largest  amount that is more likely than not to be  sustained  upon audit by the
relevant  taxing  authority.  An  uncertain  income  tax  position  will  not be
recognized  if  it  has  less  than  a  50%   likelihood  of  being   sustained.
Additionally,  FIN 48 provides  guidance on: the  classification of unrecognized
tax benefits; disclosures for interest and penalties; accounting and disclosures
for interim reporting periods; and transition requirements.  FIN 48 is effective
for fiscal years beginning after December 15, 2006.

KeySpan adopted the provisions of FIN 48 on January 1, 2007. The total amount of
unrecognized  tax  benefits as of the date of adoption was $79.6  million.  As a
result of the  implementation  of FIN 48, we recognized a $20.5 million increase
in the  liability  for  unrecognized  tax benefits  which was accounted for as a
reduction  in retained  earnings of $5.2 million and an increase to deferred tax
assets of $15.3 million.


                                       36
<PAGE>


Included in the balance of  unrecognized  tax  benefits at January 1, 2007,  are
$55.3 million of tax benefits  that, if  recognized,  would affect the effective
tax rate.

KeySpan recognizes  interest accrued related to unrecognized tax benefits in tax
expense on the Consolidated Statement of Income. During the years ended December
31, 2006, 2005 and 2004, we recognized  approximately $0.9 million, $7.6 million
and $0.4 million in interest, respectively. KeySpan had accrued interest payable
of $8.9 million and $8.0  million at December  31, 2006 and 2005,  respectively.
Upon  adoption  of FIN 48, on January 1, 2007,  KeySpan  increased  its  accrued
interest  payable  to  $24.3  million,   which  is  included  in  the  total  of
unrecognized  benefits as of the date of adoption. We do not anticipate that the
total  amounts of  unrecognized  tax  benefits  will  significantly  increase or
decrease within the next twelve months.

KeySpan is subject to federal,  state and local income tax.  Through its various
subsidiaries,  KeySpan operates predominately in New York, Massachusetts and New
Hampshire.  The  following  table  summarizes  the open tax years for each major
jurisdiction:

---------------------------------------------------
Jurisdiction                    Open Tax Years
---------------------------------------------------

Federal                          2000 - 2006
New York State                   2000 - 2006
New York City                    2000 - 2006
Massachusetts                    2000 - 2006
New Hampshire                    2003 - 2006
---------------------------------------------------

The Internal Revenue Service has recently commenced the examination of KeySpan's
tax returns for the years ended December 31, 2000 through  December 31, 2004. In
addition,  several of our  subsidiaries  are  currently  under audit by New York
State  and New York City for the tax  years  ended  December  31,  2000  through
December  31,  2005.  Although  the tax years ended  December  31, 2003  through
December  31,  2005 are open in  Massachusetts  and New  Hampshire,  none of our
subsidiaries  in these  states  are  currently  being  audited by the income tax
authorities. At this time, we do not believe that the outcome of any examination
will have a material impact on KeySpan's financial statements.


                                       37
<PAGE>


12. KEYSPAN GAS EAST CORPORATION SUMMARY FINANCIAL INFORMATION

KEDLI is a wholly owned  subsidiary of KeySpan.  KEDLI was formed on May 7, 1998
and on May 28, 1998 acquired  substantially all of the assets related to the gas
distribution  business of LILCO.  KEDLI  provides gas  distribution  services to
customers  in the Long Island  counties  of Nassau and Suffolk and the  Rockaway
peninsula of Queens county.  KEDLI established a program for the issuance,  from
time to time, of up to $600 million  aggregate  principal  amount of Medium-Term
Notes, which will be 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.  Additionally,  in 2006,  KEDLI
issued $100  million of Senior  Unsecured  Notes at 5.60% due November 29, 2016.
This debt is not guaranteed by the parent, KeySpan Corporation.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
                               Statement of Income
-------------------------------------------------------------------------------------------------------------------------------
                                                               Three Months Ended March 31, 2007
                                                                              Other
(In Millions of Dollars)                   Guarantor       KEDLI           Subsidiaries        Eliminations       Consolidated
-------------------------------------------------------------------------------------------------------------------------------
                                      -----------------------------------------------------------------------------------------
<S>                                           <C>          <C>                 <C>                 <C>                <C>
Revenues                                     $   0.2      $ 594.5             $ 2,268.0           $   (0.2)          $ 2,862.5
                                      -----------------------------------------------------------------------------------------
Operating Expenses
  Purchased gas                                    -        394.3               1,278.4                  -             1,672.7
  Fuel and purchased power                         -            -                 128.2                  -               128.2
  Operations and maintenance                     1.4         37.8                 391.7                  -               430.9
  Intercompany expense                             -          1.3                  (1.1)              (0.2)                  -
  Depreciation and amortization                    -         28.4                  83.9                  -               112.3
  Operating taxes                                  -         18.7                 103.9                  -               122.6
                                      -----------------------------------------------------------------------------------------
Total Operating Expenses                         1.4        480.5               1,985.0               (0.2)            2,466.7
                                      -----------------------------------------------------------------------------------------
Income from equity investments                     -            -                   3.7                  -                 3.7
                                      -----------------------------------------------------------------------------------------
Operating Income (Loss)                         (1.2)       114.0                 286.7                  -               399.5
                                      -----------------------------------------------------------------------------------------

Interest charges                               (41.0)       (12.7)                (19.7)              11.8               (61.6)
Other income and (deductions)                  250.9          1.7                 (14.2)            (230.2)                8.2
                                      -----------------------------------------------------------------------------------------
Total Other Income and (Deductions)            209.9        (11.0)                (33.9)            (218.4)              (53.4)
                                      -----------------------------------------------------------------------------------------

Income Taxes (Benefit)                          (4.7)        37.8                  99.6                  -               132.7
                                      -----------------------------------------------------------------------------------------
Net Income                                   $ 213.4      $  65.2             $   153.2           $ (218.4)          $   213.4
                                      =========================================================================================
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       38
<PAGE>


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

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

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




                                       39
<PAGE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Balance Sheet
-----------------------------------------------------------------------------------------------------------------------------------
                                                                               March 31, 2007
                                                                                   Other
(In Millions of Dollars)                         Guarantor          KEDLI       Subsidiaries       Eliminations        Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>            <C>               <C>                  <C>               <C>
ASSETS
Current Assets
   Cash & temporary cash investments             $    61.3       $   139.5        $    125.7          $        -        $    326.5
   Accounts receivable, net                            0.5           300.0             896.7                   -           1,197.2
   Other current assets                                1.0           193.9           1,038.4                   -           1,233.3
                                             --------------------------------------------------------------------------------------
                                                      62.8           633.4           2,060.8                   -           2,757.0
                                             --------------------------------------------------------------------------------------

                                             --------------------------------------------------------------------------------------
Equity Investments  and Other                      5,241.3               -             145.6            (5,113.8)            273.1
                                             --------------------------------------------------------------------------------------
Property
   Gas                                                   -         2,216.6           5,493.6                   -           7,710.2
   Other                                                 -             1.3           3,214.7                   -           3,216.0
   Accumulated depreciation and depletion                -          (443.9)         (2,871.6)                  -          (3,315.5)
                                             --------------------------------------------------------------------------------------
                                                         -         1,774.0           5,836.7                   -           7,610.7
                                             --------------------------------------------------------------------------------------
Intercompany Accounts Receivable                     949.7           188.6           1,851.2            (2,989.5)                -
                                             --------------------------------------------------------------------------------------
Deferred Charges                                   1,959.3           449.4           1,235.7                   -           3,644.4
                                             --------------------------------------------------------------------------------------
Total Assets                                     $ 8,213.1       $ 3,045.4        $ 11,130.0          $ (8,103.3)       $ 14,285.2
                                             ======================================================================================

LIABILITIES AND CAPITALIZATION
Current Liabilities
   Accounts payable and other liabilities        $    64.8       $    89.0        $    662.1          $        -        $    815.9
   Commercial paper                                      -               -                 -                   -                 -
   Other current liabilities                         278.1           155.0             223.7                   -             656.8
                                             --------------------------------------------------------------------------------------
                                                     342.9           244.0             885.8                   -           1,472.7
Intercompany Accounts Payable                          7.5           502.7             891.6            (1,401.8)                -
                                             --------------------------------------------------------------------------------------

Deferred Credits and Other Liabilities
Deferred income tax                                    3.4           413.0             708.1                   -           1,124.5
Other deferred credits and liabilities             1,212.1           197.2           1,304.0                   -           2,713.3
                                             --------------------------------------------------------------------------------------
                                                   1,215.5           610.2           2,012.1                   -           3,837.8
                                             --------------------------------------------------------------------------------------
Capitalization
Common shareholders' equity                        4,785.7         1,062.6           3,941.0            (5,113.8)          4,675.5
Long-term debt and capital leases                  1,861.5           625.9           3,383.6            (1,587.7)          4,283.3
                                             --------------------------------------------------------------------------------------
Total Capitalization                               6,647.2         1,688.5           7,324.6            (6,701.5)          8,958.8
                                             --------------------------------------------------------------------------------------
Minority Interest in Subsidiary Companies                -               -              15.9                   -              15.9
                                             --------------------------------------------------------------------------------------
Total Liabilities & Capitalization               $ 8,213.1       $ 3,045.4        $ 11,130.0          $ (8,103.3)       $ 14,285.2
                                             ======================================================================================
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       40
<PAGE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Balance Sheet
-----------------------------------------------------------------------------------------------------------------------------------
                                                                              December 31, 2006
                                                                                    Other
(In Millions of Dollars)                           Guarantor         KEDLI       Subsidiaries       Eliminations      Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>           <C>              <C>                <C>               <C>
ASSETS
Current Assets
   Cash & temporary cash investments                $   140.5     $    34.7       $     35.7          $        -        $    210.9
   Accounts receivable, net                               0.5         175.6            710.7                   -             886.8
   Other current assets                                   1.5         314.0          1,373.8                   -           1,689.3
                                             --------------------------------------------------------------------------------------
                                                        142.5         524.3          2,120.2                   -           2,787.0
                                             --------------------------------------------------------------------------------------

