SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

        For the transition period from April 1, 1998 to December 31, 1998

                         Commission File Number 1-14161

                             MARKETSPAN CORPORATION
             (Exact name of registrant as specified in its charter)

                        NEW YORK                                  11-3431358
    (State or other jurisdiction of incorporation or           (I.R.S. employer
                     organization)                           identification no.)

    175 EAST OLD COUNTRY ROAD, HICKSVILLE, NEW YORK                  11801
        ONE METROTECH CENTER, BROOKLYN, NEW YORK                     11201
        (Address of principal executive offices)                  (Zip code)

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

                 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

         Title of each class                      Name of each exchange on which
                                                               registered
       Common Stock, $.01 par value                     New York Stock Exchange
                                                         Pacific Stock Exchange

 Series AA Preferred Stock, $25 par value               New York Stock Exchange
                                                         Pacific Stock Exchange

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                                      None
                                (Title of class)

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


        Indicate by check mark if disclosure of  delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. |_|

        As of March 22,  1999,  the  aggregate  market value of the common stock
held by non-affiliates (139,173,954 shares) of the registrant was $3,601,126,073
(based on the closing price, on such date, of $25.88 per share).

        As of March 22, 1999,  there were  142,868,154  shares of common  stock,
$.01 par value, outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

Proxy  Statement  dated on or about April 7, 1999 is  incorporated  by reference
into Part III hereof.



<PAGE>





                             MARKETSPAN CORPORATION
                              D/B/A KEYSPAN ENERGY

<TABLE>
<CAPTION>

                               INDEX TO FORM 10-K

                                                                                          Page
                                     PART I
<S>            <C>                                                                        <C>

Item 1.        Business................................................................   1

Item 2.        Properties..............................................................   29
    
Item 3.        Legal Proceedings.......................................................   29

Item 4.        Submission of Matters to a Vote of Security Holders.....................   31

                                     PART II

Item 5.        Market for Registrant's Common Equity and Related Stockholder Matters...   31

Item 6.        Selected Financial Data.................................................   32

Item 7.        Management's Discussion and Analysis of Financial Condition and Results
               of Operations...........................................................   33

Item 7A.       Quantitative and Qualitative Disclosures About Market Risk..............   53

Item 8.        Financial Statements and Supplementary Data.............................   55

Item 9.        Changes in and Disagreements with Accountants on Accounting and Financial
               Disclosure..............................................................   101

                                    PART III

Item 10.       Directors and Executive Officers of the Registrant......................   101

Item 11.       Executive Compensation..................................................   101

Item 12.       Security Ownership of Certain Beneficial Owners and Management..........   101

Item 13.       Certain Relationships and Related Transactions..........................   101

Item 14.       Exhibits, Financial Statement Schedules and Reports on Form 8-K.........   102

</TABLE>


<PAGE>



                                     PART I

ITEM 1.  BUSINESS

OVERVIEW

     KeySpan  Energy   ("KeySpan"  or  the   "Company")   provides  a  range  of
energy-related  services through operations and investments in selected areas of
the energy industry. The Company is the fourth largest gas utility in the United
States  with   approximately   1.6  million  customers  in  the  New  York  City
metropolitan  area. The Company  competes in five  principal  lines of business,
including  natural gas  distribution,  electric  services,  gas  exploration and
production, energy-related investments, and energy-related services.

           The  Company  was  formed  to   facilitate   the   combination   (the
"Combination"), completed on May 28, 1998, of KeySpan Energy Corporation ("KSE")
and its principal  subsidiary The Brooklyn Union Gas Company  ("Brooklyn Union")
and the non-nuclear electric generation and natural gas distribution  businesses
of the Long Island Lighting Company ("LILCO"). To effect the Combination, all of
the assets used by LILCO in connection with its gas distribution  business,  its
non-nuclear  electric  generation  business  and the assets  common to its prior
operations (the "Transferred  Assets") were transferred to the Company. The Long
Island Power  Authority  ("LIPA") then acquired all of the common stock of LILCO
for approximately $2.5 billion in cash and the direct or indirect  assumption of
certain  liabilities.  The Company  sold to the former  holders of LILCO  common
stock, shares of the Company's common stock and then acquired KSE by merger with
a wholly-owned subsidiary of the Company in exchange for shares of the Company's
common  stock.  Upon  completion  of these  transactions,  former  LILCO and KSE
shareholders  owned  approximately  68% and 32% of the  Company's  common stock,
respectively.

           The assets of LILCO not  transferred  to the Company  (the  "Retained
Assets")  were  retained  by LIPA and  primarily  consist  of  LILCO's  electric
transmission and distribution  system located on Long Island (the "T&D System"),
its 18%  ownership  interest in Nine Mile Point Nuclear  Power  Station,  Unit 2
("NMP2"),  located in upstate New York, and certain of LILCO's regulatory assets
and liabilities associated with its electric business.

           The Company was organized under New York law in 1998.  Brooklyn Union
was formed in 1895 through the consolidation of several existing companies,  the
oldest  of which  commenced  operations  in  1849,  providing  gas  distribution
services  throughout  the New York City boroughs of Brooklyn,  Staten Island and
most of Queens,  New York.  LILCO was organized in 1910 to provide  electric and
gas services in the Long Island  counties of Nassau and Suffolk and the Rockaway
peninsula in the borough of Queens, all in New York.

           As used  herein,  the  "Company" or  "KeySpan"  refers to  MarketSpan
Corporation d/b/a KeySpan Energy ("KeySpan Energy"),  Brooklyn Union and KeySpan
Gas East  Corporation  d/b/a Brooklyn Union of Long Island  ("Brooklyn  Union of
Long Island"),  its two principal gas distribution  subsidiaries,  and its other
subsidiaries,  individually  and in the aggregate.  In 1998, the Company changed
its  fiscal  year end from March 31 to  December  31.  For  financial  reporting
purposes,  financial statements included,  or incorporated by reference,  herein
for the period  ending  December 31, 1998 are for the nine months then ended and
have been prepared on the basis that LILCO is deemed to be the acquiring company
in the Combination for financial reporting purposes. Unless otherwise specified,
other  information  contained  in Part I hereof has been  compiled on a combined

                                       1

<PAGE>

basis ("Combined Company Basis") to aggregate the information shown for both KSE
and LILCO and is presented for the twelve month periods ended December 31, 1998,
1997 and 1996, as indicated. Additional information about the Company's industry
segments  is  contained  in "Note  10.  Business  Segments"  of the Notes to the
Consolidated  Financial Statements included herein and incorporated by reference
thereto.

           Certain  statements  contained  in this  Annual  Report  on Form 10-K
concerning expectations,  beliefs, plans, objectives,  goals, strategies, future
events or performance and underlying  assumptions and other statements which 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
7.  Management's  Discussion and Analysis of Financial  Condition and Results of
Operations" and "Item 7A.  Quantitative and Qualitative  Disclosures About Risk"
relating to the Company's  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: available sources and cost of fuel; federal and state regulatory
initiatives that increase  competition,  threaten cost and investment  recovery,
and impact rate  structures;  the ability of the Company to successfully  reduce
its cost structure;  the successful  integration of the Company's  subsidiaries;
the degree to which the Company  develops  unregulated  business  ventures;  the
ability of the Company to identify and make complementary acquisitions,  as well
as the successful  integration  of such  acquisitions;  inflationary  trends and
interest rates; the ability of the Company and its significant vendors to modify
their computer  software,  hardware and databases to accommodate  the year 2000;
and other risks detailed from time to time in other reports and other  documents
filed by the Company  and its  predecessors  with the  Securities  and  Exchange
Commission  (the "SEC").  For any of these  statements,  the Company  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  1.
Business," "Item 7. Management's  Discussion and Analysis of Financial Condition
and  Results  of  Operations"  and  "Item  7A.   Quantitative   and  Qualitative
Disclosures About Risk" contained in the Annual Report on Form 10-K.

           The  Company's   principal  executive  offices  are  located  at  One
MetroTech  Center,  Brooklyn,  New York  11201  and 175 East Old  Country  Road,
Hicksville,  New  York  11801  and its  telephone  numbers  are  (718)  403-1000
(Brooklyn) and (516) 755-6650  (Hicksville).  Financial and other information is
also available through the World Wide Web at http://www.keyspanenergy.com.

INDUSTRY AND COMPETITION

           The electric and natural gas sectors of the regulated energy industry
are  undergoing   significant   changes,  as  market  forces  are  replacing  or
supplementing  rate regulation as a means of controlling  prices for natural gas
and  electricity.  The exposure of utilities to competition  places pressures on
them to maintain  market  share and  profits  and manage the costs of  providing
services as their  customers  gain access to lower cost  supplies of natural gas
and electricity.  Competition also presents utilities with greater opportunities
to  manage  the  cost of  their  natural  gas  and  electric  supplies,  to earn
unregulated profits on energy sales and to expand their business activities.

 
                                       2

<PAGE>

                                      

           Historically,  government regulation served both to control prices in
the natural gas and electric sectors of the energy industry and to substantially
shield  industry  participants  from  competition.  The  natural  gas sector was
segmented into three regulated parts: production; interstate transportation; and
franchised  retail sales and local  distribution.  The electric  sector featured
vertically   integrated   utilities  providing   generation,   transmission  and
distribution   services  for  their  franchised   service   territories.   Under
traditional rate  regulation,  utilities were provided the opportunity to earn a
fair, but regulated,  return on invested capital in exchange for a commitment to
serve all  customers  within a franchised  service  territory.  An extensive and
complex regime for the regulation of public utility companies and public utility
holding companies limited natural gas and electric utilities'  opportunities for
geographic expansion and business diversification.

