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 September 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 October 12, 2005
 ---------------------                          -------------------------------
    $.01 par value                                        174,361,293

<PAGE>

<TABLE>
                      KEYSPAN CORPORATION AND SUBSIDIARIES

                                      INDEX
                                      -----
<CAPTION>
                           Part I.  FINANCIAL INFORMATION                       Page No.
                                                                                --------
<S>                                                                               <C>
Item 1. Financial Statements

         Consolidated Balance Sheet (Unaudited) -
         September 30, 2005 and December 31, 2004                                   3

         Consolidated Statement of Income (Unaudited) -
         Three and Nine Months Ended September 30, 2005 and 2004                    5

         Consolidated Statement of Cash Flows (Unaudited) -
         Nine Months Ended September 30, 2005 and 2004                              6

         Notes to Consolidated Financial Statements (Unaudited)                     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                                                         74

Item 4. Controls and Procedures                                                    77

                           Part II. OTHER INFORMATION

Item 1. Legal Proceedings                                                          77

Item 5. Other Information                                                          77

Item 6. Exhibits and Reports on Form 8-K                                           79

Signatures                                                                         81
</TABLE>


                                       2
<PAGE>

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

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

ASSETS
<S>                                                                     <C>                    <C>
Current Assets
    Cash and temporary cash investments                            $        84.0          $        922.0
    Restricted cash, margin accounts                                       256.2                       -
    Accounts receivable                                                    931.8                   788.5
    Unbilled revenue                                                       223.0                   590.8
    Allowance for uncollectible accounts                                   (62.0)                  (67.8)
    Gas in storage, at average cost                                        756.6                   515.5
    Material and supplies, at average cost                                 127.6                   123.4
    Derivative contracts                                                   483.5                     8.3
    Other                                                                  152.7                   162.7
    Assets of discontinued operations                                          -                    42.9
                                                       --------------------------------------------------
                                                                         2,953.4                 3,086.3
                                                       --------------------------------------------------

Investments and  Other                                                     243.0                   272.9

Property
    Gas                                                                  7,133.2                 6,871.2
    Electric                                                             2,477.1                 2,402.1
    Other                                                                  416.1                   398.6
    Accumulated depreciation                                            (2,874.2)               (2,702.3)
    Gas exploration and production, at cost                                183.5                   187.1
    Accumulated depletion                                                 (107.9)                  (97.5)
    Property of discontinued operations                                        -                     8.7
                                                       --------------------------------------------------
                                                                         7,227.8                 7,067.9
                                                       --------------------------------------------------

Deferred Charges
    Regulatory assets
         Miscellaneous assets                                              483.8                   535.3
         Derivative contracts                                                  -                    20.1
    Goodwill and other intangible assets                                 1,666.4                 1,677.6
    Derivative contracts                                                    70.7                    21.7
    Other                                                                  669.2                   681.2
                                                       --------------------------------------------------
                                                                         2,890.1                 2,935.9
                                                       --------------------------------------------------

Total Assets                                                       $    13,314.3          $     13,363.0
                                                       ==================================================

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

        See accompanying Notes to the Consolidated Financial Statements.


                                       3
<PAGE>

<TABLE>
                           CONSOLIDATED BALANCE SHEET
                                   (Unaudited)

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

(In Millions of Dollars)                                              September 30, 2005         December 31, 2004
------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>                      <C>
LIABILITIES AND CAPITALIZATION
Current Liabilities
    Accounts payable and other liabilities                                  $      756.3             $      905.5
    Commercial paper                                                               320.0                    912.2
    Current redemption of long-term debt                                             1.5                     16.1
    Current redemption of preferred stock                                              -                     55.3
    Taxes accrued                                                                   85.1                    161.6
    Dividends payable                                                               79.3                     74.1
    Customer deposits                                                               40.5                     43.3
    Interest accrued                                                                73.4                     48.8
    Other current liability, margin accounts                                       256.7                        -
    Other current liability, derivative contracts                                   96.1                      6.2
    Liabilities of discontinued operations                                             -                     64.2
                                                               -------------------------- ------------------------
                                                                                 1,708.9                  2,287.3
                                                               -------------------------- ------------------------

Deferred Credits and Other Liabilities
    Regulatory liabilities:
          Miscellaneous liabilities                                                 41.9                     65.2
          Removal cost recovered                                                   531.3                    496.5
          Derivative contracts                                                     544.2                      8.7
    Deferred income tax                                                          1,130.3                  1,124.1
    Postretirement benefits and other reserves                                     927.3                    900.4
    Derivative contracts                                                            14.6                     37.8
    Other                                                                           98.5                     96.2
                                                               -------------------------- ------------------------
                                                                                 3,288.1                  2,728.9
                                                               -------------------------- ------------------------

Commitments and Contingencies (See Note 6)                                             -                        -

Capitalization
    Common stock                                                                 3,976.0                  3,502.0
    Retained earnings                                                              833.2                    792.2
    Other comprehensive income                                                    (117.5)                   (54.3)
    Treasury stock                                                                (304.1)                  (345.1)
                                                               -------------------------- ------------------------
         Total common shareholders' equity                                       4,387.6                  3,894.8
    Preferred stock                                                                    -                     19.7
    Long-term debt and capital leases                                            3,914.5                  4,418.7
                                                               -------------------------- ------------------------
Total Capitalization                                                             8,302.1                  8,333.2
                                                               -------------------------- ------------------------

Minority Interest in Subsidiary Companies                                           15.2                     13.6
                                                               -------------------------- ------------------------
Total Liabilities and Capitalization                                        $   13,314.3             $   13,363.0
                                                               ========================== ========================

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

        See accompanying Notes to the Consolidated Financial Statements.


                                       4
<PAGE>

<TABLE>
                        CONSOLIDATED STATEMENT OF INCOME
                                   (Unaudited)

<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
                                                            Three Months Ended Sept. 30,             Nine Months Ended Sept. 30,
(In Millions of Dollars, Except Per Share Amounts)            2005                 2004             2005                     2004
--------------------------------------------------------------------------------------- ------------------------------------------
<S>                                                      <C>                <C>                 <C>                   <C>
Revenues
     Gas Distribution                                    $    629.6        $     419.2        $    3,476.1          $     3,023.4
     Electric Services                                        619.9              503.9             1,488.9                1,296.8
     Energy Services                                           45.4               43.7               134.1                  129.7
     Houston Exploration                                          -                  -                   -                  268.1
     Energy Investments                                         8.2                8.8                27.0                   46.0
                                                   -----------------  ----------------- -------------------   --------------------
Total Revenues                                              1,303.1              975.5             5,126.1                4,763.9
                                                   -----------------  ----------------- -------------------   --------------------
Operating Expenses
     Purchased gas for resale                                 395.7              186.6             2,206.1                1,776.3
     Fuel and purchased power                                 254.6              176.0               546.9                  408.0
     Operations and maintenance                               364.3              344.8             1,143.3                1,143.1
     Depreciation, depletion and amortization                  92.1              107.2               295.8                  467.4
     Operating taxes                                           97.1               89.5               303.0                  302.1
                                                   -----------------  ----------------- -------------------   --------------------
Total Operating Expenses                                    1,203.8              904.1             4,495.1                4,096.9
Income from equity investments                                  2.5               16.2                12.5                   30.3
Sale of assets                                                  1.0                  -                 1.2                      -
                                                   -----------------  ----------------- -------------------   --------------------
Operating Income                                              102.8               87.6               644.7                  697.4
                                                   -----------------  ----------------- -------------------   --------------------
Other Income and (Deductions)
     Interest charges                                         (67.4)             (88.3)             (200.1)                (260.8)
     Gain on sale of investments                                  -                  -                 4.1                  172.9
     Cost of debt redemption                                      -              (45.9)              (20.9)                 (45.9)
     Minority interest                                         (0.2)                 -                (0.3)                 (37.0)
     Other                                                     (3.6)               4.1                 9.7                   25.9
                                                   -----------------  ----------------- -------------------   --------------------
Total Other Income and (Deductions)                           (71.2)            (130.1)             (207.5)                (144.9)
                                                   -----------------  ----------------- -------------------   --------------------
Income Taxes
     Current                                                  (25.8)            (171.8)              119.0                   (7.6)
     Deferred                                                  34.8              158.1                41.0                  210.8
                                                   -----------------  ----------------- -------------------   --------------------
Total Income Taxes                                              9.0              (13.7)              160.0                  203.2
                                                   -----------------  ----------------- -------------------   --------------------
Earnings (loss) from continuing operations                     22.6              (28.8)              277.2                  349.3
Discontinued Operations
    Loss from discontinued operations, net of tax                 -              (87.0)               (4.1)                 (86.6)
    Gain on disposal, net of tax                                  -                  -                 2.3                      -
                                                   -----------------  ----------------- -------------------   --------------------
Loss from discontinued operations                                 -              (87.0)               (1.8)                 (86.6)
                                                   -----------------  ----------------- -------------------   --------------------
Net Income (Loss)                                              22.6             (115.8)              275.4                  262.7
Preferred stock dividend requirements                             -                1.3                 2.2                    4.3
                                                   -----------------  ----------------- -------------------   --------------------
Earnings (Loss) for Common Stock                         $     22.6        $    (117.1)       $      273.2          $       258.4
                                                   =================  ================= ===================   ====================
Basic Earnings (Loss) Per Share:
  Continuing Operations,
         less preferred stock dividends                  $     0.13        $     (0.19)       $       1.63          $        2.15
  Discontinued Operations                                         -              (0.54)              (0.01)                 (0.54)
                                                   -----------------  ----------------- -------------------   --------------------
Basic Earnings Per Share                                 $     0.13        $     (0.73)       $       1.62          $        1.61
                                                   =================  ================= ===================   ====================
Diluted Earnings (Loss) Per Share
  Continuing Operations,
         less preferred stock dividends                  $     0.13        $     (0.19)       $       1.62          $        2.14
  Discontinued Operations                                         -              (0.54)              (0.01)                 (0.54)
                                                   -----------------  ----------------- -------------------   --------------------
Diluted Earnings Per Share                               $     0.13        $     (0.73)       $       1.61          $        1.60
                                                   =================  ================= ===================   ====================
Average Common Shares Outstanding (000)                     174,332            160,357             168,465                160,139
Average Common Shares Outstanding - Diluted (000)           175,238            161,346             169,403                161,091
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
        See accompanying Notes to the Consolidated Financial Statements.

                                       5
<PAGE>

<TABLE>
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (Unaudited)

<CAPTION>
---------------------------------------------------------------------------------------------------------------
                                                                                 Nine Months Ended September 30,
(In Millions of Dollars)                                                              2005               2004
---------------------------------------------------------------------------------------------------------------
Operating Activities
<S>                                                                                 <C>                <C>
Net income                                                                        $   275.4          $   262.7
Adjustments to reconcile net income to net
      cash provided by (used in) operating activities
    Depreciation, depletion and amortization                                          295.8              467.4
    Deferred income tax                                                                41.0               62.2
    Income from equity investments                                                    (12.5)             (30.3)
    Dividends from equity investments                                                   5.3                4.0
    Amortization of deferred fiancing costs and hedging settlements                    (2.5)             (12.5)
    Gain on sale of investments and property                                           (5.3)            (172.9)
    Minority interest                                                                   0.3               37.0
    Hedging losses                                                                      4.8                0.6
    Allowance for funds used during construction                                       (4.1)              (2.7)
    Goodwill impairment charge                                                            -               14.4
    Loss from discontinued operations                                                   1.8               86.6
    Amortization of property tax prepayments                                          197.6              174.6
Changes in assets and liabilities
    Accounts receivable                                                               294.3              277.2
    Materials and supplies, fuel oil and gas in storage                              (245.2)             (79.6)
    Accounts payable and other liabilities                                           (165.2)            (244.4)
    Captive insurance                                                                     -               43.2
    Insurance recovery                                                                 21.1                  -
    Property tax prepayment                                                          (193.9)            (148.6)
    Other                                                                             (36.6)              36.4
                                                                          ------------------   ----------------
Net Cash Provided by Operating Activities                                             472.1              775.3
                                                                          ------------------   ----------------
Investing Activities
    Construction expenditures                                                        (372.1)            (559.3)
    Cost of removal                                                                   (10.8)             (21.2)
    Derivative margin calls                                                           (63.3)                 -
    Net proceeds from sale of property and investments                                 46.9              525.2
                                                                          ------------------   ----------------
Net Cash (Used in) Investing Activities                                              (399.3)             (55.3)
                                                                          ------------------   ----------------
Financing Activities
    Treasury stock issued                                                              41.0               24.3
    MEDs equity conversion                                                            460.0                  -
    Issuance of long-term debt                                                            -               49.3
    Payment of long-term debt and preferred stock                                    (590.1)            (928.5)
    Issuance (Payment) of commercial paper                                           (592.2)              93.5
    Gain on settlement of treasury lock                                                   -               12.7
    Net proceeds from sale/leaseback transaction                                          -              383.7
    Common and preferred stock dividends paid                                        (229.1)            (218.4)
    Other                                                                              14.0               17.1
                                                                          ------------------   ----------------
Net Cash Used in Financing Activities                                                (896.4)            (566.3)
                                                                          ------------------   ----------------
Net Increase (Decrease) in Cash and Cash Equivalents                                 (823.6)             153.7
Cash Flow from Discontinued Operations - Operating Activities                         (15.1)               2.9
Cash Flow from Discontinued Operations - Investing Activities                           0.5                1.2
Cash Flow from Discontinued Operations - Financing Activities                           0.2                0.2
Cash and Cash Equivalents at Beginning of Period                                      922.0              203.3
                                                                          ------------------   ----------------
Cash and Cash Equivalents at End of Period                                        $    84.0          $   361.3
                                                                          ==================   ================

---------------------------------------------------------------------------------------------------------------
</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 September 30, 2005,  and the results of operations  for the three and nine
months ended  September  30, 2005 and  September 30, 2004, as well as cash flows
for the nine  months  ended  September  30, 2005 and  September  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.   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.
Income from interim periods may not be indicative of future results.