Equity Investments and Other                          5,017.8             -            144.0            (4,892.1)            269.7
                                             --------------------------------------------------------------------------------------
Property
   Gas                                                      -       2,164.4          5,475.0                   -           7,639.4
   Other                                                    -          32.3          3,171.5                   -           3,203.8
   Accumulated depreciation and depletion                   -        (434.7)        (2,830.2)                  -          (3,264.9)
                                             --------------------------------------------------------------------------------------
                                                            -       1,762.0          5,816.3                   -           7,578.3
                                             --------------------------------------------------------------------------------------

Intercompany Accounts Receivable                        969.1          80.8          1,682.9            (2,732.8)                -

Deferred Charges                                      1,942.3         502.0          1,358.2                   -           3,802.5

                                             --------------------------------------------------------------------------------------
Total Assets                                        $ 8,071.7     $ 2,869.1       $ 11,121.6          $ (7,624.9)       $ 14,437.5
                                             ======================================================================================

LIABILITIES AND CAPITALIZATION
Current Liabilities
   Accounts payable and other liabilities           $    57.2     $   118.9       $    849.9          $        -        $  1,026.0
   Commercial paper                                      85.0             -                -                   -              85.0
   Other current liabilities                            231.8          71.4            293.8                   -             597.0
                                             --------------------------------------------------------------------------------------
                                                        374.0         190.3          1,143.7                   -           1,708.0
                                             --------------------------------------------------------------------------------------
Intercompany Accounts Payable                             2.6         319.4            897.0            (1,219.0)                -
                                             --------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Deferred income tax                                     (24.3)        407.0            793.7                   -           1,176.4
Other deferred credits and liabilities                1,216.1         204.7          1,178.7                   -           2,599.5
                                             --------------------------------------------------------------------------------------
                                                      1,191.8         611.7          1,972.4                   -           3,775.9
                                             --------------------------------------------------------------------------------------
Capitalization
Common shareholders' equity                           4,641.5         996.8          3,772.6            (4,892.1)          4,518.8
Long-term debt and capital leases                     1,861.8         750.9          3,320.2            (1,513.8)          4,419.1
                                             --------------------------------------------------------------------------------------
Total Capitalization                                  6,503.3       1,747.7          7,092.8            (6,405.9)          8,937.9
                                             --------------------------------------------------------------------------------------
Minority Interest in Subsidiary Companies                   -             -             15.7                   -              15.7
                                             --------------------------------------------------------------------------------------
Total Liabilities & Capitalization                  $ 8,071.7     $ 2,869.1       $ 11,121.6          $ (7,624.9)       $ 14,437.5
                                             ======================================================================================
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       41
<PAGE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Statement of Cash Flows
-----------------------------------------------------------------------------------------------------------------------------------
                                                                             Three Months Ended March 31, 2007
                                                        ---------------------------------------------------------------------------
(In Millions of Dollars)                                  Guarantor           KEDLI          Other Subsidiaries       Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>              <C>                    <C>                    <C>
Operating Activities
Net Cash (Used in) Provided by Operating Activities        $ (23.5)          $ 110.2                $ 262.5                $ 349.2
                                                        ---------------------------------------------------------------------------
Investing Activities
   Construction expenditures                                     -             (19.4)                 (88.0)                (107.4)
   Cost of removal                                               -              (1.4)                 (10.8)                 (12.2)
   Derivative margin calls                                       -              14.1                   27.5                   41.6
   Return of investment                                          -                 -                    7.6                    7.6
                                                        ---------------------------------------------------------------------------
Net Cash (Used in) Investing Activities                          -              (6.7)                 (63.7)                 (70.4)
                                                        ---------------------------------------------------------------------------
Financing Activities
   Treasury stock issued                                       5.7                 -                      -                    5.7
   Payment of debt, net                                      (85.0)                -                   (0.6)                 (85.6)
   Common stock dividends paid                               (83.3)                -                      -                  (83.3)
   Intercompany dividend payments                              2.0                 -                   (2.0)                     -
   Net intercompany accounts                                 104.9               1.3                 (106.2)                     -
                                                                                                                                 -
                                                        ---------------------------------------------------------------------------
Net Cash (Used in) Provided by Financing Activities          (55.7)              1.3                 (108.8)                (163.2)
                                                        ---------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents       $ (79.2)          $ 104.8                $  90.0                $ 115.6
Cash and Cash Equivalents at Beginning of Period             140.5              34.7                   35.7                  210.9
                                                        ---------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period                 $  61.3           $ 139.5                $ 125.7                $ 326.5
                                                        ===========================================================================
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

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


                                       42
<PAGE>


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

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

The following is a summary of transactions  affecting  comparative  earnings for
the three months ended March 31, 2007,  compared to the three months ended March
31, 2006. Capitalized terms used in the following discussion,  but not otherwise
defined,  have the same  meaning  as when used in the Notes to the  Consolidated
Financial Statements included under Item 1. References to "KeySpan," "we," "us,"
and "our" mean KeySpan Corporation, together with its consolidated subsidiaries.

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

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

Quarter Ended March 31,                              2007              2006
-----------------------------------------------------------------------------
Gas Distribution                                 $  402.5            $ 336.4
Electric Services                                    (1.5)              65.0
Energy Services                                       1.4               (0.4)
Energy Investments                                    5.1                3.0
Eliminations and other                               (8.0)             (14.9)
-----------------------------------------------------------------------------
Operating Income                                    399.5              389.1
-----------------------------------------------------------------------------
Other income and (deductions)
     Interest charges                               (61.6)             (66.2)
     Other income and (deductions)                    8.2               11.4
-----------------------------------------------------------------------------
                                                    (53.4)             (54.8)
-----------------------------------------------------------------------------
Income taxes                                        132.7              126.3
-----------------------------------------------------------------------------
Earnings for Common Stock                         $ 213.4            $ 208.0
-----------------------------------------------------------------------------

Basic Earnings per Share                          $  1.22            $  1.19
-----------------------------------------------------------------------------

KeySpan's  earnings  for common  stock for the three months ended March 31, 2007
were $213.4 million, or $1.22 per share, compared to $208.0 million or $1.19 per
share realized during the three months ended March 31, 2006, an increase of $5.4
million, or $0.03 per share.

As indicated in the above table, operating income increased $10.4 million, or 3%
for the quarter ended March 31, 2007, compared to the corresponding quarter last
year. The Gas  Distribution  segment realized an increase in operating income of
$66.1 million,  which was effectively  offset by a decrease in operating  income
associated with KeySpan's electric operations of $66.5 million. Operating income
from  the Gas  Distribution  segment  benefited  from the  comparatively  colder
weather  during the first quarter of 2007 compared to the first quarter of 2006,


                                       43
<PAGE>


as well as from load growth additions which,  combined,  resulted in an increase
to net gas  revenues.  The Electric  Services  segment  results  were  adversely
impacted by a decrease in electric  revenues from  KeySpan's  merchant  electric
generating facilities.  Further,  during the first quarter of 2007, this segment
also  realized  an  expected  seasonal  loss on a fixed  for  floating  unforced
capacity  financial  swap which is  reflected in the  operating  results of this
segment.

Operating  income  for the  first  quarter  of 2007  from  KeySpan's  two  other
operating  segments - Energy  Services and Energy  Investments - increased  $1.8
million and $2.1 million,  respectively,  compared to the first quarter of 2006.
The increase in operating income from the Energy Services segment reflects lower
administrative  and  general  expenses,   as  well  as  higher  bandwidth  sales
associated  with  KeySpan's  fiber  optic  subsidiary,  while  the  increase  in
operating income from the Energy Investments  segment was due to higher revenues
related to KeySpan's Liquefied Natural Gas ("LNG") transportation subsidiary.

The  operating  income  variation  reflected in  "elimination  and other" is due
primarily to a decrease in costs  residing at KeySpan's  holding  company  level
such as corporate  advertising  expenses,  sponsorship fees and certain employee
benefit costs that are not allocated to KeySpan's operating  segments.  (See the
discussion under the caption "Review of Operating  Segments" for further details
on each segment.)

Other income and (deductions)  reflects interest charges and other miscellaneous
items.  For the three months ended March 31, 2007, other income and (deductions)
reflects  a net  expense of $53.4  million  compared  to a net  expense of $54.8
million for the three months ended March 31, 2006.  The  favorable  variation in
other income and  (deductions)  of $1.4 million  reflects a decrease in interest
charges of $4.6 million  year-over-year.  Comparative  interest expense reflects
the benefit from lower  commercial  paper  borrowings  and  regulatory  carrying
charges in the first  quarter of 2007,  partially  offset by the adverse  impact
from a higher level of outstanding  long-term debt.  During the first quarter of
2007,  KeySpan  had no  outstanding  commercial  paper  borrowings  compared  to
approximately $500 million in outstanding borrowings during the first quarter of
2006.  Long-term debt at March 31, 2007,  however,  was $486 million higher than
last year reflecting the November 2006 issuance of $500 million Senior Unsecured
Notes.  The benefit to earnings  from the lower  interest  charges was partially
offset by a decrease in income on certain investments.

Income tax expense for the first quarter of 2007 and 2006 generally reflects the
level of pre-tax income.

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.


