UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

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

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

                  For the quarterly period ended June 30, 2005

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

                        For the Transition period from___to___

                         Commission file number 1-14161

                              KEYSPAN CORPORATION
                              -------------------
             (Exact name of Registrant as specified in its Charter)

           New York                                     11-3431358
           --------                                     ----------
   (State or other jurisdiction of            (IRS Employer Identification No.)
    incorporation or organization)


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

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.[X]

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

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

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

    Class of Common Stock                           Outstanding at July 13, 2005
    ---------------------                           ----------------------------
       $.01 par value                                       174,280,628


<PAGE>


                      KEYSPAN CORPORATION AND SUBSIDIARIES

                                      INDEX
                                      -----

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

Item 1. Financial Statements

        Consolidated Balance Sheet -
        June 30, 2005 and December 31, 2004                               3

        Consolidated Statement of Income -
        Three and Six Months Ended June 30, 2005 and 2004                 5

        Consolidated Statement of Cash Flows -
        Six Months Ended June 30, 2005 and 2004                           6

        Notes to Consolidated Financial Statements                        7

Item 2. Management's Discussion and Analysis of Financial
        Condition and Results of Operations                              38

Item 3. Quantitative and Qualitative Disclosures
        About Market Risk                                                71

Item 4. Controls and Procedures                                          73

                           Part II.   OTHER INFORMATION

Item 1. Legal Proceedings                                                74

Item 4. Submission of Matters to a Vote of Security Holders              74

Item 5. Other Information                                                75

Item 6. Exhibits and Reports on Form 8-K                                 76

Signatures                                                               77


                                       2
<PAGE>

<TABLE>

                           CONSOLIDATED BALANCE SHEET
                                   (Unaudited)

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

(In Millions of Dollars)                             June 30, 2005       December 31, 2004
------------------------------------------------------------------------------------------

ASSETS
<S>                                                        <C>                  <C>
Current Assets
    Cash and temporary cash investments                   $    324.0           $    922.0
    Accounts receivable                                        961.6                788.5
    Unbilled revenue                                           221.4                591.4
    Allowance for uncollectible accounts                       (80.7)               (67.8)
    Gas in storage, at average cost                            459.9                515.5
    Material and supplies, at average cost                     130.4                123.4
    Other                                                      182.8                162.7
    Assets of discontinued operations                            1.0                 42.9
                                               ---------------------- --------------------
                                                             2,200.4              3,078.6
                                               ---------------------- --------------------

Investments and  Other                                         241.8                272.9

Property
    Gas                                                      7,014.5              6,871.2
    Electric                                                 2,461.0              2,402.1
    Other                                                      401.4                398.6
    Accumulated depreciation                                (2,815.1)            (2,702.3)
    Gas exploration and production, at cost                    182.1                187.1
    Accumulated depletion                                     (106.9)               (97.5)
    Property of discontinued operations                            -                  8.7
                                               ---------------------- --------------------
                                                             7,137.0              7,067.9
                                               ---------------------- --------------------

Deferred Charges
    Regulatory assets                                          510.7                555.4
    Goodwill and other intangible assets                     1,666.5              1,677.6
    Other                                                      691.6                711.7
                                               ---------------------- --------------------
                                                             2,868.8              2,944.7
                                               ---------------------- --------------------

Total Assets                                              $ 12,448.0           $ 13,364.1
                                               ====================== ====================

------------------------------------------------------------------------------------------
        See accompanying Notes to the Consolidated Financial Statements.
</TABLE>


                                       3
<PAGE>

<TABLE>

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

(In Millions of Dollars)                                     June 30, 2005       December 31, 2004
--------------------------------------------------------------------------------------------------
<S>                                                               <C>                   <C>
LIABILITIES AND CAPITALIZATION
Current Liabilities
    Accounts payable and other liabilities                       $    686.0            $    906.7
    Commercial paper                                                  284.0                 912.2
    Current redemption of long-term debt                                1.5                  16.1
    Current redemption of preferred stock                                 -                  55.3
    Taxes accrued                                                     147.2                 161.6
    Dividends payable                                                  79.2                  74.1
    Customer deposits                                                  39.0                  43.3
    Interest accrued                                                   54.6                  48.8
    Liabilities of discontinued operations                              1.0                  64.2
                                                      ---------------------- ---------------------
                                                                    1,292.5               2,282.3
                                                      ---------------------- ---------------------

Deferred Credits and Other Liabilities
    Regulatory liabilities:
          Miscellaneous liabilities                                   106.9                  74.0
          Removal cost recovered                                      522.0                 496.5
    Deferred income tax                                             1,125.9               1,124.1
    Postretirement benefits and other reserves                        890.7                 900.4
    Other                                                              98.4                 140.0
                                                      ---------------------- ---------------------
                                                                    2,743.9               2,735.0
                                                      ---------------------- ---------------------

Commitments and Contingencies (See Note 6)                                -                     -

Capitalization
    Common stock                                                    3,973.6               3,502.0
    Retained earnings                                                 890.1                 792.2
    Other comprehensive income                                        (71.4)                (54.3)
    Treasury stock                                                   (308.8)               (345.1)
                                                      ---------------------- ---------------------
         Total common shareholders' equity                          4,483.5               3,894.8
    Preferred stock                                                       -                  19.7
    Long-term debt and capital leases                               3,915.4               4,418.7
                                                      ---------------------- ---------------------
Total Capitalization                                                8,398.9               8,333.2
                                                      ---------------------- ---------------------

Minority Interest in Subsidiary Companies                              12.7                  13.6
                                                      ---------------------- ---------------------
Total Liabilities and Capitalization                             $ 12,448.0            $ 13,364.1
                                                      ====================== =====================

--------------------------------------------------------------------------------------------------
        See accompanying Notes to the Consolidated Financial Statements.
</TABLE>


                                       4
<PAGE>

<TABLE>
                        CONSOLIDATED STATEMENT OF INCOME
                                   (Unaudited)
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
                                                            Three Months Ended June 30,       Six Months Ended June 30,
(In Millions of Dollars, Except Per Share Amounts)               2005            2004           2005              2004
---------------------------------------------------------------------------------------- ---------------------------------
<S>                                                            <C>            <C>           <C>               <C>
Revenues
     Gas Distribution                                          $   821.1      $   676.4     $  2,846.5        $   2,604.2
     Electric Services                                             468.5          433.8          869.1              792.9
     Energy Services                                                44.2           41.9           88.6               86.0
     Houston Exploration                                               -          116.5              -              268.1
     Energy Investments                                              8.7            9.2           18.8               37.2
                                                        ----------------- -------------- --------------  -----------------
Total Revenues                                                   1,342.5        1,277.8        3,823.0            3,788.4
                                                        ----------------- -------------- --------------  -----------------
Operating Expenses
     Purchased gas for resale                                      501.6          363.1        1,810.5            1,589.7
     Fuel and purchased power                                      159.2          130.3          292.3              231.9
     Operations and maintenance                                    391.8          391.3          779.0              798.3
     Depreciation, depletion and amortization                       97.5          189.0          203.6              360.2
     Operating taxes                                                94.0           90.3          205.8              212.6
                                                        ----------------- -------------- --------------  -----------------
Total Operating Expenses                                         1,244.1        1,164.0        3,291.2            3,192.7
Income from equity investments                                       4.7            8.4           10.0               14.1
Sale of assets                                                       0.1              -            0.1                  -
                                                        ----------------- -------------- --------------  -----------------
Operating Income                                                   103.2          122.2          541.9              609.8
                                                        ----------------- -------------- --------------  -----------------
Other Income and (Deductions)
     Interest charges                                              (72.6)         (88.5)        (132.7)            (172.6)
     Gain on sale of investments                                       -          172.9            4.1              172.9
     Cost of debt redemption                                           -              -          (20.9)                 -
     Minority interest                                                 -          (16.7)             -              (37.0)
     Other                                                           4.1           19.2           13.2               21.8
                                                        ----------------- -------------- --------------  -----------------
Total Other Income and (Deductions)                                (68.5)          86.9         (136.3)             (14.9)
                                                        ----------------- -------------- --------------  -----------------
Income Taxes
     Current                                                        16.0            9.7          144.8              164.4
     Deferred                                                       (0.2)          69.4            6.2               52.4
                                                        ----------------- -------------- --------------  -----------------
Total Income Taxes                                                  15.8           79.1          151.0              216.8
                                                        ----------------- -------------- --------------  -----------------
Earnings from continuing operations                                 18.9          130.0          254.6              378.1
Discontinued Operations
    Income (loss) from discontinued operations, net of tax          (1.9)           0.8           (4.1)               0.4
    Gain on disposal, net of tax                                     0.1              -            2.3                  -
                                                        ----------------- -------------- --------------  -----------------
Loss from discontinued operations                                   (1.8)           0.8           (1.8)               0.4
                                                        ----------------- -------------- --------------  -----------------
Net Income                                                          17.1          130.8          252.8              378.5
Preferred stock dividend requirements                                0.9            1.5            2.2                3.0
                                                        ----------------- -------------- --------------  -----------------
Earnings for Common Stock                                      $    16.2      $   129.3     $    250.6        $     375.5
                                                        ================= ============== ==============  =================
Basic Earnings Per Share:
  Continuing Operations,
         less preferred stock dividends                        $    0.11      $    0.80     $     1.52        $      2.35
  Discontinued Operations                                          (0.01)          0.01          (0.01)                 -
                                                        ----------------- -------------- --------------  -----------------
Basic Earnings Per Share                                       $    0.10      $    0.81     $     1.51        $      2.35
                                                        ================= ============== ==============  =================
Diluted Earnings Per Share
  Continuing Operations,
         less preferred stock dividends                             0.10      $    0.80           1.52               2.33
  Discontinued Operations                                          (0.01)             -          (0.01)                 -
                                                        ----------------- -------------- --------------  -----------------
Diluted Earnings Per Share                                     $    0.09      $    0.80     $     1.51        $      2.33
                                                        ================= ============== ==============  =================
Average Common Shares Outstanding (000)                          169,933        160,167        165,529            160,030
Average Common Shares Outstanding - Diluted (000)                170,878        161,433        166,507            161,256
--------------------------------------------------------------------------------------------------------------------------
        See accompanying Notes to the Consolidated Financial Statements.
</TABLE>


                                       5
<PAGE>

<TABLE>
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (Unaudited)
<CAPTION>
-----------------------------------------------------------------------------------------------
                                                                      Six Months Ended June 30,
(In Millions of Dollars)                                                2005             2004
-----------------------------------------------------------------------------------------------
<S>                                                                    <C>             <C>
Operating Activities
Net income                                                             $ 252.8         $ 378.5
Adjustments to reconcile net income to net
      cash provided by (used in) operating activities
    Depreciation, depletion and amortization                             203.6           360.2
    Deferred income tax                                                    6.2            52.4
    Income from equity investments                                       (10.0)          (14.1)
    Dividends from equity investments                                      1.0             0.1
    Amortization of interest rate swap                                   (12.2)          (17.6)
    (Gain) on sale of investment                                          (4.1)         (172.9)
    Minority interest                                                        -            37.0
    Loss (income) from discontinued operations                             1.8            (0.4)
    Amortization of property tax prepayments                              56.7            46.5
Changes in assets and liabilities
    Accounts receivable                                                  210.0            92.4
    Materials and supplies, fuel oil and gas in storage                   48.7           113.2
    Accounts payable and other liabilities                              (219.6)         (161.7)
    Taxes accrued                                                        (14.4)           43.9
    Interest accrued                                                       5.8            (2.3)
    Captive insurance                                                        -            43.2
    Insurance recovery and regulatory settlements, net                     8.5               -
    Property tax prepayment                                              (24.9)              -
    Other                                                                (44.8)          (10.2)
                                                               ----------------  --------------
Net Cash Provided by Operating Activities                                465.1           788.2
                                                               ----------------  --------------
Investing Activities
    Construction expenditures                                           (231.0)         (411.8)
    Cost of removal                                                      (10.3)          (14.6)
    Net proceeds from sale of property and investments                    48.1           525.2
                                                               ----------------  --------------
Net Cash Provided by (Used in) Investing Activities                     (193.2)           98.8
                                                               ----------------  --------------
Financing Activities
    Treasury stock issued                                                 36.2            14.6
    MEDs equity conversion                                               460.0               -
    Issuance of long-term debt                                               -            49.1
    Payment of long-term debt                                           (514.6)         (153.9)
    Redemption of preferred stock                                        (75.0)
    Payment of commercial paper                                         (628.3)         (441.9)
    Gain on interest rate swap                                               -            12.7
    Net proceeds from sale/leaseback transaction                             -           383.7
    Common and preferred stock dividends paid                           (149.8)         (145.5)
    Other                                                                 16.0             9.9
                                                               ----------------  --------------
Net Cash Used in Financing Activities                                   (855.5)         (271.3)
                                                               ----------------  --------------
Net Increase (Decrease) in Cash and Cash Equivalents                    (583.6)          615.7
Net Cash Flow from Discontinued Operations                               (14.4)           (1.0)
Cash and Cash Equivalents at Beginning of Period                         922.0           203.4
                                                               ----------------  --------------
Cash and Cash Equivalents at End of Period                             $ 324.0         $ 818.1
                                                               ================  ==============
-----------------------------------------------------------------------------------------------
</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)

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

1. BASIS OF PRESENTATION

In our opinion,  the accompanying  unaudited  Consolidated  Financial Statements
contain all adjustments necessary to present fairly KeySpan's financial position
as of June 30, 2005,  and the results of operations for the three and six months
ended June 30, 2005 and June 30, 2004,  as well as cash flows for the six months
ended June 30, 2005 and June 30, 2004.  The  accompanying  financial  statements
should be read in conjunction  with the  consolidated  financial  statements and
notes  included  in  KeySpan's  Annual  Report on Form  10-K for the year  ended
December 31, 2004. The December 31, 2004  financial  statement  information  has
been  derived from the 2004 audited  financial  statements.  Income from interim
periods may not be indicative of future results. Certain  reclassifications were
made  to  conform  prior  period  financial  statements  to the  current  period
financial statement presentation.

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

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


                                       7
<PAGE>


We have  approximately 3.1 million common stock options  outstanding at June 30,
2005,  that  were not  included  in the  calculation  of  diluted  EPS since the
exercise price associated with these options was greater than the average market
price of our common stock.

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

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                                              Three Months Ended June 30,    Six Months Ended June 30,
(In Millions of Dollars, Except Per Share Amounts)                 2005            2004          2005          2004
---------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>           <C>           <C>            <C>
Earnings for common stock                                        $   16.2      $  129.3      $  250.6       $  375.5
Interest savings on convertible preferred stock                         -           0.1             -            0.5
Houston Exploration dilution                                            -          (0.1)            -           (0.1)
---------------------------------------------------------------------------------------------------------------------
Earnings for common stock - adjusted                             $   16.2      $  129.3      $  250.6       $  375.9
---------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding (000)                         169,933       160,167       165,529        160,030
Add dilutive securities:
Options                                                               945         1,045           978          1,005
Convertible preferred stock                                             -           221             -            221
---------------------------------------------------------------------------------------------------------------------
Total weighted average shares outstanding - assuming dilution     170,878       161,433       166,507        161,256
---------------------------------------------------------------------------------------------------------------------
Basic earnings per share                                         $   0.10      $   0.81      $   1.51       $   2.35
---------------------------------------------------------------------------------------------------------------------
Diluted earnings per share                                       $   0.09      $   0.80      $   1.51       $   2.33
---------------------------------------------------------------------------------------------------------------------
</TABLE>

2. BUSINESS SEGMENTS

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

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

The  Electric  Services  segment  consists  of  subsidiaries  that:  operate the
electric  transmission  and  distribution  system owned by LIPA; own and provide
capacity to and produce energy for LIPA from our generating  facilities  located
on Long  Island;  and  manage  fuel  supplies  for LIPA to fuel our Long  Island
generating facilities.  These services are provided in accordance with long-term
service  contracts having remaining terms that range from one to seven years and
power  purchase  agreements  with  remaining  terms  that  range  from  seven to
twenty-one years. The Electric Services segment also includes  subsidiaries that
own, lease and operate the 2,200 megawatt ("MW") Ravenswood  electric generation
facility ("Ravenswood Facility"),  located in Queens, New York, as well as a 250
MW combined cycle electric  generating  facility  located at the Ravenswood site
("Ravenswood Expansion").  Collectively,  the Ravenswood Facility and Ravenswood
Expansion  are referred to as the  "Ravenswood  Generating  Station." All of the
energy,  capacity and ancillary  services  related to the Ravenswood  Generating
Station are sold to the New York  Independent  System Operator  ("NYISO") energy
markets.  The  Electric  Services  segment  also  provides  retail  marketing of
electricity to commercial customers.


                                       8
<PAGE>


The  Energy  Services   segment  includes   companies  that  provide   primarily
energy-related  services to customers  located primarily within the Northeastern
United States,  with concentrations in the New York City and Boston metropolitan
areas through the following lines of business:  (i) Home Energy Services,  which
provides residential and small commercial customers with service and maintenance
of energy systems and appliances;  and (ii) Business  Solutions,  which provides
operation  and  maintenance,  design,  engineering,  consulting  and fiber optic
services to commercial, institutional and industrial customers.

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

In regard  to the  January  2005  transactions,  KeySpan  received  proceeds  of
approximately $16 million,  including approximately $5 million to be paid within
a three year period.  In addition,  KeySpan retained a portion of its previously
incurred surety indemnity support obligations related to certain performance and
payment bonds issued for the benefit of KeySpan's former  subsidiaries  prior to
closing. In June 2005, the balance to be paid over a three year period was fully
collected on a present value basis and a significant  portion of the performance
bonds were replaced without any remaining indemnification obligation on the part
of KeySpan.  The current  estimated cost to complete  projects  supported by the
remaining indemnity obligations  associated with the January 2005 transaction is
approximately  $3 million.  The buyers have agreed to complete  the projects for
which such indemnity obligations were incurred and to indemnify and hold KeySpan
harmless with respect to its liabilities in connection with such bonds.

In connection  with the February 2005  transaction,  KeySpan paid or contributed
approximately  $26  million to its former  subsidiary  prior to closing the sale
transaction in exchange for, among other things,  the disposition of outstanding
shares in the former subsidiary and the settlement of intercompany  advances and
replacement  of a  performance  and  payment  bond issued for the benefit of its
former  subsidiary  with  respect  to a  pending  project,  which  bond had been
supported  by a $150  million  indemnity  obligation  of KeySpan.  In  addition,
KeySpan received from its former  subsidiary an indemnity bond issued by a third
party surety company,  the purpose of which is to reimburse KeySpan in an amount
up to $80  million  in the  event it is  required  to  perform  under  all other
indemnity  obligations  previously  incurred by KeySpan to support the remaining
bonded projects of its former subsidiary as of the closing. As of June 30, 2005,
the total cost to complete  such  remaining  bonded  projects is estimated to be
approximately $60 million. The aforementioned guarantees are reflected in Note 6
"Financial  Guarantees and Contingencies."  KeySpan's former subsidiary has also
agreed to  complete  the  projects  for which such  indemnity  obligations  were
incurred and indemnify and hold KeySpan harmless with respect to any liabilities
in connection with such bonds.


                                       9
<PAGE>


In  the  fourth  quarter  of  2004,   KeySpan's  investment  in  its  mechanical
contracting subsidiaries was written-down to an estimated fair value. During the
first six months of 2005,  operating  losses were incurred  through the dates of
sale of these companies of $4.1 million after-tax,  including but not limited to
costs incurred for employee related benefits.  Partially offsetting these losses
was a gain of $2.3 million associated with the related divestitures,  reflecting
the difference  between the fair value estimates and the financial impact of the
actual sale transactions.  The net income impact of the operating losses and the
disposal gain was a loss of $1.8  million,  or $0.01 per share for the three and
six months ended June 30, 2005.