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 September
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 September 30,    Nine Months Ended September 30,
(In Millions of Dollars, Except Per Share Amounts)                      2005             2004            2005             2004
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>              <C>             <C>              <C>
Earnings (loss) for common stock - adjusted                         $    22.6        $  (117.1)      $   273.2        $   258.4
------------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding (000)                             174,332          160,357         168,465          160,139
Add dilutive securities:
Options                                                                   906              989             938              952
------------------------------------------------------------------------------------------------------------------------------------
Total weighted average shares outstanding - assuming dilution         175,238          161,346         169,403          161,091
------------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share                                     $    0.13        $   (0.73)      $    1.62         $   1.61
------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share                                   $    0.13        $   (0.73)      $    1.61         $   1.60
------------------------------------------------------------------------------------------------------------------------------------
</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." The majority
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 transactions is
approximately $1.0 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 a 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 September 30,
2005, the total cost to complete such remaining  bonded projects is estimated to
be approximately  $50 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 nine months
ended September 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  five  months 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  method 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
525,000 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 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, 2004  KeySpan
Canada's  earnings and our ownership  interest in KeySpan  Canada were accounted
for on the equity method 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 September 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        Elimi-     Consoli-
(In Millions of Dollars)                Distribution      Service      Services   Exploration     Investments    nations     dated
------------------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>           <C>         <C>           <C>              <C>         <C>       <C>
Three Months Ended September 30, 2005
Unaffiliated revenue                         629.6         619.9        45.4           -              8.2             -     1,303.1
Intersegment revenue                             -             -         1.7           -              3.7          (5.4)           -
Operating Income (loss)                      (45.5)        149.6        (1.1)          -              4.7          (4.9)      102.8

Three Months Ended September 30, 2004
Unaffiliated revenue                         419.2         503.9        43.7           -              8.8             -       975.5
Intersegment revenue                             -             -         2.9           -              1.3          (4.2)           -
Operating Income (loss)                      (23.6)        111.2       (19.3)        9.8              6.6           2.9        87.6
------------------------------------------------------------------------------------------------------------------------------------
</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 $612.2 million and $473.9 million for the three
months ended September 30, 2005 and 2004, respectively,  represent approximately
47% and 49%,  respectively,  of our  consolidated  revenues  for the  respective
periods.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                      Energy Investments
                                                                                 -------------------------
                                              Gas        Electric      Energy      Houston         Other       Elimi-     Consoli-
(In Millions of Dollars)                 Distribution    Services     Services   Exploration    Investments    nations      dated
------------------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>          <C>           <C>           <C>             <C>        <C>        <C>
Nine Months Ended September 30, 2005
Unaffiliated revenue                         3,476.1      1,488.9       134.1             -           27.0          -       5,126.1
Intersegment revenue                               -          4.6         7.9             -            3.7      (16.2)            -
Operating Income (loss)                        376.8        266.3        (6.7)            -           16.6       (8.3)        644.7

Nine Months Ended September 30, 2004
Unaffiliated revenue                         3,023.4      1,296.8       129.7         268.1           46.0          -       4,763.9
Intersegment revenue                               -            -         8.3             -            3.8      (12.1)            -
Operating Income (loss)                        391.1        226.3       (42.8)        130.8          (22.5)      14.5         697.4
------------------------------------------------------------------------------------------------------------------------------------
</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 $1.4  billion and $1.2  billion for the nine
months ended September 30, 2005 and 2004, respectively,  represent approximately
28% and  26%,  respectively  of our  consolidated  revenues  for the  respective
periods.






                                       12
<PAGE>


3. COMPREHENSIVE INCOME

The table below indicates the components of comprehensive income:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                                            Three Months Ended September 30,        Nine Months Ended September 30,
(In Millions of Dollars)                                         2005                2004               2005               2004
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>                <C>                <C>               <C>
Net Income (Loss)                                              $  22.6            $ (115.8)           $ 275.4           $ 262.7
-----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax
Settlement of derivative instruments                              10.7               (13.9)              18.4               2.6
Deconsolidation of certain subsidiaries                              -                   -                  -              (6.7)
Foreign currency translation adjustments                             -                 0.6               (5.0)            (16.5)
Unrealized gains (losses) on marketable securities                 2.9                (1.3)               1.4              (0.7)
Settlement of derivative premiums                                    -                   -                  -               3.4
Unrealized losses on derivative financial instruments            (59.8)               12.4              (78.0)             11.3
-----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive loss, net of tax                             (46.2)               (2.2)             (63.2)             (6.6)
-----------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income (Loss)                                    $ (23.6)           $ (118.0)           $ 212.2           $ 256.1
-----------------------------------------------------------------------------------------------------------------------------------
Related tax (benefit) expense
Settlement of derivative instruments                               5.8                (8.6)               9.9               0.3
Deconsolidation of certain subsidiaries                                                  -                  -               5.0
Foreign currency translation adjustments                             -                 0.3               (2.7)             (8.9)
Unrealized gains (losses) on marketable securities                 1.6                (1.0)               0.8              (0.7)
Settlement of derivative premiums                                    -                   -                  -               1.9
Unrealized losses on derivative financial instruments            (33.6)                8.1              (44.3)              7.5
-----------------------------------------------------------------------------------------------------------------------------------
Total Tax (Benefit) Expense                                    $ (26.2)           $   (1.2)           $ (36.3)          $   5.1
-----------------------------------------------------------------------------------------------------------------------------------
</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,  however,  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


                                       13
<PAGE>


we have hedged cash flow  variability  associated with forecasted  purchases and
sales  of  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 September 30, 2005, the fair value of gas swap contracts was $14.9
million;  the fair  value of the oil swap  contracts  was a  liability  of $12.4
million.  The  estimated  amount of net gains  associated  with such  derivative
instruments  that  are  reported  in  other  comprehensive  income  and that are
expected to be  reclassified  into  earnings over the next twelve months is $3.3
million, or $2.1 million after-tax. The ineffective portion of these derivatives
for the nine  months  ended  September  30,  2005 was $0.8  million and has been
recorded as an expense 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
September 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
September 30, 2005 was a liability of $25.7  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 $12.6 million, or $8.2 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 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.  At times,  KeySpan also employs natural gas futures contracts to hedge
the cash flow variability for a portion of forecasted  purchases of natural gas;
although at September 30, 2005 there no outstanding  derivatives associated with
natural gas. We use 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 fuel oil is through April 2006. The fair
value of these derivative instruments at September 30, 2005 was $0.9 million all
of which is  reported  in other  comprehensive  income  and are  expected  to be
reclassified into earnings over the next twelve months.

We have also engaged in the use of cash-settled swap instruments to hedge the
cash flow variability associated with a portion of forecasted electric energy
sales from the Ravenswood 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
maximum length of time over which we have hedged cash flow variability is
through August 2006. We use market quoted forward prices to value these
outstanding derivatives. The fair value of these derivative instruments at
September 30, 2005 was a liability of $71.1 million all of which is expected to
be reclassified into earnings over the next twelve months. The after-tax impact
is anticipated to be $46.2 million.


                                       14
<PAGE>


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 an  expense  of $0.8  million  for the  nine  months  ended
September  30, 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.

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 September 30, 2005, these
derivative instruments had a fair value of $501.1 million and are reflected as a
current asset of $467.8 million and a deferred  asset of $33.3 million,  with an
offsetting  regulatory  liability of $501.1 million 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 September 30, 2005,  these  derivatives had a fair value of $37.4 million and
are reflected as a deferred assets and regulatory  liability on the Consolidated
Balance Sheet.


                                       15
<PAGE>


Financially-Settled  Commodity  Derivative  Instruments  that Do Not Qualify for
Hedge  Accounting:  KeySpan  subsidiaries also have employed a limited number of
financial  derivatives that do not qualify for hedge accounting  treatment under
SFAS 133. In 2004,  we purchased a series of call options on the spread  between
the price of heating oil and the price of natural  gas.  The  options  cover the
period  February 2005 through  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 $1.1 million benefit in other
income and  deductions  on the  Consolidated  Statement of Income to reflect the
change in the market value  associated with this  derivative  instrument for the
nine months ended  September 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 $5.1 million loss 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 nine months ended September
30, 2005.

The table below  summarizes the fair value of the above  outstanding  derivative
instruments  at September  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)           September 30, 2005       December 31, 2004
-----------------------------------------------------------------------------
Gas Contracts:
  Current assets                            $  482.6                  $  7.7
  Other deferred assets                         70.7                    21.7
  Regulatory asset                                 -                    20.1
  Current liabilities                          (12.6)                      -
  Regulatory liabilities                      (544.2)                   (8.7)
  Other deferred liabilities                   (14.6)                  (37.8)

Oil Contracts:
  Current assets                                 0.9                     0.3
  Current liabilities                          (12.4)                   (6.2)

Electric Contracts:
  Current assets                                   -                     0.3
  Current liabilities                          (71.1)                      -
-----------------------------------------------------------------------------
                                            $ (100.7)                 $ (2.6)
-----------------------------------------------------------------------------


                                       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 September 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.  At September 30, 2005, KeySpan has received $256.2 million from its
counterparties as collateral  associated with outstanding  derivative contracts.
This amount has been recorded as restricted cash, with an offsetting position in
current liabilities on the Consolidated Balance Sheet. Further, KeySpan has paid
$63.3  million  in margin  calls to its  counterparties.  This  amount  has been
recorded as an  accounts  receivable  on the  September  30,  2005  Consolidated
Balance Sheet.

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 June 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 Payments."
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


                                       18
<PAGE>


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
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 recorded 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  original  proposed  effective  date was to be 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 provided a 60-day comment period,  which closed
September 12, 2005. The FASB, however,  decided to delay implementation of a new
standard  until the first quarter of 2006. 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,  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 $328
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,  including future  decommissioning costs, 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  recorded  asset  retirement
obligation  ("ARO")  relates to its  investment  in  Seneca-Upshur  and was $1.9
million at September 30, 2005.


                                       20
<PAGE>


KeySpan's largest asset base is its gas transmission and distribution  system. A
legal  obligation  exists  to  perform  certain  safety  requirements  at  final
abandonment.  In  addition,  a legal  obligation  may be construed to exist with
respect to KeySpan's liquefied natural gas ("LNG") storage tanks due to clean up
responsibilities  upon cessation of use.  However,  mass assets such as storage,
transmission and distribution  assets are believed to operate in perpetuity and,
therefore,  have  indeterminate  cash flow estimates.  Since that exposure is in
perpetuity  and cannot be measured,  no liability 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 $57.6 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 $48.3 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 $191.2 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.


                                       21
<PAGE>


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 September 30, 2005, we have reflected a
regulatory  asset of $221.2 million for our KEDNY/KEDLI MGP sites. In accordance
with NYPSC  policy,  KeySpan  records a reduction to regulatory  liabilities  as
costs are incurred for environmental cleanup activities.  At September 30, 2005,
these  previously  deferred  regulatory  liabilities  totaled $28.3 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 nine months ended  September  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 $1.8  million,  which amount has been
accrued by us. Expenditures incurred to date total $3.2 million.

New England Sites:  In 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 $11.3 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  $26.1
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 $7.1 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 $15.7
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 $38.7 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  $16.7  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
$16.1 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,  KeySpan's
quarterly reports on Form 10-Q for the periods ended March 31, 2005 and June 30,
2005 or other periodic reports filed on Form 8-K during 2005, we do not consider
any of such  proceedings to be material to our business or likely to result in a
material  adverse  effect on our results of operations,  financial  condition or
cash flows.

KeySpan  and  certain of its  current and former  officers  and  directors  were
defendants  in a  consolidated  class action  lawsuit filed in the United States
District Court for the Eastern District of New York. This lawsuit alleged, among
other things,  violations of Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934,  as  amended  ("Exchange  Act"),  in  connection  with  disclosures
relating to or following the acquisition of the Roy Kay companies. In June 2004,
the parties  entered into a settlement  agreement which provided for the parties
to settle the action for $13.8  million.  The court  approved the  settlement on
September 29, 2005 and the matter is now  concluded.  The  settlement was funded
entirely by insurance.

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

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


                                       24
<PAGE>


Financial Guarantees

KeySpan  has  issued  financial  guarantees  in the normal  course of  business,
primarily on behalf of its  subsidiaries,  to various third party creditors.  At
September 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)              404,000         2040
  Surety Bonds                                             (v)                88,000       2005-2008
  Commodity Guarantees and Other                           (vi)               86,000         2005
  Letters of Credit                                        (vii)              74,000         2005
---------------------------------------------------------------------------------------------------------
                                                                         $ 1,730,000
---------------------------------------------------------------------------------------------------------
</TABLE>


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

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

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

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

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


                                       25
<PAGE>


(v)  KeySpan  has  agreed  to  indemnify  the  issuers  of  various  surety  and
     performance bonds associated with certain  construction  projects currently
     being  performed by certain current and former  subsidiaries.  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.  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 September 30,
     2005,  the  total  cost to  complete  such  remaining  bonded  projects  is
     estimated to be approximately $51 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 September 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.

     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.


                                       26
<PAGE>


Other Contingencies

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

In 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  performing  a long-term  strategic  review of its future
direction.  It has engaged a team of advisors and  consultants and has conducted
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 its 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.
LIPA and KeySpan are engaged in discussions  concerning LIPA's strategic review.
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
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


                                       27
<PAGE>


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:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
                                                                    Three Months Ended Sept. 30,      Nine Months Ended Sept. 30,
(In Millions of Dollars, Except Per Share Amounts)                     2005              2004            2005             2004
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>             <C>            <C>                <C>
Earnings (loss) available for common stock:
As reported                                                            $ 22.6         $ (117.1)       $ 273.2            $ 258.4
     Add: recorded stock-based compensation expense, net of tax           1.3              1.3            7.4                4.1
     Deduct: total stock-based compensation expense, net of tax          (1.8)            (1.9)          (8.8)              (6.9)
---------------------------------------------------------------------------------------------------------------------------------
Pro-forma earnings                                                     $ 22.1         $ (117.7)       $ 271.8            $ 255.6
---------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share:
     Basic - as reported                                               $ 0.13         $  (0.73)       $  1.62            $  1.61
     Basic - pro-forma                                                 $ 0.13         $  (0.73)       $  1.61            $  1.60

     Diluted - as reported                                             $ 0.13         $  (0.73)       $  1.61            $  1.60
     Diluted - pro-forma                                               $ 0.13         $  (0.73)       $  1.60            $  1.59
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       28
<PAGE>


8. POSTRETIREMENT BENEFITS

Pension  Plans:  The  following  information  represents  the  consolidated  net
periodic pension cost for the nine months ended September 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>
-----------------------------------------------------------------------------------------------
                                                           Nine Months Ended September, 30
(In Millions of Dollars)                                      2005                 2004
-----------------------------------------------------------------------------------------------
<S>                                                       <C>                    <C>
Service cost, benefits earned during the period         $    42.5               $  39.7
Interest cost on projected benefit obligation               111.4                  108.2
Expected return on plan assets                             (129.8)                (118.7)
Net amortization and deferral                                55.4                   47.4
-----------------------------------------------------------------------------------------------
Total pension cost                                      $    79.5               $   76.6
-----------------------------------------------------------------------------------------------
</TABLE>

Other  Postretirement   Benefits:   The  following  information  represents  the
consolidated net periodic other postretirement  benefit cost for the nine months
ended September 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.