           Between  the 1930's and the late  1970's,  federal  and state  energy
regulatory  policies  remained  relatively  stable,  and  the  structure  of the
regulated  energy industry changed little.  However,  after the energy crises in
the  1970's,  new  legislation  and changes in  regulatory  policy set in motion
competitive  forces  that  are  reshaping  the  energy  industry,   dramatically
increasing business opportunities for natural gas and electric companies.

           Beginning in 1978 with federal legislation that authorized the phased
deregulation of wellhead natural gas prices and the establishment of unregulated
electric generation companies, competition has been increasingly introduced into
segments  of the  regulated  energy  industry.  To foster  competition,  federal
regulators  adopted "open access" rules which  required  interstate  natural gas
pipelines and electric  transmission  systems to "unbundle" retail sales,  I.E.,
the sale of gas or electricity,  from transportation and transmission  services.
Open access also required interstate gas pipelines and electric  utilities,  for
the  first  time,  to  provide  transportation  and  transmission  service  on a
non-discriminatory  basis to all qualified  customers.  Recent initiatives would
also permit market forces,  rather than  regulation,  to establish rates charged
under  short-term  contracts for interstate  natural gas  transportation  and to
determine  the  allocation  of  increased  electricity  costs that  result  when
electric transmission constraints prevent lower priced electricity from reaching
electric customers. By enabling natural gas producers and electric generators to
reach new  markets,  open access  policies  led to  intensified  competition  in
wholesale  markets and began to alter the geographic  character of the industry.
No longer  typified by isolated  local  companies,  the natural gas and electric
sectors in many parts of the  country  today  include a growing  number of firms
with regional, national and international dimensions.

           Parallel changes in the regulation of retail electric and gas markets
are being  implemented by many state public utility  commissions,  including the
Public  Service   Commission  of  the  State  of  New  York   ("NYPSC").   On  a
state-by-state basis,  initially in the Northeast,  Mid-Atlantic and California,
and now  spreading  to other  regions,  local  franchised  utilities  are  being
required  to separate  their  marketing  and retail  sales  businesses  from the
physical  distribution of natural gas and  electricity  through pipes and wires.
Just as at the federal level, distribution services are increasingly required to
be unbundled from retail sales, and made available on a non-discriminatory  open
access  basis  to  all  qualified  retail  customers.  Retail  natural  gas  and
electricity  marketers  are being  permitted to compete for energy  customers in
what were formerly  exclusive  service  territories  of electric and natural gas
utilities.  However,  natural gas and  electric  utilities  are likely to remain
exclusive providers of unbundled  distribution services through pipes and wires,
and may remain  obligated  to continue to sell  natural  gas or  electricity  to
customers who do not select other suppliers.

                                       3

<PAGE>

           In New York State,  large-volume  retail  customers have been able to
purchase natural gas supplies  directly from  non-utility  vendors for more than
ten years,  while  direct sales to  aggregations  of small  customers  have been
permitted  since 1996. New York  regulators  are  commencing new  initiatives to
further enhance retail competition in the state.  Similarly,  the NYPSC has been
encouraging the development of retail  competition in the electric sector in New
York. In the past two years,  electric utilities have begun to unbundle electric
sales from retail distribution  services,  open their franchised  territories to
competitors,  transfer control over their transmission systems to an independent
system operator, and divest many of their generating plants.

           The  introduction  of competition  for retail  electricity  sales may
threaten the ability of electric  utilities to recover their past investments in
electric generating plants (and, in some cases, related transmission facilities)
to the extent  that the cost of  producing  electricity  from  those  generating
plants exceeds the competitive  market price for  electricity.  In consideration
for opening franchise service territories to retail  competition,  many electric
utilities are being permitted to recover potentially  "stranded"  investments in
electric generation and associated transmission through charges to all customers
receiving  distribution  and  transmission  services.  In many cases, the market
value of electric  generating  plants and the amount of stranded  investment  is
being  determined  through  the  divestiture  of electric  generating  plants in
well-publicized auctions. The sale of generating plants and recovery of stranded
costs (to the extent  they  remain  after  divestiture)  is  providing  electric
utilities with  substantial  cash infusions which, in some cases, are being used
to repurchase stock or to finance  acquisition of other energy assets,  often in
different  regions  of  the  country  or  internationally.  Many  utilities  are
attempting  to  diversify  their lines of  business,  while some are choosing to
concentrate  on one or two  industry  segments,  such as natural gas or electric
distribution or electric generation.  Several New York investor-owned  utilities
have commenced the sale of their non-nuclear  generating  plants.  The Company's
pending purchase of the Ravenswood generating plant, as discussed below, results
from a plan under which  Consolidated  Edison  Company of New York,  Inc.  ("Con
Edison")  is  divesting  a  substantial  portion of its  non-nuclear  generating
capacity. See "The Company - Electric Services."

           A  significant  number of natural  gas and  electric  utilities  have
reacted to the changing  structure of the regulated  energy industry by entering
into business combinations, with the goal of reducing common costs, gaining size
to better withstand  competitive  pressures and business  cycles,  and attaining
synergies  from the  combination  of electric  and natural gas  operations.  The
Combination  and related  transactions  which  resulted in the  formation of the
Company shares many of these attributes.

           The  transformation  of the energy  industry  is an ongoing  process.
Larger regional,  national and international  companies are being formed through
acquisitions and mergers. The remaining legal barriers to interregional  natural
gas and electric distribution  companies,  which have been relaxed as the result
of regulatory  decisions,  are the subject of legislative  proposals calling for
repeal or substantial  modifications.  The advent of industry  restructuring has
meant that  regional,  national and  international  companies  are  increasingly
offering  energy  consumers  a wide  array of choices  as to the  supply,  type,
quality and cost of natural gas and electric services. For the Company, industry
restructuring  means increased  opportunities to enter new markets and pressures
to manage its costs of doing business.

                                       4
<PAGE>


BUSINESS STRATEGY

           The Company seeks to become a premier energy company with  operations
focused  in the  Northeastern  United  States,  the Gulf of Mexico  and  Western
Canadian supply basins as well as selected international areas where the Company
identifies opportunities for growth in those energy-related lines of business in
which the Company has developed  recognized  expertise.  The Company  intends to
grow through acquisitions and selected energy-related  investments; by expanding
its gas  distribution  business,  particularly  on Long Island;  by  emphasizing
superior  customer  service;  and by taking  advantage of the  increasing  trend
towards  deregulation  and competition to offer an expanded array of services to
its customers.

           Key elements of the Company's business strategy include:

               ENERGY-RELATED INVESTMENTS. In recent years, the Company has made
        a number of  acquisitions  and  energy-related  investments  designed to
        enhance its presence in the Northeastern  United States. The Combination
        transformed  the  Company  into the  leading  natural gas company in the
        Northeast,   with   approximately  1.6  million  gas  customers  in  two
        contiguous gas distribution  service  territories.  The Combination also
        gave the Company one of the largest power generation capabilities in the
        region, with over 4,000 megawatts of generation capacity.  Subsequent to
        December 31,  1998,  the Company  entered  into a definitive  agreement,
        subject to regulatory  approvals,  to acquire a 2,168 megawatt  electric
        generating  facility in New York City from Con Edison. Upon consummation
        of that  transaction,  the  Company's  power  generation  capacity  will
        approximate 6,200 megawatts. Consistent with the Company's long-standing
        investment in the Iroquois pipeline, the Company recently acquired a 25%
        interest in the proposed  Cross Bay pipeline,  which will  transport gas
        from interstate  pipelines in New Jersey to New York and Long Island. In
        addition,  the  Company has  expanded  the  business of its  unregulated
        energy services operations, through the acquisition of Philip Fritze and
        Sons,  one of the  largest  heating,  ventilation  and air  conditioning
        contractors in New Jersey.

               The Company has also made significant investments beyond its core
        market area. In 1998, for example,  the Company  acquired a 50% interest
        in  certain  midstream  natural  gas  assets  of Gulf  Canada  Resources
        Limited,  creating a partnership known as Gulf Midstream  Services.  The
        Company also purchased an additional  25.5% interest in Premier  Transco
        Ltd. (resulting in an aggregate 50% interest),  which transports natural
        gas  through an 84-mile  pipeline  from  southwest  Scotland to Northern
        Ireland.

               These   acquisitions   and  investments   reflect  the  Company's
        commitment  to  enhancing  its  presence  as an energy  company  focused
        primarily  on  the   Northeastern   United   States,   with   additional
        complementary  interests  in the Gulf of  Mexico  and  Western  Canadian
        supply basins, as well as Northern Ireland. The Company anticipates that
        it will continue to target other  acquisitions and investments that also
        provide it with  opportunities  to increase its  penetration of selected
        energy markets in those core geographic areas.

                                       5
<PAGE>

               EXPANDED GAS  DISTRIBUTION  SERVICES.  The Company has achieved a
        high degree of penetration in its Brooklyn Union service territory, with
        approximately  79% of  all  one-and  two-family  homes  currently  using
        natural  gas  for  space  heating.  In  contrast,  only  30% of  one-and
        two-family homes in the Brooklyn Union of Long Island service  territory
        currently use natural gas for space heating.  The Company believes there
        is significant  opportunity for increased penetration of the Long Island
        service territory and intends to make capital expenditures to expand its
        gas distribution infrastructure in order to support long-term growth. In
        addition, the Company expects to focus marketing efforts throughout both
        service territories.  Examples of such marketing efforts include efforts
        to  convert   customers   from  oil  to  gas  heat  and  to  target  new
        construction,  small to medium  commercial  businesses  and large volume
        dual-fuel customers.