                                       44
<PAGE>


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

The Brooklyn Union Gas Company,  doing  business as 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.  KeySpan Gas
East  Corporation,  doing  business  as  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
natural gas  distribution  companies - Boston Gas  Company,  Essex Gas  Company,
Colonial Gas Company and  EnergyNorth  Natural Gas,  Inc.,  each doing  business
under the name  KeySpan  Energy  Delivery  New  England  ("KEDNE"),  provide gas
distribution service to customers in Massachusetts and New Hampshire.

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

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
                                                                Three Months Ended March 31,
(In Millions of Dollars)                                     2007                      2006
----------------------------------------------------------------------------------------------
<S>                                                      <C>                        <C>
Revenues                                                 $ 2,415.5                  $ 2,180.1
Cost of gas                                                1,673.6                    1,512.6
Revenue taxes                                                 28.9                       26.2
----------------------------------------------------------------------------------------------
Net Revenues                                                 713.0                      641.3
----------------------------------------------------------------------------------------------
Operating Expenses
   Operations and maintenance                                191.2                      190.4
   Depreciation and amortization                              79.8                       75.9
   Operating taxes                                            39.5                       38.6
----------------------------------------------------------------------------------------------
Total Operating Expenses                                     310.5                      304.9
----------------------------------------------------------------------------------------------
Operating Income                                         $   402.5                  $   336.4
----------------------------------------------------------------------------------------------
Firm gas sales and transportation (MDTH)                   150,030                    126,904
Transportation - Electric Generation (MDTH)                  5,209                      6,471
Other Sales (MDTH)                                          48,557                     52,332
Warmer (Colder) than Normal - New York                        2.8%                      13.0%
Warmer (Colder) than Normal - New England                     3.0%                       7.7%
----------------------------------------------------------------------------------------------
</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.


                                       45
<PAGE>


Executive Summary

Operating  income  increased  $66.1 million for the three months ended March 31,
2007  compared  to the same  quarter  last year,  due to an  increase in net gas
revenues  (revenues less the cost of gas and associated  revenue taxes) of $71.7
million,  primarily  resulting from the comparatively  colder weather during the
first  quarter of 2007  compared  to the first  quarter of 2006 and load  growth
additions.  Operating  expenses  increased $5.6 million due to higher regulatory
amortization charges and repair and maintenance costs.

Net Revenues

Net gas revenues from our gas distribution  operations  increased $71.7 million,
or 11%, in the first quarter of 2007 compared to the same quarter of 2006.  Both
the New York and New England based gas  distribution  operations  benefited from
the significantly colder weather experienced  throughout the northeastern United
States  during the first  quarter of 2007  compared to the first quarter of 2006
and from load growth  additions.  As measured in heating  degree  days,  weather
during  the  first  quarter  of  2007  in  all of our  service  territories  was
approximately  3% colder than normal and  approximately  15% and 11% colder than
last year in our New York and New England service territories, respectively.

Net revenues from firm gas customers  (residential,  commercial  and  industrial
customers)  increased $56.5 million in the first quarter of 2007 compared to the
same quarter last year. The combination of an increase in usage per customer due
to the  comparatively  colder  weather,  as well as load growth  additions  from
oil-to-gas   conversions,   primarily  for  space   heating   purposes  and  new
construction  in 2006,  resulted in a  beneficial  impact to net gas revenues of
$47.5  million,  net  of  the  weather  normalization  adjustments  and  weather
derivatives  discussed below.  (Approximately  16% of this increase is from load
growth.)

Also  included in net gas revenues is the recovery of property  taxes that added
$3.3 million to net revenues  during the first quarter of 2007.  These revenues,
however,  do not impact net income  since the taxes they are designed to recover
are expensed as amortization  charges on the  Consolidated  Statement of Income.
Additionally,  we have a management  contract  with Merrill  Lynch Trading under
which KeySpan and Merrill Lynch Trading share the  responsibilities for managing
KeySpan's  upstream gas contracted  assets associated with its Massachusetts gas
distribution   subsidiaries.   KeySpan,  Merrill  Lynch  Trading  and  KeySpan's
Massachusetts  gas  sales  customers  share in the  profits  generated  from the
optimization of these assets. For the three months ended March 31, 2007, KeySpan
recognized a $5.7 million  profit on this  contract,  after sharing with Merrill
Lynch Trading and KeySpan's Massachusetts gas sales customers.


                                       46
<PAGE>


KEDNY and KEDLI  each  operate  under  utility  tariffs  that  contain a weather
normalization  adjustment  that  significantly  offsets  variations  in firm net
revenues due to  fluctuations  in weather.  Since weather was colder than normal
during the first quarter of 2007,  KeySpan refunded $1.6 million to its firm gas
heating  sales  customers  during  the  quarter.   The  New   England-based  gas
distribution  subsidiaries  do not have weather  normalization  adjustments.  To
mitigate  the  effect of  fluctuations  in normal  weather  patterns  on KEDNE's
results of operations and cash flows,  weather derivatives were in place for the
2006/2007  winter  heating  season - November  2006  through  March 2007.  These
financial  derivatives afford KeySpan some protection against warmer than normal
weather.  Weather  during the fourth  quarter  of 2006 was warmer  than  normal;
accordingly  KeySpan  recorded a $9.1 million  benefit to earnings in the fourth
quarter of 2006 to reflect  the  accrual for the  weather  hedges.  However,  as
noted, weather for the first quarter of 2007 was colder than normal in KeySpan's
New England service territory.  Therefore,  for the entire winter heating season
-November 2006 through March 2007 - weather was slightly colder than normal.  As
a result, in the first quarter of 2007 KeySpan reversed the $9.1 million accrual
recorded  in the  fourth  quarter  of  2006.  (See  Note  4 to the  Consolidated
Financial Statements "Hedging and Derivative Financial  Instruments" for further
information.)

Firm gas distribution  rates for KEDNY,  KEDLI and KEDNE in 2007, other than for
the recovery of gas costs,  have  remained  substantially  unchanged  from rates
charged in 2006.

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 $15.2 million during the first quarter of 2007 compared
to the same  quarter  last year  reflecting  higher  pricing  and  higher  sales
quantities.

Firm Sales, Transportation and Other Quantities

Firm gas sales and  transportation  quantities  for the quarter  ended March 31,
2007,  increased  18%  compared to the same period in 2006 due  primarily to the
colder  weather this year  compared to last year and to customer  additions  and
oil-to-gas  conversions.  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.  As  mentioned  previously,  we have a  management
contract  with  Merrill  Lynch  Trading  under which  KeySpan and Merrill  Lynch
Trading  share  the   responsibilities   for  managing  KeySpan's  upstream  gas
contracted   assets   associated  with  its   Massachusetts   gas   distribution


                                       47
<PAGE>


subsidiaries,  as well as providing city-gate delivered supply. KeySpan, Merrill
Lynch  Trading and  KeySpan's  Massachusetts  gas sales  customers  share in the
profits generated from the optimization of these assets.  KeySpan provides these
services  internally  for  its  New  York  and New  Hampshire  gas  distribution
subsidiaries.

Purchased Gas for Resale

The  increase in gas costs for the first  quarter of 2007  compared to the first
quarter of 2006 of $161.0 million, or 11%, reflects the increase in the quantity
of gas purchased due to the  comparatively  colder first  quarter  weather.  The
price per  dekatherm  of gas  purchased  for firm gas sales  customers  remained
relatively constant between years. The current gas rate structure of each of our
gas distribution  utilities includes a gas adjustment clause,  pursuant to which
variations  between actual gas costs incurred for resale to firm sales customers
and gas costs  billed to firm sales  customers  are  deferred and refunded to or
collected from customers in a subsequent period.

Operating Expenses

Operating expenses during the first quarter of 2007 compared to the same quarter
of 2006  increased  $5.6 million,  or 2%.  Operations  and  maintenance  expense
increased slightly, $0.8 million, as higher repair and maintenance costs of $5.1
million were  essentially  offset by lower  employee  benefit  costs,  primarily
postretirement  expenses,  of $4.3 million.  These  variations are, for the most
part, timing in nature.

Depreciation  and amortization  charges  increased $3.9 million due mostly to an
increase of $3.3 million for the  amortization  of deferred  property  taxes. As
noted  previously,  the amortization of these deferred taxes does not impact net
income since we recovered a similar amount from our ratepayers in revenues.

Gas Supply and Pricing

KeySpan had  adequate  gas supply  available  to meet its gas load demand in its
service  territories  for the 2006/2007  winter  heating season as KeySpan's gas
storage was 100% full at the start of the winter heating season. The current gas
rate  structure  of  each  of our  gas  distribution  utilities  includes  a gas
adjustment clause,  pursuant to which gas costs are recovered in billed sales to
regulated  firm gas  sales  customers.  Although  KeySpan  is  allowed  to "pass
through" the cost of gas to its customers,  the volatility of natural gas prices
can have an adverse  impact on  customers'  gas bills and  recovery  of customer
accounts  receivable.  High gas  prices  have  led to an  increase  in  customer
conservation   measures  and   attrition.   The   Massachusetts   Department  of
Telecommunications and Energy ("MADTE") order, received in the fourth quarter of
2005,  permitting  Boston  Gas  Company  regulatory  recovery  of the  gas  cost
component of net bad debt  write-offs has helped to mitigate any increase in bad
debt expense.


                                       48
<PAGE>


With KeySpan's continuing strategy of having its storage facilities 100% full at
the start of the heating  season and through the use of  financial  derivatives,
KeySpan  effectively  hedged the price of  approximately  two-thirds  of the gas
supply needed to serve its gas heating  customers  during the  2006/2007  winter
heating season.  This strategy mitigated the volatility of natural gas prices on
customers' winter heating gas bills.  Further,  KeySpan has programs in place to
help customers manage their gas bills, such as balanced billing plans,  deferred
payment  arrangements  and the low income home energy  assistance  program,  the
expansion  of  which  we  supported  through  the  Energy  Policy  Act of  2005.
Management believes that these measures help mitigate the impact of volatile gas
prices on customers' bills.