Net  periodic   other   postretirement   benefit  cost  included  the  following
components:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
                                                           Nine Months Ended September 30,
(In Millions of Dollars)                                      2005                 2004
---------------------------------------------------------------------------------------------
<S>                                                         <C>                   <C>
Service cost, benefits earned during the period         $     18.3              $   15.1
Interest cost on accumulated
   postretirement benefit obligation                          56.8                  55.5
Expected return on plan assets                               (27.1)                (25.4)
Net amortization and deferral                                 44.9                  35.1
---------------------------------------------------------------------------------------------
Other postretirement cost                               $     92.9              $   80.3
---------------------------------------------------------------------------------------------
</TABLE>

During the first nine months of 2005,  KeySpan  contributed $98.5 million to its
pension plans and $18.0 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, but does anticipate contributing
up to an additional $8 million to its other postretirement  benefit plans during


                                       29
<PAGE>


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,  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 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,
KeySpan now has $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  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.

In June 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.


                                       30
<PAGE>


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

The facilities  contain certain  affirmative and negative  operating  covenants,
including  restrictions on KeySpan's  ability to mortgage,  pledge,  encumber or
otherwise subject its utility property to any lien, as well as certain financial
covenants  that  require us to,  among  other  things,  maintain a  consolidated
indebtedness  to  consolidated  capitalization  ratio of no more than 65% at the
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
September  30,  2005,  KeySpan's  consolidated  indebtedness  was  49.1%  of its
consolidated capitalization and KeySpan was in compliance with all covenants.

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

At September 30, 2005,  $320 million of commercial  paper was  outstanding  at a
weighted  average  annualized  interest  rate of  3.90%.  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 September 30, 2005, under the commercial paper program.

10. SUBSEQUENT EVENT

On November 1, 2005, KeySpan's gas distribution  subsidiary,  KEDNY, issued $137
million of tax-exempt Gas Facilities Revenue Bonds ("GFRB") through the New York
State Energy  Research and  Development  Authority  ("NYSERDA") in the following
series:  (i) $82 million of 4.70% GFRB, 2005 Series A (the "Series A Bonds") and
(ii) $55 million of GFRB,  2005 Series B (the  "Series B Bonds").  The  interest
rate on the  Series B Bonds is  re-set  every  seven  days  through  an  auction
process.  KEDNY  will use the  proceeds  from  these  issuances  to  redeem  the
following three series of GFRBs: (i) $41 million  Adjustable Rate GFRBs,  Series
1989A due February 2024,  $41 million  Adjustable  Rate Gas GFRBs,  Series 1989B
February 2024 and (iii) $55 million 5.60% GFRB, Series 1993C due June 2025.


                                       31
<PAGE>


On November 1, 2005,  the MADTE  approved a base rate  increase of $7.2  million
under  Boston Gas  Company's  Performance  Based Rate Plan that was  approved in
2003. Also on November 1, 2005, the MADTE authorized recovery of under-recovered
gas related bad debt expenses for the period January 1,  2004-December  31, 2004
through the gas cost  adjustment  factor and  established a mechanism for future
recovery of such costs.  KeySpan is in the  process of  analyzing  the impact of
this order.

11. KEYSPAN ENERGY DELIVERY LONG ISLAND 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 September 30, 2005
(In Millions of Dollars)                             Guarantor      KEDLI     Other Subsidiaries   Eliminations    Consolidated
--------------------------------------------------------------------------------------------------------------------------------
                                                   -----------------------------------------------------------------------------
<S>                                                        <C>         <C>               <C>               <C>       <C>
Revenues                                                  $  0.2      $ 185.1           $ 1,118.0         $ (0.2)   $ 1,303.1
                                                   -----------------------------------------------------------------------------
Operating Expenses
  Purchased gas                                                -        136.5               259.2              -          395.7
  Fuel and purchased power                                     -            -               254.6              -          254.6
  Operations and maintenance                                 3.5         32.6               328.2              -          364.3
  Intercompany expense                                         -          1.2                (1.0)          (0.2)             -
  Depreciation and amortization                                -         14.1                78.0              -           92.1
  Operating taxes                                              -         15.5                81.6              -           97.1
                                                   -----------------------------------------------------------------------------
Total Operating Expenses                                     3.5        199.9             1,000.6           (0.2)       1,203.8
                                                   -----------------------------------------------------------------------------
 Income from equity investments                                -            -                 2.5              -            2.5
Gain on Sale of Property                                       -            -                 1.0              -            1.0
                                                   -----------------------------------------------------------------------------
Operating Income (Loss)                                     (3.3)       (14.8)              120.9              -          102.8
                                                   -----------------------------------------------------------------------------

Interest charges                                           (37.3)       (13.7)              (22.4)           6.0          (67.4)
Other income and (deductions)                               50.4          0.3               (28.3)         (26.2)          (3.8)
                                                   -----------------------------------------------------------------------------
Total Other Income and (Deductions)                         13.1        (13.4)              (50.7)         (20.2)         (71.2)
                                                   -----------------------------------------------------------------------------

Income Taxes (Benefit)                                     (12.8)        (9.9)               31.7              -            9.0
                                                   -----------------------------------------------------------------------------
                                                                                                                              -
Earnings (Loss) from Continuing Operations                  22.6        (18.3)               38.5          (20.2)          22.6
Discontinued Operations                                        -            -                   -                             -
                                                   -----------------------------------------------------------------------------
Net Income (Loss)                                         $ 22.6      $ (18.3)          $    38.5         $(20.2)   $      22.6
                                                   =============================================================================
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       32
<PAGE>

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
                               Statement of Income
----------------------------------------------------------------------------------------------------------------------------------
                                                                        Three Months Ended September 30, 2004
(In Millions of Dollars)                          Guarantor         KEDLI       Other Subsidiaries   Eliminations   Consolidated
----------------------------------------------------------------------------------------------------------------------------------
                                                ----------------------------------------------------------------------------------
<S>                                                     <C>              <C>                <C>             <C>            <C>
Revenues                                              $    0.2          $ 114.2            $ 861.3         $ (0.2)       $  975.5
                                                ----------------------------------------------------------------------------------
Operating Expenses
  Purchased gas                                              -             50.0              136.6              -           186.6
  Fuel and purchased power                                   -                -              176.0              -           176.0
  Operations and maintenance                               2.1             29.9              312.8              -           344.8
  Intercompany expense                                       -              1.3               (1.1)          (0.2)              -
  Depreciation and amortization                              -             13.8               93.4              -           107.2
  Operating taxes                                            -             15.5               74.0              -            89.5
                                                ----------------------------------------------------------------------------------
Total Operating Expenses                                   2.1            110.5              791.7           (0.2)          904.1
                                                ----------------------------------------------------------------------------------
Income from equity investments                               -                -               16.2              -            16.2
                                                ----------------------------------------------------------------------------------
Operating Income (Loss)                                   (1.9)             3.7               85.8              -            87.6
                                                ----------------------------------------------------------------------------------

Interest charges                                         (54.2)           (16.3)             (67.5)          49.7           (88.3)
Other income and (deductions)                            (90.1)             0.2               11.3           36.8           (41.8)
                                                ----------------------------------------------------------------------------------
Total Other Income and (Deductions)                     (144.3)           (16.1)             (56.2)          86.5          (130.1)
                                                ----------------------------------------------------------------------------------
Income Taxes (Benefit)                                   (30.4)            (2.6)              19.3              -           (13.7)
                                                ----------------------------------------------------------------------------------
Earnings from Continuing Operations                     (115.8)            (9.8)              10.3           86.5           (28.8)
Discontinued Operations                                      -                -              (87.0)             -           (87.0)
                                                ----------------------------------------------------------------------------------
Net Income (Loss)                                     $ (115.8)         $  (9.8)           $ (76.7)        $ 86.5        $ (115.8)
                                                ==================================================================================
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                               Statement of Income
-----------------------------------------------------------------------------------------------------------------------------------
                                                                         Nine Months Ended September 30, 2005
(In Millions of Dollars)                            Guarantor        KEDLI      Other Subsidiaries    Eliminations    Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
                                                 ----------------------------------------------------------------------------------
<S>                                                        <C>           <C>               <C>              <C>           <C>
Revenues                                                 $   0.5        $ 916.1           $ 4,210.0       $   (0.5)     $  5,126.1
                                                 ----------------------------------------------------------------------------------
Operating Expenses
  Purchased gas                                                -          588.1             1,618.0              -         2,206.1
  Fuel and purchased power                                     -              -               546.9              -           546.9
  Operations and maintenance                                10.9           96.4             1,036.0              -         1,143.3
  Intercompany expense                                         -            3.7                (3.2)          (0.5)              -
  Depreciation and amortization                                -           59.1               236.7              -           295.8
  Operating taxes                                              -           47.8               255.2              -           303.0
                                                 ----------------------------------------------------------------------------------
Total Operating Expenses                                    10.9          795.1             3,689.6           (0.5)        4,495.1
                                                 ----------------------------------------------------------------------------------
 Income from equity investments                                -              -                12.5              -            12.5
Gain on Sale of Property                                       -              -                 1.2              -             1.2
                                                 ----------------------------------------------------------------------------------
Operating Income (Loss)                                    (10.4)         121.0               534.1              -           644.7
                                                 ----------------------------------------------------------------------------------

Interest charges                                          (104.8)         (46.1)              (64.9)          15.7          (200.1)
Other income and (deductions)                              364.8            3.2               (62.4)        (313.0)           (7.4)
                                                 ----------------------------------------------------------------------------------
Total Other Income and (Deductions)                        260.0          (42.9)             (127.3)        (297.3)         (207.5)
                                                 ----------------------------------------------------------------------------------
Income Taxes (Benefit)                                     (25.8)          28.2               157.6              -           160.0
                                                 ----------------------------------------------------------------------------------
                                                                                                                                 -
Earnings from Continuing Operations                        275.4           49.9               249.2         (297.3)          277.2
Discontinued Operations                                        -              -                (1.8)                          (1.8)
                                                 ----------------------------------------------------------------------------------
Net Income                                               $ 275.4        $  49.9           $   247.4       $ (297.3)     $    275.4
                                                 ==================================================================================
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
                                       33
<PAGE>


<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                               Statement of Income
-----------------------------------------------------------------------------------------------------------------------------------
                                                                         Nine Months Ended September 30, 2004
(In Millions of Dollars)                             Guarantor         KEDLI      Other Subsidiaries  Eliminations    Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
                                                 ----------------------------------------------------------------------------------
<S>                                                       <C>             <C>              <C>              <C>           <C>
Revenues                                                 $   0.4         $ 766.7          $ 3,997.2       $   (0.4)      $ 4,763.9
                                                 ----------------------------------------------------------------------------------
Operating Expenses
  Purchased gas                                                -           438.0            1,338.3              -         1,776.3
  Fuel and purchased power                                     -               -              408.0              -           408.0
  Operations and maintenance                                (3.0)           96.8            1,049.2              -         1,143.0
  Intercompany expense                                         -             4.1               (3.7)          (0.4)              -
  Depreciation and amortization                                -            62.1              405.3              -           467.4
  Operating taxes                                              -            47.8              254.3              -           302.1
                                                 ----------------------------------------------------------------------------------
Total Operating Expenses                                    (3.0)          648.8            3,451.4           (0.4)        4,096.8
                                                 ----------------------------------------------------------------------------------
Income from equity investments                                 -               -               30.3              -            30.3
                                                 ----------------------------------------------------------------------------------
Operating Income (Loss)                                      3.4           117.9              576.1              -           697.4
                                                 ----------------------------------------------------------------------------------

Interest charges                                          (161.0)          (47.0)            (208.4)         155.6          (260.8)
Other income and (deductions)                              380.2             0.7              192.8         (457.8)          115.9
                                                 ----------------------------------------------------------------------------------
Total Other Income and (Deductions)                        219.2           (46.3)             (15.6)        (302.2)         (144.9)
                                                 ----------------------------------------------------------------------------------

Income Taxes (Benefit)                                     (40.1)           22.4              220.9              -           203.2
                                                 ----------------------------------------------------------------------------------
Earnings from Continuing Operations                        262.7            49.2              339.6         (302.2)          349.3
Discontinued Operations                                        -               -              (86.6)             -           (86.6)
                                                 ----------------------------------------------------------------------------------
Net Income                                               $ 262.7         $  49.2          $   253.0       $ (302.2)      $   262.7
                                                 ==================================================================================
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>





                                       34
<PAGE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Balance Sheet
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                    September 30, 2005
                                                                                           Other          Elimina-       Consoli-
(In Millions of Dollars)                             Guarantor           KEDLI         Subsidiaries         tions         dated
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>              <C>                <C>             <C>             <C>
ASSETS
Current Assets
   Cash & temporary cash investments                $    (5.7)       $     1.3         $     88.4       $        -      $     84.0
   Accounts receivable, net                               0.2            126.0              966.6                -         1,092.8
   Other current assets                                   2.7            421.2            1,352.7                -         1,776.6
   Assets of discontinued operations                        -                -                  -                -               -
                                           ----------------------------------------------------------------------------------------
                                                         (2.8)           548.5            2,407.7                -         2,953.4
                                           ----------------------------------------------------------------------------------------