               SUPERIOR CUSTOMER SERVICE.  The Company's utility operations have
        an  outstanding  reputation  for  customer  service  and  have  received
        consistently  excellent marks for customer loyalty and satisfaction,  as
        measured by independent customer-satisfaction  specialists. In 1998, the
        Company was the recipient of the Emergency  Response Award of the Edison
        Electric  Institute,  which honored the Company for  restoring  electric
        power  for  LIPA  after  a  severe  thunderstorm  on  Long  Island  last
        September.  Similarly,  Brooklyn  Union was  awarded the 1998 Brand Keys
        Customer Loyalty Award as the U.S. energy provider that had achieved the
        highest  level  of  success  in  anticipating  and  exceeding   customer
        expectations.  The Company  intends to continue  to  emphasize  superior
        customer  service,  both to  differentiate  itself from  competitors  as
        markets  become  increasingly  deregulated  and  to  take  advantage  of
        cross-selling  opportunities  available in complementary  energy-related
        services  such as appliance  repair and energy system  installation  and
        management.

               EXPANDED  SERVICES.  With  its  strong  market  presence  in  the
        metropolitan   New  York  City  area,   the   Company   believes  it  is
        well-positioned   to  provide  customers  with  an  expanding  array  of
        energy-related services. In recent years, the Company has begun to offer
        gas and electric  marketing services  throughout New York,  Connecticut,
        New Jersey,  Maryland,  Pennsylvania  and Ohio and appliance  repair and
        related  services  and  energy  management   services  for  residential,
        commercial and industrial customers throughout the metropolitan New York
        City  area.  The  Company   believes  that  continuing   trends  towards
        deregulation and competition,  coupled with growth in its customer base,
        will afford it  opportunities  to expand those  services both within and
        outside its  traditional  service  territories.  The Company also owns a
        250-mile  fiber optic  telecommunications  network on Long Island and is
        currently  exploring  various business  opportunities to take commercial
        advantage of that network.

THE COMPANY

                                GAS DISTRIBUTION

OVERVIEW

           The Company  sells,  distributes  and  transports  natural gas in two
separate, but contiguous service territories of approximately 1,417 square miles
in the aggregate in the New York City  metropolitan  area.  The Company owns and


                                      6
<PAGE>

operates  gas  distribution,  transmission  and storage  systems that consist of
approximately 10,036 miles of distribution pipelines,  578 miles of transmission
pipelines and two gas storage facilities.  The Company serves  approximately 1.6
million customers,  of which approximately 1.5 million, or 94%, are residential.
Gas is offered  for sale to  residential  customers  on a "firm"  basis,  and to
commercial and industrial customers on a "firm" or "interruptible" basis. "Firm"
service is offered to customers under schedules or contracts which anticipate no
interruptions,  whereas  "interruptible"  service is offered to customers  under
schedules or contracts which anticipate and permit interruption on short notice,
generally in peak-load  seasons.  Gas is available at any time of the year on an
interruptible  basis,  if the  supply is  sufficient  and the  supply  system is
adequate.  The Company also participates in the interstate  markets by releasing
pipeline capacity or bundling pipeline capacity with gas for "off-system" sales.
An  "off-system"  customer  consumes  gas  at  facilities  located  outside  the
Company's service territories,  by connecting to the Company's facilities or one
of its transporter's facilities, at a point of delivery agreed to by the Company
and the  customer.  The  Company  purchases  its  natural  gas  for  sale to its
customers under long-term supply  contracts and short-term spot contracts.  Such
gas is transported under both firm and interruptible  transportation  contracts.
In  addition,  the  Company has  commitments  for the  provision  of gas storage
capability and peaking supplies.

           During 1998, on a Combined  Company  Basis,  gas revenues were $1.760
billion, or 54% of the Company's  revenues,  and gas operating income was $218.8
million, excluding special charges related to the Combination.

           The gas  operations of the Company can be  significantly  affected by
seasonal weather  conditions.  Traditionally,  annual revenues are substantially
realized  during the  heating  season as a result of higher  sales of gas due to
cold weather. Accordingly,  operating results historically are most favorable in
the first and fourth  calendar  quarters.  However,  the  Company's  gas utility
tariffs contain weather normalization adjustments that provide for recovery from
or refund to firm  customers  of  material  shortfalls  or  excesses of firm net
revenues  (revenues less  applicable gas costs,  if any) during a heating season
due to variations from normal weather. See "Regulation and Rate Matters."

SALES AND DISTRIBUTION

           The  Company is the fourth  largest gas  distribution  company in the
United States, providing, through its gas distribution subsidiaries, natural gas
sales and transportation  services to customers in the New York City boroughs of
Brooklyn,  Queens and Staten  Island and the Long Island  counties of Nassau and
Suffolk.

                                       7
<PAGE>

           Gas sales and revenues for 1998 on a Combined  Company Basis by class
of customer are set forth below:
<TABLE>
<CAPTION>

                                                  Sales           Revenues           Revenues
Customer                                          (MDTH)        (thousands of      (% of Total)
                                                                     $)
---------------------------------------------   -----------    ----------------   ---------------
<S>                                              <C>            <C>                    <C>

FIRM
Residential house heating................         95,821        $   971,987            55.22%
Residential (other than house heating)...         10,176            199,944            11.36
Temperature-Controlled heating...........         30,899            128,703             7.31
Commercial/Industrial....................         28,434            245,005            13.92
                                                -----------    ----------------   ---------------
    Total Firm...........................        165,330          1,545,639            87.80
FIRM TRANSPORTATION......................         13,974             60,540             3.44
                                                -----------    ----------------   ---------------
   Total Firm Gas Sales and Transportation       179,304          1,606,179            91.24
INTERRUPTIBLE............................         11,861             40,276             2.29
OFF-SYSTEM SALES.........................         24,465             59,556             3.38
TRANSPORTATION...........................         29,156             18,289             1.04
                                                -----------    ----------------   ---------------
   Total Gas Sales and Transportation....        244,786          1,724,300            97.95
Other Retail Services....................          N/A               36,020             2.05
                                                ===========    ================   ===============
   Total sales and revenues*.............        244,786         $1,760,320            100%
                                                ===========    ================   ===============
</TABLE>

-----------------------
*Excludes lost, unaccounted for and interdepartmental gas.

           Set  forth  below  is  information,  on  a  Combined  Company  Basis,
concerning  certain operating  statistics  applicable to the Company's gas sales
and distribution business:

<TABLE>
<CAPTION>
                                                    1998             1997              1996
                                                --------------   --------------    -------------

<S>                                              <C>              <C>               <C>      
Revenues ($000)...........................       1,760,320        1,991,793         2,073,851
Net Income ($000).........................         133,685*         134,403           119,639
Firm Gas Sales and Transportation (MDTH)..         179,304          203,587           202,377
Other Deliveries (MDTH)...................          65,482           73,132            59,139
Heating customers.........................         665,465          657,433           651,750
Degree Days, % cooler (warmer) than normal            (17.5)            0.2               4.8
Capital Expenditures......................         181,700          178,651           190,403
</TABLE>

-----------------------
*Excludes special charges and tax benefits associated with the Combination.

           The Company sells gas to its firm gas customers at the Company's cost
for such gas,  plus a charge  designed  to  recover  the  costs of  distribution
(including  a return of and a return on invested  capital).  The Company  shares
with its firm gas  customers net revenues  (operating  revenues less the cost of
gas purchased for resale) from off-system sales and, in addition, Brooklyn Union
of  Long  Island   credits  its  firm  gas   customers  all  net  revenues  from
interruptible gas sales, thereby reducing its rates to these firm customers.

           All of the Company's  retail gas customers became eligible in 1996 to
purchase  gas  directly  from  suppliers  other than the  Company's  gas utility
subsidiaries. At December 31, 1998, approximately 32,900 residential, commercial
and industrial customers, with annual requirements of approximately 19,500 MDTH,
or 10% of the Company's annual firm gas system requirements, purchased their gas
supply from sources  other than the Company.  If a customer  decides to purchase
gas from another supplier, the supplier obtains the gas and transports it to the
Company's  distribution  system.  The  Company  then  delivers  the  gas  to the
customer's  premises  through the  Company's  system of  distribution  mains and
service lines. In addition to delivering gas that customers  purchase from other
suppliers,  the Company has been providing metering,  billing and other services

                                       8

<PAGE>

for aggregate rates that are comparable to the distribution  charge reflected in
otherwise applicable sales rates to supply comparable customers.

           On a Combined Company Basis, actual firm gas sales and transportation
quantities from gas  distribution  operations in 1998 were 179,304 MDTH compared
to 203,587 MDTH in 1997 and 202,377 MDTH in 1996.  (An MDTH is 10,000 therms 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.)
These major  variations in quantities are primarily due to weather.  Measured in
annual degree days, weather was 17.5% warmer than normal in 1998, normal in 1997
and 4.8% colder than normal in 1996. After normalizing for weather, firm volumes
in 1998 were approximately the same as 1997.

           On  a  Combined  Company  Basis,  on-system   interruptible  volumes,
off-system  sales  (sales made to  customers  outside of the  Company's  service
territories)  and related  transportation  in 1998 were 65,482 MDTH  compared to
73,132  MDTH in 1997  and  59,139  MDTH in  1996.  The  decrease  in  total  gas
throughput  during 1998 reflects the effects of warmer weather and the fact that
Brooklyn Union discontinued its off-system sales program beginning April 1, 1998
and  replaced  it with a  management  agreement  with  Enron  Capital  and Trade
Resources Corp. and its parent company, Enron Corp. (collectively,  "Enron"), in
which Enron pays the Company a fixed fee in exchange for the right granted Enron
to earn  revenues  based upon its  management  of  Brooklyn  Union's  gas supply
requirements, storage arrangements, and off-system capacity.