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

During the first quarter of 2004, our gas exploration and production investments
also included a 55% equity  interest in Houston  Exploration,  the operations of
which were fully consolidated in KeySpan's Consolidated Financial Statements. On
June 2, 2004,  KeySpan  exchanged 10.8 million shares of common stock of Houston
Exploration  for 100% of the stock of  Seneca-Upshur,  previously a wholly owned
subsidiary  of Houston  Exploration.  This  transaction  reduced our interest in
Houston Exploration from 55% to the then current level of 23.5%.  Effective June
1, 2004,  Houston  Exploration's  earnings and our ownership interest in Houston
Exploration  were  accounted  for  on  the  equity  basis  of  accounting.  This
transaction resulted in a gain to KeySpan of $150.1 million. The deconsolidation
of Houston Exploration required the recognition of certain deferred taxes on our
remaining  investment  resulting in a net deferred tax expense of $44.1 million.
Therefore,  the net gain on the share  exchange  less the deferred tax provision
was $106 million, or $0.66 per share. In the fourth quarter of 2004 KeySpan sold
its remaining interests in Houston Exploration.

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


                                       10
<PAGE>


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

During the first quarter of 2004, we also had an  approximate  61% investment in
certain  midstream  natural gas assets in Western Canada through  KeySpan Energy
Canada  Partnership  ("KeySpan  Canada").  These assets  included 14  processing
plants and associated gathering systems that produced  approximately 1.5 BCFe of
natural gas daily and  provided  associated  natural gas liquids  fractionation.
These  operations were fully  consolidated in KeySpan's  Consolidated  Financial
Statements.  On April 1, 2004,  KeySpan and KeySpan  Facilities Income Fund (the
"Fund"), which previously owned a 39.09% interest in KeySpan Canada, consummated
a  transaction  whereby  the  Fund  sold  15.617  million  units of the Fund and
acquired an additional  35.91%  interest in KeySpan  Canada from  KeySpan.  As a
result of this transaction,  KeySpan's  ownership of KeySpan Canada decreased to
25%. KeySpan recorded a gain of $22.8 million ($10.1 million after-tax, or $0.06
per share) at the time of this transaction.  Effective April 1, KeySpan Canada's
earnings and our ownership  interest in KeySpan Canada were accounted for on the
equity  basis of  accounting.  In the fourth  quarter of 2004,  KeySpan sold its
remaining interests in KeySpan Canada.

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

The  accounting  policies  of the  segments  are the same as those  used for the
preparation of the Consolidated Financial Statements. The segments are strategic
business units that are managed separately because of their different  operating
and regulatory environments.  Operating results of our segments are evaluated by
management on an operating  income basis.  At June 30, 2005, the total assets of
each reportable  segment have not changed  materially from those levels reported
at December 31, 2004.  As mentioned,  the  mechanical  contracting  subsidiaries
included in the Energy Services segment are reported as discontinued  operations
for all periods. The reportable segment information is as follows:


                                       11
<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                           Energy Investments
                                                                        ---------------------------
                                        Gas         Electric   Energy      Houston        Other
(In Millions of Dollars)           Distribution     Services   Services  Exploration    Investments    Eliminations     Consolidated
------------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>         <C>         <C>         <C>             <C>            <C>             <C>
Three Months Ended June 30, 2005
Unaffiliated revenue                     821.1       468.5       44.2             -            8.7             -            1,342.5
Intersegment revenue                         -           -        3.7             -              -          (3.7)                 -
Operating Income                          30.4        65.7       (2.8)            -            5.5           4.4              103.2

Three Months Ended June 30, 2004
Unaffiliated revenue                     676.4       433.8       41.9         116.5            9.2             -            1,277.8
Intersegment revenue                         -           -        2.9             -            1.3          (4.2)                 -
Operating Income                          35.1        67.9       (6.0)         58.5          (41.7)          8.4              122.2

------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Eliminating items include 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 $440.6 million and $416.0 million for the three
months ended June 30, 2005 and 2004,  respectively,  represent approximately 33%
of our consolidated revenues in both periods.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                 Energy Investments
                                                                           --------------------------
                                        Gas         Electric    Energy       Houston        Other
(In Millions of Dollars)           Distribution     Services    Services   Exploration   Investments    Eliminations   Consolidated
------------------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>           <C>        <C>            <C>            <C>             <C>          <C>
Six Months Ended June 30, 2005
Unaffiliated revenue                    2,846.5       869.1      88.6               -           18.8              -         3,823.0
Intersegment revenue                          -         4.6       6.3               -              -          (10.9)              -
Operating Income                          422.3       116.7      (5.6)              -           11.9           (3.4)          541.9

Six Months Ended June 30, 2004
Unaffiliated revenue                    2,604.2       792.9      86.0           268.1           37.2              -         3,788.4
Intersegment revenue                          -           -       5.4               -            2.5           (7.9)              -
Operating Income                          414.7       115.1     (23.5)          120.9          (29.0)          11.6           609.8

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

Eliminating items include 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 $816.3  million and $759.5 million for the six
months ended June 30, 2005 and 2004,  respectively,  represent approximately 21%
and 20%, respectively of our consolidated revenues.






                                       12
<PAGE>


3. COMPREHENSIVE INCOME

The table below indicates the components of comprehensive income:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                               Three Months Ended June 30,               Six Months Ended June 30,
(In Millions of Dollars)                                          2005                2004                  2005               2004
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>                 <C>                   <C>               <C>
Net Income                                                       $ 17.1             $ 130.8               $ 252.8           $ 378.5
------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax
Net losses (gains) on derivative instruments                       12.5                 5.5                   7.7              16.5
Deconsolidation of certain subsidiaries                               -                (6.7)                    -              (6.7)
Foreign currency translation adjustments                              -               (15.2)                 (5.0)            (17.1)
Unrealized gains (losses) on marketable securities                  0.3                   -                  (1.5)              0.5
Settlement of derivative premiums                                     -                   -                     -               3.4
Unrealized losses on derivative financial instruments             (10.9)               41.3                 (18.3)             (1.1)
------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive loss, net of tax                                1.9                24.9                 (17.1)             (4.5)
------------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income                                             $ 19.0             $ 155.7               $ 235.7           $ 374.0
------------------------------------------------------------------------------------------------------------------------------------
Related tax (benefit) expense
Net losses (gains) on derivative instruments                        5.2                 3.0                   4.7               8.9
Deconsolidation of certain subsidiaries                                                (5.0)                    -              (5.0)
Foreign currency translation adjustments                              -                (8.2)                 (2.7)             (9.1)
Unrealized gains (losses) on marketable securities                  0.2                   -                  (0.8)              0.2
Settlement of derivative premiums                                     -                   -                     -               1.8
Unrealized losses on derivative financial instruments              (4.5)               22.2                 (11.2)             (0.6)
------------------------------------------------------------------------------------------------------------------------------------
Total Tax (Benefit) Expense                                      $  0.9             $  12.0               $ (10.0)          $  (3.8)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

4. HEDGING AND DERIVATIVE FINANCIAL INSTRUMENTS

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

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


                                       13
<PAGE>


natural  gas is through  December  2005.  We use  standard  New York  Mercantile
Exchange ("NYMEX") futures prices to value the gas and heating oil positions. At
June 30, 2005, the fair value of gas swap  contracts was $0.3 million;  the fair
value of the oil swap  contracts was a liability of $8.1 million.  The estimated
amount of losses  associated with such derivative  instruments that are reported
in other  comprehensive  income and that are  expected to be  reclassified  into
earnings over the next twelve months is $7.9 million, or $5.1 million after-tax.
The ineffective  portion of these  derivatives for the six months ended June 30,
2005 was $0.1  million  and has been  recorded  as a benefit to  revenues in the
Consolidated Statement of Income.

Seneca-Upshur  utilizes OTC natural gas swaps to hedge the cash flow variability
associated with forecasted sales of a portion of its natural gas production.  At
June 30, 2005,  Seneca-Upshur has hedge positions in place for approximately 85%
of its estimated 2005 through 2008 gas  production,  net of gathering  costs. We
use market  quoted  forward  prices to value these swap  positions.  The maximum
length of time over which Seneca-Upshur has hedged such cash flow variability is
through  December 2008. The fair value of these  derivative  instruments at June
30,  2005 was a  liability  of $10.0  million.  The  estimated  amount of losses
associated  with  such  derivative   instruments  that  are  reported  in  other
comprehensive income and that are expected to be reclassified into earnings over
the next twelve months is $3.1 million, or $2.0 million after-tax.

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

With respect to price exposure associated with fuel purchases for the Ravenswood
Generating  Station,  KeySpan employs natural gas futures contracts to hedge the
cash flow  variability  for a portion of  forecasted  purchases  of natural gas.
KeySpan also employs the use of financially-settled  oil swap contracts to hedge
the cash flow variability for a portion of forecasted purchases of fuel oil that
will be consumed by the  Ravenswood  Generating  Station.  We use standard NYMEX
futures  prices to value the gas futures  contracts  and market  quoted  forward
prices to value oil swap  contracts.  The  maximum  length of time over which we
have  hedged cash flow  variability  associated  with  forecasted  purchases  of
natural  gas is  through  September  2005.  The fair  value of these  derivative
instruments  at June 30, 2005 was  negligible.  The maximum  length of time over
which we have hedged cash flow variability  associated with forecasted purchases
of  fuel  oil is  through  April  2006.  The  fair  value  of  these  derivative
instruments  at June 30, 2005 was $0.9 million.  The  estimated  amount of gains
associated  with  such  derivative   instruments  that  are  reported  in  other
comprehensive income and that are expected to be reclassified into earnings over
the next twelve months is $0.9 million, or $0.6 million after-tax.

We have also engaged in the use of  cash-settled  swap  instruments to hedge the
cash flow  variability  associated with a portion of forecasted  electric energy
sales from the Ravenswood  Generating Station.  Our hedging strategy is to hedge
at least 50% of forecasted  on-peak  summer season  electric  energy sales and a
portion of forecasted  electric  energy sales for the remainder of the year. The


                                       14
<PAGE>


maximum  length of time over  which we have  hedged  cash  flow  variability  is
through  June  2006.  We  use  market  quoted  forward  prices  to  value  these
outstanding derivatives.  The fair value of these derivative instruments at June
30,  2005 was $1.2  million all of which is  expected  to be  reclassified  into
earnings over the next twelve months.  The after-tax impact is anticipated to be
$0.7 million.

The above  noted  derivative  financial  instruments  are cash flow  hedges that
qualify  for  hedge   accounting  under  SFAS  133  "Accounting  for  Derivative
Instruments  and  Hedging  Activities,"  as  amended by SFAS 149  "Amendment  of
Statement 133 on Derivative  Instruments and Hedging  Activities,"  collectively
SFAS 133, and are not considered held for trading purposes as defined by current
accounting  literature.  Accordingly,  we carry the fair value of our derivative
instruments  on the  Consolidated  Balance Sheet as either a current or deferred
asset  or  liability,  as  appropriate,  and  defer  the  effective  portion  of
unrealized gains or losses in accumulated other comprehensive  income. Gains and
losses are  reclassified  from  accumulated  other  comprehensive  income to the
Consolidated  Statement of Income in the period the hedged  transaction  affects
earnings.  Gains and losses are  reflected as a component  of either  revenue or
fuel and purchased power depending on the hedged  transaction.  As noted,  hedge
ineffectiveness  was $0.1 million for the first six months of 2005, and resulted
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 was recorded directly to earnings.

The table below  summarizes  the fair value of  outstanding  financially-settled
commodity  derivative  instruments that qualify for hedge accounting at June 30,
2005 and  December  31,  2004,  and the  related  line item on the  Consolidated
Balance Sheet. Fair value is the amount at which derivative instruments could be
exchanged in a current  transaction  between  willing  parties,  other than in a
forced liquidation sale.


-------------------------------------------------------------------------------
(In Millions of Dollars)                    June 30, 2005     December 31, 2004
-------------------------------------------------------------------------------
Gas Contracts:
  Other current assets                           $   0.3              $    0.2
  Accounts payable and other liabilities            (3.1)                 (6.2)
  Other deferred liabilities                        (6.9)                 (0.8)

Oil Contracts:
  Other current assets                               0.9                   7.7
  Accounts payable and other liabilities            (8.1)                    -

Electric Contracts:
  Other current assets                               1.2                   0.4
  Accounts payable and other liabilities               -                     -
-------------------------------------------------------------------------------
                                                 $ (15.7)             $    1.3
-------------------------------------------------------------------------------


Financially-Settled  Commodity  Derivative  Instruments  that Do Not Qualify for
Hedge  Accounting:  KeySpan  subsidiaries also have employed a limited number of
financial  derivatives that do not qualify for hedge accounting  treatment under
SFAS 133. In 2004,  we purchased a series of call options on the spread  between
the price of heating oil and the price of natural  gas.  The  options  cover the


                                       15
<PAGE>


period  February 2005 through  December 2005 and further  complement our hedging
strategy  noted above  regarding  sales to certain  large-volume  customers.  As
stated,  we sell gas to certain  large-volume  customers  at prices  established
monthly relative to a prevailing alternate fuel price;  however, the cost of gas
plus the rate for the highest consumption block otherwise applicable to our firm
commercial customers (under our applicable New York City and Long Island utility
tariffs)  is an upper  limit on the price  KeySpan  can  charge  for the sale of
natural gas to these  customers.  These options are intended to limit  KeySpan's
exposure to heating  oil price  spikes.  These  options do not qualify for hedge
accounting treatment under SFAS 133. We recorded a $3.0 million benefit in other
income and  deductions  on the  Consolidated  Statement of Income to reflect the
change in the market value  associated with this  derivative  instrument for the
six months ended June 30, 2005. In addition,  the Ravenswood  Generating Station
sold a three year option for 30-day peaking gas service.  The 30-day peaking gas
service is for the following  three winter  seasons:  October 2004 - March 2005,
October 2005 - March 2006 and October 2006 - March 2007.  For each of the winter
seasons just mentioned,  the counterparty can call on the Ravenswood  Generating
Station  to supply no more than  30,000  Mdth of a gas a day for no more than 30
days. We recorded a $0.6 million  benefit in other income and  deductions on the
Consolidated  Statement  of Income to reflect  the  change in the  market  value
associated  with this  derivative  instrument  for the six months ended June 30,
2005.

Firm Gas Sales Derivative  Instruments - Regulated Utilities:  We use derivative
financial  instruments to reduce the cash flow  variability  associated with the
purchase price for a portion of future natural gas purchases associated with our
Gas Distribution  operations.  Our strategy is to minimize  fluctuations in firm
gas sales prices to our regulated  firm gas sales  customers in our New York and
New England service territories. The accounting for these derivative instruments
is subject to SFAS 71. Therefore, changes in the fair value of these derivatives
have  been  recorded  as a  regulatory  asset  or  regulatory  liability  on the
Consolidated Balance Sheet. Gains or losses on the settlement of these contracts
are initially deferred and then refunded to or collected from our firm gas sales
customers  consistent  with  regulatory  requirements.  At June 30, 2005,  these
derivative  instruments had a fair value of $60.6 million and are reflected as a
regulatory liability on the Consolidated Balance Sheet.

Physically-Settled  Commodity  Derivative  Instruments:   SFAS  133  establishes
criteria that must be satisfied in order for option contracts, forward contracts
with  optionality  features,  or contracts that combine a forward contract and a
purchase option contract to be exempted as normal  purchases and sales.  Certain
contracts for the physical purchase of natural gas associated with our regulated
gas utilities are not exempt as normal  purchases from the  requirements of SFAS
133. Since these contracts are for the purchase of natural gas sold to regulated
firm gas sales customers,  the accounting for these contracts is subject to SFAS
71. Therefore, changes in the market value of these contracts have been recorded
as a regulatory asset or regulatory liability on the Consolidated Balance Sheet.
At June 30, 2005,  these  derivatives  had a net fair value of $11.4 million and
are reflected as a regulatory  liability of $20.4 million and a regulatory asset
of $9.0 on the Consolidated Balance Sheet.


                                       16
<PAGE>


Interest Rate Derivative  Instruments:  In January 2005,  KeySpan  redeemed $500
million  of  outstanding  debt - 6.15%  Notes  due  2006,  and  accelerated  the
amortization of approximately $11.2 million of previously  unamortized  benefits
associated  with an  interest  rate  swap on these  notes  that  was  previously
settled.  The accelerated  amortization  was recorded as a reduction to interest
expense.  (See Note 9  "Long-term  Debt and  Commercial  Paper"  for  additional
details regarding the debt  redemption.)  There were no interest rate derivative
instruments outstanding at June 30, 2005.

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

In 2004, we purchased  heating-degree  day put options to mitigate the effect of
fluctuations  from normal weather on KEDNE's  financial  position and cash flows
for the  2004/2005  winter  heating  season - November  2004 through March 2005.
These put options  would have paid KeySpan up to $40,000 per heating  degree day
when  the  actual   temperature   was  below  4,130  heating   degree  days,  or
approximately  5% warmer than normal,  based on the most recent 20-year  average
for normal  weather.  The maximum  amount  KeySpan  would have received on these
purchased  put options was $16 million.  The net premium cost for these  options
was $1.6 million and was  amortized  over the heating  season.  Unlike  previous
years,  if weather  was  colder  than  normal  KeySpan  would have no  financial
obligation.  Since  weather was colder than normal  during the first  quarter of
2005 there was no earnings impact  associated  with these  financial  derivative
instruments  other than the premium cost for purchasing the options.  We account
for these derivatives pursuant to the requirements of EITF 99-2, "Accounting for
Weather  Derivatives." In this regard,  such instruments are accounted for using
the "intrinsic value method" as set forth in such guidance.

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


                                       17
<PAGE>


5. RECENT ACCOUNTING PRONOUNCEMENTS

In 2004, the Financial  Accounting  Standards  Board ("FASB")  issued FASB Staff
Position ("FSP") 106-2  "Accounting and Disclosure  Requirements  Related to the
Medicare  Prescription  Drug,  Improvement and  Modernization Act of 2003." This
guidance clarified the accounting and disclosure requirements for employers with
postretirement  benefit  plans  that have been  affected  by the  passage of the
Medicare  Prescription  Drug  Improvement  and  Modernization  Act of 2003  (the
"Medicare  Act").  The Act  introduced  two new  features  to  Medicare  that an
employer  needs  to  consider  in  measuring  its  obligation  and net  periodic
postretirement  benefit costs.  KeySpan's  retiree health benefit plan currently
includes a  prescription  drug  benefit  that is provided to retired  employees.
KeySpan implemented the requirements of FSP 106-2 in September 2004.

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

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

In March 2005, the FASB issued FASB Interpretation No. 47 ("FIN 47") "Accounting
for  Conditional  Asset  Retirement  Obligations  - an  interpretation  of  FASB
Statement No. 143." FIN 47 clarifies that the term conditional  asset retirement
obligation  as  used  in  SFAS  No.  143   "Accounting   for  Asset   Retirement
Obligations",  refers  to a legal  obligation  to  perform  an asset  retirement
activity in which the timing and/or method of settlement  are  conditional  on a
future  event  that may or may not be within  the  control  of the  entity.  The
obligation to perform the asset retirement activity is unconditional even though


                                       18
<PAGE>


uncertainty exists about the timing and/or method of settlement. Accordingly, an
entity is required to recognize a liability  for the fair value of a conditional
asset retirement obligation if the fair value of the liability can be reasonably
estimated.  Uncertainty  about  the  timing  and/or  method of  settlement  of a
conditional asset retirement  obligation should be factored into the measurement
of the liability when sufficient  information  exists. An entity shall recognize
the  cumulative  effect of initially  applying FIN 47 as a change in  accounting
principle.  The effective date of FIN 47 is December 31, 2005 for  calendar-year
enterprises.

At the present time,  KeySpan's only asset retirement  obligation relates to its
investment in Seneca-Upshur.  KeySpan is currently reviewing the requirements of
FIN 47 and at this point in time can not  determine  the  impact,  if any,  that
implementation  of FIN 47 will have on its results of  operations  or  financial
position; cash flows should not be impacted by the implementation of FIN 47. See
Note 6 "Financial  Guarantees and Contingencies," for details on KeySpan's asset
retirement obligation.

