UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-Q

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

                            For the quarterly period
                         ended March 31, 2004 TRANSITION
                        REPORT PURSUANT TO SECTION 13 OR
                                      15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                        For the Transition period from to

                         Commission file number 1-14161

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

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

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

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

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

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

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

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

 Class of Common Stock                             Outstanding at April 16, 2004
 ---------------------                             -----------------------------
    $.01 par value                                          160,164,056



<PAGE>

                      KEYSPAN CORPORATION AND SUBSIDIARIES

                                      INDEX
                                      -----

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

Item 1. Financial Statements

           Consolidated Balance Sheet -
           March 31, 2004 and December 31, 2003                           3

           Consolidated Statement of Income -
           Three Months Ended March 31, 2004 and 2003                     5

           Consolidated Statement of Cash Flows -
           Three Months Ended March 31, 2004 and 2003                     6

           Notes to Consolidated Financial Statements                     7

Item 2. Management's Discussion and Analysis of Financial
           Condition and Results of Operations                            30

Item 3. Quantitative and Qualitative Disclosures
           About Market Risk                                              57

                               Part II.   OTHER INFORMATION

Item 1. Legal Proceedings                                                 61

Item 6. Exhibits and Reports on Form 8-K                                  61

Signatures                                                                61



                                       2
<PAGE>


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

(In Thousands of Dollars)                                    March 31, 2004         December 31, 2003
---------------------------------------------------------------------------------------------------------
<S>                                                             <C>                     <C>
ASSETS

Current Assets
    Cash and temporary cash investments                         $    256,940            $    205,751
    Accounts receivable                                            1,384,598               1,029,459
    Unbilled revenue                                                 460,460                 505,633
    Allowance for uncollectible accounts                             (91,016)                (79,184)
    Gas in storage, at average cost                                  154,072                 488,521
    Material and supplies, at average cost                           118,772                 121,415
    Other                                                             69,519                 115,304
                                                   ---------------------------- ---------------------
                                                                   2,353,345               2,386,899
                                                   ---------------------------- ---------------------

Investments and  Other                                               256,372                 248,565

Property
    Gas                                                            6,590,421               6,522,251
    Electric                                                       2,671,594               2,636,537
    Other                                                            429,716                 425,576
    Accumulated depreciation                                      (2,655,711)             (2,610,876)
    Gas exploration and production, at cost                        3,157,026               3,088,242
    Accumulated depletion                                         (1,229,368)             (1,167,427)
                                                   ---------------------------- ---------------------
                                                                   8,963,678               8,894,303
                                                   ---------------------------- ---------------------

Deferred Charges
    Regulatory assets                                                554,563                 578,383
    Goodwill and other intangible assets                           1,810,161               1,809,712
    Other                                                            741,613                 722,320
                                                   ---------------------------- ---------------------
                                                                   3,106,337               3,110,415
                                                   ---------------------------- ---------------------

Total Assets                                                    $ 14,679,732            $ 14,640,182
                                                   ============================ =====================
</TABLE>

        See accompanying Notes to the Consolidated Financial Statements.


                                       3
<PAGE>


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

                                (In Thousands of Dollars)                March 31, 2004          December 31, 2003
------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>                      <C>
LIABILITIES AND CAPITALIZATION
Current Liabilities
    Current redemption of long-term debt                                    $      1,471             $      1,471
    Accounts payable and other liabilities                                       950,861                1,141,597
    Commercial paper                                                             294,150                  481,900
    Dividends payable                                                             72,070                   72,289
    Taxes accrued                                                                197,686                   46,580
    Customer deposits                                                             41,028                   40,370
    Interest accrued                                                             102,967                   64,609
                                                               -------------------------- ------------------------
                                                                               1,660,233                1,848,816
                                                               -------------------------- ------------------------

Deferred Credits and Other Liabilities
    Regulatory liabilities:
          Miscellaneous liabilities                                               93,110                  104,034
          Removal cost recovered                                                 462,585                  450,034
    Deferred income tax                                                        1,250,672                1,278,341
    Postretirement benefits and other reserves                                 1,060,525                  961,962
    Other                                                                        162,713                  121,790
                                                               -------------------------- ------------------------
                                                                               3,029,605                2,916,161
                                                               -------------------------- ------------------------

Commitments and Contingencies (See Note 6)                                             -                        -

Capitalization
    Common stock                                                               3,492,116                3,487,645
    Retained earnings                                                            796,410                  621,430
    Other comprehensive income                                                   (89,309)                 (59,932)
    Treasury stock                                                              (366,691)                (378,487)
                                                               -------------------------- ------------------------
         Total common shareholders' equity                                     3,832,526                3,670,656
    Preferred stock                                                               83,433                   83,568
    Long-term debt                                                             5,537,456                5,611,432
                                                               -------------------------- ------------------------
Total Capitalization                                                           9,453,415                9,365,656
                                                               -------------------------- ------------------------

Minority Interest in Subsidiary Companies                                        536,479                  509,549
                                                               -------------------------- ------------------------
Total Liabilities and Capitalization                                        $ 14,679,732             $ 14,640,182
                                                               ========================== ========================
</TABLE>


        See accompanying Notes to the Consolidated Financial Statements.


                                       4
<PAGE>


                        CONSOLIDATED STATEMENT OF INCOME
                                   (Unaudited)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
                                                                                    Three Months Ended March 31,
(In Thousands of Dollars, Except Per Share Amounts)                                  2004                  2003
------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>                  <C>
Revenues
     Gas Distribution                                                            $ 1,927,779          $ 1,832,701
     Electric Services                                                               359,136              397,700
     Energy Services                                                                 129,059              129,065
     Gas Exploration and Production                                                  152,419              127,847
     Energy Investments                                                               27,180               25,212
                                                                    ----------------------------------------------
Total Revenues                                                                     2,595,573            2,512,525
                                                                    ----------------------------------------------
Operating Expenses
     Purchased gas for resale                                                      1,226,573            1,196,165
     Fuel and purchased power                                                        101,612               97,522
     Operations and maintenance                                                      492,466              498,189
     Depreciation, depletion and amortization                                        171,684              144,971
     Operating taxes                                                                 122,279              124,713
                                                                    ----------------------------------------------
Total Operating Expenses                                                           2,114,614            2,061,560
                                                                    ----------------------------------------------

Income from equity investments                                                         5,717                5,729
                                                                    ----------------------------------------------
Operating Income                                                                     486,676              456,694
                                                                    ----------------------------------------------
Other Income and (Deductions)
     Interest charges                                                                (84,066)             (68,939)
     Gain on sale of subsidiary stock                                                      -               19,020
     Cost of debt redemption                                                               -              (18,194)
     Minority interest                                                               (20,293)             (18,054)
     Other                                                                             2,761               15,397
                                                                    ----------------------------------------------
Total Other Income and (Deductions)                                                 (101,598)             (70,770)
                                                                    ----------------------------------------------

Income Taxes
     Current                                                                         147,702              129,575
     Deferred                                                                        (10,320)              13,258
                                                                    ----------------------------------------------
Total Income Taxes                                                                   137,382              142,833
                                                                    ----------------------------------------------

Earnings Before Effect of Change in Accounting Principle                             247,696              243,091
Cummulative Effect of Change in Accounting Principle                                       -                  174
                                                                    ----------------------------------------------

Net Income                                                                           247,696              243,265
Preferred stock dividend requirements                                                  1,461                1,461
                                                                    ----------------------------------------------
Earnings for Common Stock                                                        $   246,235          $   241,804
                                                                    ==============================================
Basic Earnings Per Share:
  Before Change in Accounting Principle,
         less preferred stock dividends                                          $      1.54          $      1.54
  Change in Accounting Principle                                                           -                    -
                                                                    ----------------------------------------------
Basic Earnings Per Share                                                         $      1.54          $      1.54
                                                                    ==============================================
Diluted Earnings Per Share
  Before Change in Accounting Principle,
         less preferred stock dividends                                          $      1.53          $      1.53
  Change in Accounting Principle                                                           -                    -
                                                                    ----------------------------------------------
Diluted Earnings Per Share                                                       $      1.53          $      1.53
                                                                    ==============================================
Average Common Shares Outstanding (000)                                              159,892              156,886
Average Common Shares Outstanding - Diluted (000)                                    161,164              158,045
</TABLE>

     See accompanying Notes to the Consolidated Financial Statements.


                                       5
<PAGE>


                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (Unaudited)

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
                                                                            Three Months Ended March 31,
(In Thousands of Dollars)                                                      2004               2003
---------------------------------------------------------------------------------------------------------
<S>                                                                         <C>                <C>
Operating Activities
Net income                                                                  $ 247,696          $ 243,265
Adjustments to reconcile net income to net
      cash provided by (used in) operating activities
    Depreciation, depletion and amortization                                  171,684            144,971
    Deferred income tax                                                       (10,320)            13,258
    Income from equity investments                                             (5,717)            (5,729)
    Dividends from equity investments                                             104                  -
    Amortization of interest rate swap                                         (2,448)            (2,500)
    (Gain) on disposal of subsidiary stock                                          -            (19,020)
    Minority interest                                                          20,293             18,054
Changes in assets and liabilities
    Accounts receivable                                                      (298,134)          (520,062)
    Materials and supplies, fuel oil and gas in storage                       337,092            201,789
    Accounts payable and other liabilities                                   (190,736)           146,311
    Taxes accrued                                                             151,106            203,411
    Interest accrued                                                           38,357              8,324
    Captive insurance                                                          43,214                  -
    Other                                                                      76,895             64,755
                                                                 ----------------------------------------
Net Cash Provided by Operating Activities                                     579,086            496,827
                                                                 ----------------------------------------
Investing Activities
    Construction expenditures                                                (220,224)          (220,779)
    Cost of removal                                                            (6,204)            (6,938)
    Proceeds from monetization of Houston Exploration                               -             79,200
    Proceeds from sale of property                                             13,138                  -
                                                                 ----------------------------------------
Net Cash Used in Investing Activities                                        (213,290)          (148,517)
                                                                 ----------------------------------------
Financing Activities
    Treasury stock issued                                                      11,796             26,307
    Equity issuance                                                                 -            473,573
    Issuance of long-term debt                                                 20,000             39,161
    Payment of long-term debt                                                 (94,853)           (72,565)
    Payment of commercial paper                                              (187,750)          (238,365)
    Redemption of promissory notes                                                  -           (447,005)
    Preferred stock dividends paid                                             (1,461)            (1,461)
    Common stock dividends paid                                               (71,474)           (63,557)
    Other                                                                       9,135              9,047
                                                                 ----------------------------------------
Net Cash Used in Financing Activities                                        (314,607)          (274,865)
                                                                 ----------------------------------------
Net Increase in Cash and Cash Equivalents                                   $  51,189          $  73,445
Cash and Cash Equivalents at Beginning of Period                              205,751            170,617
                                                                 ----------------------------------------
Cash and Cash Equivalents at End of Period                                  $ 256,940          $ 244,062
                                                                 ========================================
</TABLE>

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

     See accompanying Notes to the Consolidated Financial Statements.


                                       6
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

1. BASIS OF PRESENTATION

In our opinion,  the accompanying  unaudited  Consolidated  Financial Statements
contain all adjustments necessary to present fairly KeySpan's financial position
as of March 31, 2004,  and the results of operations  for the three months ended
March 31, 2004 and March 31,  2003,  as well as cash flows for the three  months
ended March 31, 2004 and March 31, 2003. The accompanying  financial  statements
should be read in conjunction  with the  consolidated  financial  statements and
notes  included  in  KeySpan's  Annual  Report  on Form 10K for the  year  ended
December 31, 2003. The December 31, 2003  financial  statement  information  has
been  derived from the 2003 audited  financial  statements.  Income from interim
periods may not be indicative of future results. Certain  reclassifications were
made  to  conform  prior  period  financial  statements  to the  current  period
financial statement presentation.

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

We have approximately 3.6 million common stock options  outstanding at March 31,
2004,  that  were not  included  in the  calculation  of  diluted  EPS since the
exercise price associated with these options was greater than the average market
price of our common stock.


                                       7
<PAGE>


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

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
                                                                             Three Months Ended March 31,
(In Thousands of Dollars, Except Per Share Amounts)                            2004               2003
---------------------------------------------------------------------------------------------------------
<S>                                                                          <C>                <C>
Earnings for common stock                                                   $ 246,235          $ 241,804
Interest savings on convertible preferred stock                                   129                133
Houston Exploration dilution                                                      (81)               (87)
---------------------------------------------------------------------------------------------------------
Earnings for common stock - adjusted                                        $ 246,283          $ 241,850
---------------------------------------------------------------------------------------------------------
Weighted average shares outstanding (000)                                     159,892            156,886
Add dilutive securities:
Options                                                                         1,050                931
Convertible preferred stock                                                       222                228
---------------------------------------------------------------------------------------------------------
Total weighted average shares outstanding - assuming dilution                 161,164            158,045
---------------------------------------------------------------------------------------------------------
Basic earnings per share                                                    $    1.54          $    1.54
---------------------------------------------------------------------------------------------------------
Diluted earnings per share                                                  $    1.53          $    1.53
---------------------------------------------------------------------------------------------------------
</TABLE>


2. BUSINESS SEGMENTS

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

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

The  Electric  Services  segment  consists  of  subsidiaries  that:  operate the
electric  transmission  and  distribution  system owned by LIPA; own and provide
capacity to and produce energy for LIPA from our generating  facilities  located
on Long  Island;  and  manage  fuel  supplies  for LIPA to fuel our Long  Island
generating facilities.  These services are provided in accordance with long-term
service  contracts  having remaining terms that range from three to eleven years
and power purchase  agreements for 23 years. The Electric  Services segment also
includes  subsidiaries  that own,  lease and operate the 2,450  megawatt  ("MW")
Ravenswood  electric  generation facility  ("Ravenswood  facility"),  located in
Queens,  New York,  which includes the recently  completed 250 MW combined cycle
electric  generating facility located at the Ravenswood site (see below). All of
the energy,  capacity and ancillary services related to the Ravenswood  facility
is sold to the New York  Independent  System Operator  ("NYISO") energy markets.
The Electric  Services  segment also provides retail marketing of electricity to
commercial customers.


                                       8
<PAGE>


We are currently in the process of structuring a leveraged  lease  financing for
the new 250  megawatt  electric  generating  facility  located  at the  existing
Ravenswood  site,  and are seeking to close this  transaction in May to coincide
with the commencement of full commercial  operation of the new facility.  At the
closing,  the new facility  will be acquired by the lessor from our  subsidiary,
KeySpan Ravenswood,  LLC, and simultaneously  leased back to it. All obligations
of our subsidiary under the lease will be unconditionally guaranteed by KeySpan.
We anticipate that this lease transaction will generate cash proceeds equivalent
to the fair  market  value  of the  facility,  as  determined  by a  third-party
appraiser.  It is expected that the cash proceeds from this  transaction will be
used to redeem outstanding  commercial paper. This lease transaction is intended
to  qualify  as an  operating  lease  under  SFAS  98  "Accounting  for  Leases:
Sale/Leaseback  Transactions  Involving Real Estate;  Sales-Type  Leases of Real
Estate;  Definition  of the  Lease  Term;  an  Initial  Direct  Costs of  Direct
Financing Leases, an amendment of FASB Statements No.13, 66, 91 and a rescission
of FASB Statement No. 26 and Technical  Bulletin No. 79-11." The lease will have
an initial term of 36 years and  operating  lease expense is  anticipated  to be
between $15 million to $17 million per year.  Lease payments will fluctuate from
year to year, but are substantially paid over the first 16 years.

The Energy Services segment includes companies that provide energy-related and a
minimal amount of fiber optic services to customers primarily located within the
Northeastern   United  States,   with   concentrations  in  the  New  York  City
metropolitan  area,  including  New  Jersey  and  Connecticut,  as well as Rhode
Island,  Pennsylvania,  Massachusetts  and New Hampshire,  through the following
lines of business:  (i) Home Energy  Services,  which provides  residential  and
small  commercial  customers with service and  maintenance of energy systems and
appliances;  and (ii) Business  Solutions,  which  provides  plumbing,  heating,
ventilation,  air conditioning and mechanical services, as well as operation and
maintenance,  design,  engineering  and  consulting  services to commercial  and
industrial customers.

The Energy  Investments  segment  consists of our gas exploration and production
investments, as well as certain other domestic and international  energy-related
investments.  Our gas exploration and production subsidiaries are engaged in gas
and oil  exploration  and  production,  and the  development  and acquisition of
domestic natural gas and oil properties.  These  investments  consist of our 55%
equity interest in The Houston Exploration Company ("Houston  Exploration"),  an
independent  natural  gas  and oil  exploration  company,  as  well  as  KeySpan
Exploration and Production,  LLC, our wholly owned subsidiary engaged in a joint
venture with Houston Exploration.