           During 1998,  the Company  continued to grow in its existing  service
territories and to expand into new markets. In the Company's service area of the
New York City boroughs of Brooklyn, Queens and Staten Island,  approximately 79%
of one- and  two-  family  homes  currently  use gas for  space  heating,  while
approximately  48% of the multi-family  market and 63% of the commercial  market
use gas for space heating.  In these areas,  the Company  intends to seek growth
with an  aggressive  marketing  effort  designed  to  encourage  conversions  of
residential and  multi-family  homes and businesses from fuel oil to natural gas
heating. In the Company's service area of the Long Island counties of Nassau and
Suffolk and the Rockaway  peninsula of Queens County,  approximately 30% of one-
and  two-family  homes  currently  use  natural  gas for  space  heating,  while
approximately  17% of the multi-family  market and 57% of the commercial  market
use gas for space heating.  In these service areas, the Company will seek growth
through  the  expansion  of its  distribution  system  as  well as  through  the
conversion  of  residential  homes  and the  pursuit  of  opportunities  to grow
multi-family, industrial and commercial markets. The Company also offers special
area  development  and  incentive  gas  rates to  multi-family,  commercial  and
industrial  businesses that move to or expand  operations in designated areas of
the Company's service territories.

SUPPLY AND STORAGE

           The  Company  has  contracts  for  the  purchase  of  firm  long-term
transportation  and storage  services.  The Company's gas supplies are purchased
under  long-term  contracts  and on the  spot  market  and  are  transported  by
interstate  pipelines  from domestic and Canadian  sources.  Storage and peaking
supplies are available to meet system requirements during winter periods.

           Regulatory  actions,  economic  factors and changes in customers  and
their preferences  continue to reshape the Company's gas operations  markets.  A
number of multi-family, commercial and industrial customers and a growing number
of residential  customers currently purchase their gas supplies from natural gas

                                       9


<PAGE>

marketers and then contract with the Company for local transportation, balancing
and other unbundled services. Since these customers are no longer reliant on the
Company for sales  service,  the quantity of gas that the Company must obtain to
meet remaining sales  customers'  requirements  has been reduced.  This trend is
likely to continue as state regulators  implement policies designed to encourage
customers to purchase their gas from suppliers  other than the  traditional  gas
utilities.

           PEAK-DAY CAPABILITY. The design criteria for the Company's gas system
assumes  an  average  temperature  of 0(0)F  for  peak-day  demand.  Under  such
criteria,  the Company  estimates that the  requirements  to supply its firm gas
customers would amount to approximately  1,754 MDTH of gas for a peak-day during
the 1998/99  winter  season and that the gas  available to the Company on such a
peak-day amounts to  approximately  2,033 MDTH. For the 1999/2000 winter season,
the  Company   estimates  that  the  peak-day   requirements   would  amount  to
approximately  1,789 MDTH and that the gas  available to the Company  amounts to
approximately  2,033  MDTH.  As of March 1, 1999,  the 1998/99  winter  peak-day
throughput to the Company's  customers was 1,511 MDTH, which occurred on January
14, 1999, at an average  temperature  of  22(degree)F,  representing  74% of the
Company's  peak-day  capability at that time.  The Company  expects that it will
have  sufficient gas available to meet the projected  requirements  for firm gas
customers  for the 1999/2000  winter  season.  The  Company's  firm gas peak-day
capability is summarized in the following table:

<TABLE>
<CAPTION>


Source                                                      MDTH per day         % of Total
------------------------------------------------------    -----------------   -----------------

<S>                                                             <C>                  <C>
Producers..........................................               750                 37
Underground Storage................................               779                 38
Peaking Supplies...................................               504                 25
                                                          =================   =================
    Total..........................................             2,033                100
                                                          =================   =================
</TABLE>

           PRODUCERS.  The  Company  purchases  natural  gas  for  sale  to  its
customers under contracts with suppliers located in domestic and Canadian supply
basins and arranges for its  transportation  to the Company's  facilities  under
firm long-term contracts with interstate pipeline companies.  During 1998, about
78% of the Company's  natural gas supply was available from domestic sources and
22% from Canadian  sources.  The Company has  available  under firm contract 750
MDTH per day of year-round and seasonal pipeline  transportation capacity to its
facilities in the New York City metropolitan area. Major providers of interstate
pipeline capacity and related services to the Company include:  Transcontinental
Gas Pipe Line Corporation, Texas Eastern Transmission Corporation,  Iroquois Gas
Transmission   System,   Tennessee  Gas  Pipeline   Company,   CNG  Transmission
Corporation and Texas Gas Transmission Company.

           STORAGE.  In order to meet higher winter demand, the Company also has
long-term  contracts  with  Transcontinental  Gas Pipe Line  Corporation,  Texas
Eastern   Transmission   Corporation,   Tennessee  Gas  Pipeline  Company,   CNG
Transmission Corporation, Equitrans, Inc., Hattiesburg First Reserve and Honeoye
Storage  Corporation,  for underground  storage  capacity of 58,935 MDTH for the
winter season, with 779 MDTH per day maximum deliverability.

           PEAKING SUPPLIES. In addition to the pipeline and storage supply, the
Company  supplements its winter supply with peaking supplies which are available
on the  coldest  days of the year to enable the  Company  to meet the  increased
requirements  of its  heating  customers  economically.  The  Company's  peaking
supplies include gas provided by the Company's two liquefied natural gas ("LNG")

                                       10
<PAGE>


plants   and   under   peaking   supply   contracts   with   four   cogeneration
facilities/independent  power  producers  located in its franchise area. For the
1998/99  winter  season,  the  Company has the  capability  to provide a maximum
peak-day  supply of 504 MDTH on  excessively  cold days.  The LNG plants  have a
storage capacity of approximately 2,053 MDTH and peak-day throughput capacity of
394 MDTH, or 19% of peak-day  supply.  The Company also has contract rights with
Trigen  Services   Corporation,   Brooklyn  Navy  Cogeneration   Partners,   LP,
Nissequogue  Cogen Partners and the New York Power Authority to purchase peaking
supplies with a maximum daily capacity of 110 MDTH and total  available  peaking
supplies during the winter season of 3,349 MDTH.

           GAS SUPPLY  MANAGEMENT.  During  1998,  the  Company  entered  into a
one-year  arrangement  with  Enron  whereby  Enron  provides  gas  supply  asset
management services for Brooklyn Union. Under the terms of this agreement, Enron
is  responsible  for managing  certain  aspects of Brooklyn  Union's  interstate
pipeline  transportation,  gas supply and storage. Enron also is responsible for
satisfying  certain of the  Company's  gas  supply  requirements;  however,  the
Company  remains  contractually  obligated  to its  gas  suppliers  and  has not
terminated  any  of  its  supply  and  delivery  contracts.   Pursuant  to  this
arrangement,  Enron  paid the  Company  a fee in 1998,  a  portion  of which was
credited  to the  Company's  gas  ratepayers,  and  obtained  the  right to earn
revenues  based upon its  management of the  Company's gas supply  requirements,
storage arrangements and off-system capacity.

           In 1998,  the Company  entered  into a one-year  alliance  with Coral
Energy Resources, L.P., a division of Shell Oil Company ("Coral"), whereby Coral
assists the Company in the origination,  structuring, valuation and execution of
energy-related  transactions  relating to Brooklyn  Union of Long Island and the
Company's  energy-management  services  undertaken  on behalf of LIPA. A sharing
agreement  exists  between the gas ratepayers and the Company for off-system gas
transactions   and  between  the  Company  and  LIPA  for  off-system   electric
transactions.  The Company's  share of the profits on such  transactions is then
shared with Coral.  The Company  also shares in revenues  arising  from  certain
transactions initiated by Coral.

           The arrangements with Enron and Coral are short-term agreements.  The
Company will continue to evaluate the  effectiveness  of these  arrangements and
ultimately  determine  the most  effective  management  approach in light of the
Company's  growth  objectives.  This approach  could be an  outsourcing  of this
management  function,  entering into a strategic  alliance with a third party to
jointly manage this activity, or internalizing the entire function.

           GAS  COSTS.  On a  Combined  Company  Basis,  gas costs for 1998 were
$702.7  million  and  reflect  warmer  than  normal  weather  during  the  year.
Variations in gas costs have little  impact on operating  results of the Company
since its current gas rate  structures  include gas adjustment  clauses  whereby
variations  between  actual gas costs and gas cost  recoveries  are deferred and
subsequently refunded to or collected from customers.

                                ELECTRIC SERVICES

OVERVIEW

           The  Company's   electric  services  primarily  consist  of  (i)  the
ownership and operation of oil- and gas-fired  generating  facilities located on
Long Island and the delivery of the power generated by these facilities to LIPA;
(ii) the management and operation of LIPA's T&D System; and (iii) the management
of LIPA's fuel and electric energy purchases and any off-system sales.

                                       11
<PAGE>

           As more fully described  below,  the Company (i) provides to LIPA all
operation, maintenance and construction services relating to the Retained Assets
through a Management  Services  Agreement  (the "MSA");  (ii) supplies LIPA with
capacity  and energy  through a Power Supply  Agreement  (the "PSA") in order to
allow LIPA to provide  electricity  to its  customers on Long Island;  and (iii)
manages all aspects of the fuel supply for the Generating Facilities (as defined
below) as well as all  aspects  of the  capacity  and  energy  owned by or under
contract  to  LIPA  through  an  Energy   Management   Agreement   (the  "EMA").
Collectively,  the MSA,  PSA and EMA are  referred  to herein as the  "Operating
Agreements."