On July 14, 2005,  the FASB issued an Exposure Draft  "Accounting  for Uncertain
Tax Positions,"  that would  interpret SFAS 109,  "Accounting for Income Taxes."
This proposal seeks to reduce the diversity in practice  associated with certain
aspects of the recognition and  measurement  requirements  related to accounting
for income taxes.  Specifically,  the proposal would require that a tax position
meet a "probable  recognition  threshold"  for the benefit of an  uncertain  tax
position to be  recognized  in the  financial  statements.  The  proposal  would
require  recognition  in the  financial  statements  of the best estimate of the
effect of a tax position only if that position is probable of being sustained on
audit by the  appropriate  taxing  authorities,  based  solely on the  technical
merits of the position.

The proposed  effective  date is the first fiscal year ending after December 15,
2005. Any adjustments  resulting from the  implementation  of the exposure draft
would be recognized as a cumulative effect of a change in accounting  principle.
The FASB has provided a 60-day comment period,  which closes September 12, 2005.
At this time we are unable to predict the final  action to be taken by the FASB,
or what impact, if any, such action will have on KeySpan's financial  condition,
results of operations or cash flows.

6. FINANCIAL GUARANTEES AND CONTINGENCIES

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


                                       19
<PAGE>


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

We have  classified  the Master Lease as $412.3 million of long-term debt on the
Consolidated  Balance Sheet based on our current status as primary  beneficiary.
Further,  we have an asset  on the  Consolidated  Balance  Sheet  for an  amount
substantially  equal  to the  fair  market  value of the  leased  assets  at the
inception of the lease, less depreciation since that date, or approximately $332
million.

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

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

Asset Retirement Obligations: In 2003, KeySpan adopted SFAS 143, "Accounting for
Asset  Retirement  Obligations."  SFAS 143 required us to record a liability and
corresponding   asset  representing  the  present  value  of  legal  obligations
associated  with the retirement of tangible,  long-lived  assets that existed at
the inception of the  obligation.  KeySpan's  only asset  retirement  obligation
("ARO") relates to its investment in Seneca-Upshur  and was $1.9 million at June
30, 2005.

KeySpan's largest asset base is its gas transmission and distribution  system. A
legal obligation exists due to certain safety requirements at final abandonment.
In  addition,  a legal  obligation  may be  construed  to exist with  respect to
KeySpan's   liquefied  natural  gas  ("LNG")  storage  tanks  due  to  clean  up
responsibilities  upon cessation of use.  However,  mass assets such as storage,


                                       20
<PAGE>


transmission and distribution  assets are believed to operate in perpetuity and,
therefore,  have  indeterminate  cash flow estimates.  Since that exposure is in
perpetuity  and cannot be measured,  no liability has been recorded  pursuant to
SFAS 143. As discussed in Note 5 "Recent  Accounting  Pronouncements,"  the FASB
recently issued FIN 47 which clarifies certain reporting and measurement  issues
for asset  retirement  obligations.  As noted,  we are  currently  reviewing the
requirements of FIN 47, and its potential impact, if any, on KeySpan's financial
position and results of operations.

Environmental Matters

New York Sites:  Within the State of New York we have  identified  43 historical
manufactured gas plant ("MGP") sites and related facilities, which were owned or
operated by KeySpan subsidiaries or such companies'  predecessors.  These former
sites,  some of which are no longer owned by us, have been identified to the New
York  State  Public   Service   Commission   ("NYPSC")  and  the  Department  of
Environmental   Conservation   ("DEC")  for   inclusion  on   appropriate   site
inventories.  Administrative  Orders on  Consent  ("ACO") or  Voluntary  Cleanup
Agreements  have been  executed  with the DEC to address the  investigation  and
remediation   activities   associated  with  certain  sites.  KeySpan  submitted
applications to the DEC for each of the remaining sites in August 2004 under the
DEC's Brownfield Cleanup Program ("BCP").  As a result of a recent United States
Supreme  Court  decision,  KeySpan  withdrew its  applications  in the DEC's BCP
program and will resubmit  applications  for individual  sites under various DEC
cleanup programs on a case-by-case basis.

We have  identified 28 of these sites as being  associated  with the  historical
operations of KEDNY. One site has been fully  remediated.  Subject to the issues
described in the preceding  paragraph,  the remaining 27 sites either are in the
process of being  investigated  and remediated or will be  investigated  and, if
necessary,  remediated  under the terms and  conditions  of various types of DEC
cleanup  orders.  Expenditures  incurred  to date by us with  respect  to  KEDNY
MGP-related activities total $53.2 million.

The  remaining  15 sites  have  been  identified  as being  associated  with the
historical operations of KEDLI. Expenditures incurred to date by us with respect
to KEDLI  MGP-related  activities  total $47.1 million.  One site has been fully
investigated  and requires no further action.  The remaining sites either are in
the process of being investigated and remediated or will be investigated and, if
necessary,  remediated  under the  conditions  of various  types of DEC  cleanup
orders.

We presently  estimate  the  remaining  cost of our KEDNY and KEDLI  MGP-related
environmental  remediation  activities will be $196.8 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,  the KEDNY and KEDLI rate plans approved by
the NYPSC generally provide for the recovery from customers of investigation and
remediation  costs of certain  sites.  At June 30,  2005,  we have  reflected  a
regulatory  asset of $223 million for our  KEDNY/KEDLI  MGP sites. In accordance


                                       21
<PAGE>


with NYPSC  policy,  KeySpan  records a reduction to regulatory  liabilities  as
costs are incurred for environmental cleanup activities. At June 30, 2005, these
previously  deferred  regulatory  liabilities  totaled $32.1 million. In October
2003,  KEDNY and  KEDLI  filed a joint  petition  with the  NYPSC  seeking  rate
treatment for additional  environmental costs that may be incurred at all of our
New York MGP sites. That petition is still pending.

During the six months ended June 30, 2005, KEDNY and KEDLI received an aggregate
amount of $21.1  million from  insurance  carriers  associated  with MGP related
insurance settlements. These proceeds were used to offset other regulatory items
and therefore had no earnings impact.

We are  also  responsible  for  environmental  obligations  associated  with the
Ravenswood  Facility,  purchased  from  Consolidated  Edison in 1999,  including
remediation  activities  associated with its historical  operations and those of
the MGP facilities  that formerly  operated at the site. We are not  responsible
for  liabilities  arising from disposal of waste at off-site  locations prior to
the  acquisition  closing  and any  monetary  fines  arising  from  Consolidated
Edison's pre-closing conduct. We presently estimate the remaining  environmental
clean up activities  for this site will be $1.9  million,  which amount has been
accrued by us. Expenditures incurred to date total $3.1 million.

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

Boston Gas Company, Colonial Gas Company and Essex Gas Company may have or share
responsibility under applicable  environmental laws for the remediation of 67 of
these sites.  A subsidiary of National Grid USA,  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
environmental regulatory authority.

We  presently  estimate  the  remaining  cost  of  these   Massachusetts   KEDNE
MGP-related environmental cleanup activities will be $15.3 million, which amount
has been  accrued by us as a  reasonable  estimate  of  probable  cost for known
sites,  however  remediation  costs for each site may be materially  higher than
noted,  depending upon changing technologies and regulatory standards,  selected
end  use  for  each  site,  and  actual  environmental  conditions  encountered.
Expenditures  incurred  since  November 8, 2000,  the date KeySpan  acquired the
KEDNE  companies,  with  respect to these  MGP-related  activities  total  $23.8
million.


                                       22
<PAGE>


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

We  presently   estimate  the   remaining   cost  of   EnergyNorth   MGP-related
environmental  cleanup  activities  will be $12  million,  which amount has been
accrued by us as a reasonable estimate of probable cost for known sites however,
remediation costs for each site may be materially  higher than noted,  depending
upon changing technologies and regulatory  standards,  selected end use for each
site, and actual environmental  conditions  encountered.  Expenditures  incurred
since November 8, 2000, with respect to these MGP-related activities total $13.7
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
December 31, 2004, we have reflected a regulatory asset of $44.1 million for the
KEDNE MGP sites.  As  previously  mentioned,  Colonial Gas Company and Essex Gas
Company are not subject to the provisions of SFAS 71 and therefore have recorded
no  regulatory  asset.  However,  rate  orders  currently  in  effect  for these
subsidiaries provide for the recovery of investigation and remediation costs.

KeySpan  New  England,  LLC  Sites:  We are  aware  of three  non-utility  sites
associated  with  KeySpan  New  England,  LLC,  a  successor  company to Eastern
Enterprises, for which we may have or share environmental remediation or ongoing
maintenance   responsibility.   These  three  sites,  located  in  Philadelphia,
Pennsylvania, New Haven, Connecticut and Everett, Massachusetts, were associated
with  historical  operations  involving  the  production  of  coke  and  related
industrial processes. Honeywell International,  Inc. and Beazer East, Inc. (both
former  owners and/or  operators of certain  facilities at Everett (the "Everett
Facility")   together  with   KeySpan,   have  entered  into  an  ACO  with  the
Massachusetts  Department of Environmental  Protection for the investigation and
development  of a remedial  response  plan for a portion of that site.  KeySpan,
Honeywell and Beazer East have entered into a cost-sharing  agreement to address
the cost of compliance with the ACO.

We presently estimate the remaining cost of our environmental cleanup activities
for the three  non-utility  sites will be  approximately  $18.1  million,  which
amount has been  accrued by us as a  reasonable  estimate of probable  costs for
known sites however,  remediation  costs for each site may be materially  higher
than noted,  depending  upon changing  technologies  and  regulatory  standards,
selected end use for each site, and actual environmental conditions encountered.
Expenditures  incurred since November 8, 2000, with respect to these sites total
$14.7 million.


                                       23
<PAGE>


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

See KeySpan's  Annual Report on Form 10-K for the year ended  December 31, 2004,
Note 7 to those  Consolidated  Financial  Statements  "Contractual  Obligations,
Financial Guarantees and Contingencies" for further information on environmental
matters.

Legal Matters

From time to time we are subject to various legal proceedings arising out of the
ordinary  course of our  business.  Except as described  below,  or in KeySpan's
Annual  Report on Form 10-K for the year  ended  December  31,  2004,  we do not
consider  any of such  proceedings  to be material to our  business or likely to
result in a material  adverse  effect on our  results of  operations,  financial
condition or cash flows.

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

This new complaint asserts  essentially the same allegations as contained in two
prior federal  shareholder  derivative  actions which were  commenced in October
2001 and June 2002.  On March 15, 2004,  KeySpan and the  individual  defendants
filed a motion to dismiss those earlier federal  complaints.  On April 14, 2004,
the plaintiffs filed a notice of voluntary withdrawal of their actions. On April
23, 2004, the federal court dismissed both actions without  prejudice.  On April
29, 2005,  KeySpan and the individual  defendants filed a motion to dismiss this
new  complaint.  In response to this motion to dismiss,  on July 20,  2005,  the
plaintiff  served an amended  complaint  in which she  attempts  to address  the
issues  raised in the motion.  KeySpan  intends to file a motion to dismiss this
amended  complaint.  While KeySpan  denies any  wrongdoing,  the outcome of this
proceeding cannot be determined as yet.

KeySpan  subsidiaries,  along with  several  other  parties,  have been named as
defendants in numerous  proceedings filed by plaintiffs claiming various degrees
of injury from asbestos exposure at generating facilities formerly owned by Long
Island Lighting  Company  ("LILCO") and others.  In connection with the May 1998
transaction  with LIPA,  costs incurred by KeySpan for  liabilities for asbestos
exposure  arising from the  activities of the generating  facilities  previously
owned by LILCO are  recoverable  from LIPA  through the Power  Supply  Agreement
("PSA") between LIPA and KeySpan.


                                       24
<PAGE>


KeySpan  is  unable  to  determine  the  outcome  of  the  outstanding  asbestos
proceedings,  but does not believe that such  outcome,  if adverse,  will have a
material effect on its financial condition,  results of operation or cash flows.
KeySpan   believes   that  its  cost   recovery   rights   under  the  PSA,  its
indemnification  rights against third parties and its insurance  coverage (above
applicable  deductible  limits)  cover its  exposure  for  asbestos  liabilities
generally.

Financial Guarantees

KeySpan  has  issued  financial  guarantees  in the normal  course of  business,
primarily on behalf of its  subsidiaries,  to various third party creditors.  At
June 30, 2005,  the  following  amounts  would have to be paid by KeySpan in the
event of non-payment by the primary obligor at the time payment is due:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
                                                              Amount of      Expiration
  Nature of Guarantee (In Thousands of Dollars)                Exposure         Dates
------------------------------------------------------------------------------------------
<S>                                               <C>         <C>           <C>
Guarantees for Subsidiaries
  Medium-Term Notes - KEDLI                       (i)        $   525,000     2008-2010
  Industrial Development Revenue Bonds            (ii)           128,000       2027
  Ravenswood - Master Lease                       (iii)          425,000       2009
  Ravenswood - Sale/leaseback                     (iv)           385,000       2040
  Surety Bonds                                    (v)            102,000     2005-2008
  Commodity Guarantees and Other                  (vi)            71,000       2005
  Letters of Credit                               (vii)           74,000       2005
------------------------------------------------------------------------------------------
                                                             $ 1,710,000
------------------------------------------------------------------------------------------
</TABLE>

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

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

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

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


                                       25
<PAGE>


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

(v)  KeySpan  has  agreed  to  indemnify  the  issuers  of  various  surety  and
     performance bonds associated with certain  construction  projects currently
     being  performed by certain current and former  subsidiaries.  In the event
     that the current or former  subsidiaries  fail to perform their obligations
     under contracts, the injured party may demand that the surety make payments
     or provide  services  under the bond.  KeySpan  would then be  obligated to
     reimburse  the surety for any expenses or cash outlays it incurs.  Although
     KeySpan  is  not   guaranteeing  any  new  bonds  for  any  of  the  former
     subsidiaries,  KeySpan's  indemnity  obligation  supports  the  contractual
     obligation  of these  current  and  former  subsidiaries.  In  addition,  a
     performance and payment bond issued for the benefit of a former  subsidiary
     with respect to a pending project,  which bond had been supported by a $150
     million indemnity obligation,  has been replaced. KeySpan has also received
     from a  former  subsidiary  an  indemnity  bond  issued  by a  third  party
     insurance  company,  the  purpose  of which is to  reimburse  KeySpan in an
     amount up to $80 million in the event it is  required to perform  under all
     other indemnity obligations  previously incurred by KeySpan to support such
     company's bonded projects existing prior to divestiture.  At June 30, 2005,
     the total cost to complete such remaining  bonded  projects is estimated to
     be approximately $63 million.

(vi) KeySpan has guaranteed  commodity-related  payments for subsidiaries within
     the Energy  Services  segment,  as well as KeySpan  Ravenswood,  LLC. These
     guarantees  are  provided  to third  parties  to  facilitate  physical  and
     financial  transactions  involved in the  purchase of natural  gas, oil and
     other petroleum products for electric production and marketing  activities.
     The guarantees cover actual purchases by these  subsidiaries that are still
     outstanding as of June 30, 2005.

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


                                       26
<PAGE>


     To date,  KeySpan has not had a claim made  against it for any of the above
     guarantees and we have no reason to believe that our subsidiaries 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.

Other Contingencies

We derive a substantial portion of our revenues in our Electric Services segment
from a series  of  agreements  with  LIPA  pursuant  to which we  manage  LIPA's
transmission  and  distribution   system  and  supply  the  majority  of  LIPA's
customers'  electricity needs. The agreements terminate at various dates between
May 28, 2006 and May 28, 2013, and at this time we can provide no assurance that
any of the agreements will be renewed or extended, or if they were to be renewed
or extended, the terms and conditions thereof. In addition, given the complexity
of these  agreements,  disputes arise from time to time between KeySpan and LIPA
concerning the rights and obligations of each party to make and receive payments
as required pursuant to the terms of these agreements.  As a result,  KeySpan is
unable to determine  what  effect,  if any,  the  ultimate  resolution  of these
disputes  will have on its  financial  condition,  results of operations or cash
flows.

In March  2005,  LIPA issued a Request for  Proposal  ("RFP") to provide  system
power supply  management  services  beginning  May 29, 2006 and fuel  management
services for certain of its peaking  generating units beginning January 1, 2006.
A KeySpan subsidiary is currently performing these services. KeySpan submitted a
bid in  response to the new RFP in April 2005.  LIPA was  scheduled  to select a
service  provider in June 2005,  but has deferred such decision at this time. We
cannot predict the outcome or the timing of any decisions by LIPA on this matter
at this time.

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

During the year ended  December  31, 2002,  KeySpan  recorded an  adjustment  to
deferred  income taxes of $177.7  million to reflect a decrease in the tax basis
of the  assets  acquired  at the  time of the  KeySpan/LILCO  combination.  This
adjustment  resulted  from a  revised  valuation  study.  Concurrent  with  this
deferred tax adjustment,  KeySpan reduced current income taxes payable by $183.2
million,  resulting  in a net $5.5 million  income tax  benefit.  As reported in


                                       27
<PAGE>


KeySpan's Form 10-K for the year ended  December 31, 2004, the Internal  Revenue
Service  ("IRS")  conducted  an audit of LILCO's  tax  returns for the tax years
ended  December 31, 1996 through  March 31, 1999 and  KeySpan's and The Brooklyn
Union Gas  Company's  tax  returns for the tax years  ended  September  30, 1997
through December 31, 1998, pertaining to the KeySpan/LILCO combination,  as well
as  other  return  years.  The  primary  issue  raised  in  the  conduct  of the
examination   relates  to  the  valuation  of  the  transferred  assets  in  the
KeySpan/LILCO  combination.  The IRS has  completed its audit and has proposed a
significant  adjustment  to the  valuation  of  the  assets  transferred  in the
KeySpan/LILCO combination, as well as other adjustments.

KeySpan is pursuing an administrative  appeal before the IRS with respect to the
issues raised in the audit.  KeySpan believes that its tax positions comply with
applicable tax law and will defend these  positions both through  administrative
and,  if  necessary,  judicial  procedures.  At this  point in time,  we can not
determine  what the impact,  if any,  will be on KeySpan's  financial  position,
results of operations or cash flows from the resolution of these tax matters.

7. STOCK OPTIONS

Stock options have been issued to KeySpan officers,  directors and certain other
management  employees  and  consultants  as approved by the Board of  Directors.
These options generally vest over a three-to-five  year period and have exercise
periods from five to ten years. In 2003,  KeySpan adopted the prospective method
of transition of accounting for stock option expense in accordance with SFAS 148
"Accounting   for  Stock-Based   Compensation  -  Transition  and   Disclosure."
Accordingly,  compensation  expense has been  recognized  by employing  the fair
value   recognition   provisions  of  SFAS  123   "Accounting   for  Stock-Based
Compensation" for grants awarded after January 1, 2003.