Subsidiaries in this segment also hold a 20% equity interest in the Iroquois Gas
Transmission  System  LP, a  pipeline  that  transports  Canadian  gas supply to
markets in the  Northeastern  United  States and a 50%  interest  in the Premier
Transmission  Pipeline  in  Northern  Ireland.  At  March  31,  2004,  we had an
approximate  61% investment in certain  midstream  natural gas assets in Western
Canada through KeySpan Energy Canada Partnership  ("KeySpan  Canada").  With the
exception of KeySpan Canada, which is consolidated in our financial  statements,
these subsidiaries are accounted for under the equity method.


                                       9
<PAGE>


On April 1, 2004, The KeySpan  Facilities Income Fund (the "Fund") issued 15.617
million  units  at a price  of  $12.60  per unit for  gross  total  proceeds  of
approximately  CDN$196.8  million.  The  proceeds of the  offering  were used to
acquire an  additional  35.91%  interest in the business of KeySpan  Canada from
KeySpan.  KeySpan received net proceeds of approximately  CDN$186.3  million (or
approximately  US$140  million),  after  commissions  and  expenses.  The Fund's
ownership in KeySpan Canada has now increased from 39.1% to  approximately  75%.
KeySpan's  ownership of KeySpan Canada is now approximately 25%. KeySpan expects
to record a pre-tax gain of approximately $20 million on this transaction, which
will be reflected in its  earnings in the second  quarter of 2004.  The proceeds
from the transaction will be used to redeem outstanding debt.

The  accounting  policies  of the  segments  are the same as those  used for the
preparation of the Consolidated Financial Statements. The segments are strategic
business units that are managed separately because of their different  operating
and regulatory environments.  Operating results of our segments are evaluated by
management on an operating  income basis. At March 31, 2004, the total assets of
each reportable  segment have not changed  materially from those levels reported
at December 31, 2003.  However, in the first quarter of 2004 we reclassified the
operating results of our electric marketing  subsidiary from the Energy Services
segment to the Electric Services segment.  As a result we restated the financial
results for the first quarter of 2003. The reportable segment  information is as
follows:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                               Energy Investments
                                                                           -------------------------
                                                                              Gas
                                                                           Exploration
                                          Gas       Electric     Energy       and          Other
(InThousands of Dollars)             Distribution   Services    Services   Production    Investments    Eliminations   Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>           <C>        <C>         <C>           <C>              <C>          <C>
Three Months Ended March 31, 2004
Unaffiliated revenue                   1,927,779     359,136    129,059      152,419       27,180               -        2,595,573
Intersegment revenue                           -           -      3,436            -        1,265          (4,701)               -
Operating Income                         379,653      47,200    (18,474)      62,108       12,922           3,267          486,676

Three Months Ended March 31, 2003
Unaffiliated revenue                   1,832,701     397,700    129,065      127,847       25,212               -        2,512,525
Intersegment revenue                           -          25      1,426            -        1,252          (2,703)               -
Operating Income                         364,937      39,644     (9,122)      55,590       10,124          (4,479)         456,694
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

Because of the nature of our Electric Services  business,  electric revenues are
derived  from two  large  customers  - the NYISO  and  LIPA.  Electric  Services
revenues from these customers of $345.6 million and $334.4 million for the three
months  ended  March  31,  2004  and  2003  represent  approximately  13% of our
consolidated revenues in both periods.


                                       10
<PAGE>


3. COMPREHENSIVE INCOME

The table below indicates the components of comprehensive income:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
                                                                                          Three Months Ended March 31,
(In Thousands of Dollars)                                                                 2004                    2003
------------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>                    <C>
Net Income                                                                             $ 247,696              $ 243,265
------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax
Net losses (gains) on derivative instruments                                              11,029                  2,354
Foreign currency translation adjustments                                                  (1,896)                 9,753
Unrealized gains (losses) on marketable securities                                           513                 (3,156)
Settlement of derivative premiums                                                          3,437                      -
Unrealized losses on derivative financial instruments                                    (42,458)               (14,749)
------------------------------------------------------------------------------------------------------------------------
Other comprehensive loss, net of tax                                                     (29,375)                (5,798)
------------------------------------------------------------------------------------------------------------------------
Comprehensive Income                                                                   $ 218,321              $ 237,467
------------------------------------------------------------------------------------------------------------------------
Related tax (benefit) expense
Net losses (gains) on derivative instruments                                               5,939                  1,267
Foreign currency translation adjustments                                                  (1,021)                 5,252
Unrealized gains (losses) on marketable securities                                           274                 (1,699)
Settlement of derivative premiums                                                          1,851                      -
Unrealized losses on derivative financial instruments                                    (22,862)                (7,942)
------------------------------------------------------------------------------------------------------------------------
Total Tax (Benefit) Expense                                                            $ (15,819)             $  (3,122)
------------------------------------------------------------------------------------------------------------------------
</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 exploration and
production  activities  and  its  electric  generating  facilities.   Derivative
financial  instruments  are employed by Houston  Exploration  to hedge cash flow
variability  associated  with  forecasted  sales of natural gas. The  Ravenswood
facility  uses  derivative   financial   instruments  to  hedge  the  cash  flow
variability  associated  with the  purchase  of natural gas and oil that will be
consumed  during the generation of  electricity.  The  Ravenswood  facility also
hedges the cash flow  variability  associated with a portion of on-peak electric
energy sales.

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


                                       11
<PAGE>


Houston  Exploration has utilized collars and purchased put options,  as well as
over-the-counter  ("OTC") swaps, to hedge the cash flow  variability  associated
with forecasted  sales of a portion of its natural gas production.  At March 31,
2004, Houston  Exploration has hedge positions in place for approximately 70% of
its estimated 2004 gas production, with an effective floor price of $4.26 and an
effective  ceiling  price of  $5.85.  Further,  Houston  Exploration  has  hedge
positions in place for  approximately  60% of its estimated 2005 gas production,
with an effective floor price of $4.57 and an effective  ceiling price of $5.46.
Houston Exploration uses standard New York Mercantile Exchange ("NYMEX") futures
prices to value its swap positions and, in addition,  uses published  volatility
in its Black-Scholes  calculation for outstanding options. The maximum length of
time over which Houston  Exploration  has hedged such cash flow  variability  is
through December 2005. The fair market value of these derivative  instruments at
March 31, 2004 was a liability of $83.8 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 $63.5 million, or approximately $41 million after-tax.
For the first three months of 2004, Houston  Exploration  recorded an unrealized
loss of $1.0 million  ($0.7  million net of tax)  representing  the  ineffective
portion of its derivative instruments.

With respect to price exposure associated with fuel purchases for the Ravenswood
facility,  KeySpan employs standard NYMEX natural gas futures contracts to hedge
the cash flow variability for a portion of forecasted  purchases of natural gas.
KeySpan also employs the use of financially-settled  oil swap contracts to hedge
the cash flow variability for a portion of forecasted purchases of fuel oil that
will be consumed at the  Ravenswood  facility.  The maximum  length of time over
which we have hedged cash flow variability  associated with forecasted purchases
of natural gas and fuel oil is through  September  2005.  We use standard  NYMEX
futures  prices to value the gas futures  contracts  and market  quoted  forward
prices to value oil swap  contracts.  The fair market value of these  derivative
instruments  at March  31,  2004 was an asset  of $0.3  million.  A  substantial
portion  of  these   derivative   instruments,   which  are  reported  in  other
comprehensive  income,  are expected to be  reclassified  into earnings over the
next twelve months.

We have also engaged in the use of  cash-settled  swap  instruments to hedge the
cash flow  variability  associated  with a portion of  forecasted  peak electric
energy  sales from the  Ravenswood  facility.  Our hedging  strategy is to hedge
approximately 50% of forecasted  on-peak summer season electric energy sales and
a portion of  forecasted  peak  electric  energy sales for the  remainder of the
year. The maximum length of time over which we have hedged cash flow variability
is through  December  2005. We use market quoted  forward  prices to value these
outstanding  derivatives.  The fair market value of these derivative instruments
at March 31, 2004 was a  liability  of $1.1  million.  The  estimated  amount of
losses  associated with such derivative  instruments  that are reported in other
comprehensive income and that are expected to be reclassified into earnings over
the next twelve months is $0.6 million, or approximately $0.4 million after-tax.


                                       12
<PAGE>


The table below summarizes the fair value of each category of derivative
instrument outstanding at March 31, 2004 and its related line item on the
Consolidated Balance Sheet. Fair value is the amount at which derivative
instruments could be exchanged in a current transaction between willing parties,
other than in a forced liquidation sale.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
(In Thousands of Dollars)                                       March 31, 2004        December 31, 2003
--------------------------------------------------------------------------------------------------------
<S>                                                                <C>                    <C>
Gas Contracts:
  Other current assets                                           $      47               $   3,458
  Accounts payable and other liabilities                           (63,535)                (35,592)
  Other deferred liabilities                                       (20,302)                 (4,734)

Oil Contracts:
  Other current assets                                                 257                       -
  Other deferred charges                                                 6                     385

Electric Contracts:
  Accounts payable and other liabilities                              (572)                      -
  Other deferred liabilities                                          (477)                    259
--------------------------------------------------------------------------------------------------------
                                                                 $ (84,576)              $ (36,224)
--------------------------------------------------------------------------------------------------------
</TABLE>


Financially-Settled  Commodity  Derivative  Instruments  that Do Not Qualify for
Hedge Accounting: KeySpan subsidiaries also employ a limited number of financial
derivatives that do not qualify for hedge  accounting  treatment under SFAS 133.
In 2003, we sold a "swaption" to hedge the cash flow variability associated with
50 MW of  forecasted  2004  summer  electric  energy  sales from the  Ravenswood
facility.  The swaption is an option that gives the  counterparty the right, but
not the obligation,  to enter into a swap transaction with KeySpan in the future
at a given strike  price.  This  swaption can be converted  into a swap,  at the
election of the  counterparty  and has an expiration  date of June 1, 2004.  The
premium  payment  KeySpan  received was  recorded as a current  liability on the
Consolidated  Balance Sheet. The premium  generally will be recorded into income
at the time the swaption is either exercised or expires. An internally developed
option-pricing  model is used to value the swaption  and at March 31, 2004,  the
fair value of the swaption was immaterial.

Firm Gas Sales Derivative  Instruments - Regulated Utilities:  We use derivative
financial  instruments to reduce the cash flow  variability  associated with the
purchase price for a portion of future natural gas purchases associated with our
Gas Distribution  operations.  Our strategy is to minimize  fluctuations in firm
gas sales prices to our regulated  firm gas sales  customers in our New York and
New England service territories. The accounting for these derivative instruments
is  subject  to  SFAS 71  "Accounting  for  the  Effects  of  Certain  Types  of
Regulation." Therefore, changes in the fair value of these derivatives have been
recorded as a  regulatory  asset or  regulatory  liability  on the  Consolidated
Balance  Sheet.  Gains  or  losses  on the  settlement  of these  contracts  are
initially  deferred and then  refunded to or  collected  from our firm gas sales
customers  consistent with  regulatory  requirements.  At March 31, 2004,  these
derivatives  had a net fair market value of $18.4 million and are reflected as a
regulatory liability on the Consolidated Balance Sheet.


                                       13
<PAGE>


Physically-Settled  Commodity  Derivative  Instruments:   SFAS  133  establishes
criteria that must be satisfied in order for option contracts, forward contracts
with  optionality  features,  or contracts that combine a forward contract and a
purchase  option  contract to be exempted as normal  purchases and sales.  Based
upon a continuing  review of our  physical gas  contracts,  we  determined  that
certain  contracts for the physical  purchase of natural gas associated with our
regulated gas utilities are not exempt as normal purchases from the requirements
of SFAS 133.  Since these  contracts are for the purchase of natural gas sold to
regulated  firm gas sales  customers,  the  accounting  for these  contracts  is
subject to SFAS 71.  Therefore,  changes in the market value of these  contracts
have  been  recorded  as a  regulatory  asset  or  regulatory  liability  on the
Consolidated Balance Sheet. At March 31, 2004 these contracts had a net negative
fair  market  value  of  $5.3  million,  and  are  reflected  as a $6.0  million
regulatory  asset and $0.7  million  regulatory  liability  on the  Consolidated
Balance Sheet.

Interest Rate Derivative Instruments: In May 2003, we entered into interest rate
swap  agreements  in which we swapped  $250  million of 7.25% fixed rate debt to
floating  rate debt.  Under the terms of the  agreements,  we received the fixed
coupon  rate  associated  with these  bonds and paid our swap  counterparties  a
variable  interest rate based on LIBOR,  that was reset on a semi-annual  basis.
These swaps were  designated as fair-value  hedges and qualified for "short-cut"
hedge  accounting  treatment under SFAS 133. During the three months ended March
31, 2004, we paid our  counterparty an average  interest rate of 6.44%, and as a
result, we realized  interest savings of $0.5 million.  The fair market value of
this derivative was $2 million at March 31, 2004.

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

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


                                       14
<PAGE>


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.  We  believe  that our  credit  risk  related  to the  above  mentioned
derivative financial instruments is no greater than the risk associated with the
primary  contracts which they hedge and that the elimination of a portion of the
price risk reduces  volatility in our reported results of operations,  financial
position and cash flows and lowers overall business risk.

5. RECENT ACCOUNTING PRONOUNCEMENTS

In March 2004, the Financial  Accounting  Standards Board ("FASB") issued,  as a
proposal,   FASB  Staff  Position  ("FSP")  106-b   "Accounting  and  Disclosure
Requirements  Related  to  the  Medicare  Prescription  Drug,   Improvement  and
Modernization  Act of 2003." When issued in final,  this guidance will supersede
FSP  106-1  issued  in 2003 and  will  clarify  the  accounting  and  disclosure
requirements for employers with  postretirement  benefit plans that have been or
will be affected by the passage of the Medicare  Prescription  Drug  Improvement
and  Modernization  Act of 2003 ("the Act"). The Act introduces two new features
to Medicare that an employer  needs to consider in measuring its  obligation and
net  periodic  postretirement  benefit  costs.  The  effective  date for the new
requirements is the first interim or annual period beginning after June 15, 2004
or for KeySpan's purposes the third quarter of 2004.

KeySpan's  retiree health benefit plan  currently  includes a prescription  drug
benefit  that  is  provided  to  retired  employees.   It  is  anticipated  that
implementation  of the new requirements will have a positive impact on KeySpan's
results of operations  and cash flows,  although the magnitude of the impact can
not be determined with any degree of certainty at this time.

6. FINANCIAL GUARANTEES AND CONTINGENCIES

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


                                       15
<PAGE>


The  initial  term of the  Master  Lease  expires  on June  20,  2004 and may be
extended  until June 20,  2009.  In June 2004,  we have the right to: (i) either
purchase the facility for the original  acquisition  cost of $425 million,  plus
the present  value of the lease  payments  that would  otherwise  have been paid
through June 2009;  (ii) terminate the Master Lease and dispose of the facility;
or (iii)  otherwise  extend the  Master  Lease to 2009.  At this  time,  KeySpan
intends to extend the Master Lease through  2009. 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  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 $385
million.  Under the terms of our  credit  facility,  the  Master  Lease has been
considered debt in the ratio of debt-to-total capitalization since the inception
of the lease.  If our subsidiary  that leases the  Ravenswood  facility were not
able to fulfill  its  payment  obligations  with  respect  to the  Master  Lease
payments,  then the maximum amount KeySpan would be exposed to under its current
guarantees would be $425 million,  plus the present value of the remaining lease
payments through June 20, 2009.

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.  At March 31,
2004, the present value of our future asset  retirement  obligation  ("ARO") was
approximately  $88.6  million,  primarily  related to our  investment in Houston
Exploration.

KeySpan's largest asset base is its gas transmission and distribution  system. A
legal obligation exists due to certain safety requirements at final abandonment.
In  addition,  a legal  obligation  may be  construed  to exist with  respect to
KeySpan's   liquefied  natural  gas  ("LNG")  storage  tanks  due  to  clean  up
responsibilities  upon cessation of use.  However,  mass assets such as storage,
transmission and distribution  assets are believed to operate in perpetuity and,
therefore,  have  indeterminate  cash flow estimates.  Since that exposure is in
perpetuity  and cannot be measured,  no liability  will be recorded  pursuant to
SFAS 143.  KeySpan's ARO will be re-evaluated in future periods until sufficient
information exists to determine a reasonable estimate of fair value.