Other Matters

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

In order to serve the  anticipated  market  requirements in our New York service
territories,  KeySpan and Spectra Energy  Corporation  each have a 50% ownership
interest in Islander East  Pipeline  Company,  LLC  ("Islander  East").  Once in
service,  the  pipeline  is expected to have the  capacity  to  transport  up to
260,000 DTH of natural gas to the Long Island and New York City energy  markets,
enough  natural gas to heat 600,000  homes.  In  addition,  KeySpan has a 26.25%
interest in the Millennium Pipeline  development project which is anticipated to
transport  up to 525,000 DTH of natural gas a day to a point of  interconnection
with the Algonquin  pipeline in Ramapo, New York. KEDLI has executed a Precedent
Agreement for 175,000 DTH of natural gas per day of transportation capacity from
the Millennium Pipeline system,  increasing to 200,000 DTH in the second year of
the pipeline  being in service.  These  pipeline  projects will allow KeySpan to
diversify the geographic sources of its gas supply. See the discussion under the
caption "Energy Investments" for additional information regarding these pipeline
projects.


                                       49
<PAGE>


Electric Services

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

On February 1, 2006,  KeySpan and LIPA  entered into (i) an amended and restated
Management  Services Agreement (the "2006 MSA"),  pursuant to which KeySpan will
continue to operate and  maintain  the electric T&D System owned by LIPA on Long
Island  through  2013;  (ii) a new Option and Purchase and Sale  Agreement  (the
"2006 Option  Agreement"),  to replace the Generation  Purchase Rights Agreement
(the "GPRA"),  pursuant to which LIPA had the option, through December 15, 2005,
to acquire  substantially  all of the electric  generating  facilities  owned by
KeySpan on Long Island;  and (iii) a Settlement  Agreement (the "2006 Settlement
Agreement")  resolving outstanding issues between the parties regarding the 1998
LIPA Agreements. The 2006 MSA, the 2006 Option Agreement and the 2006 Settlement
Agreement  are  collectively  referred to herein as the "2006 LIPA  Agreements."
These agreements will become effective  following approval by the New York State
Comptroller's  Office and the New York State  Attorney  General.  (For a further
discussion on these LIPA  agreements see Note 10 to the  Consolidated  Financial
Statements "2006 LIPA Settlement").  The Electric Services segment also provides
retail marketing of electricity to commercial customers.

On March  23,  2007,  KeySpan,  National  Grid plc and LIPA  announced  that the
parties reached an agreement in principle pursuant to which LIPA agreed to waive
its  contractual  right to terminate the 1998 LIPA  Agreements and the 2006 LIPA
Agreements  upon  consummation  of the Merger between  KeySpan and National Grid
plc, in exchange for  enhancements  to certain of the 2006 LIPA  Agreements  and
certain  other  considerations.  The  amended  and  enhanced  agreements  become
effective upon  completion of the Merger  between  KeySpan and National Grid plc
and are subject to approval  by the LIPA Board of  Trustees,  the New York State
Attorney General and the New York State Comptroller.


                                       50
<PAGE>


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

-------------------------------------------------------------------------------
                                                 Three Months Ended March 31,
(In Millions of Dollars)                       2007                      2006
-------------------------------------------------------------------------------
Revenues                                  $    398.2                $    424.8
Purchased fuel                                 132.3                     130.0
-------------------------------------------------------------------------------
Net Revenues from Operations                   265.9                     294.8
Derivative Financial Instrument                 (9.9)                        -
-------------------------------------------------------------------------------
Net Electric Revenues                          256.0                     294.8
-------------------------------------------------------------------------------
Operating Expenses
   Operations and maintenance                  185.3                     155.3
   Depreciation                                 25.1                      27.1
   Operating taxes                              47.1                      47.4
-------------------------------------------------------------------------------
Total Operating Expenses                       257.5                     229.8
-------------------------------------------------------------------------------
Operating Income                          $     (1.5)               $     65.0
-------------------------------------------------------------------------------
Electric sales (MWH)*                        878,309                   806,677
Capacity(MW)*                                  2,450                     2,450
Cooling degree days                              N/A                       N/A
-------------------------------------------------------------------------------

*Reflects the operations of the Ravenswood Generating Station only.

Executive Summary

Operating  income  decreased  $66.5 million for the three months ended March 31,
2007, compared to the same quarter last year, due, in part, to a decrease in net
revenues  from the  Ravenswood  Generating  Station of $53.8  million  primarily
resulting from the  comparative  impact  associated  with  derivative  financial
instruments.  Although  KeySpan's hedging strategies during the first quarter of
2007 were consistent with past KeySpan policy to hedge the cash flow variability
associated with a portion of forecasted fuel purchases and electric energy sales
associated  with the  Ravenswood  Generating  Station,  the  results  from these
strategies were significantly lower year-over-year. Further, during the quarter,
the Electric Services segment realized an expected seasonal loss of $9.9 million
on a fixed for floating unforced capacity financial swap.

Net Revenues

Total electric net revenues realized during the first quarter of 2007 were $38.8
million,  or 13%,  lower than such revenues  realized  during the  corresponding
quarter last year.

Net revenues from the Ravenswood  Generating Station decreased $53.8 million for
the three  months  ended March 31, 2007  compared to the same  quarter last year
mainly due to lower energy margins of $43.0 million.  Further,  capacity margins
decreased $10.8 million as a result of additional capacity installed in New York
City last year.


                                       51
<PAGE>


The decrease in energy margins associated with the Ravenswood Generating Station
was due, in part, to the comparative impact of KeySpan's hedging activities.  We
employ  derivative  financial  instruments to  economically  hedge the cash flow
variability  for a portion of  forecasted  purchases of natural gas and fuel oil
consumed  at the  Ravenswood  Generating  Station,  as well as for a portion  of
forecasted electric energy sales. For the first three months of 2007,  KeySpan's
hedging strategies,  which are reflected in net electric revenues, resulted in a
gain of $7.6 million  compared to hedging gains of $55.6 million realized during
the same period last year, resulting in a net comparative reduction in operating
income of $48.0  million.  Due to the  dual-fuel  capability  of the  Ravenswood
Generating  Station and the impact that the two hurricanes in the summer of 2005
in the Gulf Coast of the United  States had on oil and gas  prices,  KeySpan was
able to "lock-in"  very  favorable  fuel pricing and resultant  electric  energy
margins during the later part of 2005 for the first quarter of 2006.

Offsetting,  to some  extent,  the  adverse  impact of the  comparative  hedging
results,  was an increase  in physical  "spark-spreads"  (the  selling  price of
electricity less the cost of fuel, exclusive of hedging gains or losses),  which
resulted in a benefit of $5.0  million to energy  margins for the first  quarter
2007  compared  to the same  quarter  of 2006.  (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 New York Independent System Operator ("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.

KeySpan has an  International  SWAP Dealers  Association  Master Agreement for a
fixed for floating unforced capacity  financial swap with Morgan Stanley Capital
Group Inc. ("Swap  Agreement").  This agreement has a three year term that began
on May 1, 2006.  For the first  quarter of 2007,  KeySpan  realized  an expected
seasonal loss of $9.9 million from this  derivative  financial  instrument.

Net  revenues  for the first  quarter of 2007 from the service  agreements  with
LIPA,  including  the power  purchase  agreements  associated  with two electric
peaking  facilities,  increased  $24.9  million  compared to the same quarter of
2006.  The increase is due,  for the most part,  to recovery of  operations  and
maintenance  charges  billed  to  LIPA of  approximately  $19.5  million.  These
recoveries had no impact on operating income since actual expenses  increased by
a like amount. Therefore, only approximately $5.4 million of the increase in net
revenues  resulted  in a benefit  to  operating  income.  This  increase  in net
revenues  from the  LIPA  service  agreements  was  driven  by  higher  capacity
revenues, which are predominately timing in nature, as well as higher off-system
electric energy sales and emission credit sales.  (For a description of the LIPA
Agreements  and power purchase  agreements,  see KeySpan's 2006 Annual Report on
Form 10-K for the year ended December 31, 2006 Item 7.  Management's  Discussion
and Analysis of Financial  Condition and Results of Operations under the caption
"Electric Services - Revenue Mechanisms.")


                                       52
<PAGE>


Revenues associated with KeySpan's electric marketing activities during the
first quarter of 2007 have remained consistent with such revenues realized
during the same quarter of 2006.

Operating Expenses

For the three months ended March 31, 2007,  operating  expenses  increased $27.7
million  compared  to the same  quarter  of  2006.  Operations  and  maintenance
expenses increased $30.0 million  reflecting,  in part, a $19.5 million increase
in costs recovered from LIPA. As noted  previously,  this increase had no impact
on operating income since revenues increased by a similar amount. Therefore, the
operations and  maintenance  expenses that actually  impacted  operating  income
increased  approximately  $10.5 million.  These expenses  reflect an increase in
overhaul  costs and  non-outage  maintenance  work  performed on the  Ravenswood
Generating Station and our Long Island based electric  generating units, as well
as to the timing of maintenance  work on LIPA's  transmission  and  distribution
system.