Equity Investments                                    4,500.4              0.8              128.0         (4,386.2)          243.0
                                           ----------------------------------------------------------------------------------------
Property
   Property, Plant and Equipment                                       2,070.8            8,139.0                -        10,209.8
   Accumulated depreciation and depletion                   -           (402.3)          (2,579.7)               -        (2,982.0)
   Property of discontinued operations                      -                -                  -                -               -
                                           ----------------------------------------------------------------------------------------
                                                            -          1,668.5            5,559.3                -         7,227.8
                                           ----------------------------------------------------------------------------------------

Intercompany Accounts Receivable                      2,334.5             32.3               75.2         (2,442.0)              -
                                                            -
Deferred Charges                                        472.9            247.9            2,169.3                -         2,890.1

                                           ----------------------------------------------------------------------------------------
Total Assets                                        $ 7,305.0        $ 2,498.0         $ 10,339.5       $ (6,828.2)     $ 13,314.3
                                           ========================================================================================

LIABILITIES AND CAPITALIZATION
Current Liabilities
   Accounts payable                                 $    28.2        $   248.3         $    479.8       $        -      $    756.3
   Commercial paper                                     320.0                -                  -                -           320.0
   Other current liabilities                            145.0             27.1              460.5                -           632.6
   Liabilities of discontinued operations                   -                -                  -                -               -
                                           ----------------------------------------------------------------------------------------
                                                        493.2            275.4              940.3                -         1,708.9
                                           ----------------------------------------------------------------------------------------
Intercompany Accounts Payable                           (62.0)            99.6              890.6           (928.2)              -
                                           ----------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Deferred income tax                                      16.8            362.6              750.9                -         1,130.3
Other deferred credits and liabilities                  558.9            244.0            1,354.9                -         2,157.8
                                           ----------------------------------------------------------------------------------------
                                                        575.7            606.6            2,105.8                -         3,288.1
                                           ----------------------------------------------------------------------------------------
Capitalization
Common shareholders' equity                           4,448.2            865.5            3,460.1         (4,386.2)        4,387.6
Long-term debt                                        1,849.9            650.9            2,927.5         (1,513.8)        3,914.5
                                           ----------------------------------------------------------------------------------------
Total Capitalization                                  6,298.1          1,516.4            6,387.6         (5,900.0)        8,302.1
                                           ----------------------------------------------------------------------------------------
Minority Interest in Subsidiary Companies                   -                -               15.2                -            15.2
                                           ----------------------------------------------------------------------------------------
Total Liabilities & Capitalization                  $ 7,305.0        $ 2,498.0         $ 10,339.5       $ (6,828.2)     $ 13,314.3
                                           ========================================================================================
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       35
<PAGE>


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet
------------------------------------------------------------------------------------------------------------------------------------
                                                                                  December 31, 2004
                                                                                       Other            Elimina-          Consoli-
(In Millions of Dollars)                           Guarantor          KEDLI         Subsidiaries          tions             dated
------------------------------------------------------------------------------------------------------------------------------------
<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              1,087.1                -           1,311.5
   Other current assets                                 4.5           146.5                658.9                -             809.9
   Assets of discontinued operations                      -               -                 42.9                -              42.9
                                            ----------------------------------------------------------------------------------------
                                                      586.0           369.2              2,131.1                -           3,086.3
                                            ----------------------------------------------------------------------------------------

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              2,333.2                -           2,935.9

                                            ----------------------------------------------------------------------------------------
Total Assets                                      $ 8,020.3       $ 2,256.7           $ 11,329.4       $ (8,243.4)       $ 13,363.0
                                            ========================================================================================

LIABILITIES AND CAPITALIZATION
Current Liabilities
   Accounts payable                               $    48.4       $   111.6           $    745.5       $        -        $    905.5
   Commercial paper                                   912.2               -                    -                -             912.2
   Other current liabilities                          294.7           167.2                (56.5)               -             405.4
   Liabilities of discontiuned operations                 -               -                 64.2                -              64.2
                                            ----------------------------------------------------------------------------------------
                                                    1,255.3           278.8                753.2                -           2,287.3
                                            ----------------------------------------------------------------------------------------
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                958.3                -           1,604.8
                                            ----------------------------------------------------------------------------------------
                                                      451.3           410.1              1,867.5                -           2,728.9
                                            ----------------------------------------------------------------------------------------
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           $ 11,329.4       $ (8,243.4)       $ 13,363.0
                                            ========================================================================================
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>



                                       36
<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Statement of Cash Flows
------------------------------------------------------------------------------------------------------------------------------------
                                                                                Nine Months Ended September 30, 2005
                                                         ---------------------------------------------------------------------------
                                                                                                         Other
(In Millions of Dollars)                                            Guarantor          KEDLI          Subsidiaries     Consolidated
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>               <C>                 <C>              <C>
Operating Activities
Net Cash Provided by (Used in )Operating Activities                 $ (326.2)         $ 156.7            $  641.6          $  472.1
                                                         ---------------------------------------------------------------------------
Investing Activities
   Capital expenditures                                                    -            (70.9)             (301.2)           (372.1)
   Cost of removal                                                                       (1.6)               (9.2)            (10.8)
   Proceeds from sale of property and investments                          -             (2.1)               49.0              46.9
   Derivative margin calls                                                 -                -               (63.3)            (63.3)
                                                         ---------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities                        -            (74.6)             (324.7)           (399.3)
                                                         ---------------------------------------------------------------------------
Financing Activities
   Treasury stock issued                                                41.0                -                   -              41.0
   Payment of debt, net                                             (1,092.2)               -               (15.1)         (1,107.3)
   Redemption of preferred stock                                       (75.0)               -                   -             (75.0)
   Common and preferred stock dividends paid                          (229.1)               -                   -            (229.1)
   MEDs equity conversion                                              460.0                -                   -             460.0
   Intercompany dividend payments                                      317.0                -              (317.0)                -
   Other                                                                (2.4)               -                16.4              14.0
   Net intercompany accounts                                           304.0            (80.0)             (224.0)                -
                                                                                                                                  -
                                                         ---------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities                   (276.7)           (80.0)             (539.7)           (896.4)
                                                         ---------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents                $ (602.9)         $   2.1            $ (222.8)         $ (823.6)
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                          $  (22.2)         $   1.2            $  105.0          $   84.0
                                                         ===========================================================================
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
Statement of Cash Flows
-------------------------------------------------------------------------------------------------------------------------------
                                                                                Nine Months Ended September 30, 2004
                                                         ----------------------------------------------------------------------
                                                                                                    Other
(In Millions of Dollars)                                          Guarantor           KEDLI      Subsidiaries     Consolidated
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>               <C>               <C>              <C>
Operating Activities
Net Cash Provided by (Used in) Operating Activities               $ (154.5)         $ 198.6           $ 731.2          $ 775.3
                                                         ----------------------------------------------------------------------
Investing Activities
  Capital expenditures                                                   -            (76.3)           (483.0)          (559.3)
  Cost of removal                                                        -             (4.7)            (16.5)           (21.2)
  Proceeds from sale of property and investments                         -                -             525.2            525.2
                                                         ----------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities                      -            (81.0)             25.7            (55.3)
                                                         ----------------------------------------------------------------------
Financing Activities
   Treasury stock issued                                              24.3                -                 -             24.3
   Payment of debt, net                                             (589.4)               -            (187.8)          (777.2)
   Common and preferred stock dividends paid                        (218.4)               -                 -           (218.4)
   Proceeds from sale/leaseback transaction                              -                -             383.7            383.7
   Redemption of preferred stock                                      (8.5)                                 -             (8.5)
   Gain on settlement of treasury lock                                12.7                                  -             12.7
   Other                                                               3.9                -              13.2             17.1
   Net intercompany accounts                                         906.6           (117.1)           (789.5)               -
                                                                                                                             -
                                                         ----------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities                  131.2           (117.1)           (580.4)          (566.3)
                                                         ----------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents                 (23.3)             0.5             176.5            153.7
Net Cash Flow from Discontinued Operations                               -                -               4.3              4.3
Cash and Cash Equivalents at Beginning of Period                      97.6              1.5             104.2            203.3
                                                         ----------------------------------------------------------------------
Cash and Cash Equivalents at End of Period                          $ 74.3            $ 2.0           $ 285.0          $ 361.3
                                                         ======================================================================
-------------------------------------------------------------------------------------------------------------------------------
</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 nine months ended  September  30, 2005,  compared to the three and
nine months ended  September 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       Nine Months Ended        Nine Months Ended
(In Millions of Dollars,             September 30, 2005       September 30, 2004       September 30, 2005        September 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 (loss) from continuing
 operations, less preferred stock
 dividends                          $ 22.6         $ 0.13    $ (30.1)      $ (0.19)   $ 275.0       $  1.63     $345.0       $ 2.15
Discontinued operations                  -              -      (87.0)        (0.54)      (1.8)        (0.01)     (86.6)       (0.54)
------------------------------------------------------------------------------------------------------------------------------------
Earnings (Loss) for Common Stock    $ 22.6         $ 0.13    $(117.1)      $ (0.73)   $ 273.2       $  1.62     $258.4       $ 1.61
------------------------------------------------------------------------------------------------------------------------------------

Components of Continuing Operations
   Core operations                  $ 22.6         $ 0.13    $   4.9       $  0.03    $ 281.8       $  1.67     $248.6       $ 1.55
   Ceiling test write-down               -              -          -             -          -             -      (31.1)       (0.19)
   Debt redemption costs                 -              -      (29.3)        (0.18)      (6.8)        (0.04)     (29.3)       (0.18)
   Impairment charges                    -              -      (12.6)        (0.08)         -             -      (12.6)       (0.08)
   Non-core operations                   -              -        6.9          0.04          -             -       53.3         0.33
   Asset sales                           -              -          -             -          -             -      116.1         0.72
------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing
 operations, less preferred stock
 dividends                          $22.6          $ 0.13    $ (30.1)      $ (0.19)   $ 275.0       $  1.63     $345.0       $ 2.15
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


Earnings from Continuing Operations

KeySpan's  earnings from continuing  operations,  less preferred stock dividends
for the three months ended  September 30, 2005 were $22.6 million,  or $0.13 per
share,  compared to a loss of $30.1 million or $0.19 per share  incurred  during
the  corresponding   quarter  last  year.  KeySpan's  earnings  from  continuing
operations,  less preferred  stock dividends for the nine months ended September
30, 2005 were $275.0 million, or $1.63 per share,  compared to $345.0 million or
$2.15 per share realized during the same period last year.  KeySpan's  financial
results  for all  periods  reflect the  following  items that had a  significant
impact on comparative results: (i) asset sales of non-core subsidiaries recorded
in 2004 and their respective  results for 2004; (ii) impairment charges recorded
in 2004; and (iii) debt redemption charges recorded in 2005 and 2004.


                                       38
<PAGE>


For the first five 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 based in
Houston,  Texas.  Further, for the first three months of 2004, 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.

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 Houston  Exploration  were fully  consolidated  in KeySpan's
Consolidated  Financial  Statements  during  the first  five  months of 2004 and
KeySpan  Canada's  operations  were fully  consolidated  during the first  three
months of 2004.  The  operations of these  companies  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 nine
months ended  September 30, 2004,  KeySpan's  share of the combined  earnings of
Houston  Exploration  and  KeySpan  Canada,  including  the gains from the stock
transactions, were $6.9 million or $0.04 per share, and $169.4 million, or $1.05
per share, respectively.  KeySpan sold its remaining ownership interest in these
non-core operations in the fourth quarter of 2004.

KeySpan recorded two significant impairment charges during the nine months ended
September 30, 2004 (a goodwill impairment charge recorded in the Energy Services
segment and a ceiling test  write-down  associated  with our gas exploration and
production   activities)  that  resulted  in  after-tax  charges  to  continuing
operations  of $12.6  million,  or $0.08 per share  for the three  months  ended
September  30,  2004 and $43.7  million,  or $0.27 per share for the nine months
ended September 30, 2004.

In the third quarter of 2004, the Energy Services  segment recorded an after-tax
non-cash  goodwill  impairment  charge of $12.6  million,  or $0.08 per share in
continuing  operations  as a result of an  evaluation  of the carrying  value of
goodwill  recorded  in  this  segment.  That  evaluation  resulted  in  a  total
impairment charge of $90.4 million after-tax, or $0.56 per share - $12.6 million
of this charge is  attributable  to continuing  operations,  while the remaining
$77.8 million,  or $0.48 per share,  was reflected in  discontinued  operations.
(See the  discussion  below under the  caption  "Earnings  Available  for Common
Stock" for additional details on discontinued operations.)


                                       39
<PAGE>


Also,  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  which is
reflected in the nine months ended September 30, 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  gains
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 on the Consolidated  Statement
of Income.  The net after-tax  charge  associated with this transaction was $6.8
million, or $0.04 per share.

In August 2004,  KeySpan  redeemed  approximately  $758  million of  outstanding
long-term debt. KeySpan incurred $54.5 million in call premiums  associated with
this  redemption,  of which $45.9 was  expensed and recorded in other income and
deductions on the Consolidated  Statement of Income. The remaining amount of the
call premiums were deferred for future recovery. Further, KeySpan wrote-off $8.2
million of  previously  deferred  financing  costs which have been  reflected in
interest  expense.  The total after-tax expense of the debt redemption was $29.3
million or $0.18 per share.

The net impact of the above  mentioned  items resulted in a decrease to earnings
from  continuing  operations of $35.0 million,  or $0.22 per share for the third
quarter of 2004. For the nine months ended  September 30, 2005 the net impact of
the above  mentioned  items  resulted in a decrease to earnings from  continuing
operations of $6.8 million, or $0.04 per share compared to gain of $96.4 million
or $0.60 per share for the same period of 2004.

The remaining item impacting  comparative earnings from continuing operations is
KeySpan's core operations.  As indicated in the above table,  KeySpan's earnings
from core  operations  increased  $17.7  million or $0.10 per share in the third
quarter of 2005, primarily reflecting higher earnings from our electric services
operations as well as lower interest charges,  offset by lower earnings from our
gas distribution operations.  Electric services operations reflect the favorable
results from an increase in net  electric  revenues  principally  as a result of
improved  pricing due, in part, to the warm weather  during the third quarter of
2005.