                                       16
<PAGE>


Environmental Matters


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

We have  identified 28 of these sites as being  associated  with the  historical
operations of KEDNY.  One site has been fully  remediated.  The remaining  sites
will  be  investigated  and,  if  necessary,  remediated  under  the  terms  and
conditions  of  Administrative  Orders on Consent  ("ACO") or Voluntary  Cleanup
Agreements  ("VCA").  Expenditures  incurred to date by us with respect to KEDNY
MGP-related activities total $42.6 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 $33.9 million.  One site has been fully
investigated  and  requires  no  further  action.  The  remaining  sites will be
investigated and, if necessary, remediated under the conditions of ACOs or VCAs

We presently  estimate  the  remaining  cost of our KEDNY and KEDLI  MGP-related
environmental  remediation  activities will be $220.6 million,  which amount has
been  accrued by us as a reasonable  estimate of probable  cost for known sites.
Expenditures incurred to date by us with respect to these MGP-related activities
total $76.5 million.

With  respect to  remediation  costs,  the KEDNY and KEDLI rate plans  generally
provide for the recovery of investigation and remediation costs in rates charged
to gas distribution customers. At March 31, 2004, we have reflected a regulatory
asset of $240.8 million for our  KEDNY/KEDLI  MGP sites.  In accordance with New
York  State  Public  Service  Commission  ("NYPSC")  policy,  KeySpan  records a
reduction to  regulatory  liabilities  as costs are  incurred for  environmental
clean-up  activities.  At March 31, 2004, these previously  deferred  regulatory
liabilities  totaled $53 million. In October 2003, KEDNY and KEDLI filed a joint
petition with the NYPSC  seeking rate  treatment  for  additional  environmental
costs that may be incurred in the future.

We are  also  responsible  for  environmental  obligations  associated  with the
Ravenswood  facility,  purchased  from  Consolidated  Edison in 1999,  including
remediation  activities  associated with its historical  operations and those of
the MGP facilities  that formerly  operated at the site. We are not  responsible
for  liabilities  arising from disposal of waste at off-site  locations prior to
the  acquisition  closing  and any  monetary  fines  arising  from  Consolidated
Edison's pre-closing conduct. We presently estimate the remaining  environmental
clean up activities  for this site will be $3.3  million,  which amount has been
accrued by us. Expenditures incurred to date total $1.7 million.

New England Sites: Within the Commonwealth of Massachusetts and the State of New
Hampshire, we are aware of 76 former MGP sites and related facilities within the
existing or former service  territories of KEDNE.


                                       17
<PAGE>


Boston Gas Company, Colonial Gas Company and Essex Gas Company may have or share
responsibility under applicable  environmental laws for the remediation of 66 of
these sites. A subsidiary of National Grid USA ("National  Grid"),  formerly New
England Electric System, has assumed  responsibility for remediating 11 of these
sites,  subject  to a limited  contribution  from  Boston Gas  Company,  and has
provided  full  indemnification  to Boston Gas Company  with  respect to 8 other
sites.  In  addition,  Boston Gas Company,  Colonial Gas Company,  and Essex Gas
Company have each assumed  responsibility for remediating 3 sites. At this time,
it is uncertain as to whether Boston Gas Company,  Colonial Gas Company or Essex
Gas Company have or share responsibility for remediating any of the other sites.
No notice of  responsibility  has been  issued to us for any of these sites from
any governmental environmental authority.

We  presently  estimate  the  remaining  cost  of  these   Massachusetts   KEDNE
MGP-related environmental cleanup activities will be $25.4 million, which amount
has been  accrued by us as a  reasonable  estimate  of  probable  cost for known
sites.  Expenditures  incurred  since  November  8, 2000 with  respect  to these
MGP-related activities total $13.9 million.

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

We  presently   estimate  the   remaining   cost  of   EnergyNorth   MGP-related
environmental  cleanup  activities will be $13.8 million,  which amount has been
accrued  by us as a  reasonable  estimate  of  probable  cost for  known  sites.
Expenditures  incurred since November 8, 2000, with respect to these MGP-related
activities total $8 million.

By rate orders, the Massachusetts  Department of  Telecommunications  and Energy
("DTE") and the New Hampshire Public Utility  Commission  ("NHPUC")  provide for
the recovery of site  investigation and remediation costs and,  accordingly,  at
March 31, 2004,  we have  reflected a regulatory  asset of $51.2 million for the
KEDNE MGP sites.  Colonial  Gas Company and Essex Gas Company are not subject to
the  provisions  of  Statement  of Financial  Accounting  Standard  ("SFAS") 71,
"Accounting  for the Effects of Certain Types of Regulation"  and therefore have
recorded no regulatory asset.  However, rate plans currently in effect for these
subsidiaries provide for the recovery of investigation and remediation costs.

KeySpan  New  England,  LLC  Sites:  We are  aware  of three  non-utility  sites
associated  with  KeySpan  New  England,  LLC,  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


                                       18
<PAGE>


with  historical  operations  involving  the  production  of  coke  and  related
industrial processes. Honeywell International,  Inc. and Beazer East, Inc. (both
former  owners and/or  operators of certain  facilities at Everett ("the Everett
Facility")   together  with   KeySpan,   have  entered  into  an  ACO  with  the
Massachusetts  Department of Environmental  Protection for the investigation and
development  of a remedial  response  plan for a portion of that site.  KeySpan,
Honeywell and Beazer East have entered into a cost-sharing agreement under which
each  company has agreed to pay  one-third of the costs of  compliance  with the
consent  order,  while  preserving  any  claims  it may have  against  the other
companies for, among other things, reallocation of proportionate liability.

We presently estimate the remaining cost of our environmental cleanup activities
for the three  non-utility  sites will be  approximately  $24.3  million,  which
amount has been  accrued by us as a  reasonable  estimate of probable  costs for
known sites. Expenditures incurred since November 8, 2000, with respect to these
sites total $8.5 million.

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

See  KeySpan's  Annual  Report on Form 10K for the year ended  December 31, 2003
Note 7 to those  Consolidated  Financial  Statements  "Contractual  Obligations,
Financial Guarantees and Contingencies" for further information on environmental
matters.

Legal Matters

From time to time we are subject to various legal proceedings arising out of the
ordinary  course of our  business.  Except as described  below,  or in KeySpan's
Annual  Report  on Form 10K for the year  ended  December  31,  2003,  we do not
consider  any of such  proceedings  to be material to our  business or likely to
result in a material  adverse  effect on our  results of  operations,  financial
condition or cash flows.

KeySpan  and  certain of its  current  and former  officers  and  directors  are
defendants  in a  consolidated  class action  lawsuit filed in the United States
District Court for the Eastern District of New York. This lawsuit alleges, among
other things,  violations of Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934,  as  amended  ("Exchange  Act"),  in  connection  with  disclosures
relating to or following the  acquisition of the Roy Kay  companies.  In October
2001, a shareholder's  derivative action was commenced in the same court against


                                       19
<PAGE>


certain  current and former officers and directors of KeySpan,  alleging,  among
other things,  breaches of fiduciary  duty,  violations of the New York Business
Corporation Law and violations of Section 20(a) of the Exchange Act. On June 12,
2002,  a  second   derivative   action  was  commenced  which  asserted  similar
allegations.  Each of these proceedings seeks monetary damages in an unspecified
amount.  On March 18,  2003,  the court  granted our motion to dismiss the class
action  complaint.  The court's order dismissed  certain class  allegations with
prejudice,  but provided the  plaintiffs a final  opportunity to file an amended
complaint concerning the remaining allegations.  In April 2003, plaintiffs filed
an amended complaint and in July 2003 the court denied our motion to dismiss the
amended complaint but did strike certain allegations.  On November 20, 2003, the
court  granted  our  motion for  reconsideration  of the July 2003 order and the
court struck additional allegations from the amended complaint which effectively
limited the potential class period. On December 19, 2003, KeySpan filed a motion
to dismiss the derivative actions. The motion is still pending.  KeySpan intends
to  vigorously  defend  each of these  proceedings.  However,  we are  unable to
predict the outcome of these  proceedings  or what effect,  if any, such outcome
will have on our financial condition, results of operations or cash flows.

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.





                                       20
<PAGE>


Financial Guarantees

KeySpan  has  issued  financial  guarantees  in the normal  course of  business,
primarily on behalf of its  subsidiaries,  to various third party creditors.  At
March 31, 2004,  the  following  amounts would have to be paid by KeySpan in the
event of non-payment by the primary obligor at the time payment is due:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
Nature of Guarantee (In Thousands of Dollars)                                        Amount of       Expiration
                                                                                      Exposure         Dates
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>              <C>              <C>
Medium-Term Notes - KEDLI                                          (i)             $   525,000        2008-2010
Industrial Development Revenue Bonds                               (ii)                128,000           2027
Master Lease  - Ravenswood                                         (iii)               425,000           2004
Surety Bonds                                                       (iv)                169,000        Revolving
Commodity Guarantees and Other                                     (v)                  51,000           2005
Letters of Credit                                                  (vi)                 74,000           2004
-----------------------------------------------------------------------------------------------------------------------
                                                                                   $ 1,372,000
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

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

(i)  KeySpan has fully and unconditionally guaranteed $525 million to holders of
     Medium-Term  Notes  issued  by KEDLI.  These  notes are due to be repaid on
     January  15, 2008 and  February  1, 2010.  KEDLI is required to comply with
     certain financial covenants under the debt agreements.  Currently, KEDLI is
     in compliance  with all covenants and management  does not anticipate  that
     KEDLI will have any difficulty maintaining such compliance.  The face value
     of these notes is included in long-term  debt on the  Consolidated  Balance
     Sheet.

(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 the Glenwood and
     Port Jefferson  electric-generation peaking plants. 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 $425 million Ravenswood master lease
     (the "Master Lease") associated with the lease of the Ravenswood  facility.
     The initial term of the lease  expires on June 20, 2004 and may be extended
     until June 20,  2009.  The Master  Lease is  classified  as $412.3  million
     long-term debt on the Consolidated Balance Sheet.

(iv) KeySpan  has  agreed  to  indemnify  the  issuers  of  various  surety  and
     performance bonds associated with certain  construction  projects currently
     being performed by subsidiaries  within the Energy Services segment. In the
     event that the operating  companies in the Energy Services  segment fail to
     perform their obligations under contract, the injured party may demand that
     the surety make payments or provide services under the bond.  KeySpan would
     then be obligated to reimburse  the surety for any expenses or cash outlays
     it incurs.


                                       21
<PAGE>


(v)  KeySpan  has  guaranteed  commodity-related  payments  for  certain  of its
     subsidiaries.  These guarantees are provided to third parties to facilitate
     physical  and  financial  transactions  involved in the purchase of natural
     gas, oil and other petroleum products for electric production and marketing
     activities.  The guarantees  cover actual  purchases by these  subsidiaries
     that are still outstanding as of March 31, 2004.

(vi) 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  will
     default on their current obligations. However, we cannot predict when or if
     any defaults may take place or the impact any such defaults may have on our
     consolidated results of operations, financial condition or cash flows.

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

7. STOCK OPTIONS

Stock options have been issued to KeySpan officers,  directors and certain other
management  employees  and  consultants  as approved by the Board of  Directors.
These  options  generally  vest  over a  three-to-five  year  period  and have a
ten-year exercise period.  Moreover,  under a separate plan, Houston Exploration
has issued stock options to its directors and key Houston Exploration employees.

                                       22

<PAGE>


(Beginning in 2004, KeySpan officers that serve on the Houston Exploration Board
of  Directors  will not receive  Houston  Exploration  stock  options.) In 2003,
KeySpan and Houston  Exploration adopted the prospective method of transition of
accounting for stock option expense in accordance  with SFAS 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure". Accordingly, compensation
expense has been recognized by employing the fair value  recognition  provisions
of SFAS 123 "Accounting for Stock-Based  Compensation"  for grants awarded after
January 1, 2003.

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

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
                                                                                           Three Months Ended March 31,
(In Thousands of Dollars, Except Per Share Amounts)                                       2004                     2003
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>                      <C>
Earnings available for common stock:
As reported                                                                           $ 246,235                $ 241,804
     Add: recorded stock-based compensation expense, net of tax                           1,512                      857
     Deduct: total stock-based compensation expense, net of tax                          (2,967)                  (2,913)
--------------------------------------------------------------------------------------------------------------------------
Pro-forma earnings                                                                    $ 244,780                $ 239,748
--------------------------------------------------------------------------------------------------------------------------
Earnings per share:
     Basic - as reported                                                                 $ 1.54                   $ 1.54
     Basic - pro-forma                                                                   $ 1.53                   $ 1.53

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


8. POSTRETIREMENT BENEFITS

Pension  Plans:  The  following  information  represents  the  consolidated  net
periodic pension cost for the three months ended March 31, 2004 and 2003 for our
noncontributory  defined  benefit  pension plans which cover  substantially  all
employees. Benefits are based on years of service and compensation.  Funding for
pensions is in  accordance  with  requirements  of federal law and  regulations.
KEDLI and  Boston  Gas  Company  are  subject  to  certain  deferral  accounting
requirements  mandated by the New York Public Service Commission  ("NYSPSC") and
the Department of  Telecommunications  Energy ("DTE"),  respectively for pension
costs  and other  postretirement  benefit  costs.  Further,  KeySpan's  electric
subsidiaries are subject to certain "true-up"  provisions in accordance with the
LIPA service agreements.


                                       23
<PAGE>


The calculation of net periodic pension cost is as follows:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                                                              Three Months Ended March 31,
(In Thousands of Dollars)                                                  2004                        2003
---------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>                          <C>
Service cost, benefits earned during the period                   $       13,079               $       11,883
Interest cost on projected benefit obligation                             36,047                       34,568
Expected return on plan assets                                           (36,521)                     (32,639)
Net amortization and deferral                                             16,917                       16,737
---------------------------------------------------------------------------------------------------------------------
Total pension cost                                                $       29,522               $       30,549
---------------------------------------------------------------------------------------------------------------------
</TABLE>


Other  Postretirement   Benefits:   The  following  information  represents  the
consolidated net periodic other postretirement benefit cost for the three months
ended  March 31, 2004 and 2003 for our  noncontributory  defined  benefit  plans
covering certain health care and life insurance  benefits for retired employees.
We have been funding a portion of future benefits over employees' active service
lives  through  Voluntary  Employee  Beneficiary  Association  ("VEBA")  trusts.
Contributions  to  VEBA  trusts  are  tax  deductible,  subject  to  limitations
contained in the Internal Revenue Code.

Net  periodic   other   postretirement   benefit  cost  included  the  following
components:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
                                                                                   Three Months Ended March 31,
(In Thousands of Dollars)                                                        2004                       2003
------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>                        <C>
Service cost, benefits earned during the period                                  5,392                      4,706
Interest cost on accumulated
   postretirement benefit obligation                                            18,521                     17,451
Expected return on plan assets                                                  (7,708)                    (6,883)
Net amortization and deferral                                                   11,280                      8,954
------------------------------------------------------------------------------------------------------------------
Other postretirement cost                                                       27,485                     24,228
------------------------------------------------------------------------------------------------------------------
</TABLE>

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

9. LONG-TERM DEBT

At March 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 commits us, three years from the date
of issuance of the MEDS Equity  Units,  May 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 is composed of
interest  payments  on the  six-year  note of 4.9% and  premium  payments on the
three-year  equity  forward  contract  of  3.85%.  These  instruments  have been
recorded as long-term  debt on the  Consolidated  Balance Sheet.  Further,  upon
issuance  of the MEDS  Equity  Units,  we  recorded a direct  charge to retained
earnings of $49.1  million,  which  represents  the present value of the forward
contract's premium payments.


                                       24
<PAGE>



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

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

The Emerging Issues Task Force of the FASB is considering  proposals  related to
accounting  for  certain   securities  and  financial   instruments,   including
securities  such as the Equity Units.  The current  proposals  being  considered
include the method of accounting discussed above. Alternatively, other proposals
being  considered  could result in the common  shares  issuable  pursuant to the
purchase  contract to be deemed  outstanding  and included in the calculation of
diluted earnings per share, and could result in periodic "mark to market" of the
purchase  contracts,  causing  periodic  charges or  credits to income.  If this
latter  approach  were adopted,  our basic and diluted  earnings per share could
increase and decrease  from quarter to quarter to reflect the lesser and greater
number of shares issuable upon satisfaction of the contract,  as well as charges
or credits to income.