           In  addition,  on  January  28,  1999,  the  Company  entered  into a
definitive  agreement  with Con  Edison  to  purchase,  for  approximately  $597
million,   subject  to  adjustment,   the  2,168-megawatt   Ravenswood  electric
generating   facilities   located  in  Long  Island  City,   Queens,  New  York.
Consummation of this transaction is subject to various regulatory approvals, the
timing of which cannot be determined.

           During 1998,  on a Combined  Company  Basis,  electric  revenues were
$1.294 billion or 40% of the Company's  revenues and electric  operating  income
was $264.2 million,  excluding  special charges related to the Combination.  For
the period following  completion of the LIPA Transaction and ending December 31,
1998,  electric  revenues were $408.3 million and electric  operating income was
$10.7  million,  excluding  special  charges  related to the  Combination.  On a
Combined Company Basis, electric revenues were $2.481 billion and $2.466 billion
for 1997 and 1996, respectively,  and electric operating income was $645 million
and $642 million for 1997 and 1996, respectively.

GENERATION

           GENERATING  FACILITY  OPERATIONS.  The Company  owns and  operates an
aggregate  of  53  electric   generation   units  throughout  Long  Island  (the
"Generating  Facilities"),  20 of which can be powered  either by oil or natural
gas at the Company's  election.  In recent years,  the Company has  reconfigured
several of its facilities to enable them to burn either oil or natural gas, thus
enabling the Company to switch periodically between fuel alternatives based upon
cost and seasonal environmental requirements.

           The  following  table  indicates  the  1998  summer  capacity  of the
Company's steam generation  facilities and internal  combustion  ("IC") Units as
reported to the New York Power Pool ("NYPP"):

<TABLE>
<CAPTION>
 ---------------------- ---------------------- ---------------- ---------------- --------------
   LOCATION OF UNITS         DESCRIPTION            FUEL             UNITS            MW
 ---------------------- ---------------------- ---------------- ---------------- --------------
<S>                         <C>                     <C>               <C>            <C>  
 Northport, L.I.            Steam Turbine           Dual*              3             1,156
 Northport, L.I.            Steam Turbine            Oil               1               381
 Port Jefferson, L.I.       Steam Turbine           Dual*              2               386
 Glenwood, L.I.             Steam Turbine            Gas               2               228
 Island Park, L.I.          Steam Turbine           Dual*              2               390
 Far Rockaway, L.I.         Steam Turbine           Dual*              1               108
 Throughout L.I.              IC Units              Dual*             12               291
 Throughout L.I.              IC Units               Oil              30             1,078
 ====================== ====================== ================ ================ ==============
 Total                                                                53             4,018
 ====================== ====================== ================ ================ ==============
</TABLE>

*Dual - Oil or natural gas.

                                       12


<PAGE>

           The maximum  demand on the T&D System was 4,208  megawatts  ("MW") on
July 22, 1998,  representing 84% of the total available  capacity of 4,993 MW on
that day, which  included 769 MW of firm capacity  purchased from other sources.
By agreement  with the NYPP,  the Company is required to maintain,  on a monthly
and annual basis,  an installed  and  contracted  firm power reserve  generating
capacity  equal to at least 18% of its actual peak demand.  The Company  expects
that it will be able to  continue  to meet this NYPP  requirement.  However,  as
demand for capacity on Long Island  increases,  the Company  anticipates that it
will seek to meet  such  demand  through  the  acquisition  or  construction  of
additional generation facilities.

           POWER SUPPLY AGREEMENT.  The PSA provides for the sale to LIPA by the
Company of all of the capacity and, to the extent LIPA requests, energy from the
Generating  Facilities.  Capacity  refers to the ability to generate energy and,
pursuant to NYPP requirements, must be maintained at specified levels (including
reserves)  regardless  of the  source  and  amount  of  energy  consumption.  By
contrast, energy refers to the electricity actually generated for consumption by
customers.  Such sales of capacity and energy from the Generating Facilities are
made at cost-based  wholesale rates  regulated by the Federal Energy  Regulatory
Commission  ("FERC").  These rates may be  modified in the future in  accordance
with the terms of the PSA for (i) agreed upon labor and expense  indices applied
to the base year; (ii) a return of and on the capital invested in the Generating
Facilities;  and (iii) reasonably incurred expenses that are outside the control
of the Company.

           The PSA provides incentives and penalties for the Company to maintain
the output  capability  of the  Generating  Facilities,  as  measured  by annual
industry-standard  tests of operating  capability,  and plant  availability  and
efficiency.  These  combined  incentives  and  penalties may total as much as $4
million  annually.  In 1998 the Company  earned  approximately  $3.3  million in
incentives under the PSA.

           The PSA provides  LIPA with all of the capacity  from the  Generating
Facilities.  However,  LIPA  has no  obligation  to  purchase  energy  from  the
Generating  Facilities and is able to purchase energy on a least-cost basis from
all available  sources  consistent  with existing  transmission  interconnection
limitations of the T&D System.  Under the terms of the PSA, LIPA is obligated to
pay for capacity at rates which reflect a large  percentage of the overall fixed
cost  of  maintaining  and  operating  the  Generating  Facilities.  A  variable
maintenance charge is imposed for each unit of energy actually acquired from the
Generating  Facilities.  The term of the PSA is 15  years  and is  renewable  on
similar terms.  However,  the PSA provides LIPA the option of electing to reduce
or  "ramp-down"  the  capacity it purchases  from the Company  beginning in year
seven of the PSA,  in  accordance  with  agreed-upon  schedules.  In years seven
through ten of the PSA, if LIPA elects to ramp-down,  the Company is entitled to
receive  payment for 100 percent of the present  value of the  capacity  charges
otherwise  payable over the remaining  term of the PSA. If LIPA  ramps-down  the
generation  capacity  in years 11 through 15 of the PSA,  the  capacity  charges
otherwise  payable  by  LIPA  will  be  reduced  in  accordance  with a  formula
established in the PSA. If LIPA exercises its ramp-down option,  the Company may
use any capacity released by LIPA to bid on new LIPA capacity requirements or to
bid on LIPA's capacity  requirements to replace other ramped-down  capacity.  If
the Company continues to operate the ramped-down  capacity,  the PSA requires it
to use reasonable efforts to market the capacity and energy from the ramped-down
capacity  and to share any profits  with LIPA.  Capacity  and energy sold by the
Company from ramped-down  capacity must be transported over the T&D System,  and
the Company  will be  required  to pay LIPA's  standard  transmission  (and,  if
applicable,  distribution) rates for the service.  The PSA will be terminated in

                                       13

<PAGE>

the event that LIPA exercises its right to purchase,  at fair market value,  all
of the Generating Facilities in the twelve-month period beginning in May 2001.

           The Company has an inventory of sulfur  dioxide  ("SO2") and nitrogen
oxide ("NOx")  emission  allowances that may be sold to third party  purchasers.
The  amount of  allowances  varies  from year to year  relative  to the level of
emissions from the Generating Facilities,  which is greatly dependent on the mix
of natural  gas and fuel oil used for  generation  and the  amount of  purchased
power that is imported  onto Long  Island.  In  accordance  with the PSA, 33% of
emission  allowance  sales  revenue is kept by the  Company and the other 67% is
credited  to LIPA.  LIPA  also has a right of  first  refusal  on any  potential
emission allowance sales. Additionally,  the Company is bound by a memorandum of
understanding  with the New York State Department of Environmental  Conservation
which  prohibits the sale of SO2 allowances into certain states and requires the
purchaser to be bound by the same restriction,  which may affect the allowances'
market value.

TRANSMISSION AND DISTRIBUTION MANAGEMENT

           MANAGEMENT  SERVICES  AGREEMENT.  Under the MSA, the Company performs
day-to-day operations and maintenance of the T&D System, including,  among other
functions,  transmission and distribution facility operations, customer service,
billing and collection, meter reading, planning,  engineering, and construction,
all in accordance  with  policies and  procedures  adopted by LIPA.  The Company
furnishes  such  services  as an  independent  contractor  and does not have any
ownership or leasehold interest in the T&D System.

     In exchange for providing these  services,  the Company is entitled to earn
an annual management fee of $10 million and may also earn certain incentives, or
be responsible for certain penalties, based upon its performance. The incentives
provide  for  the  Company  to  retain  100% of the  first  $5  million  of cost
reductions and 50% of any additional cost reductions up to 15% of the total cost
budget.  Thereafter  all savings  accrue to LIPA.  The total cost budget for the
twelve month period ended December 31, 1998 was  approximately  $385.2  million.
The Company  also is  required to absorb any total cost budget  overruns up to a
maximum of $15 million in each contract year.

           In addition to the foregoing cost-based incentives and penalties, the
Company is eligible for  incentives  for  performance  above  certain  threshold
target levels and subject to disincentives  for performance  below certain other
threshold  levels,  with an  intermediate  band of  performance in which neither
incentives nor disincentives will apply, for system reliability,  worker safety,
and customer satisfaction.

           The term of the MSA is eight  years and  requires  that LIPA  solicit
bids in the  sixth  year of the term  for a new  management  services  agreement
beginning after the eighth year. Generally,  the Company is eligible to submit a
bid for such new management services agreement.