Depreciation  expense and operating  taxes  decreased  $2.3 million in the first
quarter of 2007  compared to the same  quarter of 2006.  The  decrease  reflects
costs primarily  associated with KeySpan's Long Island based electric generating
units that are 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 final and non-appealable.
Also in 2003,  LIPA  issued a Request for  Proposal  ("RFP")  seeking  bids from
developers to either build and operate a Long Island generating facility, and/or
a new cable that will link Long Island to power from a non-Long Island source of
between  250 to 600 MW of  electricity  by no  later  than the  summer  of 2007.
KeySpan  filed a proposal in response  to LIPA's  RFP.  In 2004,  LIPA  selected
proposals submitted by two other bidders in response to the RFP. KeySpan remains
committed  to the  Melville  project and the  benefits to Long  Island's  energy
future that this project would  supply.  The project has received New York State
Article X approval by having met all  operational and  environmental  permitting
requirements.  Further, the project is strategically  located in close proximity
to both the high  voltage  power  transmission  grid and the high  pressure  gas
distribution  network. In addition,  given the intense public pressure to reduce
emissions  from  existing  generating  facilities,  development  of the Melville
project is possible as a means to "virtually  re-power"  older,  less  efficient
generating units. Specifically, KeySpan believes that it would be able to reduce
emissions on Long Island in a cost  effective  manner by developing the Melville
project and retiring an older, less efficient generating facility. Additionally,
in August  2006,  the NYISO  included the  Melville  project in its  Reliability
Report as one of the market solutions to help address the long-term  reliability
of New York State's  electric grid. At March 31, 2007, total  capitalized  costs
associated  with the siting,  permitting  and  procurement  of equipment for the
Melville facility were $64.2 million.


                                       53
<PAGE>


Energy Services

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

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



---------------------------------------------------------------------------
                                             Three Months Ended March 31,
(In Millions of Dollars)                  2007                       2006
---------------------------------------------------------------------------
Revenues                                 $ 54.7                     $ 50.9
Operating expenses                         53.3                       51.3
---------------------------------------------------------------------------
Operating Income (Loss)                  $  1.4                     $ (0.4)
---------------------------------------------------------------------------

The Energy Services  segment posted an operating  profit of $1.4 million for the
three months ended March 31, 2007, compared to an operating loss of $0.4 million
incurred during the three months ended March 31, 2006. The improved  performance
reflects  favorable  earnings under a long-term energy service and energy supply
contract.  KeySpan's  fiber  optic  operations  realized a benefit to  operating
income from an increase in  bandwidth  sales and the  successful  completion  of
certain projects.  Finally,  general and  administrative  expenses were lower in
2007  compared  to 2006 as a result of the  implementation  of cost  containment
measures.

Energy Investments

The Energy  Investments  segment  consists of our gas production and development
investments,  as well as  certain  other  domestic  energy-related  investments.
KeySpan's gas production and  development  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 production and development activities primarily in West Virginia.
KeySpan   Exploration   is  involved  in  a  joint  venture  with  Merit  Energy
Corporation, an independent oil and gas producer.

This segment is also  engaged in pipeline  development  activities.  KeySpan and
Spectra 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 26.25% interest in the Millennium
Pipeline Company LLC, the developer of the Millennium  pipeline project which is
expected to have the  capacity to  transport  up to 525,000 DTH of natural gas a
day from  Corning,  New York to Ramapo,  New York,  where it will  connect to an
existing pipeline. Additionally,  subsidiaries in this segment hold a 20% equity


                                       54
<PAGE>


interest in the Iroquois Gas Transmission  System LP, a pipeline that transports
Canadian  gas  supply  to  markets  in the  northeastern  United  States.  These
investments   are  accounted   for  under  the  equity  method  of   accounting.
Accordingly, equity income from these investments is reflected as a component of
operating income in the Consolidated Statement of Income.

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

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

------------------------------------------------------------------------------
                                                Three Months Ended March 31,
(In Millions of Dollars)                      2007                       2006
------------------------------------------------------------------------------
Revenues                                    $ 11.3                      $ 9.1
Less: Operation and maintenance expense        6.3                        6.6
          Other operating expenses             3.6                        3.1
Add:  Equity earnings                          3.7                        3.4
          Gain on sale of property               -                        0.2
------------------------------------------------------------------------------
Operating Income                            $  5.1                      $ 3.0
------------------------------------------------------------------------------

As  indicated in the above table,  operating  income for the Energy  Investments
segment  increased  $2.1  million in the first  quarter of 2007  compared to the
corresponding  quarter of 2006 due,  mainly,  to an increase in operating income
from a KeySpan  subsidiary  engaged in the  transportation  of liquefied natural
gas.

Other Matters

In order to serve the  anticipated  market  requirements in our New York service
territories,  KeySpan and Spectra Energy  Corporation  each have a 50% ownership
interest in 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.  Applications for all necessary regulatory authorizations
were filed in 2000 and 2001. Islander East has received a final certificate from
the FERC and all  necessary  permits  from the State of New  York.  The State of
Connecticut denied Islander East's request for a consistency determination under
the Coastal Zone  Management  Act ("CZMA")  and  application  for a permit under
Section  401 of the  Clean  Water  Act.  Islander  East  appealed  the  State of
Connecticut's determination on the CZMA issue to the United States Department of
Commerce which overrode Connecticut's denial and granted the CZMA authorization.
The determination of the Secretary of Commerce was appealed to the United States
District  Court for the District of Columbia by the State of  Connecticut  and a
decision from that court is pending. Following an appeal filed by Islander East,
the Second  Circuit Court of Appeals ruled on October 5, 2006 that,  among other
things, the Connecticut  Department of Environmental  Protection ("CTDEP") acted
arbitrarily and  capriciously  in denying the Clean Water Act permit.  The Court


                                       55
<PAGE>


remanded the matter to CTDEP to either  provide  sufficient  evidence to support
the  denial  or  otherwise  take any  action  necessary  in  furtherance  of the
development  of the project.  In December  2006, the CTDEP issued an order again
denying the Clean Water Act permit. Islander East filed a motion for review with
the Second  Circuit  Court of Appeals.  Oral argument was conducted on April 10,
2007.   Subject  to  obtaining  final  permits  and  financing,   Islander  East
anticipates  that this pipeline will be in service in late 2008. As of March 31,
2007,   KeySpan's  total  capitalized  costs  associated  with  the  siting  and
permitting of the Islander East pipeline were approximately $31.1 million.


As  noted,  KeySpan  also owns a 26.25%  ownership  interest  in the  Millennium
Pipeline  Company LLC, the developer of the  Millennium  Pipeline  project.  The
other partners in the Millennium  Pipeline are Columbia Gas  Transmission  Corp.
("Columbia  Transmission"),  a unit of  NiSource  Incorporated  and  DTE  Energy
Company.  The Millennium Pipeline project is anticipated to have the capacity to
transport  up to 525,000  DTH of natural gas a day from  Corning to Ramapo,  New
York,  interconnecting  with the pipeline  systems of various other utilities in
New York.  The project  received a FERC  certificate  to construct,  acquire and
operate the  facilities  in 2002,  subject to certain  conditions.  On August 1,
2005, the project filed an application to amend the FERC certificate requesting,
among other  things,  authority  to phase in over time the  construction  of the
proposed  pipeline  system,  approval  of a reduction  in  capacity  and maximum
allowable operating pressure, minor route modifications, the addition of certain
facilities and the acquisition of certain facilities from Columbia Transmission.
In December  2006,  the FERC issued an order  granting the amended  certificate.
Additionally,  Consolidated  Edison,  KEDLI and Columbia  Transmission have each
entered into amended precedent  agreements to purchase capacity on the pipeline.
KEDLI has agreed to purchase  175,000 DTH per day from the  Millennium  Pipeline
system,  increasing  to 200,000 DTH in the second year of the pipeline  being in
service.  This will provide  KEDLI with new,  competitively  priced  supplies of
natural gas from Canada and other North American  supply basins.  The conditions
in the precedent  agreements are subject to, among other things,  the receipt of
necessary  regulatory  approvals and financing.  Millennium is in the process of
securing all remaining environmental permits,  financing and the finalization of
certain  agreements  prior to actual  construction.  Subject  to the  receipt of
remaining permits and financing,  Millennium expects that the first phase of the
project will be in service by November  2008.  As of March 31,  2007,  KeySpan's
investment in the Millennium Pipeline project was $19.5 million

In 2005, KeySpan LNG entered into a precedent agreement with BG LNG Services,  a
subsidiary  of  British  Gas,  to provide  liquefied  natural  gas  terminalling
service.  KeySpan LNG proposed to upgrade the liquefied  natural gas facility to
accept marine deliveries and to triple vaporization (or regasification) capacity
to  provide  these  services.  In June  2005,  the  FERC  denied  KeySpan  LNG's
application to expand the facility  citing  concerns that the proposed  upgraded
facility would not meet current federal new construction  and safety  standards.
KeySpan  sought a rehearing  with FERC, and on January 20, 2006, the FERC denied
such  request,  although  the order  provided  that  KeySpan  LNG could  file an
amendment to its original  application  addressing a revised  expansion  project
which would differ  substantially from that originally proposed by KeySpan.  Any


                                       56
<PAGE>


amended application would need to include a detailed analysis of the new project
scope,  including upgrades to the existing  facilities and alternative plans for
any service  disruptions  that may be  necessary  during  construction  of a new
expanded  project.  KeySpan has filed a petition for judicial review of the FERC
order with the United  States  Circuit  Court for the District of Columbia.  The
Court is expected to issue a decision  affirming  or vacating the FERC orders by
the third or fourth quarter of 2007.