10. KEYSPAN GAS EAST CORPORATION SUMMARY FINANCIAL INFORMATION

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



                                       25

<PAGE>


<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
                                Statement of Income
---------------------------------------------------------------------------------------------------------------------------------
                                                                   Three Months Ended March 31, 2004
(In Thousands of Dollars)                   Guarantor         KEDLI        Other Subsidiaries     Eliminations      Consolidated
--------------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>    <C>     <C>                   <C>                <C>             <C>
Revenues                                   $     153       $ 471,083            $ 2,124,490        $    (153)      $ 2,595,573
                                       -----------------------------------------------------------------------------------------
Operating Expenses
  Purchased gas                                    -         291,089                935,484                 -         1,226,573
  Fuel and purchased power                         -               -                101,612                 -           101,612
  Operations and maintenance                     369          33,217                458,880                 -           492,466
  Intercompany expense                             -           1,355                 (1,355)                                  -
  Depreciation and amortization                    -          29,841                141,843                 -           171,684
  Operating taxes                                  -          19,543                102,736                 -           122,279
                                       -----------------------------------------------------------------------------------------
Total Operating Expenses                         369         375,045              1,739,200                 -         2,114,614
                                       -----------------------------------------------------------------------------------------
Income from equity investments                     -               -                  5,717                 -             5,717
                                       -----------------------------------------------------------------------------------------
Operating Income (Loss)                         (216)         96,038                391,007              (153)          486,676
                                       -----------------------------------------------------------------------------------------
Interest charges                             (53,488)        (15,863)               (71,475)           56,760           (84,066)
Other income and (deductions)                297,529             374                 (1,960)         (313,475)          (17,532)
                                       -----------------------------------------------------------------------------------------
Total Other Income and (Deductions)          244,041         (15,489)               (73,435)         (256,715)         (101,598)
                                       -----------------------------------------------------------------------------------------
Income Taxes (Benefit)                        (5,862)         22,710                120,534                 -           137,382

                                                                                          -                 -
                                       -----------------------------------------------------------------------------------------
Net Income                                 $ 249,687       $  57,839            $   197,038        $ (256,868)     $    247,696
                                       =========================================================================================
</TABLE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                        Statement of Income
------------------------------------------------------------------------------------------------------------------------------------
                                                               Three Months Ended March 31, 2003
(In Thousands of Dollars)                          Guarantor         KEDLI      Other Subsidiaries    Eliminations     Consolidated
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>            <C>                <C>               <C>             <C>
Revenues                                          $     143       $ 478,345          $ 2,034,180      $     (143)      $ 2,512,525
                                               ------------------------------------------------------------------------------------
Operating Expenses
  Purchased gas                                           -         287,009              909,156               -         1,196,165
  Fuel and purchased power                                -               -               97,522               -            97,522
  Operations and maintenance                          7,259          38,220              452,710               -           498,189
  Intercompany expense                                   34           1,182               (1,182)            (34)                -
  Depreciation and amortization                         (20)         26,920              118,071               -           144,971
  Operating taxes                                         -          24,005              100,708               -           124,713
                                               ------------------------------------------------------------------------------------
Total Operating Expenses                              7,273         377,336            1,676,985             (34)        2,061,560
                                               ------------------------------------------------------------------------------------
Income from equity investments                            -               -                5,729               -             5,729
                                               ------------------------------------------------------------------------------------
Operating Income (Loss)                              (7,130)        101,009              362,924            (109)          456,694
                                               ------------------------------------------------------------------------------------

Interest charges                                    (46,477)        (15,006)             (52,299)         44,843           (68,939)
Other income and (deductions)                       293,453          (7,217)               4,514        (292,581)           (1,831)
                                               ------------------------------------------------------------------------------------
Total Other Income and (Deductions)                 246,976         (22,223)             (47,785)       (247,738)          (70,770)
                                               ------------------------------------------------------------------------------------

Income Taxes                                         (3,419)         28,312              117,940               -           142,833
                                               ------------------------------------------------------------------------------------
Earnings before change in accounting principle      243,265          50,474              197,199        (247,847)          243,091
Cumulative change in accounting principle                                                    174               -               174
                                               ------------------------------------------------------------------------------------
Net Income                                        $ 243,265       $  50,474          $   197,373      $ (247,847)      $   243,265
                                               ====================================================================================
</TABLE>


                                       26
<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet
------------------------------------------------------------------------------------------------------------------------------------
                                                                                 March 31, 2004
                                                    Guarantor        KEDLI      Other Subsidiaries      Eliminations   Consolidated
                                             ---------------------------------------------------------------------------------------
<S>                                               <C>            <C>                <C>                <C>              <C>
ASSETS
Current Assets
   Cash & temporary cash investments             $    81,730    $        59        $    175,151       $          -      $   256,940
   Accounts receivable, net                            7,667        274,627           1,471,748                  -        1,754,042
   Other current assets                                2,479         44,457             295,427                  -          342,363
                                             ---------------------------------------------------------------------------------------
                                                      91,876        319,143           1,942,326                  -        2,353,345
                                             ---------------------------------------------------------------------------------------

Equity Investments                                 4,740,262          1,043             160,609         (4,645,542)         256,372
                                             ---------------------------------------------------------------------------------------
Property
   Gas                                                     -      1,919,592           4,670,829                  -        6,590,421
   Other                                                   -              -           6,258,336                  -        6,258,336
   Accumulated depreciation and depletion                  -       (316,831)         (3,568,248)                 -       (3,885,079)
                                             ---------------------------------------------------------------------------------------
                                                           -      1,602,761           7,360,917                  -        8,963,678
                                             ---------------------------------------------------------------------------------------

Intercompany Accounts Receivable                   2,977,170                          1,212,607         (4,189,777)               -

Deferred Charges                                     375,495        225,589           2,505,253                  -        3,106,337

                                             ---------------------------------------------------------------------------------------
Total Assets                                     $ 8,184,803    $ 2,148,536        $ 13,181,712       $ (8,835,319)     $14,679,732
                                             =======================================================================================

LIABILITIES AND CAPITALIZATION
Current Liabilities
   Accounts payable                              $    49,113    $   162,274        $    740,946       $          -      $   952,333
   Commercial paper                                  294,150                                  -                  -          294,150
   Other current liabilities                         283,634         12,275             117,841                  -          413,750
                                             ---------------------------------------------------------------------------------------
                                                     626,897        174,549             858,787                  -        1,660,233
                                             ---------------------------------------------------------------------------------------
Intercompany Accounts Payable                              -         48,291           2,556,920         (2,605,211)               -
                                             ---------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
Deferred income tax                                  (48,188)       259,184           1,039,676                  -        1,250,672
Other deferred credits and liabilities               571,504        175,547           1,031,882                  -        1,778,933
                                             ---------------------------------------------------------------------------------------
                                                     523,316        434,731           2,071,558                  -        3,029,605
                                             ---------------------------------------------------------------------------------------
Capitalization
Common shareholders' equity                        3,901,569        840,061           3,736,438         (4,645,542)       3,832,526
Preferred stock                                       83,433              -                   -                  -           83,433
Long-term debt                                     3,049,588        650,904           3,421,530         (1,584,566)       5,537,456
                                             ---------------------------------------------------------------------------------------
Total Capitalization                               7,034,590      1,490,965           7,157,968         (6,230,108)       9,453,415
                                             ---------------------------------------------------------------------------------------
Minority Interest in Subsidiary Companies                  -              -             536,479                  -          536,479
                                             ---------------------------------------------------------------------------------------
Total Liabilities & Capitalization               $ 8,184,803    $ 2,148,536        $ 13,181,712       $ (8,835,319)     $14,679,732
                                             =======================================================================================
</TABLE>


                                       27
<PAGE>


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

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

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

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

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

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


                                       28
<PAGE>

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
Statement of Cash Flows
-------------------------------------------------------------------------------------------------------------------------------
                                                                           Three Months Ended March 31, 2004
                                                         ----------------------------------------------------------------------
                                                               Guarantor        KEDLI        Other Subsidiaries    Consolidated
                                                         ----------------------------------------------------------------------
<S>                                                            <C>           <C>                   <C>               <C>
Operating Activities
Net Cash Provided by Operating Activities                     $  95,128      $ 91,155              $ 392,803         $ 579,086
                                                         ----------------------------------------------------------------------
Investing Activities
   Capital expenditures                                               -       (24,388)              (195,836)         (220,224)
   Cost of removal                                                    -          (356)                (5,848)           (6,204)
   Proceeds from sale of property                                     -             -                 13,138            13,138
                                                         ----------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities                   -       (24,744)              (188,546)         (213,290)
                                                         ----------------------------------------------------------------------
Financing Activities
   Treasury stock issued                                         11,796             -                      -            11,796
   Payment of debt, net                                        (187,750)            -                (74,853)         (262,603)
   Common and preferred stock dividends paid                    (72,935)            -                      -           (72,935)
   Other                                                          9,523             -                   (388)            9,135
   Net intercompany accounts                                    128,401       (67,906)               (60,495)                -
                                                                                                                             -
                                                         ----------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities            (110,965)      (67,906)              (135,736)         (314,607)
                                                         ----------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents                     $ (15,837)     $ (1,495)             $  68,521         $  51,189
Cash and Cash Equivalents at Beginning of Period                 97,567         1,554                106,630           205,751
                                                         ----------------------------------------------------------------------
Cash and Cash Equivalents at End of Period                    $  81,730      $     59              $ 175,151         $ 256,940
                                                         ======================================================================
</TABLE>

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
Statement of Cash Flows
----------------------------------------------------------------------------------------------------------------------------------
                                                                                 Three Months Ended March 31, 2003
                                                          ------------------------------------------------------------------------
                                                                 Guarantor         KEDLI        Other Subsidiaries    Consolidated
                                                          ------------------------------------------------------------------------
<S>                                                             <C>             <C>                    <C>              <C>
Operating Activities
Net Cash Provided by (Used in) Operating Activities             $ 239,598       $ 121,439              $ 135,790        $ 496,827
                                                          ------------------------------------------------------------------------
Investing Activities
   Capital expenditures                                                 -         (25,941)              (194,838)        (220,779)
  Cost of removal                                                       -            (420)                (6,518)          (6,938)
  Proceeds from monetization of Houston Exploration                79,200               -                      -           79,200
                                                          ------------------------------------------------------------------------
Net Cash Used in Investing Activities                              79,200         (26,361)              (201,356)        (148,517)
                                                          ------------------------------------------------------------------------
Financing Activities
   Treasury stock issued                                           26,307               -                      -           26,307
   Equity issuance                                                473,573               -                      -          473,573
   Redemption of promissory notes                                (447,005)              -                      -         (447,005)
   Payment of debt, net                                          (238,365)              -                (33,404)        (271,769)
   Common and preferred stock dividends paid                      (65,018)              -                      -          (65,018)
   Other                                                            7,153               -                  1,894            9,047
   Net intercompany accounts                                      (73,193)        (87,265)               160,458                -
                                                                                                                                -
                                                          ------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities              (316,548)        (87,265)               128,948         (274,865)
                                                          ------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents            $   2,250       $   7,813              $  63,382        $  73,445
Cash and Cash Equivalents at Beginning of Period                   88,308           6,472                 75,837          170,617
                                                          ------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period                      $  90,558       $  14,285              $ 139,219        $ 244,062
                                                          ========================================================================
</TABLE>


                                       29
<PAGE>


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

Consolidated Review of Results

The following is a summary of transactions  affecting comparative earnings and a
discussion of material  changes in revenues and expenses during the three months
ended  March 31,  2004,  compared  to the three  months  ended  March 31,  2003.
Capitalized terms used in the following  discussion,  but not otherwise defined,
have the same  meaning as when used in the Notes to the  Consolidated  Financial
Statements included under Item 1. References to "KeySpan," "we," "us," and "our"
mean KeySpan Corporation, together with its consolidated subsidiaries.

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

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

Quarter Ended March 31,                                  2004            2003
-------------------------------------------------------------------------------
Gas Distribution                                     $ 379,653       $ 364,937
Electric Services                                       47,200          39,644
Energy Services                                        (18,474)         (9,122)
Energy Investments                                      75,030          65,714
Eliminations and other                                   3,267          (4,479)
-------------------------------------------------------------------------------
Operating Income                                       486,676         456,694
Interest charges                                       (84,066)        (68,939)
Other income and (deductions)                          (17,532)         (1,831)
Income taxes                                           137,382         142,833
-------------------------------------------------------------------------------
Income before cumulative effect
   of a change in accounting principle                 247,696         243,091
Cumulative effect of a change
   in accounting principle                                   -             174
-------------------------------------------------------------------------------
Net Income                                             247,696         243,265
Preferred stock dividend requirements                    1,461           1,461
-------------------------------------------------------------------------------
Earnings for Common Stock                            $ 246,235       $ 241,804
-------------------------------------------------------------------------------
Basic Earnings per Share
    Income before cumulative effect
       of a change in accounting principle           $    1.54       $    1.54
   Change in accounting principle                            -               -
-------------------------------------------------------------------------------
                                                     $    1.54       $    1.54
-------------------------------------------------------------------------------

As indicated in the above table,  operating income increased $30 million, or 7%,
for the quarter ended March 31, 2004, compared to the corresponding  period last
year. The increase in operating  income  reflects  higher  earnings from the Gas
Distribution, Energy Investments and Electric Services segments, somewhat offset
by a decrease in earnings from the Energy Services segment. The Gas Distribution
segment  benefited  from  oil-to-gas  conversions  throughout  all  our  service
territories,  as well as from a rate  increase  resulting  from the  Boston  Gas
Company rate proceeding  concluded last fall. In the Energy Investment  segment,


                                       30
<PAGE>


higher gas production volumes and realized gas prices resulted in an increase in
operating  income  associated with gas  exploration  and production  activities,
while the Electric  Services  segment  benefited from generally  lower operating
costs.  Operating  results  for the  Energy  Services  segment  reflects  higher
operating  costs.  (See the  discussion  under the caption  "Review of Operating
Segments" for further details on each segment.)

The increase in interest expense of $15.1 million, or 22%, reflects the benefits
realized in 2003  associated  with  interest  rate swaps.  In February  2003, we
terminated  an  interest  rate swap  agreement  with a  notional  amount of $270
million.  This swap was used to hedge a portion of outstanding  promissory notes
that were issued to the Long Island Power Authority  ("LIPA") in connection with
the  KeySpan/Long   Island  Lighting  Company  ("LILCO")  business   combination
completed in May 1998.  In March 2003, we called  approximately  $447 million of
the outstanding  promissory notes and recorded debt redemption  charges of $18.2
million in other income and (deductions). The cash proceeds from the termination
of the interest rate hedge were $18.4 million, of which $8.1 million represented
accrued swap interest.  The difference between the termination settlement amount
and the amount of accrued swap interest, $10.3 million, was recorded to earnings
(as an  adjustment  to  interest  expense)  in the  first  quarter  of 2003  and
effectively  offset a portion of the redemption  charges.  Further,  in December
2003, KeySpan implemented FASB Interpretation No. 46 ("FIN 46"),  "Consolidation
of  Variable  Interest  Entities,   an  Interpretation  of  ARB  No.  51."  This
Interpretation  required us to, among other things,  consolidate  the Ravenswood
Master  Lease  and  classify  the  lease  obligation  as  long-term  debt on the
Consolidated  Balance Sheet based on our current status as primary  beneficiary.
As a result of  implementing  FIN 46,  beginning  January 1, 2004 lease payments
have been reflected as interest expense on the Consolidated  Statement of Income
resulting  in an  increase  to  interest  expense of $7.5  million for the first
quarter of 2004.

Other income and (deductions)  includes minority  interest  adjustments of $20.3
million and $18.1 million for the first quarter of 2004 and 2003,  respectively,
related to our ownership interest in The Houston  Exploration  Company ("Houston
Exploration")  our gas  exploration  and production  subsidiary,  as well as our
ownership  interest  in  KeySpan  Canada,  which  owns  natural  gas  processing
facilities in western Canada.  On April 1, 2004 KeySpan completed the sale of an
additional  36%  interest in KeySpan  Canada.  KeySpan's  ownership  interest in
KeySpan Canada is now 25%. (See Note 2 to the Consolidated  Financial Statements
"Business Segments" for additional details.)

In  addition  to the debt  redemption  charges  noted  above,  other  income and
(deductions) for the first quarter of 2003 also includes a gain of $19.0 million
reflecting the  monetization  of a portion of our ownership  interest in Houston
Exploration.  In February  2003,  we reduced our  ownership  interest in Houston
Exploration from 66% to approximately  55% following the repurchase,  by Houston
Exploration,  of three million  shares of common stock owned by KeySpan.  Income
taxes  were  not  provided  on  this  transaction,  since  the  transaction  was
structured  as a return of capital.  Further,  during the first  quarter of 2003
Houston Exploration  recorded a $10.6 million severance tax refund for severance
taxes paid in 2002 and earlier  periods,  which has also been reflected in other
income and (deductions).