The decrease in interest  expense  resulted  from the benefits  attributable  to
lower  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.  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 adverse  impact from recent  collection
experience, as well as from an increase in property taxes.


                                       40
<PAGE>


For the nine months ended  September  30,  2005,  KeySpan's  earnings  from core
operations,  less preferred stock dividends,  increased $33.2 million,  or $0.12
per share  compared  to the same  period of 2004,  primarily  reflecting  higher
earnings from the Electric  Services  segment,  improved results from the Energy
Services  segment,  and a decrease  in  interest  charges.  As noted,  KeySpan's
electric services operations  benefited from higher pricing due, in part, to the
warm summer weather. Lower operating losses were incurred at the Energy Services
segment as a result of lower operating  expenses.  These favorable  results were
somewhat   offset  by  a  decrease  in  operating   income  from  KeySpan's  gas
distribution operations as a result of higher operating expenses,  primarily due
to an  increase  in the  provision  for  uncollectible  accounts  as a result of
increasing gas costs and the adverse impact from recent  collection  experience,
as well as from an increase in property taxes.

The full benefit of the favorable operating results of the Electric Services and
Energy  Services  segments,  as well the  decrease in interest  charges was also
mitigated by the higher  level of common  shares  outstanding.  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 issuance on earnings per share
for the nine months ended September 30, 2005, was approximately $0.07. (See Note
9 to the Consolidated Financial Statements "Long-term Debt and Commercial Paper"
for additional details on the MEDs Equity Units.)

Earnings Available for Common Stock

Earnings  available  for common  stock also  include  losses  from  discontinued
operations.  For all periods,  we have  reclassified the operations of KeySpan's
former mechanical  contracting  subsidiaries as discontinued  operations because
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
nine months ended September 30, 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 nine months ended September 30, 2005.

As noted, in the third quarter of 2004,  KeySpan  conducted an evaluation of the
carrying value of its investments in the Energy Services segment. As a result of
this  evaluation,  KeySpan  recorded a loss in discontinued  operations of $87.0
million,  or $0.54 per share.  This loss  reflects the $77.8  million  after-tax
impairment  charges  to  reflect a  reduction  to the  carrying  value of assets
associated with mechanical  contracting  activities and operating losses of $9.2
million.  For the nine months ended September 30, 2005,  KeySpan recorded a loss
in  discontinued  operations  of $86.6  million,  or $0.54 per share.  This loss
reflects the $77.8 million after-tax  impairment charges and operating losses of
$8.8 million.


                                       41
<PAGE>


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

Consolidated Review of Results

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

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
(In Millions of Dollars, Except per Share)
--------------------------------------------------------------------------------------------------------------------------------
                                                   Three Months Ended September 30,              Nine Months Ended September 30,
                                                       2005                   2004                 2005                   2004
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>                     <C>                 <C>                     <C>
Gas Distribution                                    $ (45.5)               $  (23.6)            $ 376.8                 $ 391.1
Electric Services                                     149.6                   111.2               266.3                   226.3
Energy Services -
   Operations                                          (1.1)                   (4.9)               (6.7)                  (28.4)
   Goodwill impairment charge                             -                   (14.4)                  -                   (14.4)
Energy Investments -
   Operations of entities sold                            -                    11.2                   -                   143.1
   Operations of remaining entities                     4.7                     5.2                16.6                    13.4
   Ceiling test write-down                                -                       -                   -                   (48.2)
Eliminations and other                                 (4.9)                    2.9                (8.3)                   14.5
--------------------------------------------------------------------------------------------------------------------------------
Operating Income                                      102.8                    87.6               644.7                   697.4
--------------------------------------------------------------------------------------------------------------------------------
Other Income and (Deductions)
   Interest charges                                   (67.4)                  (88.3)             (200.1)                 (260.8)
   Gain on sale of investments                            -                       -                 4.1                   172.9
   Cost of debt redemption                                -                   (45.9)              (20.9)                  (45.9)
   Minority interest                                   (0.2)                      -                (0.3)                  (37.0)
   Other income and (deductions)                       (3.6)                    4.1                 9.7                    25.9
--------------------------------------------------------------------------------------------------------------------------------
                                                      (71.2)                 (130.1)             (207.5)                 (144.9)
--------------------------------------------------------------------------------------------------------------------------------
Income taxes                                            9.0                   (13.7)              160.0                   203.2
--------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations             22.6                   (28.8)              277.2                   349.3
Discontinued operations                                   -                   (87.0)               (1.8)                  (86.6)
--------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss)                                       22.6                  (115.8)              275.4                   262.7
Preferred stock dividend requirements                     -                     1.3                 2.2                     4.3
--------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) for Common Stock                    $  22.6                $ (117.1)            $ 273.2                 $ 258.4
--------------------------------------------------------------------------------------------------------------------------------
Basic Earnings (Loss) per Share
   Continuing operations, less preferred
      stock dividends                               $  0.13                $  (0.19)            $  1.63                 $  2.15
   Discontinued operations                                -                   (0.54)              (0.01)                  (0.54)
--------------------------------------------------------------------------------------------------------------------------------
                                                    $  0.13                $  (0.73)            $  1.62                 $  1.61
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>

As indicated in the above table,  operating income  increased $15.2 million,  or
17%, for the third quarter of 2005,  compared to the third quarter of last year.
The  comparative  operating  results  reflect the following two items that had a
significant  impact on results:  (i) operating results of non-core  subsidiaries
recorded in 2004;  and (ii) a goodwill  impairment  charge  recorded in 2004. As
noted earlier,  during 2004 KeySpan held equity  ownership  interests in Houston
Exploration and KeySpan  Canada.  For the three months ended September 30, 2004,
KeySpan's  share of the combined  operating  income of Houston  Exploration  and
KeySpan Canada was $11.2 million.  KeySpan sold its ownership  interest in these


                                       42
<PAGE>


non-core operations in the fourth quarter of 2004. Also as noted earlier, in the
third  quarter  of 2004 the Energy  Services  segment  recorded a $14.4  million
non-cash  goodwill   impairment  charge  ($12.6  million,  or  $0.08  per  share
after-tax) in continuing operations as a result of an evaluation of the carrying
value of goodwill  recorded in this  segment.  The combined  impact of these two
items was a reduction to operating  income in the third  quarter of 2004 of $3.2
million. KeySpan's core businesses,  therefore,  posted an increase in operating
income  of $12  million  for the third  quarter  of 2005  compared  to the third
quarter  of 2004  primarily  reflecting  an  increase  of $38.4  million  in the
Electric  Services  segment  partially offset by a $21.9 million decrease in the
Gas Distribution  segment.  As mentioned,  the favorable  results from KeySpan's
electric services operations were due to an increase in net electric revenues as
a result of higher  electric  prices that were due, in part, to the warm weather
during the third  quarter  of 2005.  Gas  distribution  results,  however,  were
adversely impacted by higher operating expenses, primarily due to an increase in
the  provision  for  uncollectible  accounts,  as well as  from an  increase  in
property taxes.

For the nine months ended September 30, 2005,  operating  income decreased $52.7
million,  or 8% compared to the nine months ended September 30, 2004. Similar to
the analyses of the quarterly results, the comparative operating results for the
nine  months  ended  September  30,  2005,  compared  to the nine  months  ended
September  30,  2004  reflect,  in part,:  (i)  operating  results  of  non-core
subsidiaries recorded in 2004; and (ii) the non-cash impairment charges recorded
in 2004. For the nine months ended  September 30, 2004,  the combined  operating
income of Houston Exploration and KeySpan Canada was $143.1 million.  Offsetting
this income, to some extent was the non-cash  impairment charge of $48.2 million
recorded in June 2004 to recognize the reduced  valuation of proved  reserves as
previously  noted.  Also as noted,  in the third  quarter  of 2004,  the  Energy
Services segment recorded a $14.4 million non-cash goodwill  impairment  charge.
The combined impact of these items was a benefit to operating income in the nine
months ended September 30, 2004 of $80.5 million.

KeySpan's core businesses,  therefore, posted an increase in operating income of
$27.8  million  for the nine months  ended  September  30, 2005  compared to the
corresponding  period of 2004 primarily reflecting an increase of $40 million in
the Electric  Services  segment  partially offset by a $14.3 million decrease in
the Gas Distribution segment. As mentioned, the favorable results from KeySpan's
electric services operations reflect an increase in net electric revenues due to
higher  electric  prices  partially as a result of warm weather during the third
quarter of 2005. Gas distribution  results,  however, were adversely impacted by
higher  operating  expenses,  primarily  due to an increase in the provision for
uncollectible  accounts  receivable,  as well as from an  increase  in  property
taxes. (See the discussion under the caption "Review of Operating  Segments" for
further details on each segment.)

Other income and (deductions)  reflects interest charges,  costs associated with
debt redemptions,  income from subsidiary stock transactions,  minority interest
charges  and other  miscellaneous  items.  For the third  quarter  of 2005 other
income  and  deductions  reflects  an expense of $71.2  million  compared  to an
expense  of  $130.1  million  for the  third  quarter  of 2004.  This  favorable
variation of $58.9 million is due to lower interest  charges of $20.9 million or


                                       43
<PAGE>


24%, as well as to debt redemption costs recorded in 2004. As noted earlier,  in
August 2004 KeySpan redeemed approximately $758 million of outstanding long-term
debt  and  incurred  $54.5  million  in  call  premiums   associated  with  this
redemption, of which $45.9 million was expensed and recorded in other income and
(deductions) on the  Consolidated  Statement of Income.  The remaining amount of
the call premiums was deferred for future recovery.  Further,  KeySpan wrote-off
$8.2 million of previously deferred financing costs which have been reflected in
interest  expense.  Other income and  (deductions) for the third quarter of 2005
also  reflects a $8.5 million  non-cash loss  associated  with the fair value of
outstanding  derivative  financial  instruments  that do not  qualify  for hedge
accounting  treatment.  (See Note 4 to the  Consolidated  Financial  Statements,
"Hedging and Derivative  Financial  Instruments"  for additional  details on the
non-cash loss associated with the derivative financial instruments.)

For the nine  months  ended  September  30, 2005 other  income and  (deductions)
reflects an expense of $207.5  million  compared to an expense of $144.9 million
for the nine months ended  September  30, 2004.  This  unfavorable  variation of
$62.6 is due to  significantly  smaller gains from asset sales  recorded in 2005
compared  to  2004,  offset  by a  decrease  in  interest  charges,  lower  debt
redemption  costs and the absence of  minority  interest  charges.  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.

For the nine months ended  September 30, 2004,  KeySpan  realized $172.9 million
from subsidiary  stock  transactions.  As noted earlier,  in June 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. The net gain on the share exchange less deferred tax provisions was
$150.1 million ($106 million after-tax,  or $0.66 per share).  Further, in April
2004,  KeySpan sold 35.91% of its interest in KeySpan  Canada that resulted in a
gain of $22.8 million ($10.1 million after-tax, or $0.06 per share).

Interest  expense  decreased  $60.7  million,  or 23%, for the nine months ended
September 30, 2005, compared to the same period of 2004, reflecting the benefits
attributable to lower  outstanding debt resulting from recent debt  redemptions,
as well as the sale of Houston  Exploration and KeySpan Canada. At September 30,
2005,  KeySpan had $3.9 billion of long-term debt  outstanding  compared to $5.2
billion outstanding at September 30, 2004.

In addition,  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 reduced  interest  expense in 2005 by $9.9
million.  As  previously  noted,  in 2004  KeySpan  wrote-off  $8.2  million  of
previously deferred financing costs associated with debt redemptions. Therefore,
the net  impact  of the 2005  and  2004  debt  redemptions  lowered  comparative
interest expense by $18.1 million.


                                       44
<PAGE>


Further, as noted, the call premium associated with the 2005 debt redemption was
$20.9  million  compared  to  $45.9  million   associated  with  the  2004  debt
redemption.

Other income and (deductions) for the nine months ended September 30, 2005, also
reflects  a $4.8  million  non-cash  loss  associated  with  the  fair  value of
outstanding  derivative  financial  instruments  that do not  qualify  for hedge
accounting treatment.  For the nine months ended September 30, 2004 other income
and  (deductions)  also 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.  Finally,
other income and (deductions) includes the effects of minority interest of $37.0
million for the nine months  ended  September  30, 2004  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 nine  months  ended
September 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 from  continuing  operations  for the three months ended  September 30,
2005 increased $51.4 million  compared to the same period last year,  reflecting
the items previously  noted - primarily higher operating income  associated with
electric service operations,  a decrease in interest charges and debt redemption
costs,  offset by lower operating income from gas distribution  operations.  The
increase in earnings available for common stock of $139.7 million,  or $0.86 per
share,  also reflects losses of $87.0 million incurred in 2004 from discontinued
operations.

Earnings from continuing operations for the nine months ended September 30, 2005
decreased $72.1 million compared to the corresponding period in 2004, reflecting
the items previously noted - the impact from the sale of Houston Exploration and
KeySpan Canada in 2004 and lower earnings from our gas distribution  operations,
partially  offset by higher earnings from our electric  services  operations,  a
decrease  in  interest  charges and debt  redemption  costs,  and the absence of
non-cash  impairment charges recorded in 2004.  However,  earnings available for
common stock increased $14.8 million,  or $0.01 per share  reflecting  losses of
$86.6 million incurred in 2004 from discontinued operations.

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.