KeySpan  continues  to apply APB Opinion  25,  "Accounting  for Stock  Issued to
Employees," and related  Interpretations  in accounting for grants awarded prior
to January 1, 2003.  Accordingly,  no compensation  cost has been recognized for
these fixed stock option plans in the  Consolidated  Financial  Statements since
the  exercise  prices  and market  values  were  equal on the grant  dates.  Had
compensation cost for these plans been determined based on the fair value at the
grant dates for awards under the plans  consistent with SFAS 123, our net income
and earnings per share would have decreased to the pro-forma  amounts  indicated
below:


                                       28
<PAGE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                                                         Three Months Ended June 30,       Six Months Ended June 30,
(In Millions of Dollars, Except Per Share Amounts)                            2005             2004            2005           2004
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>             <C>            <C>            <C>
Earnings available for common stock:
As reported                                                                  $ 16.2          $ 129.3        $ 250.6        $ 375.5
     Add: recorded stock-based compensation expense, net of tax                 3.0              1.4            6.1            2.8
     Deduct: total stock-based compensation expense, net of tax                (3.5)            (2.4)          (7.0)          (5.0)
-----------------------------------------------------------------------------------------------------------------------------------
Pro-forma earnings                                                           $ 15.7          $ 128.3        $ 249.7        $ 373.3
-----------------------------------------------------------------------------------------------------------------------------------
Earnings per share:
     Basic - as reported                                                     $ 0.10          $  0.81        $  1.51        $  2.35
     Basic - pro-forma                                                       $ 0.09          $  0.80        $  1.51        $  2.33

     Diluted - as reported                                                   $ 0.09          $  0.80        $  1.51        $  2.33
     Diluted - pro-forma                                                     $ 0.09          $  0.79        $  1.50        $  2.31
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

8. POSTRETIREMENT BENEFITS

Pension  Plans:  The  following  information  represents  the  consolidated  net
periodic  pension cost for the six months ended June 30, 2005 and 2004,  for our
noncontributory  defined  benefit  pension plans which cover  substantially  all
employees. Benefits are based on years of service and compensation.  Funding for
pensions is in  accordance  with  requirements  of federal law and  regulations.
KEDLI and  Boston  Gas  Company  are  subject  to  certain  deferral  accounting
requirements mandated by the NYPSC and the MADTE, respectively for pension costs
and other postretirement benefit costs. Further, KeySpan's electric subsidiaries
are subject to certain "true-up"  provisions in accordance with the LIPA service
agreements.

The calculation of net periodic pension cost is as follows:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
                                                                  Six Months Ended June 30,
(In Millions of Dollars)                                        2005                 2004
-----------------------------------------------------------------------------------------------
<S>                                                           <C>                  <C>
Service cost, benefits earned during the period            $    28.3               $ 26.5
Interest cost on projected benefit obligation                   74.3                 72.1
Expected return on plan assets                                 (86.6)               (79.1)
Net amortization and deferral                                   37.0                 31.6
-----------------------------------------------------------------------------------------------
Total pension cost                                         $    53.0    $            51.1
-----------------------------------------------------------------------------------------------
</TABLE>

Other  Postretirement   Benefits:   The  following  information  represents  the
consolidated net periodic other  postretirement  benefit cost for the six months
ended June 30, 2005 and 2004,  for our  noncontributory  defined  benefit  plans
covering certain health care and life insurance  benefits for retired employees.
We have been funding a portion of future benefits over employees' active service
lives  through  Voluntary  Employee  Beneficiary  Association  ("VEBA")  trusts.
Contributions  to  VEBA  trusts  are  tax  deductible,  subject  to  limitations
contained in the Internal Revenue Code.


                                       29
<PAGE>


Net periodic other postretirement benefit cost included the following
components:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
                                                                   Six Months Ended June 30,
(In Millions of Dollars)                                           2005                 2004
---------------------------------------------------------------------------------------------
<S>                                                               <C>                 <C>
Service cost, benefits earned during the period                   $ 12.2              $ 10.1
Interest cost on accumulated
   postretirement benefit obligation                                37.8                37.0
Expected return on plan assets                                     (18.1)              (17.0)
Net amortization and deferral                                       30.0                23.4
---------------------------------------------------------------------------------------------
Other postretirement cost                                         $ 61.9              $ 53.5
---------------------------------------------------------------------------------------------
</TABLE>

During the first six months 2005,  KeySpan has contributed  $98.5 million to its
pension plans and $15.0 million to its other  postretirement  benefit plans.  At
the present time, KeySpan does not anticipate  contributing any additional funds
to its pension plans for the  remainder of 2005.  However,  KeySpan  anticipates
contributing up to an additional $11 million to its other postretirement benefit
plans during the  remainder of 2005.  These  estimated  contribution  levels are
subject to change based on future  market  returns,  interest  rates and certain
other measurements. Actual contributions, therefore, may vary from these levels.

9. LONG-TERM DEBT and COMMERCIAL PAPER

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

At December 31, 2004,  KeySpan had $460 million of MEDS Equity Units outstanding
at 8.75%,  consisting of a three-year  forward purchase  contract for our common
stock and a six-year note. The purchase  contract  required us, three years from
the date of issuance of the MEDs Equity  Units,  May 16, 2005,  to issue and the
investors to purchase, a number of shares of our common stock based on a formula
tied to the market price of our common stock at that time.  The 8.75% coupon was
composed of interest  payments on the six-year note of 4.9% and premium payments
on the three-year equity forward contract of 3.85%.

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


                                       30
<PAGE>


On May 16,  2005  KeySpan  issued 12.1  million  shares of common  stock,  at an
issuance  price of $37.93  per  share,  pursuant  to the terms of the  financial
purchase  contract  described above.  KeySpan received proceeds of approximately
$460  million  from the  equity  conversion.  The  number of shares  issued  was
dependent  on the  average  closing  price of our  common  stock over the 20 day
trading period ending on the third trading day prior to May 16, 2005.

On June 24, 2005, KeySpan closed on a $920 million revolving credit facility for
five years due June 24, 2010,  which was syndicated  among fifteen banks, and an
amended  $580  million  revolving  credit  facility  due  June 24,  2009.  These
facilities replace an existing $660 million,  3-year facility due June 2006, and
a 5-year $640 million facility due June 2009. The two credit  facilities,  which
now total $1.5  billion - $920  million for five years  through  2010,  and $580
million  for the  amended  facility  through  2009,  will  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  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 at the
last day of any fiscal quarter. Violation of these covenants could result in the
termination  of the facilities  and the required  repayment of amounts  borrowed
thereunder,  as well as possible cross defaults under other debt agreements.  At
June 30, 2005, KeySpan's consolidated indebtedness was 48.4% 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.


                                       31
<PAGE>


At June 30, 2005, $284 million of commercial paper was outstanding at a weighted
average  annualized  interest rate of 3.29%. Based on the level of authorization
granted to us by the  Securities  and Exchange  Commission  ("SEC"),  we had the
ability to issue up to an additional $1.0 billion of short-term debt at June 30,
2005 under the commercial paper program.

10. KEYSPAN GAS EAST CORPORATION SUMMARY FINANCIAL INFORMATION

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

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                           Statement of Income
------------------------------------------------------------------------------------------------------------------------------------
                                                                     Three Months Ended June 30, 2005
(In Millions of Dollars)                       Guarantor          KEDLI        Other Subsidiaries     Eliminations    Consolidated
------------------------------------------------------------------------------------------------------------------------------------
                                           -----------------------------------------------------------------------------------------
<S>                                                 <C>           <C>                  <C>                  <C>            <C>
Revenues                                          $  0.1         $ 227.5              $ 1,114.8           $   0.1         $ 1,342.5
                                           -----------------------------------------------------------------------------------------
Operating Expenses
  Purchased gas                                        -           137.6                  364.0                 -             501.6
  Fuel and purchased power                             -               -                  159.2                 -             159.2
  Operations and maintenance                         1.1            31.3                  359.4                 -             391.8
  Intercompany expense                                 -             1.2                   (1.2)                -                 -
  Depreciation and amortization                        -            18.4                   79.1                 -              97.5
  Operating taxes                                      -            15.3                   78.7                 -              94.0
                                           -----------------------------------------------------------------------------------------
Total Operating Expenses                             1.1           203.8                1,039.2                 -           1,244.1
                                           -----------------------------------------------------------------------------------------
 Income from equity investments                        -               -                    4.7                 -               4.7
Gain on Sale of Property                               -               -                    0.1                 -               0.1
                                           -----------------------------------------------------------------------------------------
Operating Income (Loss)                             (1.0)           23.7                   80.4               0.1             103.2
                                           -----------------------------------------------------------------------------------------

Interest charges                                   (37.9)          (17.7)                 (52.7)             35.6             (72.6)
Other income and (deductions)                       52.7             2.9                    7.9             (59.3)              4.1
                                           -----------------------------------------------------------------------------------------
Total Other Income and (Deductions)                 14.8           (14.8)                 (44.8)            (23.7)            (68.5)
                                           -----------------------------------------------------------------------------------------

Income Taxes (Benefit)                              (3.2)            4.1                   14.9                 -              15.8
                                           -----------------------------------------------------------------------------------------
                                                                                                                                  -
Earnings from Continuing Operations                 17.1             4.7                   20.7             (23.6)             18.9
Discontinued Operations                                -               -                   (1.8)                               (1.8)
                                           -----------------------------------------------------------------------------------------
Net Income                                        $ 17.1         $   4.7              $    18.9           $ (23.6)        $    17.1
                                           =========================================================================================
</TABLE>


                                       32
<PAGE>


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                        Statement of Income
------------------------------------------------------------------------------------------------------------------------------------
                                                                       Three Months Ended June 30, 2004
(In Millions of Dollars)                        Guarantor          KEDLI       Other Subsidiaries     Eliminations     Consolidated
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>            <C>                  <C>                <C>             <C>
Revenues                                          $   0.1         $ 181.4              $ 1,096.4         $   (0.1)        $ 1,277.8
                                           -----------------------------------------------------------------------------------------
Operating Expenses
  Purchased gas                                         -            96.9                  266.2                -             363.1
  Fuel and purchased power                              -               -                  130.3                -             130.3
  Operations and maintenance                         (3.4)           33.7                  361.0                -             391.3
  Intercompany expense                                  -             1.5                   (1.5)                                 -
  Depreciation and amortization                         -            18.4                  170.6                -             189.0
  Operating taxes                                       -            12.7                   77.6                -              90.3
                                           -----------------------------------------------------------------------------------------
Total Operating Expenses                             (3.4)          163.2                1,004.2                -           1,164.0
                                           -----------------------------------------------------------------------------------------
Income from equity investments                          -               -                    8.4                -               8.4
                                           -----------------------------------------------------------------------------------------
Operating Income (Loss)                               3.5            18.2                  100.6             (0.1)            122.2
                                           -----------------------------------------------------------------------------------------

Interest charges                                    (53.3)          (14.8)                 (69.5)            49.1             (88.5)
Other income and (deductions)                       176.0             0.1                  177.4           (178.1)            175.4
                                           -----------------------------------------------------------------------------------------
Total Other Income and (Deductions)                 122.7           (14.7)                 107.9           (129.0)             86.9
                                           -----------------------------------------------------------------------------------------

Income Taxes (Benefit)                               (4.6)            2.3                   81.4                -              79.1
                                           -----------------------------------------------------------------------------------------
Earnings from Continuing Operations                 130.8             1.2                  127.1           (129.1)            130.0
Discontinued Operations                                 -               -                    0.8                -               0.8
                                           -----------------------------------------------------------------------------------------
Net Income                                        $ 130.8         $   1.2              $   127.9         $ (129.1)        $   130.8
                                           =========================================================================================
</TABLE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                           Statement of Income
-----------------------------------------------------------------------------------------------------------------------------------
                                                                    Six Months Ended June 30, 2005
(In Millions of Dollars)                     Guarantor           KEDLI      Other Subsidiaries      Eliminations       Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
                                         ------------------------------------------------------------------------------------------
<S>                                              <C>             <C>                  <C>                 <C>             <C>
Revenues                                        $   0.2         $ 731.1              $ 3,091.9          $   (0.2)       $  3,823.0
                                         ------------------------------------------------------------------------------------------
Operating Expenses
  Purchased gas                                       -           451.6                1,358.9                 -           1,810.5
  Fuel and purchased power                            -               -                  292.3                 -             292.3
  Operations and maintenance                        7.3            63.8                  707.9                 -             779.0
  Intercompany expense                                -             2.5                   (2.5)                -                 -
  Depreciation and amortization                       -            44.9                  158.7                 -             203.6
  Operating taxes                                     -            32.5                  173.3                 -             205.8
                                         ------------------------------------------------------------------------------------------
Total Operating Expenses                            7.3           595.3                2,688.6                 -           3,291.2
                                         ------------------------------------------------------------------------------------------
 Income from equity investments                       -               -                   10.0                 -              10.0
Gain on Sale of Property                              -               -                    0.1                 -               0.1
                                         ------------------------------------------------------------------------------------------
Operating Income (Loss)                            (7.1)          135.8                  413.4              (0.2)            541.9
                                         ------------------------------------------------------------------------------------------

Interest charges                                  (67.6)          (32.5)                (103.6)             71.0            (132.7)
Other income and (deductions)                     314.4             3.0                   27.0            (348.0)             (3.6)
                                         ------------------------------------------------------------------------------------------
Total Other Income and (Deductions)               246.8           (29.5)                 (76.6)           (277.0)           (136.3)
                                         ------------------------------------------------------------------------------------------

Income Taxes (Benefit)                            (13.1)           38.2                  125.9                 -             151.0
                                         ------------------------------------------------------------------------------------------
                                                                                                                                 -
Earnings from Continuing Operations               252.8            68.1                  210.9            (277.2)            254.6
Discontinued Operations                               -               -                   (1.8)                               (1.8)
                                         ------------------------------------------------------------------------------------------
Net Income                                      $ 252.8         $  68.1              $   209.1          $ (277.2)       $    252.8
                                         ==========================================================================================
</TABLE>


                                       33
<PAGE>



<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                        Statement of Income
-----------------------------------------------------------------------------------------------------------------------------------
                                                                      Six Months Ended June 30, 2004
(In Millions of Dollars)                       Guarantor           KEDLI      Other Subsidiaries     Eliminations     Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>              <C>                  <C>               <C>              <C>
Revenues                                         $   0.3         $ 652.5              $ 3,135.9         $   (0.3)        $ 3,788.4
                                          -----------------------------------------------------------------------------------------
Operating Expenses
  Purchased gas                                        -           388.0                1,201.7                -           1,589.7
  Fuel and purchased power                             -               -                  231.9                -             231.9
  Operations and maintenance                        (3.1)           66.9                  734.5                -             798.3
  Intercompany expense                                 -             2.8                   (2.8)                                 -
  Depreciation and amortization                        -            48.3                  311.9                -             360.2
  Operating taxes                                      -            32.3                  180.3                -             212.6
                                          -----------------------------------------------------------------------------------------
Total Operating Expenses                            (3.1)          538.3                2,657.5                -           3,192.7
                                          -----------------------------------------------------------------------------------------
Income from equity investments                         -               -                   14.1                -              14.1
                                          -----------------------------------------------------------------------------------------
Operating Income (Loss)                              3.4           114.2                  492.5             (0.3)            609.8
                                          -----------------------------------------------------------------------------------------

Interest charges                                  (106.8)          (30.7)                (141.0)           105.9            (172.6)
Other income and (deductions)                      471.5             0.5                  177.3           (491.6)            157.7
                                          -----------------------------------------------------------------------------------------
Total Other Income and (Deductions)                364.7           (30.2)                  36.3           (385.7)            (14.9)
                                          -----------------------------------------------------------------------------------------

Income Taxes (Benefit)                             (10.4)           25.0                  202.2                -             216.8
                                          -----------------------------------------------------------------------------------------
Earnings from Continuing Operations                378.5            59.0                  326.6           (386.0)            378.1
Discontinued Operations                                -               -                    0.4                -               0.4
                                          -----------------------------------------------------------------------------------------
Net Income                                       $ 378.5         $  59.0              $   327.0         $ (386.0)        $   378.5
                                          =========================================================================================
</TABLE>








                                       34
<PAGE>

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
Balance Sheet
----------------------------------------------------------------------------------------------------------------------------------
                                                                               June 30, 2005
                                                                                    Other
(In Millions of Dollars)                           Guarantor           KEDLI    Subsidiaries     Eliminations       Consolidated
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>             <C>             <C>               <C>                <C>
ASSETS
Current Assets
   Cash & temporary cash investments               $   182.7       $     3.5       $   137.8        $        -         $    324.0
   Accounts receivable, net                              0.7           152.8           948.8                 -            1,102.3
   Other current assets                                  2.6           154.8           615.7                 -              773.1
   Assets of discontinued operations                       -               -             1.0                 -                1.0
                                           ---------------------------------------------------------------------------------------
                                                       186.0           311.1         1,703.3                 -            2,200.4
                                           ---------------------------------------------------------------------------------------

Equity Investments                                   4,529.9             0.8           130.2          (4,419.1)             241.8
                                           ---------------------------------------------------------------------------------------
Property
   Gas                                                     -         2,032.0         4,982.5                 -            7,014.5
   Other                                                   -               -         3,044.5                 -            3,044.5
   Accumulated depreciation and depletion                  -          (396.2)       (2,525.8)                -           (2,922.0)
   Property of discontinued operations                     -               -               -                 -                  -
                                           ---------------------------------------------------------------------------------------
                                                           -         1,635.8         5,501.2                 -            7,137.0
                                           ---------------------------------------------------------------------------------------

Intercompany Accounts Receivable                     2,254.5            26.3        (1,197.4)         (1,083.4)                 -
                                                           -
Deferred Charges                                       474.9           232.7         2,161.2                 -            2,868.8
                                           ---------------------------------------------------------------------------------------
Total Assets                                       $ 7,445.3       $ 2,206.7       $ 8,298.5        $ (5,502.5)        $ 12,448.0
                                           =======================================================================================

LIABILITIES AND CAPITALIZATION
Current Liabilities
   Accounts payable                                $    41.5       $    79.7       $   564.8        $        -         $    686.0
   Commercial paper                                    284.0               -               -                 -              284.0
   Other current liabilities                           186.3           101.4            33.8                 -              321.5
   Liabilities of discontinued operations                  -               -             1.0                 -                1.0
                                           ---------------------------------------------------------------------------------------
                                                       511.8           181.1           599.6                 -            1,292.5
                                           ---------------------------------------------------------------------------------------
Intercompany Accounts Payable                           58.0            43.8          (547.2)            445.4                  -
                                           ---------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Deferred income tax                                     12.4           345.4           768.1                 -            1,125.9
Other deferred credits and liabilities                 515.2           101.8         1,001.0                 -            1,618.0
                                           ---------------------------------------------------------------------------------------
                                                       527.6           447.2         1,769.1                 -            2,743.9
                                           ---------------------------------------------------------------------------------------
Capitalization
Common shareholders' equity                          4,498.4           883.7         3,520.5          (4,419.1)           4,483.5
Long-term debt                                       1,849.5           650.9         2,943.8          (1,528.8)           3,915.4
                                           ---------------------------------------------------------------------------------------
Total Capitalization                                 6,347.9         1,534.6         6,464.3          (5,947.9)           8,398.9
                                           ---------------------------------------------------------------------------------------
Minority Interest in Subsidiary Companies                  -               -            12.7                 -               12.7
                                           ---------------------------------------------------------------------------------------
Total Liabilities & Capitalization                 $ 7,445.3       $ 2,206.7       $ 8,298.5        $ (5,502.5)        $ 12,448.0
                                           =======================================================================================
</TABLE>


                                       35
<PAGE>


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet
------------------------------------------------------------------------------------------------------------------------------------
                                                                               December 31, 2004
                                                                                     Other
(In Millions of Dollars)                           Guarantor        KEDLI         Subsidiaries       Eliminations     Consolidated
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>           <C>                <C>                <C>               <C>
ASSETS
Current Assets
   Cash & temporary cash investments               $   580.7     $    (0.9)         $    342.2         $        -        $    922.0
   Accounts receivable, net                              0.8         223.6             1,087.7                  -           1,312.1
   Other current assets                                  4.5         146.5               650.6                  -             801.6
   Assets of discontinued operations                       -             -                42.9                  -              42.9
                                            ----------------------------------------------------------------------------------------
                                                       586.0         369.2             2,123.4                  -           3,078.6
                                            ----------------------------------------------------------------------------------------

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

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

Deferred Charges                                       381.3         221.4             2,342.0                  -           2,944.7