                                       31
<PAGE>


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

Earnings  available  for common stock for the three months ended March 31, 2004,
increased  by $4.4  million,  or 2%,  compared  to the same  period  last  year.
Earnings per share, however, remained the same as last year since average common
shares  outstanding  for the  quarter  ended  March 31,  2004  increased  by 2%,
reflecting  the  re-issuance  of shares  held in  treasury  pursuant to dividend
reinvestment and employee benefit plans.  This increase in average common shares
outstanding  reduced first quarter 2004 earnings per share by $0.03  compared to
the corresponding period in 2003.

Consistent with our prior earnings guidance, KeySpan's consolidated earnings for
2004 are  forecasted  to be in the range of $2.55 to $2.75 per share,  excluding
special  items.  Earnings  from  continuing  core  operations  (defined for this
purpose as all continuing operations other than exploration and production, less
preferred  stock  dividends) are forecasted to be in the range of $2.20 to $2.30
per share,  while  earnings  from  exploration  and  production  operations  are
forecasted to be in the range of $0.35 to $0.45 per share.

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


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

In response to new disclosure regulations adopted by the Securities and Exchange
Commission as part of its  implementation  of the  Sarbanes-Oxley  Act of 2002 -
specifically  Regulation G which became  effective March 2003 - we report all of
KeySpan's 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.


                                       32
<PAGE>


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

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
                                                                           Three Months Ended March 31,
(In Thousands of Dollars)                                                  2004                    2003
-----------------------------------------------------------------------------------------------------------
<S>                                                                      <C>                    <C>
Revenues                                                                $ 1,927,779            $ 1,832,701
Cost of gas                                                               1,226,573              1,154,132
Revenue taxes                                                                34,755                 38,616
-----------------------------------------------------------------------------------------------------------
Net Revenues                                                                666,451                639,953
-----------------------------------------------------------------------------------------------------------
Operating Expenses
   Operations and maintenance                                               172,399                166,090
   Depreciation and amortization                                             76,940                 70,817
   Operating taxes                                                           37,459                 38,109
-----------------------------------------------------------------------------------------------------------
Total Operating Expenses                                                    286,798                275,016
-----------------------------------------------------------------------------------------------------------
Operating Income                                                        $   379,653             $  364,937
-----------------------------------------------------------------------------------------------------------
Firm gas sales and transportation (MDTH)                                    154,316                154,627
Transportation - Electric Generation (MDTH)                                   4,139                  5,003
Other Sales (MDTH)                                                           52,956                 54,709
Warmer (Colder) than Normal - New York                                         (6.0)%                 (8.5)%
Warmer (Colder) than Normal - New England                                      (9.4)%                (10.0)%
-----------------------------------------------------------------------------------------------------------
</TABLE>

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


Net Revenues

Net gas revenues  (revenues less the cost of gas and  associated  revenue taxes)
from our gas distribution  operations  increased by $26.5 million, or 4%, in the
first  quarter of 2004  compared to same  quarter  last year.  Net gas  revenues
benefited from customer additions and oil-to-gas conversions,  as well as from a
rate increase  resulting from the Boston Gas Company's rate  proceeding that was
concluded  in the fourth  quarter of 2003.  As measured in heating  degree days,
weather for the first  quarter of 2004 in our New York and New  England  service
territories  was  approximately  6% and 9%  colder  than  normal,  respectively,
compared to approximately 9% and 10% colder than normal last year, respectively.
Weather was  approximately  2% warmer than last year  across  KeySpan's  service
territories.

Net revenues from firm gas customers  (residential,  commercial  and  industrial
customers) in our New York service territory  increased by $13.1 million for the
first quarter of 2004 compared to the same period last year.  Customer additions
and  oil-to-gas  conversions,  net of  attrition  and  conservation,  added $9.4
million to net gas revenues.  Further, we realized a $3.5 million benefit to net
gas revenues as a result of an additional billing day in the leap year. Weather,
which was  slightly  warmer  than last year,  resulted  in an adverse  impact to
comparative net gas revenues of $1.9 million. KEDNY and KEDLI each operate under
a  utility  tariff  that  contains  a  weather  normalization   adjustment  that
significantly  offsets  variations in firm net revenues due to  fluctuations  in
normal  weather.  Since  weather  was colder  than  normal we  refunded  to firm
customers  $13  million  through  the  weather  normalization  adjustment.  Also


                                       33
<PAGE>

included in net gas revenues is the  recovery of property  taxes that added $2.1
million to net  revenues  during  the first  quarter  of 2004.  These  revenues,
however,  do not impact net income  since the taxes they are designed to recover
are expensed as amortization  charges on the  Consolidated  Statement of Income.
Firm gas  distribution  rates for KEDNY and KEDLI in the first  quarter of 2004,
other than for the recovery of gas costs, have remained substantially  unchanged
from rates charged last year.

Net  revenues  from firm gas  customers  in our New  England  service  territory
increased by $21.1  million for the first  quarter of 2004  compared to the same
period  last  year.  Customer  additions  and  oil-to-gas  conversions,  net  of
attrition and conservation,  added $3.5 million to net gas revenues. Further, we
realized a $2.2 million benefit in net gas revenues as a result of an additional
billing  day for leap  year.  As  mentioned,  the  Massachusetts  Department  of
Telecommunications  and Energy ("DTE") approved a $27 million base rate increase
for the Boston Gas Company,  which became effective  November 1, 2003. This rate
increase  resulted in a benefit to net gas revenues of $10.6 million  during the
first quarter of 2004. (See the caption under  "Regulation and Rate Matters" for
further information regarding the rate filing.) The gas distribution  operations
of our New  England  based  subsidiaries  do not  have a  weather  normalization
adjustment.  Weather,  which was slightly warmer than last year,  resulted in an
adverse impact to comparative net gas revenues of $3.0 million.  To mitigate the
effect  of  fluctuations  in normal  weather  patterns  on  KEDNE's  results  of
operations and cash flows,  weather  derivatives were in place for the 2003/2004
winter  heating  season.  Since  weather  during  the first  quarter of 2004 was
approximately 9% colder than normal in the New England service  territories,  we
recorded a $4.1  million  reduction  to  revenues  to reflect  the loss on these
derivative  transactions.  Similarly,  in  2003 we  recorded  an  $11.9  million
reduction  to  revenues.  As a result  of these  transactions,  comparative  net
revenues were favorably impacted by $7.8 million (See Note 4 to the Consolidated
Financial Statements "Hedging and Derivative Financial  Instruments" for further
information).

In our large-volume  heating and other interruptible  (non-firm) markets,  which
include large apartment houses, government buildings and schools, gas service is
provided  under rates that are  designed to compete  with prices of  alternative
fuel,  including No. 2 and No. 6 grade heating oil. These "dual-fuel"  customers
can consume either natural gas or fuel oil for heating purposes. Net revenues in
these markets  decreased  $7.7 million during the first quarter of 2004 compared
to same period last year.  This decrease  reflects a lower quantity of gas sales
to  customers  within this market due, in part,  to  customers  heating  with an
alternative fuel.  Further,  since weather during January 2004 was significantly
colder  than  normal  and last year,  KeySpan  discontinued  sales  service to a
segment of its  dual-fuel  customers  for a number of days during the month,  as
permitted  under its tariff and  directed by the New York State  Public  Service
Commission  to ensure  reliable  service  to firm  customers.  The  majority  of
interruptible  profits  earned by KEDNE and KEDLI are returned to firm customers
as an offset to gas costs.


                                       34
<PAGE>


We are  committed  to our  expansion  strategies  initiated  during the past few
years. We believe that significant growth opportunities exist on Long Island and
in our New  England  service  territories.  We  estimate  that  on  Long  Island
approximately 36% of the residential and multi-family markets, and approximately
58% of the  commercial  market,  currently  use natural  gas for space  heating.
Further, we estimate that in our New England service  territories  approximately
53% of the residential and multi-family  markets,  and  approximately 63% of the
commercial market, currently use natural gas for space heating purposes. We will
continue to seek growth,  in all our market  segments,  through the expansion of
our gas  distribution  system,  as well as through the conversion of residential
homes  from   oil-to-gas   for  space  heating   purposes  and  the  pursuit  of
opportunities to grow multi-family, industrial and commercial markets.

Firm Sales, Transportation and Other Quantities

Firm gas sales and  transportation  quantities  for the quarter  ended March 31,
2004 were  consistent with such quantities for same period in 2003. Net revenues
are not  affected by  customers  opting to purchase  their gas supply from other
sources, since delivery rates charged to transportation  customers generally are
the  same  as  delivery   rates  charged  to  full  sales   service   customers.
Transportation   quantities   related  to   electric   generation   reflect  the
transportation  of gas to our  electric  generating  facilities  located on Long
Island. Net revenues from these services are not material.

Other sales quantities include on-system  interruptible  quantities,  off-system
sales quantities  (sales made to customers  outside of our service  territories)
and related  transportation.  We have an agreement  with Coral  Resources,  L.P.
("Coral"),  a subsidiary of Shell Oil Company,  under which Coral assists in the
origination, structuring, valuation and execution of energy-related transactions
on behalf of KEDNY and KEDLI. We also have a portfolio  management contract with
Entergy Koch Trading, LP ("EKT"),  under which EKT provides all of the city gate
supply  requirements  at market prices and manages  certain  upstream  capacity,
underground storage and term supply contracts for KEDNE. These agreements expire
on March 31, 2006.

Purchased Gas for Resale

The  increase in gas costs for the first  quarter of 2004  compared to the first
quarter of 2003 of $72.4 million, or 6%, reflects an increase of 9% in the price
per  dekatherm  of gas  purchased,  and a 2%  decrease  in the  quantity  of gas
purchased.  The  current  gas  rate  structure  of each of our gas  distribution
utilities includes a gas adjustment clause, pursuant to which variations between
actual  gas costs  incurred  for resale to firm  sales  customers  and gas costs
billed to firm sales  customers  are deferred and refunded to or collected  from
customers in a subsequent period.


                                       35
<PAGE>


Operating Expenses

Operating expenses during the first quarter of 2004 compared to the same quarter
last year have  increased  by $11.8  million,  or 4%. The  increase in operating
expense is  attributable,  in part, to higher  pension and other  postretirement
benefits which  increased by $4.1 million,  net of amounts subject to regulatory
deferral  accounting  treatment,  over the level  incurred in 2003.  The cost of
these benefits has risen  primarily as a result of increased  health care costs.
In addition,  the bad debt reserve has increased primarily as a result of higher
account receivables due to higher cost of gas purchased. Higher depreciation and
amortization  expense  reflects the continued  expansion of the gas distribution
system.

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 Northport, Long Island. Applications for all necessary
regulatory  authorizations  were filed in 2000 and 2001. To date,  Islander East
has received a final certificate from the Federal Energy  Regulatory  Commission
("FERC")  and all  necessary  permits from the State of New York.  However,  the
State of Connecticut has denied  Islander East's  application for a coastal zone
management  permit  and a permit  under  Section  401 of the  Clean  Water  Act.
Islander  East  has  reinstated  its  appeal  of  the  State  of   Connecticut's
determination  on  the  coastal  zone  management  issue  to the  United  States
Department of Commerce.  On April 16, 2004, Islander East filed a petition for a
declaratory  order  challenging  the denial of the  Section  401 permit with the
State of Connecticut's Department of Environmental Protection.  Once in service,
the pipeline is expected to transport up to 260,000 DTH daily to the Long Island
and New York City energy markets,  enough natural gas to heat 600,000 homes. The
pipeline will also allow KeySpan to diversify the geographic  sources of its gas
supply.  However,  we are unable to predict when or if all regulatory  approvals
required to construct  this pipeline will be obtained.  Various  options for the
financing of pipeline  construction are currently being evaluated.  At March 31,
2004,  total  expenditures  associated  with the  siting and  permitting  of the
Islander East pipeline were $17.7 million.

Electric Services

The Electric  Services segment  primarily  consists of subsidiaries that own and
operate oil and gas fired  electric  generating  plants in the Borough of Queens
(including the "Ravenswood  facility") and the counties of Nassau and Suffolk on
Long Island.  In addition,  through long-term  contracts of varying lengths,  we
manage the electric  transmission and distribution  ("T&D") system, the fuel and
electric  purchases,  and the  off-system  electric sales for LIPA. The Electric
Services  segment also provides  retail  marketing of  electricity to commercial
customers, the earnings of which were previously reported in the Energy Services
segment.  Financial  results  for 2003  have  been  restated  to  reflect  these
activities in the Electric Services segment.



                                       36
<PAGE>


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

-------------------------------------------------------------------------------
                                                 Three Months Ended March 31,
(In Thousands of Dollars)                        2004                    2003
-------------------------------------------------------------------------------
Revenues                                      $ 359,136              $ 397,725
Purchased fuel                                  101,489                139,421
-------------------------------------------------------------------------------
Net Revenues                                    257,647                258,304
-------------------------------------------------------------------------------
Operating Expenses
   Operations and maintenance                   147,185                164,401
   Depreciation                                  21,605                 16,620
   Operating taxes                               41,657                 37,639
-------------------------------------------------------------------------------
Total Operating Expenses                        210,447                218,660
-------------------------------------------------------------------------------
Operating Income                              $  47,200              $  39,644
-------------------------------------------------------------------------------
Electric sales (MWH)*                           983,106                767,349
Capacity(MW)*                                     2,450                  2,200
Cooling degree days                      N/A                      N/A
--------------------------------------------------------------------------------
*Reflects the operations of the Ravenswood facility only.

Net Revenues

Total  electric  net  revenues  realized  during the first  quarter of 2004 were
comparable to such revenues realized during the first quarter of 2003.

Net revenues  from the  Ravenswood  facility for the first  quarter of 2004 were
consistent with net revenues realized in the first quarter of 2003.  Comparative
net revenues reflect higher energy margins of $3.4 million, offset by a decrease
in capacity revenues of $3.3 million.  The increase in energy margins reflects a
higher level of megawatt hours ("MWh") sold into the New York Independent System
Operator  ("NYISO")  energy  market.  Energy sales  quantities  during the first
quarter of 2003 were adversely  impacted by the scheduled  major overhaul of our
largest electric generating unit.

We  employ  derivative  financial  hedging  instruments  to hedge  the cash flow
variability  for a portion of  forecasted  purchases of natural gas and fuel oil
consumed at the  Ravenswood  facility.  Further,  we have  engaged in the use of
derivative  financial  hedging  instruments  to hedge the cash flow  variability
associated  with a portion of  forecasted  peak  electric  energy sales from the
Ravenswood  facility.  These derivative  instruments resulted in hedging losses,
which are  reflected  in net electric  margins,  of $4.4 million for the quarter
ended March 31, 2004,  compared to hedging gains of $1.6 million for the for the
quarter  ended  March  31,  2003.  (See  Note  4 to the  Consolidated  Financial
Statements  "Hedging and Derivative  Financial  Instruments"  as well as Item 3.
Quantitative  and  Qualitative   Disclosures   about  Market  Risk  for  further
information).

The decrease in capacity  revenues  reflects a revision to the NYISO's  capacity
market procurement  design. In 2003, the FERC approved a revised capacity market
procurement design with an effective date of May 21, 2003. This revised capacity
market  procurement  design is based on a demand  curve  rather than  relying on
deficiency auctions to procure necessary  capacity.  The deficiency auction with
its  associated  fixed minimum  capacity  requirements  was replaced with a spot


                                       37
<PAGE>

market auction that pays gradually  declining  prices as additional  capacity is
offered and gradually  increasing  prices as capacity offers decrease.  This new
market  design  recognizes  the  value of  capacity  in  excess  of the  minimum
requirement  and reduces price spikes during  periods of shortage.  Essentially,
the demand  curve  design  eliminates  the high and low cycles  inherent  in the
deficiency  auction  market  design.  This new market  design  also  established
seasonal  electric  generator  specific  price caps.  Price caps  establish  the
maximum  price  per MW that  capacity  can be sold  into the  NYISO by  divested
electric generators like Ravenswood.  Prior to this design change, one price cap
was  established  for the  entire  year  and  was  effective  for  all  electric
generators.  As a result of this re-design,  Ravenswood's  2003/2004  structured
winter  price cap was lower  than the  yearly  price cap  effective  during  the
2002/2003 winter,  which was prior to the implementation of the new demand curve
methodology, resulting in lower capacity revenues.