OTHER OPERATING AGREEMENTS

           ENERGY  MANAGEMENT  AGREEMENT.  Pursuant to the EMA,  the Company (i)
procures and manages fuel supplies for LIPA to fuel the  Generating  Facilities,
(ii) performs  off-system capacity and energy purchases on a least-cost basis to
meet  LIPA's  needs,  and  (iii)  makes  off-system  sales  of  output  from the
Generating Facilities and other power supplies either owned or under contract to
LIPA.  LIPA  is  entitled  to  two-thirds  of the  profit  from  any  off-system

                                       14


<PAGE>

electricity sales arranged by the Company.  The term for the service provided in
(i) above is fifteen  years,  and the term for the service  provided in (ii) and
(iii) above is eight years.

           In exchange for these  services,  the Company  earns an annual fee of
$1.5  million,  plus an  allowance  for certain  costs  incurred  in  performing
services under the EMA. The EMA further  provides  incentives for control of the
cost of fuel and  electricity  purchased on behalf of LIPA by the Company.  Fuel
and  electricity  purchase prices will be compared to regional price indices and
the Company will receive a payment from LIPA,  or be obligated to make a payment
to LIPA, for fuel and/or purchased  electricity  costs which are below or above,
respectively,  specified  tolerance bands. The total fuel purchase  incentive or
disincentive  can be no greater  than $5 million  annually  and the  electricity
purchase  incentive or disincentive can be no greater than $2 million  annually.
For the period ended  December 31, 1998, the Company earned an aggregate of $3.4
million in incentives under the EMA as well as revenue from off-system sales.

           OTHER  RIGHTS.  Pursuant  to other  agreements  between  LIPA and the
Company,  certain  future  rights have been granted to LIPA.  Subject to certain
conditions, these rights include the right for 99 years to lease or purchase, at
fair market value,  parcels of land and to acquire  unlimited access to, as well
as  appropriate  easements  at, the  Generating  Facilities  for the  purpose of
constructing  new  electric  generating  facilities  to be  owned by LIPA or its
designee. Subject to this right granted to LIPA, the Company will have the right
to sell or lease  property on or adjoining  the  Generating  Facilities to third
parties.  In  addition,  LIPA has the right to acquire a parcel at the  Shoreham
Nuclear Power Station site suitable as the terminus for a potential transmission
cable under Long Island Sound or the potential site of a new gas-fired  combined
cycle generating facility.

     The Company owns the common plant (such as administrative  office buildings
and computer  systems)  formerly  owned by LILCO and recovers  LIPA's  allocable
share of the  carrying  costs of such plant  through  the  agreements  described
above.  The Company has agreed to provide  LIPA,  for a period of 99 years,  the
right to enter into leases at fair market value for common plant or sub-contract
for  common  services  which it may  assign to a  subsequent  manager of the T&D
System.  The Company has also agreed (i) for a period of 99 years not to compete
with LIPA as a provider of transmission or distribution  service on Long Island;
(ii) that LIPA will share in synergy (I.E.,  efficiency) savings over a ten-year
period attributed to the Combination (estimated to be approximately $1 billion),
which  savings are  incorporated  into the cost  structure  under the  Operating
Agreements; and (iii) not to commence any tax certiorari case (until termination
of the  PSA)  challenging  certain  property  tax  assessments  relating  to the
Generating Facilities.

           GUARANTEES  AND  INDEMNITIES.  The Company and LIPA also have entered
into   agreements   providing   for  the   guarantee  of  certain   obligations,
indemnification against certain liabilities and allocation of responsibility and
liability for certain  pre-existing  obligations  and  liabilities.  In general,
liabilities  associated  with the  Transferred  Assets have been  assumed by the
Company and  liabilities  associated with the Retained Assets are borne by LIPA,
subject to certain specified exceptions. The Company has assumed all liabilities
arising from all  manufactured  gas plant  ("MGP")  operations  of LILCO and its
predecessors and LIPA has assumed certain liabilities relating to the Generating
Facilities  and  all  liabilities  traceable  to  the  business  and  operations
conducted by LIPA after completion of the Combination.

           An agreement also provides for an allocation of liabilities  that are
not  traceable to either the business or  operations  to be conducted by LIPA or

                                       15

<PAGE>

the Company after completion of the Combination  which relate to the assets that
were common to the operations of LILCO and/or shared services.  LIPA bears 53.6%
of the costs associated therewith and the Company bears the remainder.

                          GAS EXPLORATION & PRODUCTION

           Through its 64% equity  interest in The Houston  Exploration  Company
("THEC"),  an independent natural gas and oil company, the Company is engaged in
the  exploration,  development and  acquisition of domestic  natural gas and oil
properties.  THEC's offshore  properties are located in the Gulf of Mexico,  and
its onshore properties are located in South Texas,  South Louisiana,  the Arkoma
Basin of Oklahoma and Arkansas, East Texas and West Virginia.

           THEC was organized by the Company in 1985 to conduct  natural gas and
oil  exploration  and  production  activities.  It completed  an initial  public
offering  in 1996 and its  shares  are  currently  traded on the New York  Stock
Exchange  under the  symbol  "THX."  At March 22,  1999,  its  aggregate  market
capitalization was approximately $451.0 million (based upon the closing price on
the New York Stock Exchange on that date of $18.875).

           Information  with  respect  to  net  proved   reserves,   production,
productive wells and acreage, undeveloped acreage, drilling activities,  present
activities and drilling  commitments is contained in "Note 14.  Supplemental Gas
and Oil  Disclosures"  of the  Notes to the  Consolidated  Financial  Statements
included herein.

           During  1998,  on a  Combined  Company  Basis,  gas  exploration  and
production  revenues were $127.1  million,  and gas  exploration  and production
operating income was $15.3 million, excluding an impairment charge on its proved
gas reserves.  Set forth below is certain  selected  information with respect to
THEC:

<TABLE>

THEC Operating Statistics
-------------------------
<CAPTION>

                                                          1998          1997          1996
                                                       -----------   -----------   -----------

<S>                                                      <C>           <C>           <C>    
Net Proved Reserves (Mmcfe)......................        480,347       337,063       327,260
Production of Natural Gas and Oil (MMcfe)........         62,829        51,336        31,923
Average Realized Price of Natural Gas ($/per Mcf)           2.02          2.25          2.00
Average Unhedged Price of Natural Gas ($/per Mcf)           1.96          2.45         2.35
Capital Expenditures ($000)......................        302,837       145,175       177,774
</TABLE>

           THEC  has  achieved   significant  growth  in  net  proved  reserves,
production  and revenues  over the past five years.  It has increased net proved
reserves at a compound  annual rate of 41% from 121 Bcfe at December 31, 1993 to
480 Bcfe at December 31, 1998. During this period,  annual production  increased
at a compound annual rate of 28% from 23 Bcfe in 1994 to 63 Bcfe in 1998. At the
close of 1998, daily  production  averaged 190 MMcfe per day. THEC's oil and gas
revenues have increased from $41.8 million in 1994 to $127.1 million in 1998.

           THEC  focuses  its  operations  offshore  in the Gulf of  Mexico  and
onshore in South Texas,  South Louisiana,  the Arkoma Basin, East Texas and West
Virginia.  The  geographic  focus  of its  operations  enables  it to  manage  a
comparatively  large asset base with  relatively  few  employees  and to add and
operate  production at relatively low incremental  costs.  THEC seeks to balance
its  offshore  and  onshore  activities  so that the lower risk and more  stable

                                       16

<PAGE>

production  typically  associated  with onshore  properties  complement the high
potential  exploratory  projects  in the Gulf of  Mexico by  balancing  risk and
reducing volatility. THEC's business strategy is to seek to continue to increase
reserves,  production and cash flow by pursuing internally  generated prospects,
primarily  in the Gulf of Mexico,  by  conducting  development  and  exploratory
drilling  on  its  offshore  and  onshore  properties  and by  making  selective
opportune acquisitions.

           OFFSHORE  PROPERTIES.  THEC  holds  interests  in  86  lease  blocks,
representing  439,896 gross (355,129 net) acres,  in federal and state waters in
the Gulf of Mexico,  of which 27 have current  operations.  THEC  operates 21 of
these blocks,  accounting for approximately  82% of THEC's offshore  production.
Over the past five years,  THEC has drilled 19 successful  exploratory wells and
14 successful development wells in the Gulf of Mexico, representing a historical
success rate of 65%. During 1998, THEC drilled two successful  exploratory wells
and one successful development well on its Gulf of Mexico properties. During the
same period,  THEC drilled five exploratory  wells and one development well that
were not successful.  THEC plans to drill  approximately  10 exploratory  wells,
along with limited development drilling, in the Gulf of Mexico in 1999.

           ONSHORE PROPERTIES.  THEC owns onshore natural gas and oil properties
representing  interests  in 1,179  gross (764 net) wells,  approximately  84% of
which THEC is the operator of record,  and 174,513  gross  (125,595  net) acres.
Over the past five years, THEC has drilled or participated in the drilling of 83
successful  development  wells  and  7  successful  exploratory  wells  onshore,
representing  a  historical  success rate of 78%.  During 1998,  THEC drilled or
participated  in  the  drilling  of 23  successful  development  wells  and  one
successful  exploratory well on its onshore properties.  During the same period,
THEC drilled or participated in the drilling of four development wells that were
not successful.
THEC plans to drill approximately 25 wells onshore in 1999.