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

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





                                       36
<PAGE>


<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
Statement of Cash Flows
----------------------------------------------------------------------------------------------------------------------------------
                                                                              Six Months Ended June 30, 2005
                                                            ----------------------------------------------------------------------
(In Millions of Dollars)                                         Guarantor        KEDLI       Other Subsidiaries     Consolidated
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>            <C>                   <C>              <C>
Operating Activities
Net Cash Provided by (Used in )Operating Activities                $ (94.6)      $ 144.2               $  415.6          $  465.1
                                                            ----------------------------------------------------------------------
Investing Activities
   Capital expenditures                                                  -         (43.2)                (187.8)           (231.0)
   Cost of removal                                                                  (2.5)                  (7.8)            (10.3)
   Proceeds from sale of investment                                      -             -                   48.1              48.1
                                                            ----------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities                      -         (45.7)                (147.6)           (193.2)
                                                            ----------------------------------------------------------------------
Financing Activities
   Treasury stock issued                                              36.2             -                      -              36.2
   Payment of debt, net                                           (1,128.2)            -                  (14.7)         (1,142.9)
   Redemption of preferred stock                                     (75.0)            -                      -             (75.0)
   Common and preferred stock dividends paid                        (149.8)            -                      -            (149.8)
   MEDs equity conversion                                            460.0             -                      -             460.0
   Other                                                              (2.4)            -                   18.4              16.0
   Intercompany dividend payments                                    266.5                               (266.5)                -
   Net intercompany accounts                                         289.2         (94.0)                (195.2)                -
                                                                                                                                -
                                                            ----------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities                 (303.4)        (94.0)                (458.0)           (855.5)
                                                            ----------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents              $ (398.0)      $   4.4               $ (190.0)         $ (583.6)
Net Cash Flow from Discontinued Operations                               -             -                  (14.4)            (14.4)
Cash and Cash Equivalents at Beginning of Period                     580.7          (0.9)                 342.2             922.0
                                                            ----------------------------------------------------------------------
Cash and Cash Equivalents at End of Period                        $  182.7       $   3.5               $ 137.8           $ 324.0
                                                            ======================================================================
</TABLE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Statement of Cash Flows
-----------------------------------------------------------------------------------------------------------------------------------
                                                                              Six Months Ended June 30, 2004
                                                           ------------------------------------------------------------------------
(In Millions of Dollars)                                        Guarantor         KEDLI        Other Subsidiaries     Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>            <C>                   <C>              <C>
Operating Activities
Net Cash Provided by (Used in) Operating Activities                $   4.4         $ 152.7                $ 631.1          $ 788.2
                                                           ------------------------------------------------------------------------
Investing Activities
  Capital expenditures                                                   -           (51.2)                (360.6)          (411.8)
  Cost of removal                                                        -            (0.7)                 (13.9)           (14.6)
  Proceeds from sale of property                                         -               -                  525.2            525.2
                                                           ------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities                      -           (51.9)                 150.7             98.8
                                                           ------------------------------------------------------------------------
Financing Activities
   Treasury stock issued                                              14.6               -                      -             14.6
   Payment of debt, net                                             (441.9)              -                 (104.7)          (546.6)
   Common and preferred stock dividends paid                        (145.5)              -                      -           (145.5)
   Proceeds from sale/leaseback transaction                              -               -                  383.7            383.7
   Other                                                              10.4               -                   12.1             22.5
   Net intercompany accounts                                         986.7          (103.6)                (883.1)               -
                                                                                                                                 -
                                                           ------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities                  424.3          (103.6)                (592.0)          (271.3)
                                                           ------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents                 428.7            (2.8)                 189.8            615.7
Net Cash Flow from Discontinued Operations                               -               -                   (1.0)            (1.0)
Cash and Cash Equivalents at Beginning of Period                      97.6             1.6                  104.2            203.4
                                                           ------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period                         $ 526.3         $  (1.2)               $ 293.0          $ 818.1
                                                           ========================================================================
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       37
<PAGE>


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

Executive Summary of Results
----------------------------

The following is a summary of transactions affecting comparative earnings for
the three and six months ended June 30, 2005, compared to the three and six
months ended June 30, 2004. Capitalized terms used in the following discussion,
but not otherwise defined, have the same meaning as when used in the Notes to
the Consolidated Financial Statements included under Item 1. References to
"KeySpan," "we," "us," and "our" mean KeySpan Corporation, together with its
consolidated subsidiaries.

The table below summarizes the KeySpan's earnings for the periods indicated.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                 Three Months Ended        Three Months Ended        Six Months Ended          Six Months Ended
(In Millions of Dollars,            June 30, 2005             June 30, 2004            June 30, 2005             June 30, 2004
   Except Per Share Amounts)    Earnings        E.P.S.    Earnings        E.P.S.   Earnings        E.P.S.     Earnings      E.P.S.
------------------------------------------------------------------------------------------------------------------------------------
<S>                              <C>            <C>        <C>           <C>        <C>            <C>         <C>           <C>
Earnings from core operations,
   less preferred stock
    dividends                   $ 18.0         $ 0.11     $  20.8        $ 0.13    $ 252.4         $ 1.52     $ 243.6        $ 1.52
Ceiling test write-down              -              -       (31.1)        (0.19)         -              -       (31.1)        (0.19)
Non-core earnings -
    Operations                       -              -        22.7          0.14          -              -        46.5          0.30
    Subsidiary stock
     transactions                    -              -       116.1          0.72          -              -       116.1          0.72
Discontinued operations           (1.8)         (0.01)        0.8          0.01       (1.8)         (0.01)        0.4             -

------------------------------------------------------------------------------------------------------------------------------------
Earnings for common stock       $ 16.2         $ 0.10     $ 129.3        $ 0.81    $ 250.6         $ 1.51     $ 375.5        $ 2.35
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


KeySpan's  earnings  for common  stock for the three  months ended June 30, 2005
were $16.2 million, or $0.10 per share,  compared to $129.3 million or $0.81 per
share realized during the corresponding  quarter last year.  KeySpan's  earnings
for common stock for the six months ended June 30, 2005 were $250.6 million,  or
$1.51 per share,  compared to $375.5 million or $2.35 per share realized  during
the same  period last year.  The  variation  in  earnings  for the three and six
months  ended  June 30,  2005  compared  to the  corresponding  periods of 2004,
primarily  reflects the absence of earnings in 2005 from  non-core  subsidiaries
that were sold in 2004 and gains on subsidiary stock transactions.

For the first three months of 2004, KeySpan's non-core subsidiaries included its
55% equity  ownership  interest in The  Houston  Exploration  Company  ("Houston
Exploration"), an independent natural gas and oil exploration company located in
Houston,   Texas.  Further,  during  this  time  frame,  KeySpan  also  held  an
approximate  61% investment in certain  midstream  natural gas assets in Western
Canada through KeySpan Energy Canada Partnership ("KeySpan Canada").

On June 2,  2004,  KeySpan  exchanged  10.8  million  shares of common  stock of
Houston Exploration for 100% of the stock of Seneca-Upshur,  previously a wholly
owned subsidiary of Houston  Exploration.  This transaction reduced our interest
in Houston Exploration from 55% to the then current level of 23.5%. The net gain
on the share  exchange less  deferred tax  provisions  was $106 million  ($150.1
million pre-tax), or $0.66 per share.


                                       38
<PAGE>


On April 1, 2004, KeySpan and KeySpan Facilities Income Fund (the "Fund"), which
previously owned a 39.09% interest in KeySpan Canada,  consummated a transaction
whereby  the  Fund  sold  15.617  million  units of the  Fund  and  acquired  an
additional  35.91% interest in KeySpan Canada from KeySpan.  As a result of this
transaction,  KeySpan's  ownership of KeySpan Canada  decreased to 25%.  KeySpan
recorded a gain of $22.8 million ($10.1 million  after-tax,  or $0.06 per share)
on the transaction.

The  operations  of both  Houston  Exploration  and  KeySpan  Canada  were fully
consolidated in KeySpan's  Consolidated  Financial  Statements  during the first
three months 2004,  and were  accounted  for on the equity  method of accounting
after the respective stock transactions  reduced our ownership interest in these
companies to below 50%. During the three and six months ended June 30, 2004, the
combined earnings of Houston Exploration and KeySpan Canada, including the gains
from the stock transactions,  were $138.8 million or $0.86 per share, and $162.6
million, or $1.02 per share, respectively.  KeySpan sold its remaining ownership
interest in these non-core operations in the fourth quarter of 2004.

Also,  in June 2004,  KeySpan's  wholly  owned gas  exploration  and  production
subsidiaries  that have  remained  with  KeySpan  after the Houston  Exploration
transaction,  recorded  a non-cash  impairment  charge of $48.2  million  ($31.1
million  after-tax,  or $0.19 per share) to recognize  the reduced  valuation of
proved reserves.

Additionally,  for all periods, we have reclassified the operations of KeySpan's
former mechanical contracting  subsidiaries as discontinued  operations as these
companies  were  discontinued  in the  fourth  quarter of 2004 and sold in early
2005. In the fourth  quarter of 2004,  KeySpan's  investment  in its  mechanical
contracting  subsidiaries was  written-down to fair value.  During the first six
months  of 2005,  operating  losses  amounting  to $4.1  million  after tax were
incurred  through  the  dates of sale of  these  companies,  including,  but not
limited to, costs incurred for employee related benefits.  Partially  offsetting
these  losses  was  a  gain  of  $2.3  million   associated   with  the  related
divestitures, reflecting the difference between the fair value estimates and the
financial impact of the actual sale  transactions.  The net income impact of the
operating losses and the disposal gain was a loss of $1.8 million,  or $0.01 per
share for the three and six months ended June 30, 2005.

As indicated in the above table,  KeySpan's earnings from core operations,  less
preferred  stock  dividends,  decreased  $2.8  million or $0.02 per share in the
second  quarter  of  2005,  primarily  reflecting  lower  earnings  from our gas
distribution and electric services operations, offset by lower interest charges.
Gas distribution  results were impacted by higher operating expenses,  primarily
due to an increase in the  provision for  uncollectible  accounts as a result of
increasing gas costs and the impact from recent collection experience.  Electric
service operations were impacted by higher costs for plant overhauls, as well as
lower net electric revenues from KeySpan's  electric marketing  activities.  The
decrease in interest  expense  resulted from the benefits  attributable to lower


                                       39
<PAGE>


outstanding  debt resulting from debt  redemptions in 2004 and the first quarter
of 2005, as well as from the sale of Houston Exploration and KeySpan Canada.

For the six months ended June 30, 2005, KeySpan's earnings from core operations,
less preferred  stock  dividends,  increased  $8.8 million  compared to the same
period of 2004,  primarily  reflecting higher earnings from our gas distribution
operations,  as well as lower interest charges.  Gas distribution  earnings were
favorably  impacted by customer  additions and  oil-to-gas  conversions,  net of
attrition and conservation,  as well as from higher revenues associated with the
large volume  heating  market.  However,  earnings per share  remained the same,
reflecting a higher level of outstanding  common stock.  On May 16, 2005 KeySpan
issued  12.1  million  shares of common  stock upon the  conversion  of the MEDs
Equity  Units.  The  dilutive  effect of this on earnings  per share for the six
months  ended  June  30,  2005,  was  approximately  $0.05.  (See  Note 6 to the
Consolidated  Financial  Statements  "Long-term  Debt and Commercial  Paper" for
additional details on the MEDs Equity Units.)

See the  discussion  under  the  caption  "Review  of  Operating  Segments"  for
additional details on KeySpan's operating results.








                                       40
<PAGE>


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

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

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
(In Millions of Dollars, Except per Share)
---------------------------------------------------------------------------------------------------------------------------
                                                    Three Months Ended June 30,                  Six Months Ended June 30,
                                                      2005                2004                   2005                2004
---------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>                <C>                    <C>                 <C>
Gas Distribution                                     $ 30.4             $  35.1                $ 422.3             $ 414.7
Electric Services                                      65.7                67.9                  116.7               115.1
Energy Services                                        (2.8)               (6.0)                  (5.6)              (23.5)
Energy Investments -                                                          -
   Operations                                           5.5                65.0                   11.9               140.1
   Ceiling test write-down                                -               (48.2)                     -               (48.2)
Eliminations and other                                  4.4                 8.4                   (3.4)               11.6
---------------------------------------------------------------------------------------------------------------------------
Operating Income                                      103.2               122.2                  541.9               609.8
---------------------------------------------------------------------------------------------------------------------------
Other Income and (Deductions)
   Interest charges                                   (72.6)              (88.5)                (132.7)             (172.6)
   Gain on sale of investments                            -               172.9                    4.1               172.9
   Cost of debt redemption                                -                   -                  (20.9)                  -
   Other income and (deductions)                        4.1                 2.5                   13.2               (15.2)
---------------------------------------------------------------------------------------------------------------------------
                                                      (68.5)               86.9                 (136.3)              (14.9)
---------------------------------------------------------------------------------------------------------------------------
Income taxes                                           15.8                79.1                  151.0               216.8
---------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations                    18.9               130.0                  254.6               378.1
Discontinued operations                                (1.8)                0.8                   (1.8)                0.4
---------------------------------------------------------------------------------------------------------------------------
Net Income                                             17.1               130.8                  252.8               378.5
Preferred stock dividend requirements                   0.9                 1.5                    2.2                 3.0
---------------------------------------------------------------------------------------------------------------------------
Earnings for Common Stock                            $ 16.2             $ 129.3                $ 250.6             $ 375.5
---------------------------------------------------------------------------------------------------------------------------
Basic Earnings per Share
   Continuing operations, less preferred
      stock dividends                                $ 0.11             $  0.80                $  1.52             $  2.35
   Discontinued operations                            (0.01)               0.01                  (0.01)                  -
---------------------------------------------------------------------------------------------------------------------------
                                                     $ 0.10             $  0.81                $  1.51             $  2.35
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

As indicated in the above table,  operating income  decreased $19.0 million,  or
16%,  and $67.9  million,  or 11%, for the quarter and six months ended June 30,
2005,  respectively,  compared  to the  corresponding  periods  last  year.  The
decrease  in  operating  income  primarily   reflects  lower  operating  results
associated  with the  Energy  Investments  segment  of $11.3  million  and $80.0
million for the quarter and six months  ended June 30,  2005,  respectively.  As
noted earlier,  during 2004, KeySpan held equity ownership  interests in Houston
Exploration  and  KeySpan  Canada.  For the three and six months  ended June 30,
2004, the combined  operating  income of Houston  Exploration and KeySpan Canada
was $60.9 million and $131.9 million,  respectively.  KeySpan sold its ownership
interest in these non-core operations in the fourth quarter of 2004.  Offsetting
these  results,  to some  extent  was the  non-cash  impairment  charge of $48.2
million  recorded in June 2004 to recognize the reduced  valuation of proved oil
and gas reserves as previously noted.


                                       41
<PAGE>


KeySpan's core businesses  posted a decrease in operating income of $6.3 million
for the second  quarter of 2005  compared to the same quarter of 2004  primarily
due to lower earnings from the Gas Distribution and Electric Services  segments.
Gas distribution  results were impacted by higher operating expenses,  primarily
due to an increase in the provision for  uncollectible  accounts  resulting from
higher  gas  costs and the  impact  from  recent  collection  experience,  while
Electric Service's operations realized higher costs for plant overhauls, as well
as  lower  net  electric  revenues  from  KeySpan's  retail  electric  marketing
activities.

For the six months  ended June 30, 2005,  KeySpan's  core  businesses  posted an
increase in operating income of $15.8 million compared to same period last year,
primarily  due to higher  earnings from the Gas  Distribution  segment and lower
operating losses in the Energy Services  segment.  The Gas Distribution  results
reflect  an  increase  in net gas  revenues  (revenues  less the cost of gas and
associated  revenue  taxes) while the operating  results of the Energy  Services
segment benefited from lower operating  expenses.  (See the discussion under the
caption "Review of Operating Segments" for further details on each segment.)

Interest expense  decreased $15.9 million,  or 18% and $39.9 million or, 23% for
the  three  and six  months  ended  June  2005,  respectively,  compared  to the
corresponding  periods last year,  reflecting the benefits attributable to lower
outstanding debt resulting from recent debt redemptions,  as well as the sale of
Houston Exploration and KeySpan Canada. In addition to debt redemptions in 2004,
on January 14, 2005 KeySpan  redeemed  $500 million 6.15% Series notes due 2006.
KeySpan  incurred  $20.9 million in call premiums and wrote-off  $1.3 million of
previously   deferred  financing  costs.   Further,   KeySpan   accelerated  the
amortization of approximately $11.2 million of previously  unamortized  benefits
associated  with  an  interest  rate  swap  on  these  bonds.   The  accelerated
amortization of the interest rate swap and the write-off of previously  deferred
financing costs were recorded to interest expense. At June 30, 2005, KeySpan had
$3.9 billion of long-term debt outstanding  compared to $5.2 billion outstanding
at June 30, 2004.

In  addition  to the debt  redemption  charge  noted  above,  other  income  and
(deductions)  for the first six  months of 2005 also  includes a number of other
items.  In the first  quarter of 2005,  KeySpan sold its 50% interest in Premier
Transmission Limited ("PTL"), a gas pipeline from southwest Scotland to Northern
Ireland and realized cash proceeds of approximately $48.1 million. In the fourth
quarter of 2004, KeySpan recorded a pre-tax non-cash  impairment charge of $26.5
million reflecting the difference between the anticipated cash proceeds from the
sale of PTL compared to its carrying value.  The final sale of PTL resulted in a
pre-tax gain of $4.1 million  reflecting the difference  from earlier  estimates
and  what  was  recorded  in the  first  quarter  of  2005.  (See  Note 2 to the
Consolidated  Financial  Statements "Business Segments" for additional details.)
Further,  other income and  (deductions) for the six months ended June 30, 2005,
reflects  a $3.6  million  non-cash  gain  associated  with  the  fair  value of
outstanding  derivative  financial  instruments  that do not  qualify  for hedge
accounting  treatment,  as well as carrying charges on deferred regulatory items
and  interest  income.  (See Note 4 to the  Consolidated  Financial  Statements,
"Hedging and Derivative  Financial  Instruments"  for additional  details on the
non-cash gain associated with the derivative financial instruments.)


                                       42
<PAGE>


In  addition to the gain from asset sales of $172.9  million  previously  noted,
other income and  (deductions)  for the three and six months ended June 30, 2004
reflects  a $12.6  million  gain  recorded  on the  settlement  of a  derivative
financial   instrument  entered  into  in  connection  with  the  sale/leaseback
transaction  associated  with  the  Ravenswood  Expansion,  as well as  carrying
charges on deferred  regulatory  items and  interest  income.  Other  income and
(deductions) also includes the effects of minority interest of $16.7 million and
$37.0  million for the three and six months  ended June 30,  2004  respectively,
related to our previous majority ownership  interests in Houston Exploration and
KeySpan Canada.)

Income tax expense for all periods of 2005 and 2004 generally reflects the level
of pre-tax  income.  Further,  income tax  expense  for the three and six months
ended June 30, 2004,  reflects the beneficial  tax treatment  afforded the stock
transaction with Houston  Exploration,  as well as a $6.0 million benefit from a
revised appraisal associated with property that was disposed of in 2003.

Earnings for common  stock for the three  months ended June 30, 2005,  decreased
$113.1  million,  or $0.71 per share  compared  to the same  period  last  year,
reflecting the items  previously  noted - specifically  the comparative  adverse
impact on earnings from the sale of Houston  Exploration  and KeySpan  Canada in
2004, as well as lower earnings from our gas distribution and electric  services
operations, offset by lower interest charges.

Earnings  for common  stock for the six months  ended June 30,  2005,  decreased
$124.9 million, or $0.84 per share, compared to the corresponding period in 2004
reflecting the impact from the sale of Houston Exploration and KeySpan Canada in
2004,  partially offset by higher earnings from our gas distribution  operations
and lower interest charges.

Consistent with our prior earnings guidance, KeySpan's consolidated earnings for
2005 are  forecasted  to be in the range of $2.30 to $2.40 per share,  excluding
special  items.  Since we sold the majority of our non-core  assets in 2004, the
earnings  forecast  represents  earnings  from all  continuing  operations  less
preferred stock dividends.  Further, the earnings forecast included the dilutive
impact from the conversion of the MEDs Equity Units.