The rules and  regulations  for  capacity,  energy sales and the sale of certain
ancillary  services to the NYISO energy markets  continue to evolve and the FERC
has adopted  several  price  mitigation  measures that have  adversely  impacted
earnings from the  Ravenswood  facility over time.  Certain of these  mitigation
measures are still subject to rehearing and possible judicial review.  The final
resolution of these issues and their effect on our financial  position,  results
of  operations  and cash flows  cannot be fully  determined  at this time.  (See
KeySpan's  2003 Annual  Report on Form 10K for the Year Ended  December 31, 2003
Item 7. Management's  Discussion and Analysis of Financial Condition and Results
of Operations  under the caption "Market and Credit Risk Management  Activities"
for a further discussion of these matters.)

Net  revenues  for the first  quarter of 2004 from the service  agreements  with
LIPA,  including  the power  purchase  agreements  associated  with two electric
peaking  facilities,  were  comparable to such revenues  earned during the first
quarter of 2003.  (For a description  of the LIPA  Agreements and power purchase
agreements,  see  KeySpan's  2003  Annual  Report on Form 10K for the Year Ended
December  31, 2003 Item 7.  Management's  Discussion  and  Analysis of Financial
Condition  and  Results of  Operations  under the caption  "Electric  Services -
Revenue Mechanisms.")

Operating Expenses

Operating  expenses  decreased by $8.2  million,  or 4%, in the first quarter of
2004 compared to the same quarter of 2003.  This decrease  reflects in part, the
implementation of FIN 46. As previously  mentioned,  this Interpretation,  which
KeySpan  implemented in December 2003,  required KeySpan to, among other things,
consolidate  the  Ravenswood  Master Lease and classify the lease  obligation as
long-term debt on the Consolidated Balance Sheet. Further, an asset was recorded
on the Consolidated  Balance Sheet for an amount substantially equal to the fair
market  value  of  the  leased  assets  at the  inception  of  the  lease,  less
depreciation  since that date.  As a result of  implementing  FIN 46,  beginning
January 1, 2004 lease  payments have been  reflected as interest  expense on the
Consolidated  Statement of Income and the leased  assets are being  depreciated.
The reclassification of lease payments to interest expense,  partially offset by


                                       38
<PAGE>

the higher depreciation expense, resulted in a comparative decrease to operating
expense of approximately $3 million.  (See Note 6 to the Consolidated  Financial
Statements "Financial  Guarantees and Contingencies" for additional  information
regarding  the  Ravenswood  leasing  arrangement.)  The  remaining  decrease  in
comparative  operating  expenses  reflects lower repair and maintenance costs on
our electric generating units, as well as the timing of certain costs related to
the LIPA service agreements.

Other Matters

During  2002,  construction  began  on a new 250 MW  combined  cycle  generating
facility at the Ravenswood  facility site. The new facility was  synchronized to
the electric grid in December 2003 and commenced  operational testing in January
2004. In March, the facility completed full load Dependable Maximum Net Capacity
testing.  The capacity and energy produced from this plant are anticipated to be
sold into the NYISO energy markets during the second quarter of 2004.

KeySpan is currently in the process of structuring a leveraged  lease  financing
for this new generating  facility.  KeySpan is seeking to close this transaction
to  coincide  with the  commencement  of full  commercial  operation  of the new
facility.  At the closing,  the new facility will be acquired by the lessor from
our subsidiary,  KeySpan Ravenswood,  LLC, and simultaneously leased back to it.
All  obligations  of our  subsidiary  under  the lease  will be  unconditionally
guaranteed by KeySpan.  We anticipate that this lease  transaction will generate
cash proceeds generally equivalent to the fair market value of the facility,  as
determined  by a  third-party  appraiser.  It is expected that the cash proceeds
from this transaction will be used to redeem outstanding  commercial paper. This
lease  transaction  is intended to qualify as an  operating  lease under SFAS 98
"Accounting  for Leases:  Sale/Leaseback  Transactions  Involving  Real  Estate;
Sales-Type  Leases of Real  Estate;  Definition  of the Lease  Term;  an Initial
Direct Costs of Direct Financing  Leases, an amendment of FASB Statements No.13,
66, 91 and a rescission  of FASB  Statement  No. 26 and  Technical  Bulletin No.
79-11."  The lease will have an  initial  term of 36 years and  operating  lease
expense is anticipated to be between $15 million to $17 million per year.  Lease
payments will fluctuate from year to year, but are  substantially  paid over the
first 16 years.

In 2003,  the New  York  State  Board  on  Electric  Generation  Siting  and the
Environment  issued  an  opinion  and  order  which  granted  a  certificate  of
environmental  capability  and public need for a 250 MW combined  cycle electric
generating  facility  in  Melville,   Long  Island,   which  is  now  final  and
non-appealable. Also in 2003, LIPA issued a Request for Proposal ("RFP") seeking
bids from  developers  to  either  build and  operate a Long  Island  generating
facility,  and/or a new cable that will link Long Island to  dedicated  off-Long
Island power of between 250 to 600 MW of electricity by no later than the summer
of 2007. KeySpan and American National Power Inc. ("ANP") filed a joint proposal
in response to LIPA's RFP. Under the proposal,  KeySpan and ANP will jointly own
and  operate  two 250 MW electric  generating  facilities  to be located on Long
Island,  one of  which  is the  Melville  site  and  the  other  in the  town of
Brookhaven which also has received all permits and approvals.  It is anticipated
that LIPA will respond to the joint  proposal in the second  quarter of 2004. At
March 31, 2004, total  expenditures  associated with the siting,  permitting and
construction of the Ravenswood expansion project, and the siting, permitting and
procurement  of  equipment  for the Long Island 250 MW combined  cycle  electric
generating facility were approximately $400 million.


                                       39
<PAGE>

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

Energy Services

The Energy Services segment includes  subsidiaries  that provide  energy-related
and a minimal  amount of fiber optic  services to  customers  primarily  located
within the Northeastern  United States, with concentrations in the New York City
metropolitan area including New Jersey and Connecticut, as well as Rhode Island,
Pennsylvania,  Massachusetts  and New Hampshire,  through the following lines of
business:  (i) Home  Energy  Services,  which  provides  residential  and  small
commercial  customers  with  service  and  maintenance  of  energy  systems  and
appliances;   (ii)  Business  Solutions,   which  provides  plumbing,   heating,
ventilation,  air conditioning and mechanical services, as well as operation and
maintenance,  design,  engineering  and  consulting  services to commercial  and
industrial customers.

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

--------------------------------------------------------------------------
                                            Three Months Ended March 31,
(In Thousands of Dollars)                  2004                    2003
--------------------------------------------------------------------------
Revenues                                $ 132,495               $ 130,491
Less: cost of sales                       105,870                 105,145
--------------------------------------------------------------------------
Gross profit                               26,625                  25,346
Operating expenses                         45,099                  34,468
--------------------------------------------------------------------------
Operating (Loss)                        $ (18,474)              $  (9,122)
--------------------------------------------------------------------------


The Energy Services segment realized additional operating losses of $9.4 million
for the three months ended March 31, 2004 compared to the same period last year.
The  increase in  operating  expenses  principally  reflects  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.
The increase in gross profit  margin is primarily a result of the  operations of
Bard, Rao + Athanas Consulting  Engineers LLC ("BR+A") which was acquired in the
third quarter of 2003. Total backlog for the KeySpan Services group of companies
increased to $508 million compared to $479 million at March 31, 2003,  primarily
due to the BR+A acquisition.

The  operating  results  of this  segment  continue  to be  below  expectations.
Management  will continue to monitor the operating  performance  of this segment
and will conduct a review of the carrying value of goodwill during the year. The
recorded  goodwill  for this  segment,  as a result  of prior  acquisitions,  is
approximately $171 million. At this point in time, we are unable to predict what
effect,  if any, the outcome of this review will have on the  carrying  value of
our goodwill or on financial position or results of operations.


                                       40
<PAGE>


Energy Investments

The Energy  Investment  segment  consists of our gas  exploration and production
operations, certain other domestic and international energy-related investments,
as well as certain  technology  related  investments.  Our gas  exploration  and
production  subsidiaries  include  our 55%  ownership  interest  in The  Houston
Exploration  Company  ("Houston  Exploration")  and our wholly-owned  subsidiary
KeySpan  Exploration and Production LLC ("KES E&P"). These companies are engaged
in gas and oil exploration  and production,  and the development and acquisition
of domestic natural gas and oil properties.

Selected  financial data and operating  statistics for our gas  exploration  and
production  activities  are set forth in the  following  table  for the  periods
indicated.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
                                                           Three Months Ended March 31,
(In Thousands of Dollars)                                  2004                    2003
-----------------------------------------------------------------------------------------
<S>                                                     <C>                     <C>
Revenues                                               $ 152,419               $ 127,847
Depletion and amortization expense                        61,921                  47,443
Other operating expenses                                  28,390                  24,814
-----------------------------------------------------------------------------------------
Operating Income                                       $  62,108               $  55,590
-----------------------------------------------------------------------------------------
Natural gas and oil production (Mmcf)                     30,373                  26,086
Natural gas (per Mcf) realized                         $    4.99               $    4.93
Natural gas (per Mcf) unhedged                         $    5.43               $    6.35
-----------------------------------------------------------------------------------------
</TABLE>
*    Operating   income  above  represents  100%  of  our  gas  exploration  and
     production  subsidiaries'  results for the periods indicated.  Gas reserves
     and production are stated in BCFe and Mmcfe, which includes  equivalent oil
     reserves.

The  increase in  operating  income of $6.5  million or 12% for the three months
ended March 31, 2004 compared to the same period of 2003,  primarily reflects an
increase in  revenues  offset,  to some  extent,  by an  increase  in  operating
expenses associated with a higher depletion rate. Revenues for the first quarter
of 2004 benefited from a 16% increase in production  volumes,  a slight increase
in average  realized gas prices (average  wellhead price received for production
including hedging gains and losses),  as well as from the comparative  impact of
derivative hedging instruments.

Derivative  financial hedging instruments are employed by Houston Exploration to
provide  more  predictable  cash  flow,  as well as to reduce  its  exposure  to
fluctuations in natural gas prices. The average realized gas price for the three
months ended March 31, 2004 was 92% of the average  unhedged  natural gas price,
resulting in revenues  that were $12.5  million  lower than  revenues that would
have been achieved if derivative  financial  instruments  had not been in place.
Houston  Exploration  has hedge positions in place for slightly less than 70% of
its estimated 2004 production,  principally through the use of costless collars.
Further,  at March  31,  2004,  Houston  Exploration  has  derivative  financial
instruments in place for approximately 60% of its estimated 2005 production. The


                                       41
<PAGE>

average  realized gas price for the first quarter of 2003 was 77% of the average
unhedged natural gas price,  resulting in revenues that were  approximately  $35
million  lower  than  revenues  that  would  have been  achieved  if  derivative
financial  instruments had not been in place.  Houston Exploration hedged almost
70% of its  2003  first  quarter  production,  principally  through  the  use of
costless collars. (See Note 4 to the Consolidated Financial Statements, "Hedging
and  Derivative  Financial  Instruments"  as well as  Item 3.  Quantitative  and
Qualitative Disclosures about Market Risk for further information.)

The depletion  rate  experienced  during the first quarter of 2004 was $2.04 per
Mcf, compared to $1.76 per Mcf experienced during the corresponding quarter last
year.  The increase in the depletion  rate is the result of additional  costs to
Houston Exploration's depreciation base with fewer additions for reserves.

The table below  indicates the net proved  reserves of the gas  exploration  and
production subsidiaries at December 31, 2003.

-------------------------------------------------------------------
                                                  BCFe          %
-------------------------------------------------------------------
Houston Exploration                                755       99.1%
KSE E&P                                              7        0.9%
-------------------------------------------------------------------
Total                                              762      100.0%
-------------------------------------------------------------------



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

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

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
                                                                   Three Months Ended March 31,
(In Thousands of Dollars)                                          2004                    2003
--------------------------------------------------------------------------------------------------
<S>                                                               <C>                     <C>
Revenues                                                         $ 28,445                $ 26,464
Less: Operation and maintenance expense                            15,388                  16,644
          Other operating expenses                                  5,852                   5,353
Add:  Equity earnings                                               5,717                   5,657
--------------------------------------------------------------------------------------------------
Operating Income                                                 $ 12,922                $ 10,124
--------------------------------------------------------------------------------------------------
</TABLE>
*Operating income above reflects 100% of KeySpan's Canada's results.

The increase in operating  income in the first quarter of 2004,  compared to the
same period last year,  primarily  reflects higher operating  income  associated
with our Canadian investments.  KeySpan Canada experienced higher unit sales, as
well as  higher  quantities  of sales of  natural  gas  liquids,  as a result of
increasing oil prices. The pricing of natural gas liquids is directly related to
oil prices.


                                       42
<PAGE>


We do not  consider  certain  businesses  contained  in the  Energy  Investments
segment to be part of our core asset group.

On April 1, 2004, The KeySpan  Facilities Income Fund (the "Fund") issued 15.617
million  units  at a price  of  $12.60  per unit for  gross  total  proceeds  of
approximately  CDN$196.8  million.  The  proceeds of the  offering  were used to
acquire a 35.91%  interest  in the  business  of KeySpan  Canada  from  KeySpan.
KeySpan   received  net  proceeds  of   approximately   CDN$186.3   million  (or
approximately  US$140  million),  after  commissions  and  expenses.  The Fund's
ownership in KeySpan Canada has now increased from 39.1% to  approximately  75%.
KeySpan's  ownership of KeySpan Canada is now approximately 25%. KeySpan expects
to record a pre-tax gain of approximately $20 million on this transaction, which
will be reflected in earnings in the second  quarter of 2004.  The proceeds from
the transaction will be used to redeem outstanding debt.

We have  stated in the past that we may sell or  otherwise  dispose  of all or a
portion of our non-core assets. Based on current market conditions,  however, we
cannot predict when, or if, any additional sales or dispositions of our non-core
assets  may  take  place,  or the  effect  that  any  such  additional  sale  or
disposition  may have on our financial  position,  results of operations or cash
flows.

Allocated Costs

We are subject to the  jurisdiction  of the Securities  and Exchange  Commission
("SEC") under the Public Utility  Holding  Company Act ("PUHCA") as amended.  As
part  of  the  regulatory   provisions  of  PUHCA,  the  SEC  regulates  various
transactions  among  affiliates  within a holding company system.  In accordance
with the SEC's  regulations  under PUHCA and the New York State  Public  Service
Commission,  we have service companies that provide:  (i) traditional  corporate
and administrative services; (ii) gas and electric transmission and distribution
systems planning,  marketing, and gas supply planning and procurement; and (iii)
engineering and surveying services to subsidiaries.  During the first quarter of
2003, these non-operating  subsidiaries incurred expenses related to consulting,
auditing   and  legal  costs   associated   with  the   implementation   of  the
Sarbanes-Oxley   Act  that  were  not   allocated   to  the  various   operating
subsidiaries.   Further,   the  operating   income  variation  as  reflected  in
"elimination  and other" is due,  in part,  to the  timing of certain  corporate
expenses.

Liquidity

Cash flow from operations  increased $82.3 million, or 17%, in the first quarter
of 2004 compared to the same time last year,  reflecting  generally  higher cash
earnings and higher cash flow from gas exploration and production activities. In
addition,  during the first quarter of 2004, we  consolidated  our newly created
"captive" insurance company, which included $43.2 million of cash and short-term
marketable securities.


                                       43
<PAGE>


At March 31, 2004, we had cash and temporary cash investments of $256.9 million.
During the three months ended March 31, 2004, we repaid $187.8 million of
commercial paper and, at March 31, 2004, $294.2 million of commercial paper was
outstanding at a weighted average annualized interest rate of 1.1%. We had the
ability to borrow up to an additional $1 billion at March 31, 2004, under the
terms of our credit facility.

KeySpan has a $1.3 billion  revolving credit facility,  syndicated among sixteen
banks. The facility is used to support KeySpan's  commercial paper program,  and
consists  of two  separate  credit  facilities  with  different  maturities  but
substantially similar terms and conditions: a $450 million facility that extends
for 364 days (or until  June 25,  2004),  and a $850  million  facility  that is
committed  for  three  years.  The  fees for the  facilities  are  subject  to a
ratings-based  grid,  with an annual fee that  ranges  from eight to twenty five
basis  points on the  364-day  facility  and ten to twenty  basis  points on the
three-year  facility.  Both credit  agreements allow for KeySpan to borrow using
several different types of loans; specifically,  Eurodollar loans, ABR loans, or
competitively bid loans.  Eurodollar loans are based on the Eurodollar rate plus
a margin. ABR loans are based on the highest of the Prime Rate, the base CD rate
plus  1%,  or the  Federal  Funds  Effective  Rate  plus  0.5%,  plus a  margin.
Competitive  bid loans are based on bid results  requested  by KeySpan  from the
lenders.  The margins on both  facilities  are ratings based and range from zero
basis points to 112.5 basis  points.  The margins are  increased if  outstanding
loans are in  excess of 33% of the total  facility.  In  addition,  the  364-day
facility has a one-year term out option, which would cost an additional 0.25% if
utilized. We do not anticipate borrowing against this facility;  however, if the
credit rating on our commercial  paper program were to be downgraded,  it may be
necessary to do so.