           In November  1998,  the  Company  extended a $150  million  revolving
credit line to THEC (the "THEC Facility").  The THEC Facility matures January 1,
2000 and is convertible to equity if borrowings remain  outstanding at maturity.
The THEC Facility is  subordinated to THEC's bank credit facility and pari passu
to THEC's  senior  subordinated  notes.  As of December 31,  1998,  THEC had $80
million outstanding under the THEC Facility.

           On November  30,  1998,  THEC  acquired  from  Chevron  U.S.A.,  Inc.
offshore  producing  properties and facilities in the Mustang Island area of the
Gulf of Mexico.  The newly  acquired  properties are comprised of three adjacent
blocks,  with nine producing wells and three platforms.  The acquired properties
neighbor 19 undeveloped lease blocks and five producing blocks held by THEC. The
net purchase  price of $84.9 million was paid in cash and financed by borrowings
under the THEC Facility. THEC plans both exploratory and development drilling in
1999 on those properties.

           On  March  15  1999,  the  Company  and  THEC  entered  into a  joint
exploration  agreement (the "THEC Joint Venture") to explore for natural gas and
oil over a term of three  years  expiring  December  31,  2001.  The THEC  Joint
Venture may be  terminated  at the option of either  party at the end of a given
year.  Under  the  terms of this  agreement,  THEC  will  contribute  all of its
currently  undeveloped offshore leases to the THEC Joint Venture and the Company
will acquire 45% of THEC's working interest in all prospects to be drilled under
the THEC Joint  Venture and will commit up to $100 million per calendar  year to
explore and develop these leases.  THEC will retain a 55% interest in the leases
and will commit its proportionate share of the funds per calendar year necessary
for such year's exploration and development drilling program. Revenues generated

                                       17

<PAGE>

from this joint program will be shared between the Company and THEC according to
the respective  working interest  ownership of each entity.  THEC plans to drill
approximately 8-10 offshore  exploratory wells under the terms of the THEC Joint
Venture during 1999.

           The  Company   intends  to  continue  to  grow  its  exploration  and
production  investments in the Gulf region.  KeySpan  anticipates that THEC will
have capital expenditures of approximately $82 million in 1999. In addition, the
Company anticipates that it will invest  approximately $45 million  additionally
in exploration  and production  activities in 1999. Such amounts are expected to
consist primarily of contributions to the THEC Joint Venture.

                           ENERGY-RELATED INVESTMENTS

OVERVIEW

           The Company has investments in energy-related  businesses,  including
natural gas pipelines, midstream natural gas processing and gathering facilities
and gas storage  facilities in the Northeast  region of the United States and in
Canada and the United Kingdom.

           During 1998, on a Combined  Company  Basis,  net after-tax  loss from
energy-related   investments  was  $6.1  million,   and  the  Company's  capital
expenditures  in  energy-related  investments  were  $239.8  million,  which was
significantly higher than past years primarily due to the Company's $189 million
investment in certain midstream natural gas assets, as discussed below.

           The Company  owns an  approximately  20%  interest  in  Iroquois  Gas
Transmission  System L.P.  ("Iroquois"),  the  partnership  that owns a 374-mile
pipeline  which  currently  transports  892 MDTH of Canadian gas supply daily to
markets in the  Northeastern  United  States.  The  Company is also a shipper on
Iroquois and currently transports up to 135 MDTH of gas per day on the pipeline.

           The Company owns a 24.5% interest in Phoenix  Natural Gas ("Phoenix")
in Belfast,  Northern  Ireland and, in December 1998,  increased its interest in
The Premier Transco  Pipeline  ("Premier") from 24.5% to 50%. Phoenix is a newly
established gas distribution system serving the City of Belfast, which is in its
early  stages of  development  pursuant  to an  eight-year  program  of  capital
development  and line  extensions.  Premier is an 84-mile  pipeline  to Northern
Ireland from southwest Scotland that currently transports approximately 300 MDTH
of gas supply daily to markets in Northern Ireland.

           The Company has equity  investments in two gas storage  facilities in
the State of New York.

           In August 1998,  the Company  acquired a 25% interest in a venture to
develop the Cross Bay pipeline.  Upon  completion,  Cross Bay will transport gas
from  interstate  pipelines  in New  Jersey  to New York  City and Long  Island,
including supplying customers served by the Company. The new system is scheduled
to begin operating in November 2000.

           In  December  1998,  the Company  acquired a 50%  interest in certain
midstream  natural gas assets  owned by Gulf  Canada  Resources  Limited  ("Gulf
Canada") located in Western Canada. The purchased assets include interests in 14
processing   plants  and   associated   gathering   systems  which  can  process

                                       18

<PAGE>

approximately 1.4 Bcfe of natural gas daily, and associated  natural gas liquids
fractionation,  storage and  transportation  facilities.  The Company  paid Gulf
Canada $189 million for the equity  interest and agreed to provide a three-year,
$65 million loan to Gulf Canada.

           The Company's  business  strategy with respect to its  energy-related
investments is to acquire and maintain  interests in natural gas and natural gas
liquid gathering, processing,  transmission and storage facilities near areas of
rapid reserve  development or growing consumer  markets.  It is anticipated that
approximately $85 million will be invested in energy-related businesses in 1999,
a level of investment that could rise significantly in future years based on the
numerous potential domestic and international projects currently being pursued.

                             ENERGY-RELATED SERVICES

OVERVIEW

           The  Company  has  formed  non-regulated  subsidiaries  to market and
manage  natural  gas,  electricity,   and  consumer  products  and  services  to
residential,  commercial and industrial  customers,  including  those within the
Company's  traditional service  territories.  These  non-regulated  subsidiaries
which are currently in the start-up phase,  had revenues of $88.4 million and an
operating  loss of $10.2  million in 1998,  on a  Combined  Company  Basis.  The
Company  expects  to  invest   approximately   $57  million  in  1999  in  these
non-regulated subsidiaries.

           ENERGY  MARKETING.  The  Company  buys,  sells  and  markets  gas and
electricity and arranges for  transportation and related services to over 30,000
customers throughout the northeastern United States,  including those in the gas
service  territories of the Company.  In 1998,  the Company  established a joint
venture with Enron to market gas supply management  services to gas distribution
companies throughout the Northeastern United States.

           ENERGY  MANAGEMENT.  The Company owns, designs and/or operates energy
systems for  commercial  and  industrial  customers and provides  energy-related
services to clients in the New York City metropolitan  area.  Revenues have been
enhanced through the continued integration of an engineering firm.

           APPLIANCE  SERVICES.  The  Company  provides  various  technical  and
maintenance  services to  customers  throughout  the New York City  metropolitan
area,  including  maintaining and repairing  heating  equipment,  water heaters,
central  air  conditioners  and  other  appliances.  With over  100,000  service
contracts, the Company is the largest provider of these services in the State of
New York. In November 1998, the Company purchased Philip Fritze and Sons, one of
the largest heating,  ventilation and air conditioning  contractors in the State
of New Jersey.

           The Company's  energy-related  services  businesses  compete with the
marketing  and  management  operations  of both  independent  and  major  energy
companies in addition to electric utilities,  independent power producers, local
distribution companies and various energy brokers. As a result of the continuing
efforts to deregulate both the natural gas and electric industries, the relative
energy  cost  differences  among  different  forms of energy are  expected to be
reduced in the future.  Competition is based largely upon pricing,  availability
and  reliability  of supply,  technical  and  financial  capabilities,  regional
presence and experience.  The Company's energy-related services subsidiaries are
expected to enable the Company to take advantage of emerging  deregulated energy
markets for both gas and  electricity and the Company  anticipates  that it will

                                       19


<PAGE>

continue to target other  acquisitions  which also provide it with opportunities
to expand  those  services  both  within and  outside  its  traditional  service
territories.

REGULATION AND RATE MATTERS

                                    OVERVIEW

           Gas and electric public utility companies, and corporations which own
gas  and  electric  public  utility  companies  (I.E.,  public  utility  holding
companies)  may be subject to either or both state and  federal  regulation.  In
general,  state  public  service  commissions,  such as the NYPSC,  regulate the
provision of retail services, including the distribution and sale of natural gas
and electricity to consumers.  The Federal Energy Regulatory Commission ("FERC")
regulates interstate natural gas transportation and electric  transmission,  and
has jurisdiction over certain wholesale natural gas sales and wholesale electric
sales.  Public utility holding  companies,  especially  those with operations in
several  states,  are  regulated  by the SEC under the  Public  Utility  Holding
Company Act of 1935 ("PUHCA") and, to some extent, by state commissions, through
the  regulation  of  corporate,  financial  and  affiliate  activities of public
utilities.

           PUBLIC UTILITY HOLDING COMPANY REGULATION. KeySpan Energy is a public
utility holding company,  although it is exempt from most regulation under PUHCA
because  of  the  predominately  intrastate  character  of  its  public  utility
subsidiaries.  The only  provision  of PUHCA  from which  KeySpan  Energy is not
exempt is the  requirement  that any person must obtain advance SEC approval for
the acquisition of 5% or more of voting  securities issued by any public utility
company or public  utility  holding  company.  KeySpan Energy is also subject to
indirect  regulation  by the NYPSC in the form of  conditions  attached to NYPSC
orders  authorizing  the formation of the Company,  among other  matters.  Those
conditions  address the manner in which KeySpan  Energy  interacts  with its two
NYPSC-regulated  natural  gas  distribution  subsidiaries,  Brooklyn  Union  and
Brooklyn Union of Long Island.