In addition to the  proceeding at FERC,  KeySpan LNG also is involved in seeking
other required  regulatory  approvals and the  resolution of certain  litigation
regarding  such  approvals.  In  February  2005,  KeySpan LNG filed an action in
Federal District Court in Rhode Island seeking a declaratory judgment that it is
not  required to obtain a "Category B Assent" from the State of Rhode Island and
an injunction  preventing the Rhode Island Coastal Resources  Management Council
("CRMC") from enforcing the Category B assent  requirements.  In April 2005, the
Rhode  Island  Attorney  General  also filed on behalf of the state a  complaint
against  KeySpan LNG in Rhode Island State Superior Court raising  substantially
the same issues as the federal court action.  KeySpan LNG removed that action to
federal court and moved for summary  judgment.  The Court stayed the  litigation
pending  resolution of the FERC appeal process  discussed  above. An unfavorable
outcome  to the FERC  litigation  would  mean  that  KeySpan  would be unable to
construct the proposed  upgrade.  Similarly,  if the FERC litigation is resolved
favorably but the Rhode Island  litigation is not,  KeySpan could be required to
obtain a permit  under Rhode  Island  State law. If the Rhode  Island  State law
permit  were  denied,  an appeal  would lie only to Rhode  Island  State  court.
Accordingly,  an  unfavorable  outcome  to the  Rhode  Island  litigation  could
similarly  have a material  impact on  KeySpan's  ability  to  proceed  with the
proposed upgrade.

Pursuant to a letter  agreement  with BG LNG Services  extending the term of the
current  precedent  agreement  referenced  above,  BG LNG  Services  elected  to
reimburse  KeySpan LNG $7.6 million for a portion of its  development  costs. If
the  project is placed  into  service,  BG LNG  Services  may elect to have this
contribution  count as a  contribution  reducing BG LNG Services cost of service
for the Project or return to BG LNG Services in full on the service commencement
date, in which case such costs will be included in the cost of service under the
service  agreement.  As of March 31, 2007,  our  investment  in this project was
$11.2 million.

Allocated Costs

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


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<PAGE>


other" is due  primarily to costs  residing at KeySpan's  holding  company level
such as corporate  advertising  expenses,  sponsorship fees and certain employee
benefit costs that are not allocated to KeySpan's operating segments.

Liquidity

Cash flow from operations  decreased $194.7 million in the first quarter of 2007
compared to the same  quarter of 2006  primarily  reflecting  changes in working
capital  requirements.   The  variation  in  working  capital  requirements  was
primarily  driven by receipt of customer  payments during the first three months
of  2006  associated  with  the  2005  fourth  quarter  winter  heating  season.
Outstanding   accounts   receivable   balances  associated  with  KeySpan's  gas
distribution  activities  at December 31, 2005 were high due to strong gas sales
in 2005 and unusually high natural gas prices.  The collection of these accounts
receivables generated significant cash flow in 2006.

At March 31, 2007, we had cash and temporary cash investments of $326.5 million.
During the first quarter of 2007,  we repaid $85.0  million of commercial  paper
and, at March 31, 2007, Keyspan had no commercial paper outstanding.  We had the
ability to borrow up to an additional $1.5 billion at March 31, 2007,  under the
terms of our credit facility.

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

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

The facilities  contain certain  affirmative and negative  operating  covenants,
including  restrictions on KeySpan's  ability to mortgage,  pledge,  encumber or
otherwise subject its utility property to any lien, as well as certain financial
covenants  that  require us to,  among  other  things,  maintain a  consolidated
indebtedness to consolidated  capitalization ratio of no more than 65% as of the
last day of any fiscal quarter. Violation of these covenants could result in the
termination  of the facilities  and the required  repayment of amounts  borrowed
thereunder,  as well as possible cross defaults under other debt agreements.  At
March  31,  2007,   KeySpan's   consolidated   indebtedness  was  48.6%  of  its
consolidated capitalization and KeySpan was in compliance with all covenants.


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<PAGE>


Subject to certain conditions set forth in the credit facility,  KeySpan has the
right, at any time, to increase the commitments  under the $920 million facility
up to an additional $300 million. In addition,  KeySpan has the right to request
that the termination date be extended for an additional period of 365 days prior
to each  anniversary  of the  closing  date.  This  extension  option,  however,
requires the approval of lenders holding more than 50% of the total  commitments
to such  extension  request.  Under the  agreements,  KeySpan has the ability to
replace  non-consenting  lenders  with  other  pre-approved  banks or  financial
institutions.  Subject to compliance with the foregoing  conditions,  KeySpan is
currently able to issue up to $1.5 billion of commercial paper.

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

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

Capital Expenditures and Financing

Construction Expenditures

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

----------------------------------------------------------------------------
                                             Three Months Ended March 31,
(In Millions of Dollars)                  2007                         2006
----------------------------------------------------------------------------
Gas Distribution                       $  83.9                       $ 85.8
Electric Services                         18.5                         28.9
Energy Investments                         3.8                          5.4
Energy Services and other                  1.2                          2.1
----------------------------------------------------------------------------
                                       $ 107.4                      $ 122.2
----------------------------------------------------------------------------

Construction  expenditures related to the Gas Distribution segment are primarily
for  the  renewal,   replacement  and  expansion  of  the  distribution  system.
Construction  expenditures  for the Electric  Services  segment reflect costs to
maintain our generating facilities. The decrease in capital expenditures for the
three months ended March 31, 2007 compared to the same period last year of $14.8
million  reflects a decrease in the Electric  Services  segment  which,  at this
point in time,  is  mainly  due to the  timing.  KeySpan  anticipates  incurring
approximately  the  same  amount  of  construction  expenditures  in  2007 as it
incurred in 2006.


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<PAGE>


Financing

KeySpan did not engage in any financing activities in the first quarter of 2007,
other than commercial paper repayments as noted earlier.  At this point in time,
KeySpan  does  not  anticipate  engaging  in any  financing  activities  for the
remainder of the year.

The following  table  represents  the ratings of our long-term debt at March 31,
2007.  In 2004  Standard & Poor's  reaffirmed  its ratings on KeySpan's  and its
subsidiaries' long-term debt. Further in 2005, Fitch Ratings revised its ratings
on KeySpan's and its subsidiaries'  long-term debt to positive outlook.  Moody's
Investor Services,  however,  continues to maintain its negative outlook ratings
on KeySpan's and its subsidiaries' long-term debt.

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


Off-Balance Sheet Arrangements

Guarantees

KeySpan had a number of financial  guarantees with its subsidiaries at March 31,
2007.  KeySpan has fully and  unconditionally  guaranteed:  (i) $525  million of
medium-term notes issued by KEDLI;  (ii) the obligations of KeySpan  Ravenswood,
LLC, which is the lessee under the $425 million Master Lease associated with the
Ravenswood  Facility  and the  lessee  under  the  $385  million  sale/leaseback
transaction for the Ravenswood  Expansion including future decommission costs of
$19 million;  and (iii) the payment  obligations of our subsidiaries  related to
$128 million of  tax-exempt  bonds issued  through the Nassau County and Suffolk
County   Industrial   Development   Authorities  for  the  construction  of  two
electric-generation  peaking  facilities on Long Island.  The medium-term notes,
the Master Lease and the  tax-exempt  bonds are  reflected  on the  Consolidated
Balance Sheet; the sale/leaseback obligation is not recorded on the Consolidated
Balance  Sheet.  Further,  KeySpan has  guaranteed:  (i) up to $70.2  million of
surety bonds  associated  with certain  construction  projects  currently  being
performed by former subsidiaries; (ii) certain supply contracts, margin accounts
and purchase  orders for certain  subsidiaries  in an aggregate  amount of $52.7
million;  and (iii)  $76.6  million  of  subsidiary  letters  of  credit.  These
guarantees  are  not  recorded  on the  Consolidated  Balance  Sheet.  KeySpan's
guarantees  on  certain  performance  bonds  relating  to  current  construction
projects of the  discontinued  mechanical  contracting  companies will remain in
place  throughout  the  construction  period  for these  projects.  KeySpan  has
received an indemnity bond issued by a third party to offset potential  exposure
related to a significant portion of the continuing  guarantee.  At this time, we


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<PAGE>


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 (when  applicable),  operating and capital leases, and demand charges
associated with certain  commodity  purchases.  These  obligations have remained
substantially  unchanged  since  December  31,  2006.  (For  additional  details
regarding  these  obligations  see KeySpan's  Annual Report on Form 10-K for the
year ended  December 31, 2006,  Item 7  Management's  Discussion and Analysis of
Financial  Condition  and Results of  Operations,  as well as Note 6  "Long-Term
Debt"  and  Note  7   "Contractual   Obligations,   Financial   Guarantees   and
Contingencies" to those Consolidated Financial Statements.)

Discussions of Critical Accounting Policies and Assumptions

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

Below is a discussion of KeySpan's critical  accounting policies and assumptions
at  March  31,  2007.  For a more  detailed  discussion  of these  policies  and
assumptions see KeySpan's Annual Report on Form 10-K for the year ended December
31, 2006, Item 7.  Management's  Discussion and Analysis of Financial  Condition
and Results of  Operations  "Discussion  of  Critical  Accounting  Policies  and
Assumptions."

Valuation of Goodwill

KeySpan records  goodwill on purchase  transactions,  representing the excess of
acquisition  cost over the fair value of net  assets  acquired.  In testing  for
goodwill impairment under Statement of Financial  Accounting  Standards ("SFAS")
142 "Goodwill and Other Intangible Assets,"  significant reliance is placed upon
a  number  of  estimates   regarding  future   performance  that  require  broad
assumptions and significant  judgment by management.  A change in the fair value
of our  investments  could cause a significant  change in the carrying  value of
goodwill.  The assumptions used to measure the fair value of our investments are
the  same  as  those  used  by  us  to  prepare  annual  operating  segment  and
consolidated  earnings and cash flow forecasts.  In addition,  these assumptions
are used to set annual budgetary guidelines. At March 31, 2007, KeySpan had $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.