The  credit  facility  contains  certain   affirmative  and  negative  operating
covenants,  including  restrictions  on KeySpan's  ability to mortgage,  pledge,
encumber  or  otherwise  subject its  property  to any lien,  as well as certain
financial  covenants  that  require  us  to,  among  other  things,  maintain  a
consolidated  indebtedness to consolidated  capitalization ratio of no more than
64%.  Violation of this covenant  could result in the  termination of the credit
facility and the required repayment of amounts borrowed  thereunder,  as well as
possible cross defaults under other debt agreements.

Under the terms of the credit facility,  KeySpan's debt-to-total  capitalization
ratio reflects 80% equity treatment for the MEDS Equity Units issued in 2002. At
March 31, 2004, consolidated indebtedness,  as calculated under the terms of the
credit facility was 56.1% of consolidated capitalization.

The credit facility also requires that net cash proceeds from the sale of
significant subsidiaries be applied to reduce consolidated indebtedness.
Further, an acceleration of indebtedness of KeySpan or one of its subsidiaries
for borrowed money in excess of $25 million in the aggregate, if not annulled
within 30 days after written notice, would create an event of default under the
Indenture dated November 1, 2000, between KeySpan Corporation and the
JPMorganChase Bank as Trustee. At March 31, 2004, KeySpan was in compliance with
all covenants.

Houston  Exploration had a revolving  credit facility with a commercial  banking
syndicate that provided  Houston  Exploration with a commitment of $300 million.
The credit  facility  was  amended on April 1, 2004 and,  as  amended,  provides
Houston  Exploration  with a commitment  of $400 million  which may be increased
with prior approval from the banking syndicate to a maximum of $450 million. The
credit facility is subject to borrowing base limitations.  Pursuant to the April


                                       44
<PAGE>

1, 2004  amendment,  the borrowing  base was increased from $300 million to $375
million.  The $375 million  borrowing base is expected to remain in effect until
the next scheduled  redetermination on October 1, 2004. Up to $40 million of the
borrowing  base  is now  available  for  the  issuance  of  letters  of  credit.
Outstanding  borrowings continue to be unsecured and with the exception of trade
payables,  the facility  ranks senior to Houston  Exploration's  $175 million 7%
subordinated notes. The amended facility matures on April 1, 2008

Under the Houston  Exploration  credit facility,  interest on base rate loans is
payable at a fluctuating rate, or base rate, equal to the sum of (a) the greater
of the  federal  funds  rate  plus  0.50% or the  bank's  prime  rate plus (b) a
variable  margin  between 0% and 0.50%,  depending  on the amount of  borrowings
outstanding  under the credit facility.  Interest on fixed rate loans is payable
at a fixed rate equal to the sum of (a) a quoted  reserve  adjusted  LIBOR rate,
plus (b) a variable  margin between 1.25% and 2.00%,  depending on the amount of
borrowings outstanding under the credit facility.

Financial covenants under the new facility require Houston Exploration to, among
other things,  (i) maintain an interest  coverage ratio of at least 3.00 to 1.00
of earnings before interest, taxes and depreciation ("EBITDA") to cash interest;
(ii)  maintain a total debt to EBITDA  ratio of not more than 3.50 to 1.00;  and
(iii)  generally  prohibits  the hedging of more than 85% of natural gas and oil
production  during any 12-month period. At March 31, 2004,  Houston  Exploration
was in compliance with all financial covenants.

During the first quarter of 2004, Houston Exploration borrowed $20 million under
its credit  facility and repaid $77 million.  At March 31, 2004,  $70 million of
borrowings  remained  outstanding at a weighted average annualized interest rate
of 3.27%.  Also, $0.4 million was committed under outstanding  letters of credit
obligations.  Currently,  Houston  Exploration  has $304.6  million of borrowing
capacity available to it.

KeySpan  Canada has a credit  facility  that has two tranches with the following
maturities:  (i) $37.5  million  matures  in 364 days:  and (ii)  $37.5  million
matures in two years.  During the first quarter of 2004,  KeySpan  Canada repaid
$17.7  million  under the  facility  and at March 31,  2004,  $57.3  million was
available for future borrowing.

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 customers.

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.


                                       45
<PAGE>


Capital Expenditures and Financing

Construction Expenditures

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

-------------------------------------------------------------------------------
                                               Three Months Ended March 31,
(In Thousands of Dollars)                      2004                      2003
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Gas Distribution                             $ 82,235                $  78,013
Electric Services                              36,617                   56,731
Energy Investments                             97,215                   84,309
Energy Services and other                       4,157                    1,726
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
                                            $ 220,224                $ 220,779
-------------------------------------------------------------------------------


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:
(i) maintain our generating facilities; and (ii) expand the Ravenswood facility.
Construction  expenditures  related to the Energy Investments  segment primarily
reflect  costs  associated  with  gas  exploration  and  production  activities.
Expenditures  also include  development  costs associated with the joint venture
with  Houston  Exploration,  as well as costs  related to KeySpan  Canada's  gas
processing facilities.

Financing

KeySpan did not engage in any financing transactions during the first quarter of
2004.  However,  we anticipate  replacing  outstanding  commercial paper used to
finance the construction of a new 250 MW combined cycle  generating  facility at
the  Ravenswood  facility site with the proceeds from a proposed  sale/leaseback
transaction  anticipated to be completed in the second quarter of 2004. (See the
earlier discussion under the caption "Electric  Services" for further details on
this proposed  transaction).  We will continue to evaluate our capital structure
and financing strategy for the remainder of 2004 and beyond. We believe that our
current  sources of funding  (i.e.,  internally  generated  funds,  the proposed
sale/leaseback  transaction,  and the  availability  of  commercial  paper)  are
sufficient to meet our anticipated capital needs for the foreseeable future.


                                       46
<PAGE>


The following table represents the ratings of our long-term debt at March 31,
2004. Currently, Standard & Poor's and Moody's Investor Services ratings on
KeySpan's and its subsidiaries' long-term debt are on negative outlook.

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

Off-Balance Sheet Arrangements

Guarantees

KeySpan has a number of financial  guarantees  with its  subsidiaries  that have
remained  substantially  unchanged  since  December 31, 2003. At March 31, 2004,
KeySpan  has  fully  and  unconditionally   guaranteed:   (i)  $525  million  of
medium-term  notes issued by KEDLI;  (ii) the obligations of KeySpan  Ravenswood
LLC, the lessee under the $425 million Master Lease  Agreement  associated  with
the Ravenswood  facility;  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  Authority for the  construction  of the
Glenwood  and  Port  Jefferson   electric-generation   peaking  facilities.  The
medium-term  notes,  the Master Lease  Agreement  and the  tax-exempt  bonds are
reflected on the Consolidated  Balance Sheet.  Further,  KeySpan has guaranteed:
(i) up to $169 million of surety  bonds  associated  with  certain  construction
projects  currently being  performed by subsidiaries  within the Energy Services
segment; (ii) certain supply contracts,  margin accounts and purchase orders for
certain  subsidiaries  in an  aggregate  amount  of $51  million;  and (iii) $74
million of subsidiary  letters of credit.  These  guarantees are not recorded on
the Consolidated  Balance Sheet. At this time, we have no reason to believe that
our subsidiaries will default on their current  obligations.  However, we cannot
predict when or if any  defaults may take place or the impact such  defaults may
have on our  consolidated  results of  operations,  financial  condition or cash
flows.  (See  Note  6  to  the  Consolidated  Financial  Statements,  "Financial
Guarantees and Contingencies"  for additional  information  regarding  KeySpan's
guarantees.)

In  addition,  KeySpan  intends to  guarantee  the  payment  obligations  of its
subsidiaries in connection with the proposed sale/leaseback  transaction for the
financing  of the  new  250  MW  electric  generating  facility  located  on the
Ravenswood site.

Variable Interest Entity

We have an arrangement with a variable  interest entity through which we lease a
portion of the  Ravenswood  facility.  We acquired the Ravenswood  facility,  in
part, through the variable interest entity from The Consolidated  Edison Company
of New York,  Inc.  ("Consolidated  Edison") on June 18, 1999 for  approximately
$597 million. In order to reduce the initial cash requirements,  we entered into


                                       47
<PAGE>

a lease  agreement (the "Master Lease") with a variable  interest,  unaffiliated
financing entity that acquired a portion of the facility, three steam generating
units,  directly from Consolidated Edison and leased it to a KeySpan subsidiary.
The variable  interest  unaffiliated  financing entity acquired the property for
$425 million,  financed with debt of $412.3 million (97% of capitalization)  and
equity of $12.7 million (3% of capitalization). Monthly lease payments equal the
monthly interest expense on the debt securities.  This variable  interest entity
is fully  consolidated  in KeySpan's  financial  statements.  (See Note 6 to the
Consolidated Financial Statements,  "Financial Guarantees and Contingencies" for
additional information regarding the Master Lease.)

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, 2003.  (For  additional  details  regarding  these
obligations see KeySpan's  Annual Report on Form 10K for the Year Ended December
31, 2003, Item 7 Management's Discussion and Analysis of Financial Condition and
Results  of  Operations,  Note 6  "Long-Term  Debt",  as well as Note 7 to those
Consolidated Financial Statements "Contractual Obligations, Financial Guarantees
and Contingencies.")

Discussions of Critical Accounting Policies and Assumptions

In preparing our financial  statements,  the  application of certain  accounting
policies  requires   difficult,   subjective  and/or  complex   judgments.   The
circumstances  that make these judgments  difficult,  subjective  and/or complex
have to do with the need to make estimates  about the impact of matters that are
inherently  uncertain.  Actual effects on our financial  position and results of
operations  may vary  significantly  from expected  results if the judgments and
assumptions underlying the estimates prove to be inaccurate.  At March 31, 2004,
KeySpan's   critical   accounting   policies  and   assumptions   have  remained
substantially  unchanged since December 31, 2003. Below is a brief discussion of
those  critical  accounting  policies  requiring such  subjectivity.  For a more
detailed  discussion of these  policies and  assumptions  see  KeySpan's  Annual
Report on Form 10K for the Year Ended  December 31, 2003,  Item 7.  Management's
Discussion  and  Analysis  of  Financial  Condition  and  Results of  Operations
"Discussion of Critical Accounting Policies and Assumptions."

Percentage of Completion Accounting

Percentage-of-completion  accounting  is a method of  accounting  for  long-term
construction  type contracts in accordance  with Generally  Accepted  Accounting
Principles  and,  accordingly,  the method used for  engineering  and mechanical
contracting  revenue  recognition  by  the  Energy  Services  segment.   Due  to
uncertainties     inherent     within     estimates     employed     to    apply
percentage-of-completion  accounting,  it is  possible  that  estimates  will be
revised as project work progresses. Changes in estimates resulting in additional
future  costs to  complete  projects  can  result  in  reduced  margins  or loss
contracts.


                                       48
<PAGE>


Valuation of Goodwill

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

Although  management   determined  that  the  fair  value  of  KeySpan's  assets
adequately  exceeded  their carrying value for the year ended December 31, 2003,
the operating  performance of the Energy Services segment  continues to be below
expectations.  Management will continue to monitor the operating  performance of
this segment and will conduct a review of the carrying value of goodwill  during
the  year.  The  recorded  goodwill  for  this  segment,  as a  result  of prior
acquisitions,  is  approximately  $171  million.  At this point in time,  we are
unable to predict what  effect,  if any, the outcome of this review will have on
the  carrying  value of our  goodwill  or on  financial  position  or results of
operations.

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

Accounting for the Effects of Rate Regulation on Gas Distribution Operations

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

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

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

As is further  discussed  under the caption  "Regulation  and Rate Matters," the
rate plans previously in effect for KEDNY and KEDLI have expired.  The continued
application  of SFAS 71 to  record  the  activities  of  these  subsidiaries  is
contingent  upon the actions of regulators  with regard to future rate plans. We


                                       49
<PAGE>

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

Rate  regulation is undergoing  significant  change as regulators  and customers
seek lower  prices for  utility  service and greater  competition  among  energy
service  providers.  In the event  that  regulation  significantly  changes  the
opportunity  for us to  recover  costs in the  future,  all or a portion  of our
regulated operations may no longer meet the criteria for the application of SFAS
71.  In  that  event,  a  write-down  of  our  existing  regulatory  assets  and
liabilities could result. In management's  opinion,  our regulated  subsidiaries
that  currently  are subject to the  provisions  of SFAS 71 will  continue to be
subject to SFAS 71 for the foreseeable future.

Pension and Other Postretirement Benefits

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

Historically, we have funded our qualified pension plans in excess of the amount
required to satisfy  minimum ERISA funding  requirements.  At March 31, 2004, we
had  a  funding  credit   balance  in  excess  of  the  ERISA  minimum   funding
requirements.  Although we have presently  exceeded ERISA funding  requirements,
our pension plans, on an actuarial basis, are currently underfunded.  Therefore,
for 2004,  KeySpan  expects to  contribute a total of $147 million to its funded
and unfunded  post-retirement  plans.  Future funding  requirements  are heavily
dependent on actual return on plan assets and  prevailing  interest  rates.  (In
addition to Item 7 Management's  Discussion and Analysis of Financial  Condition
and Results of  Operations  in KeySpan's  Annual Report on Form 10K for the Year
Ended  December  31,  2003,  see  also  Note 4 of those  Consolidated  Financial
Statements, "Postretirement Benefits.")


                                       50
<PAGE>


Full Cost Accounting

Our gas  exploration  and  production  subsidiaries  use the full cost method to
account for their natural gas and oil  properties.  Under full cost  accounting,
all costs incurred in the acquisition,  exploration,  and development of natural
gas and oil reserves are capitalized into a "full cost pool."  Capitalized costs
include costs of all unproved  properties,  internal costs  directly  related to
natural gas and oil activities, and capitalized interest.

Under full cost  accounting  rules,  total  capitalized  costs are  limited to a
ceiling equal to the present  value of future net  revenues,  discounted at 10%,
plus the lower of cost or fair  value of  unproved  properties  less  income tax
effects (the  "ceiling  limitation").  A quarterly  ceiling test is performed to
evaluate  whether  the net book value of the full cost pool  exceeds the ceiling
limitation. If capitalized costs (net of accumulated depreciation, depletion and
amortization)  less deferred  taxes are greater than the  discounted  future net
revenues or ceiling limitation, a write-down or impairment of the full cost pool
is required.

Natural gas and oil reserve quantities represent estimates only. Under full cost
accounting,  reserve  estimates  are used to  determine  the full  cost  ceiling
limitation  as well as the depletion  rate.  Houston  Exploration  estimates its
proved  reserves and future net revenues  using sales prices  estimated to be in
effect  as of  the  date  it  makes  the  reserve  estimates.  Further,  Houston
Exploration  employs  independent  petroleum  engineers  in the  preparation  of
estimated reserve quantities.  Natural gas prices,  which have fluctuated widely
in recent years,  affect estimated  quantities of proved reserves and future net
revenues.  Any  estimates  of natural gas and oil  reserves and their values are
inherently uncertain, including many factors beyond our control.

Valuation of Derivative Instruments

We employ derivative  instruments to manage commodity and financial market risk.
All of our derivative instruments,  except for certain weather derivatives,  are
reported on the Consolidated Balance Sheet at fair value in accordance with SFAS
133;  weather  derivatives  are accounted for in accordance with Emerging Issues
Task Force ("EITF") 99-2. None of KeySpan's  derivative  instruments  qualify as
"energy trading contracts" as defined by current accounting literature.

For those derivative  instruments designated as cash flow hedges under SFAS 133,
which are the  majority  of  KeySpan's  derivative  instruments,  changes in the
derivative's fair market value are recorded in other comprehensive income on the
Consolidated  Balance Sheet, (in line with  effectiveness  measurements) and are
recorded  through  earnings  at the  time of  settlement.  To the  extent  hedge
contracts are deemed ineffective, that portion will impact earnings.

Additionally,  we use  derivative  financial  instruments  to  reduce  cash flow
variability  associated  with the purchase price for a portion of future natural
gas purchases for our regulated gas distribution activities;  the accounting for
such  derivative  instruments  is  subject to SFAS 71.  KeySpan's  non-regulated
subsidiaries  may employ a limited number of financial  derivatives  that do not
qualify for hedge accounting  treatment under SFAS 133, and, therefore,  changes
in the  market  value of  these  derivative  instruments  are  recorded  through
earnings.