                                       45
<PAGE>


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

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

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

Gas Distribution

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

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 September 30,         Nine Months Ended September 30,
(In Millions of Dollars)                                    2005                2004                 2005               2004
------------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>                 <C>                <C>                <C>
Revenues                                                 $  629.6            $  419.2            $ 3,476.1          $ 3,023.4
Cost of gas                                                 399.8               186.6              2,214.9            1,776.3
Revenue taxes                                                 7.8                 7.2                 43.0               52.3
------------------------------------------------------------------------------------------------------------------------------
Net Revenues                                                222.0               225.4              1,218.2            1,194.8
------------------------------------------------------------------------------------------------------------------------------
Operating Expenses
   Operations and maintenance                               162.9               148.8                519.8              489.4
   Depreciation and amortization                             63.5                63.4                207.4              207.1
   Operating taxes                                           41.1                36.8                114.2              107.2
------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses                                    267.5               249.0                841.4              803.7
------------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss)                                  $  (45.5)           $  (23.6)           $   376.8          $   391.1
------------------------------------------------------------------------------------------------------------------------------
Firm gas sales and transportation (MDTH)                   28,020              26,576              228,260            229,360
Transportation - Electric Generation (MDTH)                 9,756              13,304               21,188             26,077
Other Sales (MDTH)                                         47,937              30,454              142,398            111,123
Warmer (Colder) than Normal - New York                        N/A                 N/A                (2.5%)               (3%)
Warmer (Colder) than Normal - New England                     N/A                 N/A               (11.5%)               (9%)
------------------------------------------------------------------------------------------------------------------------------
</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.


                                       46
<PAGE>


Executive Summary

The Gas Distribution segment incurred a seasonal operating loss of $45.5 million
in the third  quarter of 2005  compared to loss of $23.6  million  incurred last
year. The decrease in comparative  operating  results of $21.9 million primarily
reflects higher operating  expenses of $18.5 million.  The increase in operating
expenses  was mainly  due to an  increase  in the  provision  for  uncollectible
accounts  as a result of higher gas costs and the  adverse  impact  from  recent
collection experience, as well as from higher property taxes.

Operating income decreased $14.3 million for the nine months ended September 30,
2005  compared  to the same  period  last  year,  again due to higher  operating
expenses.  Operating  expenses increased $37.7 million reflecting an increase in
the provision for  uncollectible  accounts,  as well as higher  property  taxes.
Partially  offsetting  the higher  operating  expenses  was an increase of $23.4
million  in net gas  revenues  (revenues  less  the  cost of gas and  associated
revenue taxes) resulting from customer  additions and oil-to-gas  conversions in
our firm gas  sales  market,  as well as from  higher  net gas  revenues  in our
large-volume heating markets.

Net Revenues

Net gas  revenues  from  our gas  distribution  operations  increased  by  $23.4
million,  or 2%, for the nine months ended  September  30, 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 nine months ended September 30, 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 $6.1 million for the nine months
ended  September  30,  2005  compared  to the same  period  last year.  Customer
additions and oil-to-gas conversions,  net of attrition and conservation,  added
$11.9  million  to net gas  revenues.  Further,  we  realized  a benefit of $3.5
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 $5.9 million in additional net gas revenues from the additional billing
day. Further,  KeySpan earned $8.9 million less in regulatory incentives for the
nine months ended September 30, 2005 compared to the same period last year.


                                       47
<PAGE>


Also  included in net revenues is the recovery of certain  regulatory  items and
certain taxes that combined  added $5.1 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.

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.  As a  result  of the  weather  normalization  adjustments  and
financial weather  derivatives,  weather had an immaterial impact on comparative
net gas revenues.  (See Note 4 to the Consolidated Financial Statements "Hedging
and  Derivative  Financial  Instruments"  for further  information on derivative
transactions.)

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 $17.3 million during the nine months ended September 30,
2005,  compared  to the same  period  last  year,  primarily  reflecting  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 nine months ended September
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


                                       48
<PAGE>


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.

Purchased Gas for Resale

The increase in gas costs for the nine months ended September 30, 2005, compared
to the same period of 2004, of $438.6 million,  or 25%,  reflects an increase of
12% 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 third quarter of 2005 compared to the same quarter
last year increased $18.5 million,  or 7%.  Operations and  maintenance  expense
increased  $14.1  million,  or 9%, in 2005 compared to 2004  primarily due to an
increase of $8.1 million in the provision for uncollectible accounts as a result
of  increasing  gas  costs  and  the  adverse  impact  from  recent   collection
experience.  Further,  in 2004 KeySpan  recognized a benefit of approximately $2
million,  net of amounts subject to regulatory  deferral  treatment,  associated
with the  implementation  of the  Medicare  Prescription  Drug  Improvement  and
Modernization  Act of 2003  ("Medicare  Act") and  implementation  of  Financial
Accounting  Standards  Board Staff  Position  ("FSP")  106-2.  In  addition,  in
September  2004,  Boston Gas  Company  reached an  agreement  with an  insurance
carrier for recovery of previously incurred environmental expenditures.  Under a
previously issued MADTE rate order, insurance and third-party recoveries,  after
deducting  legal fees, are shared between Boston Gas and its firm gas customers.
As a result of the insurance agreement,  in September 2004 Boston Gas recorded a
$5 million  benefit to  operations  and  maintenance  expense.  The  comparative
increase  in  operating  taxes was due to the  expiration,  in July  2005,  of a
five-year property tax assessment agreement with New York City.

For the nine months ended September 30, 2005, operating expenses increased $37.7
million, or 5% compared to the same period last year. Operations and maintenance
expense  increased $30.4 million,  or 6%, in 2005 compared to 2004 primarily due
to an increase of $20.0 million in the provision for uncollectible accounts as a
result of  increasing  gas costs and the adverse  impact from recent  collection
experience. In addition, as noted above, in 2004 KeySpan recognized a $2 million
benefit  associated with the implementation of the Medicare Act and a $5 million
benefit associated with environmental  insurance  recoveries.  Further,  the gas
distribution operations realized an increase in insurance and regulatory fees in


                                       49
<PAGE>


2005 compared to 2004. Comparative operating taxes increased $7.0 million due to
the expiration of a five-year  property tax  assessment  agreement with New York
City,  as noted,  as well as to a $2.5 million  property tax refund  received in
2004.  Higher  depreciation  charges of $4.3 million  reflecting  the  continued
expansion  of the gas  distribution  system  were  offset  by  lower  regulatory
amortization charges of $4.1 million

Gas Supply and Pricing

KeySpan  anticipates  having enough gas supply to fully meet its gas load demand
in its service territories for this coming winter heating season.  KeySpan's gas
storage  is on  target  to be 100%  full by the  start of the  2005/2006  winter
heating season.  The current gas rate structure of each of our gas  distribution
utilities  includes a gas  adjustment  clause,  pursuant  to which gas costs are
recovered  in  billed  sales to  regulated  firm gas sales  customers.  Although
KeySpan  is  allowed  to  "pass  through"  the  cost  of gas  to its  customers,
management  is  concerned  with the rising  natural  gas prices and the  related
impact on customers' gas bills and recovery of customer accounts receivable.  As
noted,  KeySpan has already  experienced  an increase in bad debt expense and an
increase in  collection  lag.  Also,  it is likely that the high gas prices will
lead to an increase in price  elasticity  possibly  resulting  in an increase in
customer  conservation  measures  and  attrition.  With our  strategy  of having
KeySpan's  storage  facilities  100% full by the start of the heating season and
the  financial   derivatives  KeySpan  currently  has  in  place,   KeySpan  has
effectively  hedged  the price of  approximately  two-thirds  of the gas  supply
needed to serve its customers during the upcoming  2005/2006  winter.  This will
help  mitigate  the full  impact from  rising  natural gas prices on  customers'
winter-heating  gas  bills.  Further,  KeySpan  has  programs  in  place to help
customers  manage  their gas bills,  such as balanced  billing  plans,  deferred
payment arrangements and the Low Income Home Energy Assistance Program, which we
worked to expand through the Energy Policy Act of 2005. Management believes that
these  measures will mitigate the full impact of rising gas prices on customers'
bills.

Other Matters

We remain committed to our ongoing gas system expansion  strategies.  We believe
that  significant  growth  opportunities  exist  on Long  Island  and in our New
England service  territories as well as continued growth in the New York service
territory,  despite  the rising gas  prices.  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.


                                       50
<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 525,000 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 September 30,        Nine Months Ended September 30,
(In Millions of Dollars)                          2005               2004                 2005               2004
--------------------------------------------------------------------------------------------------------------------
<S>                                          <C>                <C>                  <C>                 <C>
Revenues                                    $     619.9         $    503.9           $  1,493.5          $  1,296.8
Purchased fuel                                    254.2              175.9                546.0               407.6
--------------------------------------------------------------------------------------------------------------------
Net Revenues                                      365.7              328.0                947.5               889.2
--------------------------------------------------------------------------------------------------------------------
Operating Expenses
   Operations and maintenance                     150.6              153.7                480.8               472.9
   Depreciation                                    21.5               21.6                 67.6                65.6
   Operating taxes                                 45.0               41.5                133.8               124.4
--------------------------------------------------------------------------------------------------------------------
Total Operating Expenses                          217.1              216.8                682.2               662.9
--------------------------------------------------------------------------------------------------------------------
Sale of Property                                    1.0                  -                  1.0                   -
--------------------------------------------------------------------------------------------------------------------
Operating Income                            $     149.6         $    111.2           $    266.3          $    226.3
--------------------------------------------------------------------------------------------------------------------
Electric sales (MWH)*                         2,351,722          2,177,030            4,798,239           4,807,667
Capacity(MW)*                                     2,450              2,450                2,450               2,450
Cooling degree days                               1,125                751                1,438               1,051
--------------------------------------------------------------------------------------------------------------------
</TABLE>
     *Reflects the operations of the Ravenswood Generating Station only.

Executive Summary

Operating  income  increased  $38.4  million,  or 35% for the three months ended
September 30, 2005,  compared to the same quarter last year,  due to an increase
in net  revenues  from  the  Ravenswood  Generating  Station  of  $39.1  million
principally as a result of improved pricing.


                                       51
<PAGE>


For the nine months ended September 30, 2005,  operating  income increased $40.0
million  compared to the same period last year,  due primarily to an increase in
net revenues from the Ravenswood  Generating  Station of $56.3 million primarily
as a result of improved  pricing,  partially  offset by an increase in operating
lease costs  associated  with Ravenswood  Expansion of $7.5 million,  as well as
lower  net  revenues   associated  with  KeySpan's  retail  electric   marketing
activities of $7.2 million

Net Revenues

Total electric net revenues realized during the third quarter of 2005 were $37.7
million,  or 12% higher than such  revenues  realized  during the  corresponding
quarter last year. For the nine months ended September 30, 2005,  total electric
net revenues were $58.3 million, or 7% higher than such revenues realized during
the same period of 2004.

Net revenues from the Ravenswood  Generating Station increased $39.1 million, or
31% for the three months ended  September 30, 2005,  compared to the same period
last  year  reflecting  higher  energy  margins  of  $34.1  million,  as well as
increased  capacity revenues of $5.0 million.  The increase in capacity revenues
primarily  reflects  load  growth in New York City and  slightly  higher  summer
pricing.

The  increase  in energy  margins  for the third  quarter of 2005,  reflects  an
increase of 56% in realized  "spark-spreads"  (the selling price of  electricity
less  the cost of  fuel,  plus  hedging  gains  or  losses),  as well as from an
increase of 8% in the level of  megawatt  hours  ("MWh")  sold into the New York
Independent System Operator ("NYISO") energy market.  Management  believes these
favorable  energy results were primarily  driven by the warm summer weather,  as
well as the pricing differential between number 6-grade fuel oil and natural gas
used in the Ravenswood  Generating Station in the third quarter of 2005. Weather
for the third  quarter of 2005,  as measured  in cooling  degree  days,  was 50%
warmer than last year. Due to the duel-fuel nature of the Ravenswood  Generating
Station, KeySpan's generating units were able to take advantage of their ability
to switch to cheaper  fuel as the gap between oil and gas prices  spread  during
the latter part of the 2005 summer.  The two  hurricanes  experienced  this past
summer in the Gulf Coast of the United  States  contributed  to the  current gap
between number 6-grade fuel oil and natural gas prices.

For the nine months ended  September 30, 2005,  net revenues from the Ravenswood
Generating Station increased $56.3 million,  or 20%, compared to the same period
last  year  reflecting  higher  energy  margins  of  $41.0  million,  as well as
increased capacity revenues of $15.3 million.  The increase in capacity revenues
primarily  reflects the operation of the  Ravenswood  Expansion  which went into
full commercial operation in May 2004, as well as load growth in New York City.

The  increase in energy  margins for the nine months ended  September  30, 2005,
reflects an increase  of 42% in  realized  spark-spreads.  The level of megawatt
hours  ("MWh")  sold into the NYISO energy  market  during the nine months ended
September 30, 2005 was essentially  the same as last year.  Weather for the nine
months ended  September  30, 2005, as measured in cooling  degree days,  was 37%
warmer than last year.  Again,  these  favorable  energy  results were primarily


                                       52
<PAGE>


driven by the warm summer weather, as well as the pricing  differential  between
number  6-grade  fuel  oil and  natural  gas used in the  Ravenswood  Generating
Station  in  2005.  However,  in the  second  quarter  of 2005,  the  Ravenswood
Generating  Station  experienced  a  comparative   decrease  in  electric  sales
quantities between the second quarter of 2005 and the second quarter of 2004 due
to the extremely cool weather for the month of May. The comparative  decrease in
sales  quantities for the second quarter of 2005 was not fully  recovered by the
increase in  comparative  sales  quantities  experienced in the third quarter of
2005.

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 losses,  which are reflected in net electric  margins,  of $11.8 million
during the third  quarter of 2005 compared to hedging gains of $21.4 million for
the third  quarter  of 2004.  For the nine  months  ended  September  30,  2005,
derivative  instruments  resulted in hedging losses of $4.5 million  compared to
hedging gains of $18.6 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 third  quarter of 2005 from the service  agreements  with
LIPA,  including  the power  purchase  agreements  associated  with two electric
peaking facilities, were generally in-line with the third quarter of 2004.

For the nine months  ended  September  30, 2005,  net revenues  from the service
agreements with LIPA,  including the power purchase  agreements  associated with
two  electric  peaking  facilities,  increased  $9.2  million  compared  to  the
corresponding  period of 2004.  The  increase  is due,  in part,  to recovery of
depreciation  charges and property  taxes of  approximately  $7.0  million.  The
remaining increase primarily reflects the timing of certain incentives earned on
these agreements and an increase in emission credits earned.

(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.")