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

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

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


                                       43
<PAGE>


Gas Distribution

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

The table below  highlights  certain  significant  financial  data and operating
statistics for the Gas Distribution segment for the periods indicated.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
                                                             Three Months Ended June 30,          Six Months Ended June30,
(In Millions of Dollars)                                         2005             2004              2005            2004
--------------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>              <C>             <C>             <C>
Revenues                                                       $ 821.1          $ 676.4         $ 2,846.5       $ 2,604.2
Cost of gas                                                      501.6            363.1           1,815.1         1,589.7
Revenue taxes                                                     10.5             10.4              35.2            45.0
--------------------------------------------------------------------------------------------------------------------------
Net Revenues                                                     309.0            302.9             996.2           969.5
--------------------------------------------------------------------------------------------------------------------------
Operating Expenses
   Operations and maintenance                                    175.2            168.1             356.9           340.5
   Depreciation and amortization                                  67.1             66.8             143.9           143.7
   Operating taxes                                                36.3             32.9              73.1            70.6
--------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses                                         278.6            267.8             573.9           554.8
--------------------------------------------------------------------------------------------------------------------------
Operating Income                                               $  30.4          $  35.1         $   422.3       $   414.7
--------------------------------------------------------------------------------------------------------------------------
Firm gas sales and transportation (MDTH)                        49,614           48,469           202,170         203,068
Transportation - Electric Generation (MDTH)                      8,592            8,634            11,432          12,773
Other Sales (MDTH)                                              37,913           27,712            94,454          80,456
Warmer (Colder) than Normal - New York                           (1.8%)           14.0%             (2.5%)          (3.0%)
Warmer (Colder) than Normal - New England                       (28.5%)           (8.0%)           (11.5%)          (9.0%)
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

Executive Summary

Operating  income decreased $4.7 million for the second quarter of 2005 compared
to the same  quarter  last  year,  primarily  due to higher  operating  expenses
reflecting an increase in the provision for  uncollectible  accounts as a result
of  increasing  gas costs and the  impact  from  recent  collection  experience.
Operating  income  increased $7.6 million for the six months ended June 30, 2005
compared to the same period last year,  primarily  due to an increase in net gas
revenues  (revenues less the cost of gas and associated  revenue taxes) of $26.7
million resulting from customer additions and oil-to-gas conversions in our firm
gas sales  market,  as well as from higher net gas revenues in our  large-volume


                                       44
<PAGE>


heating markets.  Partially  offsetting the increase in net revenues were higher
operating  expenses  of $19.1  million,  primarily  due to an  increase of $11.9
million in the provision for  uncollectible  accounts,  as well as higher repair
and maintenance costs.

Net Revenues

Net gas  revenues  from  our gas  distribution  operations  increased  by  $26.7
million, or 3%, in the first six months of 2005 compared to the same period last
year.  Net  gas  revenues  benefited  from  customer  additions  and  oil-to-gas
conversions in our firm gas sales market (residential, commercial and industrial
customers),  as well as from higher net gas revenues in our large-volume heating
and  interruptible  (non-firm)  markets.  As  measured in heating  degree  days,
weather for the first six months of 2005 in our New York and New England service
territories was approximately  2.5% and 11.5% colder than normal,  respectively.
Compared to last year,  weather was approximately  1.6% warmer than last year in
KeySpan's  New  York  service  territory,  but 2.3%  colder  than  last  year in
KeySpan's New England service territory.

Net revenues from firm gas customers  increased  $13.2 million for the first six
months of 2005  compared to the same period last year.  Customer  additions  and
oil-to-gas conversions,  net of attrition and conservation,  added $13.5 million
to net gas revenues.  Further, we realized a benefit of $2.9 million as a result
of the Boston Gas  Company's  Performance  Based Rate Plan (the "Plan") that was
approved  by the  Massachusetts  Department  of  Telecommunications  and  Energy
("MADTE")  in 2003.  The Plan  provides  for firm gas sales rates to be adjusted
each year based on an inflation factor offset by a productivity factor. (See the
caption under  "Regulation and Rate Matters" for further  information  regarding
the rate filing.)

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

The  variation in weather from  year-to-year,  resulted in an adverse  impact to
comparative net gas revenues of $3.4 million. KEDNY and KEDLI each operate under
a  utility  tariff  that  contains  a  weather  normalization   adjustment  that
significantly  offsets  variations in firm net revenues due to  fluctuations  in
normal  weather.  However,  the gas  distribution  operations of our New England
based subsidiaries do not have a weather normalization  adjustment.  To mitigate
the effect of  fluctuations  in normal  weather  patterns on KEDNE's  results of
operations and cash flows,  weather  derivatives were in place for the 2004/2005
winter  heating  season.  These  financial  derivatives  afforded  KeySpan  some
protection against warmer than normal weather.  Unlike in prior years,  however,
KeySpan had no financial  obligation to its counterparties if weather was colder
than normal during the 2004/2005  winter heating  season.  Since weather in 2005
was colder  than  normal in the New  England  service  territories  there was no
earnings  impact  associated  with these  derivative  instruments.  However,  we
recorded a $4.1  million  reduction  to  revenues in 2004 to reflect the loss on
derivative positions that were settled. Therefore,  comparative net revenues for
the first six months of 2005 reflect a favorable  $4.1 million  variation.  (See
Note  4  to  the  Consolidated  Financial  Statements  "Hedging  and  Derivative
Financial Instruments" for further information).


                                       45
<PAGE>


Also  included in net revenues is the recovery of certain  regulatory  items and
certain taxes that combined  added $1.8 million to net  revenues.  However,  the
recovery of these items  through  revenues  does not impact net income  since we
expense  a  similar  amount  as  amortization   charges  and  income  taxes,  as
appropriate on the Consolidated Statement of Income. Firm gas distribution rates
for KEDNY, KEDLI and KEDNE in 2005, other than for the recovery of gas costs and
as noted, have remained substantially unchanged from rates charged in 2004.

In our large-volume heating and 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  $13.5  million  during  the first six  months of 2005
compared to the same  period last year,  reflecting  primarily  higher  pricing.
Further, since weather during January 2004 was significantly colder than normal,
KeySpan discontinued sales service to a segment of its dual-fuel customers for a
number of days  during the  month,  as  permitted  under its  tariff,  to ensure
reliable service to firm customers. The majority of interruptible profits earned
by KEDNE and KEDLI are returned to firm customers as an offset to gas costs.

Firm Sales, Transportation and Other Quantities

Firm gas sales and  transportation  quantities for the six months ended June 30,
2005  decreased  slightly  from the same period of 2004.  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
transportation services are not material.

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


                                       46
<PAGE>


Purchased Gas for Resale

The increase in gas costs for the six months ended June 30, 2005 compared to the
same period of 2004, of $225.4  million,  or 14%,  reflects an increase of 5% in
the price per dekatherm of gas purchased for firm gas sales  customers,  as well
as an increase in the quantity of gas  purchased  for  large-volume  heating and
interruptible  (non-firm)  customers.  The current gas rate structure of each of
our gas distribution  utilities  includes a gas adjustment  clause,  pursuant to
which  variations  between  actual gas costs  incurred  for resale to firm sales
customers and gas costs billed to firm sales customers are deferred and refunded
to or collected from customers in a subsequent period.

Operating Expenses

Operating  expenses  during the  second  quarter  of 2005  compared  to the same
quarter last year increased  $10.8 million,  or 4%.  Operations and  maintenance
expense increased $7.1 million, or 4%, in 2005 compared to 2004 primarily due to
an increase of $6.7 million in the  provision  for  uncollectible  accounts as a
result of increasing gas costs and the impact from recent collection experience.
The comparative  increase in operating taxes was due to a $2.5 million  property
tax refund received in 2004.

For the six months  ended June 30,  2005,  operating  expenses  increased  $19.1
million, or 3% compared to the same period last year. Operations and maintenance
expense  increased $16.4 million,  or 5%, in 2005 compared to 2004 primarily due
to an increase of $11.9 million in the provision for uncollectible accounts as a
result of increasing gas costs and the impact from recent collection experience.
Further, the gas distribution  operations realized higher repair and maintenance
costs in 2005  compared to 2004.  Higher  depreciation  charges of $4.2  million
reflecting the continued expansion of the gas distribution system were offset by
lower regulatory amortization charges of $4.0 million. Operating taxes increased
on a  comparative  basis due to a $2.5 million  property tax refund  received in
2004.

Other Matters

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


                                       47
<PAGE>


In order to serve the  anticipated  market  requirements in our New York service
territories,  KeySpan and Duke Energy  Corporation formed Islander East Pipeline
Company,  LLC  ("Islander  East") in 2000.  Once in  service,  the  pipeline  is
expected  to  transport  up to 260,000 DTH daily to the Long Island and New York
City energy markets,  enough natural gas to heat 600,000 homes. In addition,  in
2004 KeySpan  acquired a 21%  interest in the  Millennium  Pipeline  development
project which is anticipated to transport up to 500,000 DTH of natural gas a day
to the Algonquin pipeline. Once constructed, KeySpan anticipates contracting for
150,000 DTH per day of  transportation  capacity  from the  Millennium  Pipeline
system.  These  pipeline  projects  will also  allow  KeySpan to  diversify  the
geographic  sources of its gas  supply.  See the  discussion  under the  caption
"Energy  Investments"  for  additional   information  regarding  these  pipeline
projects.

Electric Services

The Electric  Services segment  primarily  consists of subsidiaries that own and
operate oil and gas fired  electric  generating  plants in the Borough of Queens
(including the "Ravenswood  Generating  Station") and the counties of Nassau and
Suffolk on Long Island.  In  addition,  through  long-term  contracts of varying
lengths,  we manage the electric  transmission and distribution  ("T&D") system,
the fuel and electric purchases, and the off-system electric sales for LIPA. The
Electric  Services  segment also provides  retail  marketing of  electricity  to
commercial customers.

Selected financial data for the Electric Services segment is set forth in the
table below for the periods indicated.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
                                           Three Months Ended June 30,           Six Months Ended June 30,
(In Millions of Dollars)                       2005             2004               2005              2004
------------------------------------------------------------------------------------------------------------
<S>                                       <C>              <C>                 <C>               <C>
Revenues                                 $     468.5      $     433.8         $     873.6       $     792.9
Purchased fuel                                 159.0            130.2               291.9             231.7
------------------------------------------------------------------------------------------------------------
Net Revenues                                   309.5            303.6               581.7             561.2
------------------------------------------------------------------------------------------------------------
Operating Expenses
   Operations and maintenance                  176.6            172.1               330.2             319.2
   Depreciation                                 23.1             22.4                46.0              44.0
   Operating taxes                              44.1             41.2                88.8              82.9
------------------------------------------------------------------------------------------------------------
Total Operating Expenses                       243.8            235.7               465.0             446.1
------------------------------------------------------------------------------------------------------------
Operating Income                         $      65.7      $      67.9         $     116.7       $     115.1
------------------------------------------------------------------------------------------------------------
Electric sales (MWH)*                      1,445,109        1,647,531           2,446,517         2,630,637
Capacity(MW)*                                  2,450            2,450               2,450             2,450
Cooling degree days                              313              300                 313               300
------------------------------------------------------------------------------------------------------------
</TABLE>
*Reflects the operations of the Ravenswood Generating Station only.


                                       48
<PAGE>


Executive Summary

Operating  income  decreased  $2.2  million for the three  months ended June 30,
2005,  compared to the same quarter last year, due, in part, to higher operation
and  maintenance  expenses  of $4.5  million  primarily  reflecting  lease costs
associated  with  Ravenswood  Expansion,  as  well  as  to  lower  net  revenues
associated with KeySpan's retail electric marketing  activities of $3.7 million,
substantially  offset by higher  net  revenues  associated  with the  Ravenswood
Generating Station.

For the six months ended June 30, 2005,  operating income increased $1.6 million
compared  to the same  period  last year,  due  primarily  to an increase in net
revenues from the Ravenswood  Generating Station of $17.2 million as a result of
improved  pricing,  partially  offset by an  increase in  operating  lease costs
associated  with  Ravenswood  Expansion of $7.5 million,  higher  overhaul costs
associated  with our electric  generating  units,  as well as lower net revenues
associated with KeySpan's retail electric marketing activities of $6.4 million

Net Revenues

Total electric net revenues realized during the second quarter of 2005 were $5.9
million,  or 2% higher  than such  revenues  realized  during the  corresponding
quarter last year.  For the six months ended June 30, 2005,  total  electric net
revenues were $20.5 million, or 4% higher than such revenues realized during the
same period of 2004.

Net revenues from the Ravenswood  Generating Station increased $8.5 million,  or
9% for the three months  ended June 30,  2005,  compared to the same period last
year reflecting  increased capacity revenues of $4.7 million,  as well as higher
energy  margins of $3.8  million.  The increase in capacity  revenues  primarily
reflects the  operation of the  Ravenswood  Expansion,  a 250 MW combined  cycle
generating facility that began full commercial operations in May 2004.

For the six  months  ended  June 30,  2005,  net  revenues  from the  Ravenswood
Generating Station increased $17.2 million,  or 11%, compared to the same period
last year reflecting  increased  capacity revenues of $10.3 million,  as well as
higher energy margins of $6.9 million.  Again, the increase in capacity revenues
primarily reflects the operation of the Ravenswood Expansion.

The  increase  in energy  margins  for the second  quarter of 2005,  reflects an
increase of 24% in realized  "spark-spreads"  (the selling price of  electricity
less  the  cost of  fuel,  plus  hedging  gains  or  losses).  The  increase  in
spark-spreads was partially offset by a decrease of 12% in the level of megawatt
hours  ("MWh")  sold into the New York  Independent  System  Operator  ("NYISO")
energy  market.  Weather for the second  quarter of 2005, as measured in cooling
degree days,  was 4% warmer than last year.  However,  for the month of May 2005
weather was 85% cooler than May 2004. The significantly  cooler May 2005 weather
had an adverse impact on electric sales  quantities  that were not offset by the
return to normal weather patterns in June.


                                       49
<PAGE>


The increase in energy margins for the six months ended June 30, 2005, reflects
an increase of 20% in realized spark-spreads. The increase in spark-spreads was
partially offset by a decrease of 7% in the level of megawatt hours ("MWh") sold
into the NYISO energy market. As noted, the cool May 2005 weather had an adverse
impact on electric sales quantities.

We  employ  derivative  financial  hedging  instruments  to hedge  the cash flow
variability  for a portion of  forecasted  purchases of natural gas and fuel oil
consumed at the Ravenswood  Generating Station.  Further, we have engaged in the
use  of  derivative  financial  hedging  instruments  to  hedge  the  cash  flow
variability  associated with a portion of forecasted  electric energy sales from
the Ravenswood  Generating  Station.  These derivative  instruments  resulted in
hedging  gains,  which are  reflected in net electric  margins,  of $0.6 million
during the second  quarter of 2005 compared to hedging gains of $1.5 million for
the second quarter of 2004.  For the six months ended June 30, 2005,  derivative
instruments resulted in hedging gains of $3.6 million compared to hedging losses
of $2.9 million for the  corresponding  period of 2004. The results derived from
KeySpan's  hedging  strategy  are  reflected  in  the  calculation  of  realized
spark-spreads. (See Note 4 to the Consolidated Financial Statements "Hedging and
Derivative  Financial  Instruments" for further information on KeySpan's hedging
strategy.)

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

Net revenues  for the second  quarter of 2005 from the service  agreements  with
LIPA,  including  the power  purchase  agreements  associated  with two electric
peaking  facilities,  increased  $1.1 million  compared to the second quarter of
2004  primarily  reflecting  the recovery of  depreciation  charges and property
taxes.  The  recovery of these costs does not impact  operating  income since we
incur approximately the same level in operating expenses.

For the six months ended June 30, 2005, net revenues from the service agreements
with LIPA, including the power purchase agreements  associated with two electric
peaking facilities,  increased $9.7 million compared to the corresponding period
of 2004.  The  increase is due, for the most part,  to recovery of  depreciation
charges and property taxes of approximately $8 million.  The remaining  increase
reflects the timing of certain incentives earned on these agreements.

(For a description of the LIPA  Agreements and power  purchase  agreements,  see
KeySpan's  2004 Annual Report on Form 10-K for the Year Ended  December 31, 2004
Item 7. Management's  Discussion and Analysis of Financial Condition and Results
of Operations under the caption "Electric Services - Revenue Mechanisms.")

Net revenues  associated  with KeySpan's  retail electric  marketing  activities
decreased  $3.7 million and $6.4 million for the three and six months ended June
30,  2005,  respectively,  compared  to the same  periods in 2004.


                                       50
<PAGE>


Operating Expenses

Operating expenses increased $8.1 million, or 3%, for the second quarter of 2005
compared to the second quarter of 2004.  Operations and maintenance  expense was
$4.5  million,  or 3% above last year,  reflecting  a $3.0  million  increase in
operating  lease  costs  associated  with  our  financing  arrangement  for  the
Ravenswood  Expansion,  as well as an increase in overhaul costs associated with
our electric  generating  units. The higher operating taxes primarily reflect an
increase in property taxes,  which are fully  recoverable from LIPA. (See Note 6
to   the   Consolidated   Financial   Statements   "Financial   Guarantees   and
Contingencies" for additional  information  regarding the financing  arrangement
for the Ravenswood Expansion.)

For the six months  ended June 30,  2005,  operating  expenses  increased  $18.9
million,  or  4%,  compared  to  the  same  period  last  year.  Operations  and
maintenance  expense increased $11.0 million, or 3% over last year reflecting an
increase of $7.5 million in operating lease costs  associated with our financing
arrangement  for the  Ravenswood  Expansion  and an increase  in overhaul  costs
associated  with our electric  generating  units.  The increase in  depreciation
expense is associated with KeySpan's Long Island based electric generating units
and is fully recoverable from LIPA. The higher operating taxes primarily reflect
an increase in property taxes which are also fully recoverable from LIPA.

Other Matters

In 2003,  the New  York  State  Board  on  Electric  Generation  Siting  and the
Environment  issued  an  opinion  and  order  which  granted  a  certificate  of
environmental  capability  and public need for a 250 MW combined  cycle electric
generating  facility  in  Melville,   Long  Island,   which  is  now  final  and
non-appealable. Also in 2003, LIPA issued a Request for Proposal ("RFP") seeking
bids from  developers  to  either  build and  operate a Long  Island  generating
facility,  and/or a new cable that will link Long Island to  dedicated  off-Long
Island power of between 250 to 600 MW of electricity by no later than the summer
of 2007.  KeySpan  filed a proposal in  response  to LIPA's  RFP. In 2004,  LIPA
selected  proposals  submitted  by two other  bidders  in  response  to the RFP.
KeySpan  remains  committed  to the  Melville  project and the  benefits to Long
Island's energy future that this project would supply.  The project has received
New  York  State  Article  X  approval  by  having  met  all   operational   and
environmental  permitting  requirements.  Further,  the project is strategically
located in close proximity to both the high voltage power  transmission grid and
the high pressure gas distribution  network. At June 30, 2005, total capitalized
costs  associated  with the siting,  permitting and procurement of equipment for
the Melville facility were $63.6 million.

LIPA is in the process of performing a long-term  strategic review of its future
direction.  Some of the options that LIPA is  considering  include  whether LIPA
should continue its operations as they presently  exist,  fully  municipalize or
privatize,  or sell some, but not all of its assets. LIPA was initially required
to make a  determination  by May 2005 as to whether it would exercise its option


                                       51
<PAGE>


to  purchase  our Long  Island  generating  plants  pursuant to the terms of the
Generation  Purchase Rights Agreement.  KeySpan and LIPA have mutually agreed to
extend the date by which LIPA must make this determination to December 15, 2005.
At this time,  we are unable to  determine  what the  outcome of this  strategic
review will have on the Melville project, or more broadly, our Electric Services
segment.


In March 2005, the New York Power Authority  ("NYPA") issued a RFP for long-term
New York City  capacity and energy to meet the needs of its  customers at prices
that are  economical,  stable and  predictable  over the long run. In June 2005,
KeySpan  submitted  a  non-binding  bid in  response  to NYPA's  RFP in which we
proposed to construct a 500 MW, combined cycle, natural gas fired power plant to
be located in New York City which could provide energy and capacity to NYPA. The
proposed  facility  could be in  commercial  operation  by June 2009.  We cannot
predict  the  outcome or the timing of any  decisions  by NYPA on this matter at
this time.