                                       51
<PAGE>


When available,  quoted market prices are used to record a derivative contract's
fair value.  Fair value is the amount at which derivative  instruments  could be
exchanged in a current  transaction  between  willing  parties,  other than in a
liquidation sale. However market values for certain derivative contracts may not
be  readily  available  or  determinable.  If  no  active  market  exists  for a
commodity,  a specific  contract  type,  or for the entire term of a  contract's
duration,  fair values are based on pricing  models.  Such models  employ matrix
pricing based on contracts with similar terms and risks, including pricing based
on broker quotes and industry publications. A substantial percentage of the fair
value of KeySpan's  derivative contracts is based on observable market prices or
is derived from such prices.  Changes in market  conditions or the occurrence of
unforeseen  events  could  affect the timing of  recognition  of changes in fair
value of certain hedging derivatives.

See Note 4 to the  Consolidated  Financial  Statements  "Hedging and  Derivative
Financial  Instruments and Item 3,  "Quantitative  and  Qualitative  Disclosures
About Market Risk" for a further description of our derivative instruments.

Regulation and Rate Matters

Gas Matters

As of March 31, 2004, the rate agreements for KEDNY and KEDLI have expired.
Under the terms of the KEDNY and KEDLI rate agreements, gas distribution rates
and all other provisions will remain in effect until changed by the NYPSC. At
this time, we are currently evaluating various options that may be available to
us regarding the KEDNY and KEDLI rate plans, including but not limited to,
proposing new rate plans.

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

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

Electric Matters

KeySpan sells to LIPA all of the capacity and, to the extent  requested,  energy
conversion  services  from our  existing  Long  Island  based oil and  gas-fired
generating  plants.  Sales of capacity and energy  conversion  services are made
under rates approved by the FERC in accordance  with the Power Supply  Agreement
("PSA") entered into between KeySpan and LIPA in 1998. The current FERC approved
rates,  which have been in effect since May 1998,  expired on December 31, 2003.
KeySpan filed with the FERC an updated cost of service for the Long Island based
generating plants in October 2003. The rate filing included, among other things,


                                       52
<PAGE>

an annual revenue  increase of 2.1% or approximately  $6.4 million,  a return on
equity of 11%, updated operating and maintenance  expense levels and recovery of
certain other costs. FERC approved  implementation of new rates starting January
1, 2004,  subject to refund.  Settlement  negotiations  with LIPA are  currently
ongoing.

Securities and Exchange Commission Regulation

KeySpan and 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 the authorization,  under PUHCA to do the following through December
31, 2006 (the "Authorization Period"): (a) to issue and sell up to an additional
amount  of  $3.0  billion  of  common  stock,  preferred  stock,  preferred  and
equity-linked   securities,   and  long-term  debt  securities  (the  "Long-Term
Financing Limit") in accordance with certain defined parameters; (b) in addition
to the Long-Term Financing Limit, to issue and sell up to an aggregate amount of
$1.3 billion of short-term debt (the "Short-Term Financing Limit"); (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 March 31, 2004 KeySpan's  consolidated common equity was 39%
of its consolidated capitalization,  including commercial paper, and each of its
utility   subsidiaries  common  equity  was  at  least  35%  of  its  respective
capitalization.


                                       53
<PAGE>


Environmental Matters

KeySpan  is  subject to  various  federal,  state and local laws and  regulatory
programs  related  to  the   environment.   Ongoing   environmental   compliance
activities,  which  have  not  been  material,  are  charged  to  operation  and
maintenance activities.  We estimate that the remaining cost of our manufactured
gas plant ("MGP")  related  environmental  cleanup  activities,  including costs
associated with the Ravenswood  facility,  will be approximately  $263.1 million
and we have recorded a related  liability for such amount. We have also recorded
an additional $24.3 million liability  representing the estimated  environmental
cleanup costs related to a former coal tar processing  facility.  Further, as of
March 31,  2004,  we have  expended a total of $108.6  million on  environmental
remediation.  (See Note 6 to the Consolidated  Financial Statements,  "Financial
Guarantees and Contingencies".)

Market and Credit Risk Management Activities

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

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

We  have  regional   concentration  of  credit  risk  due  to  receivables  from
residential,  commercial and industrial customers in New York, New Hampshire and
Massachusetts,  although this credit risk is spread over a  diversified  base of
residential, commercial and industrial customers. Customers' payment records are
monitored and action is taken,  when  appropriate.  Companies  within the Energy
Services  segment have a concentration  of credit risk to large customers and to
the governmental and healthcare industries.


                                       54
<PAGE>


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

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

Regulatory Issues and Competitive  Environment:  We are subject to various other
risk  exposures  and   uncertainties   associated  with  our  gas  and  electric
operations.  The most significant  contingency involves the evolution of the gas
distribution  and electric  industries  towards more competitive and deregulated
environments.  These risks have not changed  substantially  since  December  31,
2003.  For additional  information  regarding  these risks see KeySpan's  Annual
Report on Form 10K for the Year Ended  December  31, 2003,  Item 7  Management's
Discussion and Analysis of Financial Condition and Results of Operations "Market
and Credit Risk Management Activities."

Cautionary Statement Regarding Forward-Looking Statements

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

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

     -    volatility of energy prices used to generate electricity;

     -    fluctuations in weather and in gas and electric prices;

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

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


                                       55
<PAGE>

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

     -    implementation of new accounting standards;

     -    inflationary trends and interest rates;

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

     -    available sources and cost of fuel;

     -    creditworthiness  of  counterparties  to  derivative  instruments  and
          commodity contracts;

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

     -    retention of key personnel;

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

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

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

     -    competition  facing  our  unregulated   Energy  Services   businesses,
          including  but not  limited  to  competition  from  other  mechanical,
          plumbing, heating,  ventilation and air conditioning,  and engineering
          companies,  as well as, other utilities and utility holding  companies
          that are permitted to engage in such activities;

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

     -    changes in political conditions, acts of war or terrorism;

     -    changes in rates of return on overall  debt and equity  markets  could
          have an adverse impact on the value of pension assets;

     -    changes in accounting  standards or GAAP which may require  adjustment
          to financial statements;

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

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


                                       56
<PAGE>

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

For  derivative  instruments  associated  with gas  exploration  and  production
activities,  KeySpan uses standard New York Mercantile Exchange ("NYMEX") future
price  quotes  to  value  swap   positions  and  published   volatility  in  its
Black-Scholes   calculation  for  outstanding  options.  Further,  KeySpan  uses
standard NYMEX futures  prices to value gas futures  contracts and market quoted
forward prices to value oil swap and natural gas basis swap contracts associated
with its Ravenswood facility.  We also use market quoted forward prices to value
electric derivatives associated with the Ravenswood facility.

The following  tables set forth selected  financial data  associated  with these
derivative financial  instruments noted above that were outstanding at March 31,
2004.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                     Year of       Volumes                               Fixed            Current       Fair Value
             Type of Contract        Maturity        mmcf      Floor $    Ceiling $      Price $          Price $         ($000)
-----------------------------------------------------------------------------------------------------------------------------------
                 Gas
<S>                                   <C>          <C>         <C>          <C>      <C>               <C>                <C>
Collars                                2004         55,000      3.75         5.05               -       5.11 - 6.19        (32,688)
                                       2005         54,750      4.50         5.69               -       5.30 - 6.44        (24,526)

Swaps/Futures - Short Natural Gas      2004         11,000         -            -            4.96       5.11 - 6.19        (11,267)
                                       2005         18,250         -            -            4.77       5.30 - 6.44        (15,355)

Swaps/Futures - Long Natural Gas       2004             50         -            -     5.11 - 5.14       5.93 - 6.04             43
                                       2005             10         -            -            4.95              5.28              3

-----------------------------------------------------------------------------------------------------------------------------------
                                                   139,060                                                                 (83,790)
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       57
<PAGE>

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
                                     Year of       Volumes                                     Current         Fair Value
      Type of Contract               Maturity       Barrels    Fixed Price $                     Price $       ($000)
-------------------------------------------------------------------------------------------------------------------------
             Oil
<S>                                   <C>         <C>        <C>                            <C>                   <C>
Swaps - Long Fuel Oil                  2004        69,104     22.40 - 30.80                  28.58 - 30.90         194
                                       2005        42,000     24.85 - 30.80                  28.88 - 31.16          69

-------------------------------------------------------------------------------------------------------------------------
                                                  111,104                                                          263
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
                                  Year of                         Fixed Margin/            Current            Fair Value
    Type of Contract              Maturity          MWh               Price $               Price $              ($000)
------------------------------------------------------------------------------------------------------------------------
       Electricity
<S>                                <C>           <C>             <C>                    <C>                     <C>
Swaps - Energy                      2004          536,800         15.09 - 45.25          16.10 - 45.00             (134)
                                    2005          335,200         13.74 - 48.64          15.57 - 48.57             (915)

------------------------------------------------------------------------------------------------------------------------
                                                  872,000                                                        (1,049)
------------------------------------------------------------------------------------------------------------------------
</TABLE>


-------------------------------------------------------------------------------
                                                                         2004
Change in Fair Value of Derivative Instruments                          ($000)
-------------------------------------------------------------------------------
Fair value of contracts at January 1,                                 $(36,224)
Losses on contracts realized                                            16,968
(Decrease) in fair value of all open contracts                         (65,320)
-------------------------------------------------------------------------------
Fair value of contracts outstanding at March 31,                      $(84,576)
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
(In Thousands of Dollars)
-------------------------------------------------------------------------------------------------------------------
                                                                     Fair Value of Contracts
-------------------------------------------------------------------------------------------------------------------
                                                                       Mature Within                        Total
Sources of Fair Value                                                   12 Months         Thereafter     Fair Value
-------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>               <C>              <C>
Prices actively quoted                                                $ (52,529)           (8,388)       $ (60,917)
Prices based on models and
    other valuation methods                                             (10,958)          (11,915)       $ (22,873)
Local published indicies                                                   (315)             (471)       $    (786)
-------------------------------------------------------------------------------------------------------------------
                                                                      $ (63,802)        $ (20,774)       $ (84,576)
-------------------------------------------------------------------------------------------------------------------
</TABLE>


We measure the commodity  risk of our  derivative  hedging  instruments  using a
sensitivity  analysis.  The sensitivity  analysis  performed on these derivative
positions  measures  the  potential  change in the fair market  value based on a
hypothetical  10%  movement  in energy  prices.  Based on a 10%  increase in the
forward  commodity  curve for natural gas from the March 31, 2004 level,  it was
estimated  that the fair  market  value of  outstanding  derivative  instruments
expected  to be  settled  in  2004  associated  with  our  gas  exploration  and
production  activities  would  decrease  by  approximately  $27  million.  A 10%
decrease in the forward  commodity curve for natural gas would increase the fair
market value of these  outstanding  derivative  instruments by approximately $24
million. We also perform sensitivity  analysis on the estimated physical sale of
natural gas by our gas exploration and production  subsidiaries.  Based on a 10%
increase in the forward  commodity curve for natural gas from the March 31, 2004


                                       58
<PAGE>

level,  it was  estimated  that  pre-tax  income  from our gas  exploration  and
production  activities  would  increase  by  approximately  $58  million for the
remainder of 2004. A 10% decrease in the forward commodity curve for natural gas
would  decrease  pre-tax  income by  approximately  $57 million.  Based upon the
preceding sensitivity analysis,  the net impact of a 10% increase in the forward
commodity  curve for natural gas would benefit  pre-tax income by  approximately
$31 million. A 10% decrease in the forward commodity curve for natural gas would
result in a net decrease to pre-tax  income of  approximately  $34 million.  The
fact that a 10% change in the  forward  commodity  curve for  natural  gas has a
significant  impact on  pre-tax  income is  indicative  of the fact that our gas
exploration  and production  subsidiaries  do not hedge 100% of their  estimated
production.

Based on sensitivity  analysis  performed on derivative  instruments  associated
with the  operations  of the  Ravenswood  facility,  it is estimated  that a 10%
increase in the forward commodity curves for electricity and fuel from the March
31, 2004 level would  decrease the fair market value of  outstanding  derivative
instruments  that hedge the cash flow  variability  associated with a portion of
peak  electric  energy  sales  by $1  million.  A 10%  decrease  in the  forward
commodity  curves for  electricity and fuel would increase the fair market value
of these derivative instruments by a similar amount. We also perform sensitivity
analysis  on the  estimated  physical  sale  of  electricity  by the  Ravenswood
facility.  Based  on  a  10%  increase  in  the  forward  commodity  curves  for
electricity  and fuel from the March  31,  2004  level,  it was  estimated  that
pre-tax income from the Ravenswood  facility would increase by approximately $11
million for the  remainder  of 2004.  A 10%  decrease  in the forward  commodity
curves for electricity and fuel would decrease  pre-tax income by  approximately
$9 million.  Based upon the preceding sensitivity analysis,  the net impact of a
10%  increase in the forward  commodity  curves for  electricity  and fuel would
benefit  pre-tax  income by  approximately  $9  million.  A 10%  decrease in the
forward commodity curves for electricity and fuel would result in a net decrease
to pre-tax income of approximately $8 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.



                                       59
<PAGE>


The following table sets forth selected financial data associated with these
derivative financial instruments that were outstanding at March 31, 2004.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
                             Year of     Volumes     Floor          Ceiling         Fixed            Current          Fair Value
   Type of Contract         Maturity       mmcf       ($)             ($)          Price ($)         Price ($)          ($000)
---------------------------------------------------------------------------------------------------------------------------------
<S>                          <C>         <C>     <C>             <C>             <C>                <C>                 <C>
Options                       2004         2,310  4.50 - 5.25     4.76 - 6.00               -        5.11 - 6.19            309
                              2005         1,520  4.50 - 5.25     5.00 - 6.00               -        5.30 - 6.44            285
Swaps                         2004        13,900            -               -     5.44 - 5.59        5.11 - 6.19          8,976
                              2005        15,440            -               -     5.60 - 5.64        5.30 - 6.44          8,873
---------------------------------------------------------------------------------------------------------------------------------
                                          33,170                                                                         18,443
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

Item 4. Controls and Procedures

KeySpan maintains "disclosure controls and procedures",  as such term is defined
under Exchange Act Rule 13a-15(e),  that are designed to ensure that information
required to be disclosed by KeySpan in the reports it files or submits under the
Securities  Exchange Act of 1934, as amended (the "Exchange  Act"), is recorded,
processed,  summarized  and reported  within the time  periods  specified in the
Securities and Exchange  Commission's rules and forms, and that such information
is accumulated  and  communicated to KeySpan's  management,  including its Chief
Executive  Officer and Chief Financial  Officer,  as appropriate to allow timely
decisions regarding required disclosure.

An  evaluation  of  the  effectiveness  of  KeySpan's  disclosure  controls  and
procedures as of March 31, 2004 was conducted under the supervision and with the
participation of KeySpan's Chief Executive Officer and Chief Financial  Officer.
Based on that evaluation,  KeySpan's Chief Executive Officer and Chief Financial
Officer have concluded that KeySpan's  disclosure  controls and procedures  were
adequate and designed to ensure that  material  information  relating to KeySpan
and its  consolidated  subsidiaries  would be made known to the Chief  Executive
Officer  and  Chief   Financial   Officer  by  others  within  those   entities,
particularly during the periods when periodic reports under the Exchange Act are
being  prepared.  Furthermore,  there has been no change in  KeySpan's  internal
control over financial  reporting,  identified in connection with the evaluation
of such control,  that occurred  during  KeySpan's  last fiscal quarter that has
materially  affected,  or is reasonably likely to materially  affect,  KeySpan's
internal  control  over  financial  reporting.  Refer to the  Certifications  by
KeySpan's Chief Executive  Officer and Chief Financial Officer filed as exhibits
31.1 and 31.2 to this report.


                                       60

<PAGE>


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

Item 1. Legal Proceedings

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

Item 6.  Exhibits and Reports on Form 8-K

(a) Exhibits

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

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

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

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

(b) Reports on Form 8-K

In our report on Form 8-K dated  February 5, 2004,  we reported that KeySpan had
issued a press release concerning, among other things, consolidated earnings for
the year ended December 31, 2003.


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





                                       61

<PAGE>



                      KEYSPAN CORPORATION AND SUBSIDIARIES
                                    SIGNATURE

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

                                                   KEYSPAN CORPORATION
                                                       (Registrant)



Date: April 30, 2004                              /s/ Gerald Luterman
                                                 -----------------------------
                                                     Gerald Luterman
                                                     Executive Vice President
                                                     and Chief Financial Officer
















                                       62