                                       53
<PAGE>


Net revenues  associated  with KeySpan's  curtailed  retail  electric  marketing
activities decreased $0.7 million and $7.2 million for the three and nine months
ended September 30, 2005, respectively, compared to the same periods in 2004.

Operating Expenses

Operating  expenses in total were  essentially the same for the third quarter of
2005 compared to the third quarter of 2004.  Operations and maintenance  expense
was $3.1  million,  or 2% below last year,  reflecting  the timing of repair and
maintenance  work  performed  on  LIPA's  behalf.  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 nine months ended September 30, 2005, operating expenses increased $19.3
million,  or  3%,  compared  to  the  same  period  last  year.  Operations  and
maintenance  expense increased $7.9 million,  or 2% over last year reflecting an
increase of $7.5 million in operating lease costs  associated with our financing
arrangement for the Ravenswood  Expansion.  The increase in depreciation expense
is associated with KeySpan's Long Island based electric  generating units and is
fully  recoverable  from LIPA. The higher  operating taxes primarily  reflect an
increase in property taxes which are also fully recoverable from LIPA.

Other Matters

In 2003,  the New  York  State  Board  on  Electric  Generation  Siting  and the
Environment  issued  an  opinion  and  order  which  granted  a  certificate  of
environmental  capability  and public need for a 250 MW combined  cycle electric
generating  facility  in  Melville,   Long  Island,   which  is  now  final  and
non-appealable. Also in 2003, LIPA issued a Request for Proposal ("RFP") seeking
bids from  developers  to  either  build and  operate a Long  Island  generating
facility,  and/or a new cable that will link Long Island to  dedicated  off-Long
Island power of between 250 to 600 MW of electricity by no later than the summer
of 2007.  KeySpan  filed a proposal in  response  to LIPA's  RFP. In 2004,  LIPA
selected  proposals  submitted  by two other  bidders  in  response  to the RFP.
KeySpan  remains  committed  to the  Melville  project and the  benefits to Long
Island's energy future that this project would supply.  The project has received
New  York  State  Article  X  approval  by  having  met  all   operational   and
environmental  permitting  requirements.  Further,  the project is strategically
located in close proximity to both the high voltage power  transmission grid and
the high  pressure  gas  distribution  network.  At September  30,  2005,  total
capitalized  costs  associated  with the siting,  permitting and  procurement of
equipment for the Melville facility were $60.6 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


                                       54
<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.
LIPA and KeySpan are engaged in discussions  concerning LIPA's strategic review.
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, as well as
other  assets to  complement  our core  operations.  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.

The NYISO's New York City local  reliability rules currently require that 80% of
the  electric  capacity  needs  of  New  York  City  be  provided  by  "in-City"
generators.  Our Ravenswood Facility is an "in-City" generator.  As the electric
infrastructure develops and the demand for electric power increases over time in
New York City and the surrounding  areas,  the  requirement  that 80% of in-City
load be served by the in-City generators could be modified.  Construction of new
transmission and generation  facilities could also cause significant  changes to
the  market  for sales of  capacity,  energy  and  ancillary  services  from our
Ravenswood generating facility. KeySpan currently anticipates that approximately
1,000  MW of new  capacity  may be  available  during  2006 as a  result  of the
completion of in-City generation projects currently under  construction.  We can
not, however, be certain as to when the new power plants will be in operation or
the nature of future New York City energy, capacity or ancillary services market
requirements or design.  Accordingly,  we are unable to determine the impact, if
any,  the  foregoing  could  have  on our  financial  condition  or  results  of
operation.

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.


                                       55
<PAGE>


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
nine months ended September 30, 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  nine  months  ended  September  30,  2005.  (See  Note 2 to the
Consolidated  Financial Statements "Business Segments" for additional details on
the sale of the mechanical companies.)

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

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
                                                    Three Months Ended September 30,           Nine Months Ended September 30,
(In Millions of Dollars)                                2005                2004                   2005                2004
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>                 <C>                   <C>                 <C>
Revenues                                              $ 47.1             $  46.6                $ 142.0             $ 138.0
Operating expenses                                      48.2                51.5                  148.7               166.4
Goodwill impairment charge                                 -                14.4                      -                14.4
--------------------------------------------------------------------------------------------------------------------------------
Operating (Loss)                                      $ (1.1)            $ (19.3)               $  (6.7)            $ (42.8)
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>

The Energy Services  segment  incurred an operating loss of $1.1 million for the
third  quarter of 2005  compared to a loss of $19.3 million for the same quarter
last year.  For the nine months ended  September 30, 2005,  the Energy  Services
segment incurred  operating losses of $6.7 million compared to $42.8 million for
the same period last year. As noted earlier, in September 2004, KeySpan recorded
a non-cash  goodwill  impairment charge of $122.2 million ($90.4 million after -
tax or $0.56 per share) as a result of an  evaluation  of the carrying  value of
goodwill recorded in this segment - $14.4 million of this charge was recorded in
continuing  operations,  with the remaining $107.8 impairment charge recorded as
discontinued operations.

The improved  performance  for the third  quarter of 2005  compared to the third
quarter of 2004,  excluding the goodwill  impairment  charge is attributable to:
(i) an  increase  in gross  profit  margins at  Business  Solutions;  (ii) lower
operating   costs  at  Home  Energy   Services;   and  (iii)   generally   lower
administrative costs.


                                       56
<PAGE>


For the nine months ended September 30, 2005, the improved performance over last
year,  excluding the goodwill impairment charge,  primarily 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.  Further,  the  Business  Solutions
companies  have  experienced an increase in gross profit margins and the segment
has incurred generally lower administrative costs in 2005.

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 is expected to transport up to 525,000 DTH of natural gas
a day from  Corning to Ramapo,  New York,  where it will  connect to an existing
pipeline. Additionally,  subsidiaries in this segment hold a 20% equity interest
in the Iroquois Gas Transmission  System LP, a pipeline that transports Canadian
gas supply to markets in the Northeastern United States.  These subsidiaries are
accounted for under the equity method of accounting.  Accordingly, equity income
from these  investments  is reflected as a component of operating  income in the
Consolidated  Statement of Income.  KeySpan also owns a 600,000 barrel liquefied
natural gas storage and receiving facility in Providence,  Rhode Island, through
its wholly  owned  subsidiary  KeySpan LNG,  the  operations  of which are fully
consolidated. KeySpan LNG is re-evaluating its plans to upgrade its LNG facility
in  Providence,  Rhode Island in light of the FERC decision in June 2005 to deny
KeySpan  LNG's  application  for FERC  authorization  to expand the  facility to
accept marine  deliveries and triple  vaporization  capacity.  KeySpan filed its
rehearing  request with the FERC in August 2005. On September 6, 2005,  the FERC
issued an order granting rehearing for the purpose of further consideration.  As
of September 30, 2005, our investment in this project was $14.2 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 method 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.)


                                       57
<PAGE>


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 September 30,             Nine Months Ended September 30,
(In Millions of Dollars)                                  2005               2004                    2005                 2004
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>                 <C>                   <C>                  <C>
Revenues                                                 $ 11.9              $ 10.1                $ 30.7               $  49.8
Less: Operation and maintenance expense                     7.0                 7.0                  19.0                  29.5
      Ceiling test write-down                                 -                   -                     -                  48.2
      Other operating expenses                              2.7                 2.9                   7.7                  12.0
Add:  Equity earnings                                       2.5                 6.4                  12.5                  17.4
      Sale of assets                                          -                   -                   0.1                     -
--------------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss)                                  $  4.7              $  6.6                $ 16.6               $ (22.5)
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
     Operating  income  above  reflects  100% of KeySpan  Canada's  results from
     January 1, 2004 through April 1, 2004.

As  indicated in the above table,  operating  income for the Energy  Investments
segment  decreased  $1.9  million in the third  quarter of 2005  compared to the
corresponding  quarter last year primarily reflecting the sale of KeySpan Canada
in 2004. Operating income for the three months ended September 30, 2004 includes
$1.4 million in earnings from KeySpan Canada.

For the nine months ended  September 30, 2005 operating  income for this segment
increased  $39.1  million  compared to the same period of 2004,  reflecting  the
$48.2 million non-cash  impairment  charge recorded 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 nine months ended  September  30, 2004,  also includes
$12.3  million  in  earnings  from  KeySpan  Canada.  The  remaining  activities
reflected an increase in operating income of $3.2 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 $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.


                                       58
<PAGE>


During  the  first  five  months 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  method 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.

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

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
                                                      Three Months              Nine Months
                                                          Ended                    Ended
(In Millions of Dollars)                           September 30, 2004        September 30, 2004
---------------------------------------------------------------------------------------------------
<S>                                                           <C>                      <C>
Revenues                                                    $    -                   $  268.1
Depletion and amortization expense                               -                      104.6
Other operating expenses                                         -                       45.6
Add: Equity Earnings                                           9.8                       12.9
---------------------------------------------------------------------------------------------------
Operating Income                                            $  9.8                   $  130.8
---------------------------------------------------------------------------------------------------
</TABLE>

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  overriding the denial of the
Clean  Water Act permit is pending  with  Connecticut's  State  Superior  Court.
Pursuant to the Energy Act,  Islander  East has appealed the denial of the Clean
Water Act permit directly to the United States Court of Appeals for the Second


                                       59
<PAGE>


Circuit.  The  State  of  Connecticut  has  filed  a  motion  to  challenge  the
constitutionality  of the  provisions  of the Energy Act  providing  this appeal
right.  (For  additional  information  on the Energy Act, see the  discussion on
"Regulation  and Rate  Matters.")  Various  options  for the  financing  of this
pipeline construction are being evaluated. At September 30, 2005, our investment
in this project was $23.5 million.

In 2004 KeySpan acquired a 21% interest in the Millennium Pipeline Company, L.P.
(`the  "Partnership")  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,  KEDLI and  Columbia  Gas  Transmission  Corporation  each  entered into
precedent  agreements to purchase  capacity on the pipeline.  As a result of the
failure of certain conditions precedent to be achieved,  these agreements are no
longer in effect.  The Partnership is engaged in negotiations with these parties
concerning  modification to and renewal of these  agreements.  Subject to, among
other things,  the  renegotiations of the precedent  agreements,  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.
At September 30, 2005, our investment in this project was $9.2 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.


                                       60
<PAGE>


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 and is currently in the
process of developing cost allocation and other related rules.

The operating  income  variation as reflected in "elimination  and other" is due
primarily to costs residing at KeySpan's holding company level such as corporate
advertising  and  strategic  review  costs,  as well as to the timing of certain
corporate expenses and allocated costs associated with these service companies.

Liquidity

Cash flow from  operations  decreased  $303.2  million for the nine months ended
September 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 and  amount of  property  tax  payments  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 September  30, 2005,  we had cash and  temporary  cash  investments  of $84.0
million.  During the nine months  ended  September  30, 2005,  we repaid  $592.2
million  of  commercial  paper and,  at  September  30,  2005,  $320  million of
commercial paper was outstanding at a weighted-average  annualized interest rate
of 3.9%.  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
September 30, 2005 under the commercial paper program.

In June 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 replaced 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.


                                       61
<PAGE>


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

The facilities  contain certain  affirmative and negative  operating  covenants,
including  restrictions on KeySpan's  ability to mortgage,  pledge,  encumber or
otherwise subject its utility property to any lien, as well as certain financial
covenants  that  require us to,  among  other  things,  maintain a  consolidated
indebtedness to consolidated  capitalization ratio of no more than 65% as 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
September  30,  2005,  KeySpan's  consolidated  indebtedness  was  49.1%  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.

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.


                                       62
<PAGE>


Capital Expenditures and Financing

Construction Expenditures

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


----------------------------------------------------------------------------
                                             Nine Months Ended September 30,
(In Millions of Dollars)                        2005                  2004
----------------------------------------------------------------------------
Gas Distribution                              $ 270.1               $ 294.1
Electric Services                                72.8                 103.7
Energy Investments                               17.8                 150.6
Energy Services and other                        11.4                  10.9
----------------------------------------------------------------------------
                                              $ 372.1               $ 559.3
----------------------------------------------------------------------------


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

The decrease in capital  expenditures  for the nine months ended  September  30,
2005,  compared to the same period last year of $187.2 million mainly reflects a
decrease in the Gas Distribution  segment of $24.0 million and a decrease in the
Energy  Investments  segment  of  $132.8  million.   The  decrease  in  the  Gas
Distribution segment is due to more efficient repair and maintenance  processes,
as well as to an  improved  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 November 1, 2005, KeySpan's gas distribution  subsidiary,  KEDNY, issued $137
million of tax-exempt Gas Facilities Revenue Bonds ("GFRB") through the New York
State Energy  Research and  Development  Authority  ("NYSERDA") in the following
series:  (i) $82 million of 4.70% GFRB, 2005 Series A (the "Series A Bonds") and
(ii) $55 million of GFRB,  2005 Series B (the  "Series B Bonds").  The  interest
rate on the  Series B Bonds is  re-set  every  seven  days  through  an  auction
process.  KEDNY  will use the  proceeds  from  these  issuances  to  redeem  the
following three series of GFRBs: (i) $41 million  Adjustable Rate GFRBs,  Series
1989A due February 2024,  $41 million  Adjustable  Rate Gas GFRBs,  Series 1989B
February  2024 and (iii) $55  million  5.60% GFRB,  Series  1993C due June 2025.
KEDNY  incurred $1.0 million in call  premiums,  all of which have been deferred
for  future  rate  recovery.  Further,  in  December  2005,  KeySpan  intends to
refinance $50 million 5.64% GFRB, Series D1 and D2 due 2026 .


                                       63
<PAGE>


In January 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,
KeySpan now has $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 September
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.


                                       64
<PAGE>


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

Off-Balance Sheet Arrangements

Guarantees

KeySpan has a number of financial  guarantees with its subsidiaries at September
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 including future decommission costs of
$19 million;  and (iii) the payment  obligations of our subsidiaries  related to
$128 million of  tax-exempt  bonds issued  through the Nassau County and Suffolk
County   Industrial   Development   Authorities  for  the  construction  of  two
electric-generation  peaking  facilities on Long Island.  The medium-term notes,
the Master Lease and the  tax-exempt  bonds are  reflected  on the  Consolidated
Balance  Sheet;   the   sale/leaseback   transaction  is  not  recorded  on  the
Consolidated  Balance  Sheet.  Further,  KeySpan has  guaranteed:  (i) up to $88
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 $86 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.)