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

Energy Services

The Energy  Services  segment  includes  companies  that provide  energy-related
services to customers located  primarily within the Northeastern  United States,
with  concentrations in the New York City and Boston  metropolitan areas through
the  following  lines of  business:  (i) Home Energy  Services,  which  provides
residential  and small  commercial  customers  with service and  maintenance  of
energy  systems and  appliances;  and (ii) Business  Solutions,  which  provides
operation  and  maintenance,  design,  engineering,  consulting  and fiber optic
services to commercial, institutional and industrial customers.

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

In  the  fourth  quarter  of  2004,   KeySpan's  investment  in  its  mechanical
contracting subsidiaries was written-down to an estimated fair value. During the
first six months of 2005,  operating  losses were incurred  through the dates of
sale of these companies of $4.1 million  after-tax,  including,  but not limited
to, costs incurred for employee  related  benefits.  Partially  offsetting these
losses was a gain of $2.3  million  associated  with the  related  divestitures,
reflecting  the  difference  between the fair value  estimates and the financial
impact of the actual sale  transactions.  The net income impact of the operating
losses and the disposal gain was a loss of $1.8 million,  or $0.01 per share for
the three and six months  ended June 30, 2005.  (See Note 2 to the  Consolidated
Financial  Statements  "Business Segments" for additional details on the sale of
the mechanical companies.)


                                       52
<PAGE>


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

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                                Three Months Ended June 30,                Six Months Ended June 30,
(In Millions of Dollars)                         2005                2004                   2005                2004
---------------------------------------------------------------------------------------------------------------------
<S>                                             <C>                 <C>                   <C>                 <C>
Revenues                                       $ 47.8              $ 44.9                $  94.9             $  91.4
Operating expenses                               50.6                50.9                  100.5               114.9
---------------------------------------------------------------------------------------------------------------------
Operating (Loss)                               $ (2.8)             $ (6.0)               $  (5.6)            $ (23.5)
---------------------------------------------------------------------------------------------------------------------
</TABLE>


The Energy Services  segment  incurred an operating loss of $2.8 million for the
second quarter of 2005 compared to an operating loss of $6.0 million incurred in
the second quarter of 2004. The improved  performance  primarily reflects higher
installation  and fee service  revenue,  a greater  volume of  installation  and
equipment sales, as well as lower operating costs at Home Energy Services.

For the six months ended June 30, 2005, this segment  incurred an operating loss
of $5.6 million  compared to an operating loss of $23.5 million  incurred in the
corresponding  period of 2004. The improved  performance reflects a reduction in
operating  expenses.  In 2004,  the Home  Energy  Services  operations  incurred
charges  associated  with the  write-off  of accounts  receivable  and  contract
revenues on certain projects that were determined to be  uncollectible,  as well
as the write-down of inventory balances.

Energy Investments

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

This segment is also  engaged in pipeline  development  activities.  KeySpan and
Duke Energy Corporation each own a 50% interest in Islander East.  Islander East
was  created to pursue  the  authorization  and  construction  of an  interstate
pipeline  from  Connecticut,  across  Long  Island  Sound,  to a  terminus  near
Shoreham,  Long Island.  Further,  KeySpan has a 21% interest in the  Millennium
Pipeline  project  which will  transport  up to 500,000 DTH of natural gas a day


                                       53
<PAGE>


from Corning to Ramapo, New York, where it will connect to an existing pipeline.
Additionally,  subsidiaries  in this segment  hold a 20% equity  interest in the
Iroquois Gas  Transmission  System LP, a pipeline that  transports  Canadian gas
supply to markets in the  Northeastern  United States.  These  subsidiaries  are
accounted for under the equity method of accounting.  Accordingly, equity income
from these  investments  is reflected as a component of operating  income in the
Consolidated  Statement of Income.  KeySpan also owns a 600,000 barrel liquefied
natural gas storage and receiving facility in Providence,  Rhode Island, through
its wholly  owned  subsidiary  KeySpan LNG,  the  operations  of which are fully
consolidated. KeySpan LNG is re-evaluating its plans to upgrade its LNG facility
in  Providence,  Rhode Island in light of the FERC  decision on June 30, 2005 to
deny KeySpan LNG's  application for a FERC certificate to expand the facility to
accept marine deliveries and triple vaporization  capacity.  KeySpan anticipates
filing  its  rehearing  request  with the FERC on  August 4,  2005,  with a FERC
response  reasonably  expected  before the end of 2005. As of June 30, 2005, our
investment in this project was $13.4 million.

During the first quarter of 2004, we also had an  approximate  61% investment in
certain  midstream  natural gas assets in Western Canada through  KeySpan Energy
Canada  Partnership  ("KeySpan  Canada").  These assets  included 14  processing
plants and associated gathering systems that produced  approximately 1.5 BCFe of
natural gas daily and  provided  associated  natural gas liquids  fractionation.
These  operations were fully  consolidated in KeySpan's  Consolidated  Financial
Statements.  On April 1, 2004, KeySpan reduced its ownership interest in KeySpan
Canada  to 25%.  The  transaction  resulted  in a gain of $22.8  million  ($10.1
million  after-tax,  or $0.06 per share).  Effective  April 1, KeySpan  Canada's
earnings and our ownership  interest in KeySpan Canada were accounted for on the
equity basis of  accounting.  In the fourth  quarter of 2004  KeySpan,  sold its
remaining interests in KeySpan Canada. (See Note 2 to the Consolidated Financial
Statements   "Business   Segments"  for   additional   details   regarding  this
transaction.)

Selected  financial  data and  operating  statistics  for  these  energy-related
investments  are set forth in the  following  table for the  periods  indicated.
These results exclude the results of Houston Exploration.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
                                                    Three Months Ended June 30,                 Six Months Ended June 30,
(In Millions of Dollars)                              2005                2004                  2005                 2004
---------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>                <C>                   <C>                   <C>
Revenues                                             $ 8.7             $  10.5                $ 18.8               $  39.8
Less: Operation and maintenance expense                5.2                 7.4                  11.7                  23.0
          Ceiling test write-down                        -                48.2                     -                  48.2
          Other operating expenses                     2.8                 2.5                   5.3                   9.2
Add:  Equity earnings                                  4.7                 5.9                  10.0                  11.6
           Sale of assets                              0.1                   -                   0.1                     -
---------------------------------------------------------------------------------------------------------------------------
Operating Income                                     $ 5.5             $ (41.7)               $ 11.9               $ (29.0)
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

Operating income above reflects 100% of KeySpan Canada's results from January 1,
2004 through April 1, 2004.


                                       54
<PAGE>


As  indicated in the above table,  operating  income for the Energy  Investments
segment  increased  $47.2 million in the second  quarter of 2005 compared to the
corresponding  quarter  last year.  As noted  earlier,  in June 2004,  KeySpan's
wholly owned gas exploration and production subsidiaries that have remained with
KeySpan  after the  Houston  Exploration  sale,  recorded a non-cash  impairment
charge  of $48.2  million  ($31.1  million  after-tax,  or $0.19  per  share) to
recognize the reduced  valuation of proved  reserves.  Operating  income for the
second  quarter of 2004 also  includes  $2.3  million in earnings  from  KeySpan
Canada.

For the six  months  ended  June 30,  2005  operating  income  for this  segment
increased  $40.9  million  compared to the same period of 2004,  reflecting  the
$48.2 million non-cash  impairment  charge recorded last year.  Operating income
for the six months ended June 30, 2004 also  includes  $10.9 million in earnings
from KeySpan Canada. The remaining activities reflected an increase in operating
income of $3.6 million primarily associated with lower overhead costs, operating
income  from  Seneca-Upshur  and  higher  earnings  from our  investment  in the
Iroquois Gas Transmission System LP.

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

During the first quarter of 2004, our gas exploration and production investments
also included a 55% equity  interest in Houston  Exploration,  the operations of
which were fully consolidated in KeySpan's Consolidated Financial Statements. On
June 2, 2004,  KeySpan  exchanged 10.8 million shares of common stock of Houston
Exploration  for 100% of the stock of  Seneca-Upshur,  previously a wholly owned
subsidiary  of Houston  Exploration.  This  transaction  reduced our interest in
Houston Exploration from 55% to the then current level of 23.5%.  Effective June
1, 2004,  Houston  Exploration's  earnings and our ownership interest in Houston
Exploration  were  accounted  for  on  the  equity  basis  of  accounting.  This
transaction  resulted in a gain to KeySpan after deferred tax provisions of $106
million,  or $0.66 per share.  In the fourth  quarter of 2004  KeySpan  sold its
remaining interests in Houston Exploration.


                                       55
<PAGE>


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

------------------------------------------------------------------------------
                                                Three Months      Six Months
                                                   Ended            Ended
(In Millions of Dollars)                      June 30, 2004     June 30, 2004
------------------------------------------------------------------------------
Revenues                                            $ 116.5           $ 268.1
Depletion and amortization expense                     44.5             106.4
Other operating expenses                               16.0              43.3
Add: Equity Earnings                                    2.5               2.5
------------------------------------------------------------------------------
Operating Income                                    $  58.5           $ 120.9
------------------------------------------------------------------------------


Other Matters

In order to serve the  anticipated  market  requirements in our New York service
territories,  KeySpan and Duke Energy  Corporation formed Islander East Pipeline
Company,  LLC ("Islander  East") in 2000.  Islander East is owned 50% by KeySpan
and  50% by Duke  Energy,  and was  created  to  pursue  the  authorization  and
construction  of an  interstate  pipeline from  Connecticut,  across Long Island
Sound, to a terminus near Shoreham, Long Island.  Applications for all necessary
regulatory  authorizations  were  filed  in 2000  and  2001.  Islander  East has
received a final certificate from FERC which is non-appealable 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.  In 2004,  the Department of
Commerce  overrode  Connecticut's  denial and  granted  the CZMA  authorization.
Islander East's petition for a declaratory  order  challenging the denial of the
Clean Water Act permit is pending with  Connecticut's  State Superior  Court. On
July 29, Congress passed the Energy Policy Act of 2005 (the "Energy Act"), which
the  President  is  expected  to sign into law.  Pursuant  to Section 313 of the
current  version  of the Energy  Act,  Islander  East would have the  ability to
challenge the denial of the Clean Water Act permit by appealing  directly to the
United  States  Court  of  Appeals  for  the  Second  Circuit.   For  additional
information  on the Energy  Act,  see the  discussion  on  "Regulation  and Rate
Matters."

It is  anticipated  that the Islander  East  pipeline  will be in service in the
fourth  quarter of 2007 and it is expected to  transport up to 260,000 DTH daily
to the Long Island and New York City energy markets,  enough natural gas to heat
600,000 homes.  The pipeline will also allow KeySpan to diversify the geographic
sources of its gas supply.  Various  options for the  financing of this pipeline
construction  are being  evaluated.  At June 30,  2005,  our  investment  in the
Islander East pipeline was $22.4 million.


                                       56
<PAGE>


In addition,  in 2004 KeySpan acquired a 21% interest in the Millennium Pipeline
Company, L.P. which is developing a natural gas pipeline project which will have
the   capacity  to   transport   up  to  525,000  DTH  of  natural  gas  a  day,
interconnecting  with the  pipeline  systems of various  other  utilities in New
York. The project received a FERC certificate to construct,  acquire and operate
the  facilities  in 2002.  On August  1,  2005,  the  project  filed an  amended
application with FERC requesting, among other things, approval of a reduction in
capacity and maximum allowable  operating pressure,  minor route  modifications,
the addition of certain  facilities and the  acquisition  of certain  facilities
from Columbia Gas Transmission Corporation. Additionally, on August 1, 2005, Con
Edison and KEDLI each entered into precedent  agreements to initially  purchase,
subject to certain terms and conditions, a maximum of 150,000 DTH of capacity on
the pipeline. Columbia Gas Transmission also entered into agreements to purchase
and lease,  subject to certain conditions,  50,000 DTH of capacity.  Subject to,
among other things, the receipt of necessary regulatory approvals and financing,
it is  anticipated  that  construction  could begin in the Spring of 2006,  with
service  beginning in 2007. As of June 30, 2005,  our investment in this project
was $9.0 million.

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

Allocated Costs

We are currently  subject to the jurisdiction of the SEC under PUHCA. As part of
the  regulatory  provisions  of  PUHCA,  the  SEC  currently  regulates  various
transactions  among  affiliates  within a holding company system.  In accordance
with the  current  PUHCA  regulations  and state  regulatory  agencies,  we have
service  companies that provide:  (i) traditional  corporate and  administrative
services;  (ii) gas and electric  transmission and distribution system planning,
marketing,  and gas supply planning and procurement;  and (iii)  engineering and
surveying  services to  subsidiaries.  As discussed  above,  the Energy Act will
result  in the  repeal  of PUHCA and the  elimination  of the  SEC's  regulatory
oversight over affiliate transactions.  However,  certain of KeySpan's affiliate
transactions  will remain  subject to the  regulations  of the NYPSC,  MADTE and
NHPUC.  In  addition,  pursuant to the Energy  Act,  the FERC will now also have
authority  over certain  affiliate  transaction  matters.  The operating  income
variation as reflected in "elimination and other" is due primarily to the timing
of certain corporate  expenses and allocated costs associated with these service
companies, as well as costs residing at KeySpan's holding company level.


                                       57
<PAGE>


Liquidity

Cash flow from operations decreased $323.1 million for the six months ended June
30, 2005  compared  to last year,  primarily  reflecting  the absence of Houston
Exploration  and KeySpan Canada which combined  contributed  approximately  $230
million  to  consolidated  operating  cash flow in 2004.  Further,  the one time
benefit of $43 million from the start-up of the insurance  captive last year, as
well as the timing of property tax payments and other  working  capital  changes
also contributed to the variation in cash flow. It should be noted that in prior
years  Houston   Exploration   funded  their  gas  exploration  and  development
activities, in part, from available cash flow from operations.

At June 30, 2005, we had cash and temporary  cash  investments  of $324 million.
During  the six  months  ended  June 30,  2005,  we  repaid  $628.3  million  of
commercial  paper and, at June 30, 2005,  $284 million of  commercial  paper was
outstanding at a  weighted-average  annualized  interest rate of 3.29%. Based on
the level of authorization granted to us by the SEC, we had the ability to issue
up to an additional  $1.0 billion of short-term  debt at June 30, 2005 under the
commercial paper program.

On June 24, 2005, KeySpan closed on a $920 million revolving credit facility for
five years due June 24, 2010,  which was syndicated  among fifteen banks, and an
amended  $580  million  revolving  credit  facility  due  June 24,  2009.  These
facilities replace an existing $660 million,  3-year facility due June 2006, and
a 5-year $640 million facility due June 2009. The two credit  facilities,  which
now total $1.5  billion - $920  million for five years  through  2010,  and $580
million  for the  amended  facility  through  2009,  will  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  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 at the
last day of any fiscal quarter.  Violation of these covenant could result in the
termination  of the facilities  and the required  repayment of amounts  borrowed
thereunder,  as well as possible cross defaults under other debt agreements.  At
June 30, 2005, KeySpan's consolidated indebtedness was 48.4% of its consolidated
capitalization and KeySpan was in compliance with all covenants.


                                       58
<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.

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

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

Capital Expenditures and Financing

Construction Expenditures

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

------------------------------------------------------------------------
                                               Six Months Ended June 30,
(In Millions of Dollars)                       2005               2004
------------------------------------------------------------------------
Gas Distribution                             $ 154.3            $ 180.8
Electric Services                               56.0               73.7
Energy Investments                              14.0              148.3
Energy Services and other                        6.7                9.0
------------------------------------------------------------------------
                                             $ 231.0            $ 411.8
------------------------------------------------------------------------

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


                                       59
<PAGE>


The  decrease in capital  expenditures  for the six months  ended June 30, 2005,
compared  to the same  period  last year of $180.8  million  mainly  reflects  a
decrease in the Gas Distribution  segment of $26.5 million and a decrease in the
Energy  Investments  segment  of  $134.3  million.   The  decrease  in  the  Gas
Distribution segment is due to more efficient repair and maintenance  processes,
as well as to an improved  billing  process related to billing New York City for
costs associated with city/state  construction  projects. The decrease in Energy
Investments  reflects the absence of Houston  Exploration's  gas exploration and
development activities.

Financing

On January 14, 2005,  KeySpan  redeemed $500 million of outstanding debt - 6.15%
notes due 2006.  KeySpan  incurred  $20.9 million in call premiums and wrote-off
$1.3  million  of  previously  deferred  costs.   Further,  we  accelerated  the
amortization of approximately $11.2 million of previously  unamortized  benefits
associated  with  an  interest  rate  swap  on  these  bonds.   The  accelerated
amortization, as well as the write-off of previously deferred costs was recorded
to interest expense. In addition,  during the first quarter of 2005, $15 million
of 8.87% notes of a KeySpan subsidiary were redeemed at maturity.

Further,  $55.3  million of 7.07%  Series B preferred  stock was redeemed in May
2005 on its scheduled redemption date.  Additionally,  also in May 2005, KeySpan
called for  optional  redemption  $19.7  million of 7.17%  Series C of preferred
stock due 2008. KeySpan no longer has outstanding preferred stock.

At December  31,  2004,  KeySpan had 9.2 million  MEDs Equity Units issued which
were subject to conversion  upon  execution of the three-year  forward  purchase
contract.  In 2005,  KeySpan was required to remarket the note  component of the
Equity Units  between  February 2005 and May 2005 and reset the interest rate to
the then current market rate of interest; however, the reset interest rate could
not be set below 4.9%. In March 2005,  KeySpan  remarketed the note component of
$394.9  million of the Equity Units at the reset  interest  rate of 4.9% through
their maturity date of May 2008.  The balance of the notes ($65.1  million) were
held by the original MEDs Equity Unit holders in accordance with their terms and
not remarketed.  KeySpan then exchanged $300 million of the remarketed notes for
$307.2 million of new 30 year notes bearing an interest rate of 5.8%. Therefore,
at June 30,  2005  KeySpan  had $160  million of 4.9% notes  outstanding  with a
maturity date of May 2008 and $307.2  million of 5.8% notes  outstanding  with a
maturity date of April 2035.

On May 16,  2005  KeySpan  issued 12.1  million  shares of common  stock,  at an
issuance price of $37.93 per share pursuant to the terms of the forward purchase
contract.  KeySpan  received  proceeds of  approximately  $460  million from the
equity  conversion.  The number of shares  issued was  dependent  on the average
closing  price of our common stock over the 20 day trading  period ending on the
third trading day prior to May 16, 2005.

The following  table  represents  the ratings of our long-term  debt at June 30,
2005. During the fourth quarter of 2004 Standard & Poor's reaffirmed its ratings
on  KeySpan's  and its  subsidiaries'  long-term  debt and removed its  negative
outlook.  Further  in the second  quarter of 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.


                                       60
<PAGE>


-----------------------------------------------------------------------------
                           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 has a number of financial  guarantees with its  subsidiaries at June 30,
2005.  KeySpan has fully and  unconditionally  guaranteed:  (i) $525  million of
medium-term notes issued by KEDLI;  (ii) the obligations of KeySpan  Ravenswood,
LLC, which is the lessee under the $425 million Master Lease associated with the
Ravenswood  Facility  and the  lessee  under  the  $385  million  sale/leaseback
transaction for the Ravenswood  Expansion;  and (iii) the payment obligations of
our subsidiaries  related to $128 million of tax-exempt bonds issued through the
Nassau County and Suffolk  County  Industrial  Development  Authorities  for the
construction of two  electric-generation  peaking facilities on Long Island. The
medium-term  notes,  the Master Lease and the tax-exempt  bonds are reflected on
the Consolidated  Balance Sheet; the sale/leaseback  transaction is not recorded
on the Consolidated Balance Sheet.  Further,  KeySpan has guaranteed:  (i) up to
$102  million of surety bonds  associated  with  certain  construction  projects
currently  being  performed  by current and former  subsidiaries;  (ii)  certain
supply contracts,  margin accounts and purchase orders for certain  subsidiaries
in an  aggregate  amount of $71  million;  and (iii) $74  million of  subsidiary
letters of credit. These guarantees are not recorded on the Consolidated Balance
Sheet.  KeySpan's  guarantees on certain  performance  bonds relating to current
construction projects of the discontinued  mechanical contracting companies will
remain in place throughout the construction  period for these projects.  KeySpan
has  received an  indemnity  bond  issued by a third  party to offset  potential
exposure related to a significant portion of the continuing  guarantee.  At this
time, we have no reason to believe that our subsidiaries or former  subsidiaries
will default on their current obligations. However, we cannot predict when or if
any  defaults  may  take  place  or the  impact  such  defaults  may have on our
consolidated results of operations, financial condition or cash flows. (See Note
6  to  the  Consolidated   Financial   Statements,   "Financial  Guarantees  and
Contingencies" for additional information regarding KeySpan's guarantees.)