                                       61
<PAGE>


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  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," in
October 2003 the MADTE rendered its decision on the Boston Gas Company base rate
case and  Performance  Based Rate Plan proposal  submitted to the MADTE in April
2003.  The rate plans  previously in effect for KEDNY and KEDLI have expired and
the rates established in those plans remain in effect.  EnergyNorth  Natural Gas
Inc.'s  base  rates  continue  as  set by  the  NHPUC  in  1993.  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. As
part of its  application for approval of the KeySpan / National Grid plc Merger,
KeySpan  has filed  proposed  rate plans for KEDNY and KEDLI with the NYPSC.  In
addition, individual applications for a proposed annual increase in revenues for
KEDNY and KEDLI were filed.  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


                                       62
<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, 2007, 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 2007 KeySpan expects to contribute a total of $131 million to its funded and
unfunded   post-retirement   plans.  Future  funding  requirements  are  heavily
dependent on actual return on plan assets and  prevailing  interest  rates.  (In
addition to Item 7 Management's  Discussion and Analysis of Financial  Condition
and Results of Operations  in KeySpan's  Annual Report on Form 10-K for the year
ended  December  31,  2006,  see  also  Note 4 of those  Consolidated  Financial
Statements, "Postretirement Benefits.")

Valuation of Derivative Instruments

We employ derivative instruments to hedge a portion of our exposure to commodity
price risk and interest rate risk, to partially hedge the cash flow  variability
associated  with  our  electric  energy  sales  from the  Ravenswood  Generation
Station, as well as to economically hedge certain other commodity exposures.

When available,  quoted market prices are used to record a derivative contract's
fair value.  However,  market values for certain derivative contracts may not be
readily available or determinable.  A number of our commodity related derivative
instruments are exchange traded and,  accordingly,  fair value  measurements are
based on available quotes. Additionally, we use market quoted forward prices for
commodities  that are not  exchange  traded,  such as No.  6 grade  fuel oil and
electric power swaps. The fair value of our electric  capacity hedge is based on
published NYISO capacity bidding prices. Further, if no active market exists for
a commodity, fair values may be based on pricing models.

SFAS 133  establishes  criteria  that must be  satisfied  in order  for  forward
contracts  for the physical  delivery of  commodities  to qualify for the normal
purchases  and sales  exception.  Those  contracts  that  qualify for the normal
purchase and sale exception,  and where the exception has been elected,  are not
recognized in the financial  statements  until  settlement.  The  distinguishing
characteristics  between  contracts  that qualify for the normal  purchases  and
sales  exception  and those that do not are,  at times,  subjective  and require
judgment.

All fair value measurements,  whether calculated using available quotes or other
valuation  techniques,  are subjective and subject to  fluctuations in commodity
prices,  interest rates and overall economic market conditions and, as a result,
our fair value  measurements may not be precise and can fluctuate  significantly
from period to period.


                                       63
<PAGE>


Regulation and Rate Matters

Gas Matters

The rate  agreements  for KEDNY and KEDLI have  expired.  Under the terms of the
KEDNY and KEDLI rate agreements, gas distribution rates and all other provisions
will remain in effect until  changed by the NYPSC.  KeySpan has  recently  filed
proposed  rate  plans  for  KEDNY  and  KEDLI  with  the  NYPSC  as  part of its
application  for approval of the KeySpan / National Grid plc Merger,  as well as
individual applications for a proposed annual increase in revenues for KEDNY and
KEDLI.  See  the  "Introduction  to  the  Notes  to the  Consolidated  Financial
Statements" for additional details on the filings.

Effective  November 1, 2003, the MADTE approved a $25.9 million increase in base
revenues for Boston Gas with an allowed return on equity of 10.2%  reflecting an
equal  balance of debt and equity.  On January 27,  2004,  the MADTE  issued its
order on Boston Gas  Company's  Motion for  Recalculation,  Reconsideration  and
Clarification  that granted an additional  $1.1 million in base revenues,  for a
total of $27 million. The MADTE also approved a Performance Based Rate Plan (the
"Plan") for up to ten years. On November 1, 2006, the MADTE approved a base rate
increase  of $8.7  million  under the Plan.  In  addition,  an  increase of $3.7
million in the local  distribution  adjustment  clause was  approved  to recover
pension  and other  postretirement  costs.  The MADTE  also  approved  a true-up
mechanism  for  pension  and other  postretirement  benefit  costs  under  which
variations  between  actual pension and other  postretirement  benefit costs and
amounts used to establish  rates are deferred and collected  from or refunded to
customers in  subsequent  periods.  This true-up  mechanism  allows for carrying
charges on deferred assets and liabilities at Boston Gas's weighted-average cost
of capital.

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

For an additional  discussion of our current gas  distribution  rate agreements,
see KeySpan's  Annual Report on Form 10-K for the year ended  December 31, 2006,
Item 7 Management's  Discussion and Analysis of Financial  Condition and Results
of Operations "Regulation and Rate Matters."

Electric Matters

KeySpan sells to LIPA all of the capacity and, to the extent  requested,  energy
conversion  services  from our  existing  Long  Island  based oil and  gas-fired
generating  plants.  Sales of capacity and energy  conversion  services are made
under rates approved by the FERC in accordance with the PSA entered into between
KeySpan and LIPA in 1998.  The original FERC approved  rates,  which had been in
effect since May 1998, expired on December 31, 2003. On October 1, 2004 the FERC


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<PAGE>


approved a settlement  reached between KeySpan and LIPA to reset rates effective
January 1, 2004. The settlement  agreement reflects a cost of equity of 9.5%, as
well as updated operating and maintenance expense levels and recovery of certain
other costs as agreed to by the parties.

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

The Public Utility Holding Company Act of 2005

Pursuant  to PUHCA  2005,  FERC has  jurisdiction  over  certain of our  holding
company  activities,  including (i) regulating  certain  transactions  among our
affiliates  within our holding  company  system;  (ii)  governing  the issuance,
acquisition  and  disposition  of securities and assets by certain of our public
utility   subsidiaries;   and  (iii)  approving   certain  utility  mergers  and
acquisitions. The SEC's jurisdiction over KeySpan's activities is limited to the
registration and issuance of our securities  under the federal  securities laws.
Moreover,  our affiliate transactions also remain subject to certain regulations
of the NYPSC, MADTE and NHPUC, in addition to FERC.

Environmental Matters

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

We estimate that the  remaining  cost of our MGP related  environmental  cleanup
activities,  including costs associated with the Ravenswood  Generating Station,
will be  approximately  $351.8 million and we have recorded a related  liability
for such amount.  We have also  recorded an additional  $9.2 million  liability,
representing the estimated  environmental cleanup costs related to a former coal
tar  processing  facility.  As of March 31,  2007,  we have  expended a total of
$236.7 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,


                                       65
<PAGE>


currency,  weather, and other factors regardless of accounting method. We manage
our  exposure  to  changes  in  market  prices  using  various  risk  management
techniques,  including hedging through the use of derivative  instruments,  both
exchange-traded  and  over-the-counter  contracts,  purchase  of  insurance  and
execution of other contractual arrangements.

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

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

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  operations
have  not  changed   substantially  since  December  31,  2006.  For  additional
information  regarding these risks see KeySpan's  Annual Report on Form 10-K for
the year ended December 31, 2006, 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 to KeySpan's
electric operations.


                                       66
<PAGE>


10-Minute Spinning and Non-Spinning Reserves
--------------------------------------------

Due to the  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 require 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, were rejected.

The NYISO, The Consolidated  Edison Company of New York ("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 (the "Decision"). Essentially, the Court found errors in FERC's order
and remanded some issues back to FERC for further explanation and action.

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  not  to  order  refunds.  FERC  also  provided  the  further
explanation requested by the Court as to why refunds were not being ordered. The
NYISO and various New York  Transmission  Owners  requested  rehearing of FERC's
latest order and on November 17, 2005, FERC denied those requests. The NYISO and
various New York Transmission  Owners appealed FERC's November 17, 2005 order to
the United States Court of Appeals for the District of Columbia, which appeal is
pending.

NYISO In-City Capacity Mitigation
---------------------------------

The NYPSC, Con Edison and other load serving entities ("LSEs") complained to the
NYISO that in-City capacity market clearing prices during the summer of 2006 did
not decline as they had expected with the  introduction of additional  supply in
the New York City market.  The NYISO issued a letter to FERC  indicating that no
tariff  violations  occurred and that prices were as it expected.  Nevertheless,
the NYISO  stated that if changes to the market are  warranted,  the NYISO would
consider making revisions as necessary.

Accordingly,  the NYPSC and Con Edison developed additional  mitigation measures
that  would  apply  to  certain  in-City  generation  owned  by  KeySpan.  These
mitigation  measures  essentially  proposed to reduce the capacity  offer cap on
bids by the Ravenswood Generating Station and certain other generation owners of
capacity into the NYISO Spot Demand Curve Auction Market, from the current offer
cap of $105/kW-year to $82/kW-year plus 3%.


                                       67
<PAGE>


FERC rejected the $82 In-City Capacity  Mitigation  Proposal filed by the NYISO.
FERC found that the NYISO filing failed to meet the burden of proof  required to
support  revisions  to  market  rules.  Nevertheless,  on its own  motion,  FERC
initiated  a   proceeding   to   investigate   and  consider  the  justness  and
reasonableness of the NYISO's in-City capacity market, including whether and how
market rules should be revised to provide a fair level of compensation that will
attract and retain needed infrastructure.

A refund effective date on or about May 15, 2007 was established,  such that the
rate,  terms and conditions  established in this proceeding could go into effect
as of such date regardless of when this proceeding is completed.  However,  this
proceeding and associated litigated hearings, are being held in abeyance to give
the parties an  opportunity  to settle the issues with the  assistance of a FERC
administrative  law judge  ("ALJ") and FERC Staff.  KeySpan's  earnings  for the
quarter  ended March 31,  2007,  and for all prior  periods,  are not subject to
refund under this proceeding.