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


                                       65
<PAGE>


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 September  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."

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


                                       66
<PAGE>


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 September 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.

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


                                       67
<PAGE>


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 September 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,  $116.5  million of which had been
contributed by the end of the third 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

The Energy Act,  which was enacted in August  2005,  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  which  will be on
February 8, 2006. 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 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. On
September 16, 2005, FERC issued a notice of proposed  rulemaking with respect to
how it will  implement  its expanded  jurisdiction.  The FERC will  finalize its
rules  during  the next few months  and  implement  them by  February  2006.  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.


                                       68
<PAGE>


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 September 30, 2005, KeySpan's consolidated common equity was
50.9% of its consolidated  capitalization,  including commercial paper, and each
of its utility  subsidiaries  common  equity was at least 49% of its  respective
capitalization.

As noted  previously,  the Energy  Policy Act of 2005  resulted in the repeal of
PUHCA,   and  the  elimination  of  the  financing,   investment  and  operating
limitations discussed earlier.  Although,  KeySpan would no longer be subject to
the  limitations  under PUHCA,  it remains  subject to  regulation by the NYPSC,
MADTE  and  NHPUC  and  will  become  subject  to  the   additional   regulatory
requirements of the FERC.


                                       69
<PAGE>


Gas Matters

As of September 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 November 1, 2005, the MADTE approved a base rate increase of
$7.2  million  under the Plan.  Also on November 1, 2005,  the MADTE  authorized
recovery of under-recovered gas related bad debt expenses for the period January
1, 2004-December 31, 2004 through the gas cost adjustment factor and established
a mechanism  for future  recovery  of such  costs.  KeySpan is in the process of
analyzing the impact of this order.

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."

Electric Matters

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


                                       70
<PAGE>


We estimate that the  remaining  cost of our MGP related  environmental  cleanup
activities,  including costs  associated with the Ravenswood  Facility,  will be
approximately  $211.4 million and we have recorded a related  liability for such
amount.   We  have  also  recorded  an  additional   $16.7  million   liability,
representing the estimated  environmental cleanup costs related to a former coal
tar processing  facility.  As of September 30, 2005, we have expended a total of
$167.0 million on environmental  investigation and remediation activities.  (See
Note 6 to the  Consolidated  Financial  Statements,  "Financial  Guarantees  and
Contingencies.")

Market and Credit Risk Management Activities

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

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

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


                                       71
<PAGE>


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.

On June 25,  2004,  the NYISO  submitted a motion to FERC  seeking  refunds as a
result of the Decision.  KeySpan and others  submitted  statements of opposition
opposing  the  refunds.  On March 4, 2005,  FERC issued an order  upholding  its
original  decision  not  to  order  refunds.  FERC  also  provided  the  further
explanation requested by the Court as to why refunds were not being ordered. The
NYISO and 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 on renewal
from the Court of Appeals.


                                       72
<PAGE>


The NYISO and other market participants have requested a rehearing of this March
4, 2005 order. FERC has not issued an order in response to the rehearing or stay
request.

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

Cautionary Statement Regarding Forward-Looking Statements

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

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

     -    volatility of energy prices used to generate electricity;

     -    fluctuations in weather and in gas and electric prices;

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

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

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

     -    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;


                                       73
<PAGE>


     -    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.

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


                                       74
<PAGE>


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 September
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          2,226        7.31 - 7.81       11.41 - 14.43                 14.9

OTC Swaps - Short Natural Gas                  2005            493        6.58 - 6.70       14.68 - 15.19                 (4.0)
                                               2006          1,827        6.17 - 6.29       10.95 - 15.70                (11.0)
                                               2007          1,679        5.86 - 5.97        9.34 - 12.56                 (7.3)
                                               2008          1,539        6.77 - 6.85        8.22 - 10.86                 (3.4)
-------------------------------------------------------------------------------------------------------------------------------
                                                             7,764                                                       (10.8)
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>


<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           20,000    30.80 - 37.16                       60.49                    0.5
                                       2006           12,000            34.40                       62.20                    0.3

Swaps - Short Heating Oil              2005              212    62.77 - 63.59               89.44 - 90.51                  (12.4)


---------------------------------------------------------------------------------------------------------------------------------
                                                      32,212                                                               (11.6)
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
                                  Year of                        Fixed Margin/             Current                Fair Value
    Type of Contract              Maturity         MWh               Price $                Price $            (In $ Millions)
------------------------------------------------------------------------------------------------------------------------------
       Electricity
<S>                                <C>         <C>              <C>                   <C>                               <C>
Swaps - Energy                      2005          656,400        66.50 - 150.00        141.50 - 155.00                  (21.0)
                                    2006          953,600        76.00 - 208.00        141.01 - 207.00                  (50.1)

------------------------------------------------------------------------------------------------------------------------------
                                                1,610,000                                                               (71.1)
------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       75
<PAGE>


----------------------------------------------------------------------------
                                                                    2005
Change in Fair Value of Derivative Instruments               (In $ Millions)
----------------------------------------------------------------------------
Fair value of contracts at January 1, 2005                              1.3
Net losses (gains) on contracts realized                               28.3
(Decrease) in fair value of all open contracts                       (123.1)
----------------------------------------------------------------------------
Fair value of contracts outstanding at September 30,                  (93.5)
----------------------------------------------------------------------------

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
(In Millions of Dollars)
---------------------------------------------------------------------------------------
                                                  Fair Value of Contracts
---------------------------------------------------------------------------------------
                                           Mature Within                       Total
Sources of Fair Value                        12 Months       Thereafter      Fair Value
---------------------------------------------------------------------------------------
<S>                                              <C>            <C>              <C>
Prices actively quoted                         $ (10.1)       $ (13.2)         $ (23.3)
Local published indicies                         (70.2)             -            (70.2)
---------------------------------------------------------------------------------------
                                               $ (80.3)       $ (13.2)         $ (93.5)
---------------------------------------------------------------------------------------
</TABLE>

We measure the commodity risk of our derivative hedging  instruments  (indicated
in the  above  table)  using a  sensitivity  analysis.  Based  on a  sensitivity
analysis as of September  30, 2005, a 10%  increase/decrease  in heating oil and
natural gas prices would  decrease/increase the value of derivative  instruments
maturing  in one  year by $3.0  million.  Further,  a 10%  increase/decrease  in
electricity  and fuel prices  would  decrease/increase  the value of  derivative
instruments maturing in one year by $16.1 million.

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

The following  table sets forth selected  financial data  associated  with these
derivative financial instruments that were outstanding at September 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         3,370     5.50 - 6.40     5.50 - 8.70                 -       13.92 - 14.43               22.7
                        2006         7,070     5.50 - 6.40     5.50 - 8.70                 -       10.56 - 14.43               46.3
Swaps                   2005        22,807               -               -      5.95 - 13.45       13.92 - 14.43              140.8
                        2006        53,253               -               -      5.43 - 13.74       10.56 - 14.77              271.4
                        2007         9,350                                      6.94 - 11.34        8.39 - 11.78               19.9
------------------------------------------------------------------------------------------------------------------------------------
                                    95,850                                                                                    501.1
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

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


                                       76
<PAGE>


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 September 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.

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 5.  Other Information

The following  disclosure  regarding the recent  refinancing  conducted by KEDNY
would  otherwise have been filed on Form 8-K under the heading "Item 101 - Entry
into a Material  Definitive  Agreement"  and "Item  2.03 - Creation  of a Direct
Financial Obligation or an Off-Sheet Balance Arrangement of a Registrant."

On November 1, 2005, KEDNY,  issued  $82,000,000  aggregate  principal amount of
4.70% Gas Facilities Revenue Bonds, 2005 Series A (KEDNY Project) (the "Series A
Refunding Bonds").  The Series A Refunding Bonds were issued to refund within 90
days NYSERDA's  $41,000,000  outstanding principal amount of Adjustable Rate Gas
Facilities Revenue Bonds,  Series 1989A (KEDNY project) due 2024 and $41,000,000
outstanding  principal  amount of Adjustable Rate Gas Facilities  Revenue Bonds,
Series 1989B (KEDNY project) due 2024.


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<PAGE>


The  Series A  Refunding  Bonds bear  interest  at a rate per annum of 4.70% and
mature on February  1, 2024.  Interest on the bonds is payable on February 1 and
August 1 of each year,  commencing on February 1, 2006.  These bonds are subject
to certain  redemption  provisions,  including  optional  redemption at any time
after  February 1, 2016 by NYSERDA,  at the direction of KEDNY,  at a redemption
price  equal  to  the  principal  amount  thereof;  and  extraordinary  optional
redemption by NYSERDA, at the direction of KEDNY, at a redemption price equal to
100% of the aggregate  principal amount thereof plus accrued and unpaid interest
to the redemption date under certain limited circumstances.

The Series A Refunding  Bonds are issued pursuant to and secured by an Indenture
of Trust  dated as of  November 1, 2005 (the  "Indenture")  between  NYSERDA and
Citibank,   N.A,  as  trustee  (the  "Trustee").   KEDNY  also  entered  into  a
Participation Agreement,  dated as of November 1, 2005 with NYSERDA. Pursuant to
the terms of the Participation Agreement, KEDNY issued a Promissory Note related
to the  Series A  Refunding  Bonds  under  which it is  obligated  to pay to the
trustee amounts  sufficient for, together with other amounts held by the Trustee
and available  under the Indenture for  application to, the payment of principal
of and premium, if any, and interest on the Series A Refunding Bonds as the same
become due and payable.  The payment of the  principal of, and interest on these
bonds is unconditionally  guaranteed by a Municipal Bond Insurance Policy issued
by Financial Guaranty Insurance Company.

This  description  of  the  Indenture  of  Trust,  Participation  Agreement  and
Promissory  Note  related are subject to, and  qualified  in their  entirety by,
reference to the Indenture of Trust, Participation Agreement and Promissory Note
attached hereto as Exhibits 10.1, 10.2 and 10.3,  respectively,  copies of which
(including  the form of the  Promissory  Note) are  included as exhibits to this
Form 10-Q.

On November 1, 2005, KEDNY, also issued $55,000,000  aggregate  principal amount
of Gas Facilities  Revenue Bonds,  2005 Series B (KEDNY  Project) (the "Series B
Refunding Bonds").  The Series B Refunding Bonds were issued to refund within 90
days  NYSERDA's  $55,000,000  outstanding  principal  amount  of Gas  Facilities
Revenue Bonds, Series C (KEDNY project) due 2025.

The Series B Refunding  Bonds bear  interest  at an auction  rate which is reset
every seven days and mature on June 1, 2025.  These bonds are subject to certain
redemption provisions,  including optional redemption at any time after February
1, 2016 by NYSERDA,  at the direction of KEDNY,  at a redemption  price equal to
the principal amount thereof; and extraordinary  optional redemption by NYSERDA,
at the direction of KEDNY, at a redemption  price equal to 100% of the aggregate
principal amount thereof plus accrued and unpaid interest to the redemption date
under certain limited circumstances.

The Series B Refunding  Bonds are issued pursuant to and secured by an Indenture
of Trust  dated as of  November 1, 2005 (the  "Indenture")  between  NYSERDA and
Citibank,   N.A,  as  trustee  (the  "Trustee").   KEDNY  also  entered  into  a
Participation Agreement,  dated as of November 1, 2005 with NYSERDA. Pursuant to
the terms of the Participation Agreement, KEDNY issued a Promissory Note related
to the  Series B  Refunding  Bonds  under  which it is  obligated  to pay to the
trustee amounts  sufficient for, together with other amounts held by the Trustee
and available  under the Indenture for  application to, the payment of principal
of, and premium,  if any,  and  interest on the Series A Refunding  Bonds as the
same become due and  payable.  The payment of the  principal  of and interest on
these bonds is  unconditionally  guaranteed by a Municipal Bond Insurance Policy
issued by Financial Guaranty Insurance Company.


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<PAGE>


This  description  of  the  Indenture  of  Trust,  Participation  Agreement  and
Promissory  Note  related are subject to, and  qualified  in their  entirety by,
reference to the Indenture of Trust, Participation Agreement and Promissory Note
attached hereto as Exhibits 10.4, 10.5 and 10.6,  respectively,  copies of which
(including  the form of the  Promissory  Note) are  included as exhibits to this
Form 10-Q.



Item 6.       Exhibits

10.1*     Indenture  of  Trust  between  New  York  State  Energy  Research  and
          Development  Authority  and  Citibank,  N.A.  for the  issuance of $82
          million  GFRB,  2005  Series A,  4.7% due  February  2024  dated as of
          November 1, 2005

10.2*     Participation  Agreement  between New York State  Energy  Research and
          Development Authority and The Brooklyn Union Gas Company d/b/a KeySpan
          Energy  Delivery New York for the issuance of $82 million  GFRB,  2005
          Series A, 4.7% due February 2024 dated as of November 1, 2005

10.3*     Promissory  Note  executed by The  Brooklyn  Union Gas  Company  d/b/a
          KeySpan Energy  Delivery New York for $82 million GFRB, 2005 Series A,
          4.7% due February 2024 dated as of November 1, 2005

10.4*     Indenture  of  Trust  between  New  York  State  Energy  Research  and
          Development  Authority  and  Citibank,  N.A.  for the  issuance of $55
          million GFRB, 2005 Series B due June 2025 dated as of November 1, 2005



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<PAGE>



10.5*     Participation  Agreement  between New York State  Energy  Research and
          Development Authority and The Brooklyn Union Gas Company d/b/a KeySpan
          Energy  Delivery New York for the issuance of $55 million  GFRB,  2005
          Series due June 2025 dated as of November 1, 2005

10.6*     Promissory  Note  executed by The  Brooklyn  Union Gas  Company  d/b/a
          KeySpan  Energy  Delivery New York for for the issuance of $55 million
          GFRB, 2005 Series B due June 2025 dated as of November 1, 2005

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

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

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

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

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





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




















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