                                       61
<PAGE>


Contractual Obligations

KeySpan has certain contractual obligations related to its outstanding long-term
debt,  outstanding  credit facility  borrowings,  outstanding  commercial  paper
borrowings,  operating and capital  leases,  and demand charges  associated with
certain  commodity  purchases.  These  obligations  have remained  substantially
unchanged  since December 31, 2004.  (For  additional  details  regarding  these
obligations see KeySpan's Annual Report on Form 10-K for the Year Ended December
31, 2004, Item 7 Management's Discussion and Analysis of Financial Condition and
Results  of  Operations,  Note 6  "Long-Term  Debt,"  as well as Note 7 to those
Consolidated Financial Statements "Contractual Obligations, Financial Guarantees
and Contingencies.")

Discussions of Critical Accounting Policies and Assumptions

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

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

Below is a discussion of KeySpan's critical  accounting policies and assumptions
at  June  30,  2005.  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, 2004, Item 7.  Management's  Discussion and Analysis of Financial  Condition
and Results of  Operations  "Discussion  of  Critical  Accounting  Policies  and
Assumptions."


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<PAGE>


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 June 30, 2005, KeySpan has $1.7
billion  of  recorded  goodwill  and has  concluded  that the fair  value of the
business units that have recorded goodwill exceed their carrying value.

Accounting for the Effects of Rate Regulation on Gas Distribution Operations

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

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

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

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

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


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<PAGE>


Pension and Other Postretirement Benefits

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

Historically, we have funded our qualified pension plans in excess of the amount
required to satisfy minimum ERISA funding requirements. At June 30, 2005, we had
a funding  credit balance in excess of the ERISA minimum  funding  requirements.
Although we have  presently  exceeded  ERISA funding  requirements,  our pension
plans, on an actuarial basis, are currently  underfunded.  Therefore,  for 2005,
KeySpan  expects to contribute up to a total of $124.5 million to its funded and
unfunded  postretirement  plans, $113.5 million of which had been contributed by
the end of the second quarter. 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, 2004, see also Note 4 of those Consolidated  Financial  Statements,
"Postretirement Benefits.")

Regulation and Rate Matters

The Energy Policy Act of 2005

On July 29,  Congress  passed the Energy Act, which the President is expected to
sign into law.  The Energy Act is a broad  energy bill that places an  increased
emphasis  on the  production  of energy  and  promotes  the  development  of new
technology and alternative  energy sources and provides tax credits to companies
that produce natural gas, oil, coal, electricity and renewable energy.

One of the more significant provisions of the Energy Act is the repeal of PUHCA,
effective  six months  from the  effective  date of the Act.  Upon  repeal,  our
corporate and financial  activities and those of our subsidiaries will no longer
be subject to regulation by the SEC. However,  we will remain subject to certain
regulations of the NYPSC,  MADTE and NHPUC and the authority of the FERC will be
expanded to cover a limited number of holding company activities. In particular,
FERC approval will likely be required for KeySpan to acquire  securities  of, or
directly or indirectly merge with,  another electric utility or electric utility
holding company. The FERC will also have authority to review and authorize costs
charged by service  companies to electric  utilities in the same holding company


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<PAGE>


system.  The FERC and state  regulators  will be granted access to the books and
records of all companies  within any utility holding company system,  similar to
the access granted to the SEC under PUHCA.  We continue to review the provisions
of the  Energy  Act in order to assess  its  impact on us,  and  ultimately  the
effects of many of these changes will be subject to FERC  rulemaking and further
interpretation.

Securities and Exchange Commission Regulation Under PUHCA

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

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

In addition,  we have committed that during the Authorization Period, our common
equity will be at least 30% of our consolidated  capitalization  and each of our
utility  subsidiaries'  common  equity  will be at  least  30% of such  entity's
capitalization. At June 30, 2005, KeySpan's consolidated common equity was 51.6%


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<PAGE>


of its consolidated capitalization,  including commercial paper, and each of its
utility   subsidiaries  common  equity  was  at  least  50%  of  its  respective
capitalization.

As noted  previously,  if  enacted,  the Energy Act will result in the repeal of
PUHCA, and therefore, the elimination of the financing, investment and operating
limitations discussed earlier.  Although,  KeySpan would no longer be subject to
the limitations  under PUHCA, it would remain subject to certain  regulations of
the NYPSC,  MADTE and NHPUC and may become  subject to additional  rulemaking of
the FERC.

Gas Matters

As of June 30, 2005, the rate agreements for KEDNY and KEDLI have expired. Under
the terms of the KEDNY and KEDLI rate agreements, gas distribution rates and all
other provisions will remain in effect until changed by the NYPSC. At this time,
we  are  currently  evaluating  various  options  that  may be  available  to us
regarding  the  KEDNY  and KEDLI  rate  plans,  including  but not  limited  to,
proposing new rate plans.

Regarding  the Boston Gas Company,  in 2003 the MADTE  approved a $25.9  million
increase in base revenues with an allowed  return on equity of 10.2% assuming an
equal balance of debt and equity. On January 27, 2004 the MADTE issued orders on
Boston Gas Company's Motion for Recalculation, Reconsideration and Clarification
that granted an  additional  $1.1 million in base  revenues,  for a total of $27
million.  The MADTE also approved a Performance Based Rate Plan (the "Plan") for
up to ten years. On October 29, 2004, the MADTE approved a base rate increase of
$4.6 million  under the Plan.  In  addition,  an increase of $7.9 million in the
local  distribution  adjustment clause was approved to recover pension and other
postretirement  costs.  The 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.

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, 2004,
Item 7 Management's  Discussion and Analysis of Financial  Condition and Results
of Operations "Regulation and Rate Matters."

KeySpan submitted  testimony to the MADTE concerning a proceeding brought by Bay
State Gas  Company  ("Bay  State")  concerning  the  current  bad debt  recovery
mechanism provided by the MDTE. Bad debt write-offs have increased over the last
five years  principally as a result of higher gas costs. The proposed  mechanism
would provide a higher level of recovery of bad debts if approved by the MADTE.

Electric Matters

KeySpan sells to LIPA all of the capacity and, to the extent  requested,  energy
conversion  services  from our  existing  Long  Island  based oil and  gas-fired
generating  plants.  Sales of capacity and energy  conversion  services are made
under rates approved by the FERC in accordance  with the Power Supply  Agreement
("PSA")  entered  into  between  KeySpan  and LIPA in 1998.  The  original  FERC


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<PAGE>


approved rates, which had been in effect since May 1998, expired on December 31,
2003. On October 1, 2004 the FERC approved a settlement  reached between KeySpan
and LIPA. Under the new Settlement Agreement,  KeySpan's rates reflect a cost of
equity of 9.5% with no revenue  increase  in the first year.  The FERC  approved
updated  operating and maintenance  expense levels and recovery of certain other
costs as agreed to by the parties.

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, we anticipate  that costs related to MGP  environmental
cleanup  activities  will be  recovered  in rates  charged  to gas  distribution
customers and, as a result,  adjustments to these reserve balances do not impact
earnings.  However,  environmental  cleanup  activities  related  to  the  three
non-utility sites are not subject to rate recovery.

We estimate that the  remaining  cost of our MGP related  environmental  cleanup
activities,  including costs  associated with the Ravenswood  Facility,  will be
approximately  $226.0 million and we have recorded a related  liability for such
amount.   We  have  also  recorded  an  additional   $18.1  million   liability,
representing the estimated  environmental cleanup costs related to a former coal
tar processing facility. As of June 30, 2005, we have expended a total of $155.6
million on environmental  investigation and remediation activities.  (See Note 6
to  the   Consolidated   Financial   Statements,   "Financial   Guarantees   and
Contingencies.")

Market and Credit Risk Management Activities

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

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

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


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<PAGE>


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  activities
have  not  changed   substantially  since  December  31,  2004.  For  additional
information  regarding these risks see KeySpan's  Annual Report on Form 10-K for
the Year Ended December 31, 2004, Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations "Market and Credit Risk Management
Activities."  The following is an update to certain  matters  related  KeySpan's
electric operations.

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

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


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<PAGE>


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

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

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

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

Cautionary Statement Regarding Forward-Looking Statements

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

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

-    volatility of energy prices used to generate electricity;

-    fluctuations in weather and in gas and electric prices;

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

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


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<PAGE>


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

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

-    inflationary trends and interest rates;

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

-    available sources and cost of fuel;

-    creditworthiness of counterparties to derivative  instruments and commodity
     contracts;

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

-    retention of key personnel;

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

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

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

-    competition facing our unregulated Energy Services businesses;

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

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

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

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

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


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<PAGE>


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


Item 3.  Quantitative and Qualitative Disclosures About Market Risk

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

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

The following  tables set forth selected  financial data  associated  with these
derivative  financial  instruments noted above that were outstanding at June 30,
2005.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
                                              Year of       Volumes          Fixed               Current            Fair Value
             Type of Contract                 Maturity        mmcf           Price $             Price $         (In $ Millions)
--------------------------------------------------------------------------------------------------------------------------------
                    Gas
<S>                                            <C>          <C>           <C>                 <C>                         <C>
Swaps/Futures - Long Natural Gas                2005          4,168        6.76 - 8.24         6.98 - 8.30                  0.3

OTC Swaps - Short Natural Gas                   2005            990        6.58 - 6.70         6.98 - 8.30                 (1.0)
                                                2006          1,884        6.17 - 6.29         7.55 - 8.69                 (3.8)
                                                2007          1,812        5.86 - 5.97         7.28 - 8.64                 (3.7)
                                                2008          1,740        6.77 - 6.85         6.94 - 8.27                 (1.5)
--------------------------------------------------------------------------------------------------------------------------------
                                                             10,594                                                        (9.7)
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       71
<PAGE>


<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
                                           Year of         Volumes       Fixed                 Current               Fair Value
         Type of Contract                  Maturity        Barrels       Price $                Price $            (In $ Millions)
----------------------------------------------------------------------------------------------------------------------------------
                Oil
<S>                                         <C>           <C>        <C>                    <C>                             <C>
Swaps - Long Fuel Oil                        2005           49,000    29.95 - 45.20          47.14 - 49.02                    0.7
                                             2006           12,000    39.65 - 51.85          50.02 - 50.29                    0.2

Swaps - Short Heating Oil                    2005          733,712    54.43 - 63.59          68.06 - 72.64                   (8.1)


----------------------------------------------------------------------------------------------------------------------------------
                                                           794,712                                                           (7.2)
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
------------------------------------------------------------------------------------------------------------------------------
                                 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                      2005        1,250,400        76.00 - 113.50         66.50 - 113.50                    4.0
                                    2006          418,400        76.00 - 106.00         76.00 - 121.50                   (2.8)

------------------------------------------------------------------------------------------------------------------------------
                                                1,668,800                                                                 1.2
------------------------------------------------------------------------------------------------------------------------------
</TABLE>


-----------------------------------------------------------------
                                                        2005
Change in Fair Value of Derivative Instruments    (In $ Millions)
-----------------------------------------------------------------
Fair value of contracts at January 1, 2004                   1.3
Net losses (gains) on contracts realized                    11.8
(Decrease) in fair value of all open contracts             (28.8)
-----------------------------------------------------------------
Fair value of contracts outstanding at June 30,            (15.7)
-----------------------------------------------------------------


--------------------------------------------------------------------------------
(In Millions of Dollars)
--------------------------------------------------------------------------------
                                                 Fair Value of Contracts
--------------------------------------------------------------------------------
                                         Mature Within                  Total
Sources of Fair Value                      12 Months     Thereafter   Fair Value
--------------------------------------------------------------------------------
Prices actively quoted                       $ (11.0)      $ (6.7)      $ (17.7)
Local published indicies                         2.0            -           2.0
--------------------------------------------------------------------------------
                                             $  (9.0)      $ (6.7)      $ (15.7)
--------------------------------------------------------------------------------


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 June 30,  2005,  a 10%  increase  in heating oil and natural gas
prices would decrease the value of derivative  instruments  maturing in one year
by $2.4 million,  while the value of expected  physical  deliveries for one year
would be enhanced $5.1 million (net benefit to KeySpan of $2.7  million).  A 10%
decrease  in heating  oil and  natural  gas prices  would  enhance  the value of
derivative  instruments maturing in one year by $2.4 million, while the value of
expected  physical  deliveries for one year would be decreased $5.1 million (net
cost to KeySpan of $2.7 million).

Based  on a  sensitivity  analysis  as of  June  30,  2005,  a 10%  increase  in
electricity  and fuel prices would decrease the value of derivative  instruments
maturing in one year by $4.1 million, while the value of expected physical power
production  for one year would be enhanced  $6.5 million (net benefit to KeySpan
of $2.4  million).  A 10% decrease in  electricity  and fuel prices would have a
$2.8 million favorable impact on the value of derivative instruments maturing in
one year, while the value of expected physical power production would be reduced
$6.4 million (net cost to KeySpan of $3.6 million).


                                       72
<PAGE>


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

The following  table sets forth selected  financial data  associated  with these
derivative financial instruments that were outstanding at June 30, 2005.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                    Year of      Volumes         Floor            Ceiling          Fixed             Current          Fair Value
Type of Contract    Maturity       mmcf           ($)               ($)           Price ($)           Price ($)     (In $ Millions)
-----------------------------------------------------------------------------------------------------------------------------------
<S>                  <C>         <C>         <C>               <C>               <C>               <C>                   <C>
Options               2005         7,620      5.50 - 6.40       5.50 - 8.70                 -       6.98 - 8.30            0.5
                      2006         5,830      5.50 - 6.40       5.50 - 8.70                 -       7.55 - 8.69            4.8
Swaps                 2005        21,476                -                 -       5.94 - 8.62       6.98 - 8.30           15.5
                      2006        36,236                -                 -       5.50 - 8.97       7.55 - 8.69           39.2
                      2007         2,602                                          6.94 - 8.61       7.40 - 8.64            0.6
-----------------------------------------------------------------------------------------------------------------------------------
                                  73,764                                                                                  60.6
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


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

Item 4. Controls and Procedures

We maintain  disclosure  controls and  procedures (as defined under Exchange Act
Rule  13a-15(e)  and  15d-15(e))  that are  designed to ensure that  information
required  to be  disclosed  by us in the  reports  we file or  submit  under the
Exchange Act is recorded,  processed,  summarized  and reported  within the time
periods specified in the Securities and Exchange  Commission's  rules and forms,
and  that  such   information  is  accumulated  and  communicated  to  KeySpan's
management,  including our Chief Executive Officer and Chief Financial  Officer,
as appropriate,  to allow timely decisions  regarding required  disclosure.  Any
control  system,  no matter how well  designed  and  operated,  can provide only
reasonable   assurance  of  achieving  the  desired  control   objectives.   Our
management,  under  the  supervision  and with the  participation  of our  Chief
Executive Officer and Chief Financial  Officer,  has evaluated the effectiveness
of our disclosure  controls and procedures as of June 30, 2005.  Based upon that
evaluation,  our Chief Executive  Officer and Chief Financial  Officer concluded
that the design and operation of our disclosure controls and procedures provided
reasonable  assurance that the disclosure  controls and procedures are effective
to accomplish their objectives.


                                       73
<PAGE>


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

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

Item 1.  Legal Proceedings

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

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

We held our Annual  Meeting of  Shareholders  at 10:00 a.m.  on Friday,  May 20,
2005,  at the  Tilles  Center for the  Performing  Arts  located at Long  Island
University,  C. W. Post Campus, 720 Northern Boulevard,  Greenvale, New York, to
consider and take action on the following items:

1.   Election of Ten Directors

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

DIRECTOR                   VOTES              VOTES                TOTAL
                           FOR                WITHHELD             VOTES

Robert B. Catell           130,465,783         4,112,927           134,578,710
Andrea S. Christensen      124,107,813        10,470,897           134,578,710
Robert J. Fani             131,526,037         3,052,673           134,578,710
Alan H. Fishman            122,244,432        12,334,278           134,578,710
James R. Jones             124,073,228        10,505,482           134,578,710
James L. Larocca           124,128,875        10,449,835           134,578,710
Gloria C. Larson           123,944,565        10,634,145           134,578,710
Stephen W. McKessy         131,527,762         3,050,948           134,578,710
Edward D. Miller           131,385,526         3,193,184           134,578,710
Vikki L. Pryor             131,441,791         3,136,919           134,578,710


                                       74
<PAGE>


2.   Ratification  of Deloitte & Touche LLP, as  independent  registered  public
     accountants for the Company for the year ending December 31, 2005.

Deloitte & Touche LLP  received a majority  of the votes cast by the  holders of
shares  entitled  to  vote  thereon,   and  were  accordingly  ratified  as  the
independent  registered public accountants of KeySpan for the fiscal year ending
December 31, 2005.



DELOITTE & TOUCHE LLP                VOTES CAST
          FOR                       131,794,691
          AGAINST                     1,242,196
          ABSTAIN                     1,541,823
          -------------------------------------
          TOTAL                     134,578,710


Item 5.           Other Information

The following  disclosure  regarding director  compensation would otherwise have
been  filed on Form 8-K under the  heading  "Item  101 - Entry  into a  Material
Definitive Agreement."

The  KeySpan  Board  of  Director's   Compensation  and  Management  Development
Committee  conducted its annual review of director  compensation.  The Committee
directly  engaged  the  services  of Towers  Perrin,  an  independent,  national
compensation  consultant to assist them in such review. As part of their review,
the Committee  completed a  comprehensive  assessment  to ensure that  KeySpan's
overall  director  compensation  package  be fair  and  equitable,  designed  to
attract,  develop,  motivate and retain  directors,  and be consistent with best
practices among our peer companies.  On August 3, 2005, upon the  recommendation
of the Committee,  the Board of Directors  approved a new director  compensation
package which maintained the existing structure, except that the annual grant of
common stock equivalents  pursuant to the Directors' Deferred  Compensation Plan
was  increased  from  $30,000 to  $64,000;  the annual  retainer  for serving as
chairman of the Audit  Committee  was  increased  from $5,000 to $10,000 and the
directors will now receive  committee  meeting fees for all committee  meetings,
including those held on the same day as Board meetings.

The non-employee  directors will receive the following  compensation  [effective
August 1, 2005]:

     -    $43,500 annual retainer;

     -    $2,000 committee meeting fee;

     -    $5,000 committee chairman retainer for the Compensation and Management
          Development   Committee  and  Corporate   Governance   and  Nominating
          Committee;

     -    $10,000 committee chairman retainer for the Audit Committee;

     -    $64,000 in common stock equivalents granted pursuant to the Directors'
          Deferred Compensation Plan.


                                       75
<PAGE>


Employee  directors  continue to receive no  additional  compensation  for their
service on the Board of Directors or its committees.

Item 6.         Exhibits

10.1*     Summary  of  Compensation  for  Non-Management  Directors  of  Keyspan
          Corporation

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








                                       76
<PAGE>



                      KEYSPAN CORPORATION AND SUBSIDIARIES
                                    SIGNATURE

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



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



Date: August 4, 2005                             /s/Gerald Luterman
                                                 -------------------------
                                                    Gerald Luterman
                                                    Executive Vice President and
                                                    Chief Financial Officer






















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