At this time, we are unable to predict the outcome of this  proceeding  and what
effect it will have on our financial condition,  results of operations, and cash
flows.

NYISO May 2006 In-City Capacity Market Error
--------------------------------------------

On December 1, 2006, the NYISO filed a complaint against  SCS/Astoria Energy LLC
("Astoria"),  an in-City  electric  generating  unit,  alleging  that it did not
follow the NYISO tariff rules related to the  certification and sale of capacity
in relation to its auctions for the sale of capacity to the NYISO  market.  As a
result,  a certain amount of capacity that was sold in the May 2006 auctions was
determined by the NYISO to be ineligible.  In its complaint,  the NYISO proposes
to impose a  deficiency  charge  against  Astoria  for the  improperly-certified
capacity.  The NYISO could then award  additional  capacity  payments to another
in-City  supplier  (including the Ravenswood  Generating  Station)  because that
supplier would have sold additional capacity if not for the Astoria discrepancy.

On March 15, 2007,  FERC issued an order denying the NYISO's  complaint  against
Astoria  regarding  Astoria's  capacity  certification  prior  to the  May  2006
installed  capacity  auctions.  Even though FERC denied the complaint,  it found
that  Astoria  did not  supply  its  certified  capacity  in May 2006,  and must
therefore  pay a  deficiency  charge for its capacity  shortfall.  The NYISO was
directed to pay the affected  suppliers  for the capacity it supplied in May. On
April 16, 2007,  the Ravenswood  Generating  Station  sought  clarification  and
rehearing  of the  order.  The  NYISO  also  sought  clarification  and  Astoria
requested a  rehearing.  A decision  by the FERC  related to the  rehearing  and
clarification requests is pending.

Summer 2002 Capacity under Procurement Complaint
------------------------------------------------

On January 12, 2007,  the Court of Appeals for the District of Columbia  Circuit
("Court") issued its decision related to a KeySpan  complaint  against the NYISO
related to capacity  procurement  activities during the summer of 2002.  KeySpan
had  complained  to FERC  that the NYISO  violated  its  tariff  and as a result
received  $23.3  million  less than it would have if the NYISO had  followed the
tariff.  The Court vacated rulings by the FERC that denied KeySpan's  complaint.
The Court  determined that the NYISO did in fact violate its tariff but remanded


                                       68
<PAGE>


two issues back to the FERC for further consideration.  The two issues relate to
whether FERC should grant KeySpan's  requested relief for the tariff  violation.
The case is still pending at FERC and at this time, we are unable to predict the
outcome of this proceeding and what effect it will have on KeySpan's  results of
operations, financial position and cash flows.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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
production and development  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  when
economically  appropriate to do so. Seneca-Upshur utilizes OTC natural gas swaps
to hedge cash flow variability associated with forecasted sales of natural gas.

Commodity  Derivative  Instruments  that are not  Accounted  for as Hedges:  The
Ravenswood Generating Station uses derivative physical and financial instruments
to financially hedge the cash flow variability associated with the purchase of a
portion of natural gas and oil that will be consumed  during the  generation  of
electricity.  The Ravenswood Generating Station also financially hedges the cash
flow  variability  associated  with a portion of electric energy sales using OTC
electricity swaps.  KeySpan also has an International  SWAP Dealers  Association
Master Agreement for a fixed for floating unforced capacity  financial swap with
Morgan Stanley Capital Group Inc.

The following  tables set forth selected  financial data  associated  with these
derivative financial  instruments noted above that were outstanding at March 31,
2007.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                        Year of           Volumes                                                   Fair Value
    Type of Contract                    Maturity           mmcf        Fixed Price $       Current Price $       (In $ Millions)
-----------------------------------------------------------------------------------------------------------------------------------
            Gas
<S>                                        <C>             <C>          <C>                 <C>                       <C>
Swaps/Futures - Long Natural Gas            2007            6,490        6.84 - 9.82         7.89 - 11.21               1.3
                                            2008              680        9.08 - 9.82         8.55 - 15.55              (0.1)

OTC Swaps - Short Natural Gas               2007            1,826        5.86 - 9.98          7.73 - 9.16              (3.8)
                                            2008            1,637        6.77 - 6.85          8.26 - 10.49             (3.6)
                                            2009            1,334        7.60 - 10.90         7.90 - 9.77               0.3
                                                                                                                          -
-----------------------------------------------------------------------------------------------------------------------------------
                                                           11,967                                                      (5.9)
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       69
<PAGE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
                                Year of          Volumes                                                        Fair Value
     Type of Contract           Maturity         Barrels        Fixed Price $      Current Price $            (In $ Millions)
-----------------------------------------------------------------------------------------------------------------------------
         Oil
<S>                               <C>           <C>            <C>                <C>                                   <C>
Swaps - Long Fuel Oil              2007          183,160        48.30 - 67.60      51.80 - 58.39                        (0.3)
                                   2008           59,928                67.60      55.79 - 58.39                        (0.4)

-----------------------------------------------------------------------------------------------------------------------------
                                                 243,088                                                                (0.7)
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
                            Year of                      Fixed Margin/                                    Fair Value
    Type of Contract        Maturity         MWh             Price $           Current Price $          (In $ Millions)
-----------------------------------------------------------------------------------------------------------------------
       Electricity
<S>                           <C>         <C>           <C>                    <C>                                <C>
Swaps - Energy                 2007        670,036       58.25 - 131.25         58.25 - 125.75                    (5.2)
                               2008         35,536                70.10          62.50 - 88.50                     0.1

-----------------------------------------------------------------------------------------------------------------------
                                           705,572                                                                (5.1)
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

-----------------------------------------------------------------------------
                                                                    2007
Change in Fair Value of Derivative Instruments                (In $ Millions)
-----------------------------------------------------------------------------
Fair value of contracts at January 1,                                   (5.6)
Net (gains) on contracts realized                                       (6.0)
Decrease in fair value of all open contracts                            (0.1)
-----------------------------------------------------------------------------
Fair value of contracts outstanding at March 31,                       (11.7)
-----------------------------------------------------------------------------

<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                         $ (1.9)              $ (3.8)              $  (5.7)
Local published indicies                         (5.6)                (0.4)                 (6.0)
-------------------------------------------------------------------------------------------------
                                               $ (7.5)              $ (4.2)              $ (11.7)
-------------------------------------------------------------------------------------------------
</TABLE>

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,  2007 a 10%  increase/decrease  in natural  gas prices
would decrease/increase the value of derivative instruments maturing in one year
by $2.3 million.

Commodity  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.  Further,  KeySpan has a gas  distribution  asset
optimization  contract  that  employs  derivative  financial  instruments.   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.


                                       70
<PAGE>


The following  table sets forth selected  financial data  associated  with these
derivative financial instruments that were outstanding at March 31, 2007.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                       Year of    Volumes                                                                               Fair Value
  Type of Contract     Maturity     mmcf        Floor ($)      Ceiling ($)     Fixed Price ($)    Current Price ($)  (In $ Millions)
------------------------------------------------------------------------------------------------------------------------------------
<S>                       <C>      <C>        <C>              <C>            <C>                 <C>                         <C>
Options                    2007        479     5.50 - 6.00      7.15 - 8.00               -        7.73 - 8.27                  0.3

Swaps                      2007     29,603               -                -    6.79 - 11.18        7.73 - 9.56                  1.6
                           2008     41,270               -                -    7.30 - 11.64        8.10 - 9.89                  6.8

Optimization Contract      2009                                                                                                26.2
------------------------------------------------------------------------------------------------------------------------------------
                                    71,352                                                                                     34.9
------------------------------------------------------------------------------------------------------------------------------------
</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, 2007. Based upon that
evaluation,  our Chief Executive  Officer and Chief Financial  Officer concluded
that the design and operation of our  disclosure  controls and  procedures  were
effective at the reasonable  assurance level in alerting them timely to material
information required to be included in KeySpan's periodic SEC reports.

Furthermore,  there  has been no  change  in  KeySpan's  internal  control  over
financial  reporting 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."


                                       71
<PAGE>


Item 1A. Risk Factors

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


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

-    the occurrence of any event,  change or other circumstances that could give
     rise to the  termination of the Merger  Agreement with National Grid plc or
     the failure of the Merger to close for any reason;

-    volatility of fuel prices used to generate electricity;

-    fluctuations in weather and in gas and electric prices;

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

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

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

-    implementation  of  new  accounting  standards  or  changes  in  accounting
     standards or Generally  Accepted  Accounting  Principles  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;


                                       72
<PAGE>


-    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 and state regulatory  policies  affecting our ability to retain and
     operate such business ventures profitably;

-    a change in the fair  market  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 LIPA and the  NYISO,  our two  largest
     customers;

-    changes in the unforced capacity financial swap pricing structure;

-    receipt of approval for, and the timing thereof,  the 2006 LIPA Agreements;
     and

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

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

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

         None

Item 3.  Defaults Upon Senior Securities

         None

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

         None

Item 5.  Other Information

         None


                                       73
<PAGE>


Item 6. Exhibits

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

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

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

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

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




                                       74
<PAGE>


                                   SIGNATURES

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



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


Date: April 27, 2007               /s/Gerald Luterman
                                   ----------------------
                                      Gerald Luterman
                                      Executive Vice President and
                                      Chief Financial Officer


Date: April 27, 2007               /s/Theresa A. Balog
                                   --------------------
                                      Theresa A. Balog
                                      Vice President and
                                      Chief Accounting Officer



                                       75