                                NYPSC REGULATION

           NATURAL GAS UTILITIES. The NYPSC is the principal agency in the State
of New York which regulates, as "gas corporations,"  companies that own, operate
or manage pipelines and other facilities used to distribute or sell natural gas.
The NYPSC regulates the construction,  use and maintenance of intrastate natural
gas facilities, the retail rates, terms and conditions of service offered by gas
corporations, as well as matters relating to the quality, reliability and safety
of service.  The NYPSC also  regulates  the  corporate,  financial and affiliate
activities of gas  corporations.  Both Brooklyn Union and Brooklyn Union of Long
Island are gas corporations subject to the full scope of NYPSC regulation.

           Beginning in the mid-1980's, the NYPSC has taken a number of steps to
require  the  "unbundling"  of  natural  gas sales and other  services  from the
distribution of natural gas through pipelines, in order to encourage competition
among gas sellers and energy service  providers.  In 1985, the NYPSC ordered the
major gas  utilities  in the  state to offer  transportation  service  for large
volume  customers  who choose to  purchase  natural  gas from  other  suppliers.
Subsequently,  the NYPSC required that transportation  service be made available
to all  customers  beginning on May 1, 1996.  Brooklyn  Union of Long Island has
been providing a transportation  service option to all its customers since April
1996.  Brooklyn  Union has been  providing  a  transportation  option to all its
customers since May 1996.

                                       20

<PAGE>

           In April 1997,  the NYPSC  ordered gas  utilities to cease  providing
non-safety  related  appliance  repair  service  by no later  than May 1,  2000.
Brooklyn Union stopped providing these services in April 1998; Brooklyn Union of
Long Island will cease providing non-emergency appliance repair services on July
1, 1999.  Utility  affiliates can provide this service,  and the Company does so
through a subsidiary.

           In  November  1998,   the  NYPSC  issued  a  policy   statement  that
anticipated  that  natural gas  utilities  would cease sales of gas,  and become
transportation-only  providers, within three to seven years. Marketers which are
affiliated  with the natural gas  utilities  are permitted to compete for retail
natural  gas sales.  The  NYPSC's  policy  statement  envisions  proceedings  to
restructure  the  operations of natural gas utilities in order to facilitate the
achievement of the objectives  articulated in the policy statement.  The Company
is evaluating the policy statement and anticipates  making specific proposals to
the NYPSC in 1999.

           Brooklyn  Union  of  Long  Island  is  currently  operating  under  a
three-year  rate plan.  The rate plan  applies to the  period  December  1, 1997
through  November 30, 2000.  Under the plan, if Brooklyn  Union of Long Island's
earnings exceed 11.10%, it must credit back to certain customers 60% of earnings
up to 100 basis  points  above the 11.10% and 50% of any earnings in excess of a
12.10% return.  Both a customer  service and a safety and reliability  incentive
performance  program became  effective on December 1, 1997, with maximum pre-tax
return on equity penalties of 40 and 12 basis points, respectively,  if Brooklyn
Union of Long Island  fails to achieve  certain  performance  standards in these
areas.

           Brooklyn Union is currently  operating  under a multi-year  rate plan
that ends on September 30, 2002.  Brooklyn  Union,  like Brooklyn  Union of Long
Island,  is subject to an  earnings  sharing  provision,  under which it will be
required to credit to certain  customers  60% of any utility  earnings up to 100
basis points  above  specified  equity  return  levels  (other than any earnings
associated with discrete  incentives) and 50% of any utility  earnings in excess
of 100 basis points above such threshold levels. The threshold levels are 13.75%
for fiscal year 1998,  13.50% for fiscal years 1999,  2000 and 2001;  and 13.25%
for fiscal year 2002. A safety and reliability  incentive  mechanism  provides a
maximum 12 basis point pre-tax penalty return on common equity if Brooklyn Union
fails to achieve certain safety and  reliability  performance  standards,  and a
customer  service  incentive  performance  program with a maximum 40 basis point
pre-tax penalty return on equity.  With the exception of the  simplification  of
the customer  service  performance  standards and the imposition of the earnings
sharing  provisions,  the Brooklyn Union rate plan approved by the NYPSC in 1996
remains unchanged.

           As  part  of  the  settlement  agreement  approved  by the  NYPSC  in
connection with its approval of the Combination  (the  "Stipulation"),  Brooklyn
Union and  Brooklyn  Union of Long  Island  are  subject  to  certain  affiliate
transaction restrictions, cost allocation and financial integrity conditions and
a code of conduct  governing  affiliate  relationships.  These  restrictions and
conditions  eliminate  or  relax  many  restrictions  previously  applicable  to
Brooklyn  Union in such  areas as  affiliate  transactions,  use of the name and
reputation of Brooklyn Union by unregulated  affiliates,  common officers of the
Company, the utility subsidiaries and unregulated subsidiaries, dividend payment
restrictions, and the composition of the Board of Directors of Brooklyn Union.

           The Stipulation provides that, in order to achieve forecasted synergy
savings resulting from the Combination, one or more shared services subsidiaries
of the  Company  may be formed to  provide  to both  regulated  and  unregulated
operating subsidiaries, functions common to both utilities and their affiliates,
such as accounting,  finance, human resources, legal and information systems and
technology.

                                       21
<PAGE>

           ELECTRIC  UTILITIES.  KeySpan Generation LLC ("KeySpan  Generation"),
KeySpan's  electric  generation  subsidiary,   is  not  subject  to  NYPSC  rate
regulation  because its sales of electricity are made  exclusively at wholesale;
however,  KeySpan  Generation  is subject to NYPSC  financial,  reliability  and
safety regulation.  As a wholesale  generator,  KeySpan Generation qualifies for
"lightened" regulatory treatment,  I.E. certain financial regulations are waived
or  applied  with  less  scrutiny  than  would be the  case for  fully-regulated
electric utilities.

                               FEDERAL REGULATION

           NATURAL GAS COMPANIES.  The FERC has jurisdiction to regulate certain
natural  gas sales for resale in  interstate  commerce,  the  transportation  of
natural gas in interstate commerce, and, unless an exemption applies,  companies
engaged in such activities.  The natural gas distribution activities of Brooklyn
Union and  Brooklyn  Union of Long Island and  certain  related  intrastate  gas
transportation  functions are not subject to FERC jurisdiction.  However, to the
extent that Brooklyn Union and Brooklyn Union of Long Island sell gas for resale
in interstate  commerce,  such sales are subject to FERC  jurisdiction  and have
been authorized by the FERC.

           The Company also owns an approximately  20% interest in Iroquois,  an
interstate  natural gas  pipeline  extending  from the  Canadian  border to Long
Island,  and 52% and 18.6% of the Honeoye  and  Steuben gas storage  facilities,
respectively.  Iroquois,  Honeoye and Steuben are fully regulated by the FERC as
natural gas companies.

           ELECTRIC  UTILITIES.  The FERC  regulates the sale of  electricity at
wholesale and the transmission of electricity in interstate commerce, as well as
certain corporate and financial activities of companies that are engaged in such
activities.

     KeySpan  Generation  is  subject to FERC  regulation  based on its sales of
electricity  at  wholesale  to LIPA under the PSA.  On  October 1, 1997,  a rate
application  was filed with the FERC which proposed rates that were designed for
KeySpan  Generation to recover $327.6 million from LIPA for the first year of an
approximately five-year rate plan with various adjustments, and to set the rates
for the  remainder of the  multi-year  rate period.  In December  1997,  KeySpan
Generation  and LIPA agreed  jointly to propose to FERC rates that would recover
$301.8 million in the first year of the multi-year  rate period and  adjustments
to set rates for the remaining years. LIPA, KeySpan Generation, and the Staff of
FERC  eventually  stipulated to setting rates designed to recover $300.5 million
in the first year with agreed-upon adjustments to set rates for the remainder of
the multi-year  rate period.  The only party opposed to this  stipulation is the
County of Suffolk. Parties submitted initial briefs to a FERC Administrative Law
Judge  ("ALJ") on December 8, 1998 and reply  briefs on January  15,  1999.  The
Company has not yet  received  the  decision  of the ALJ or a final  decision of
FERC.  Until such final decision,  rates are in effect subject to adjustment and
refund.  The FERC retains the ability in future  proceedings,  either on its own
motion or upon a complaint  filed with the FERC, to modify KeySpan  Generation's
rates,  either  upward or downward,  if the FERC finds that the public  interest
requires it to do so.

                                       22
<PAGE>

                          REGULATION IN OTHER COUNTRIES

           The  Company's  operations  in Northern  Ireland,  conducted  through
Premier and Phoenix, are subject to licensing by the Northern Ireland Department
of Economic  Development  and  regulation  by the U.K.  Department  of Trade and
Industry  (with  respect to the  subsea  and  on-land  portions  of the  Premier
pipeline) and the Northern Ireland Director  General,  Office for the Regulation
of  Electricity  and Gas (with  respect to the Northern  Ireland  portion of the
Premier pipeline and Phoenix's  operations  generally).  The licenses  establish
mechanisms for the establishment of rates for the conveyance and  transportation
of natural gas, and generally  may not be revoked  except upon long term notice.
Charges  for the  supply of gas by  Phoenix  are  largely  unregulated  unless a
determination is made of an absence of competition.

           The Company's  midstream natural gas processing  facilities in Canada
are subject to regulation by Canadian  provincial  authorities.  Such regulatory
authorities license the operations of the facilities and regulate safety matters
and certain changes in such facilities' operations.

ENVIRONMENTAL MATTERS

                                    OVERVIEW

           The  Company's  ordinary  business  operations  subject it to various
federal,   state  and  local  laws,  rules  and  regulations  dealing  with  the
environment,  including  air,  water,  and  hazardous  waste,  and its  business
operations  are  regulated  by  various  federal,   regional,  state  and  local
authorities,  including the United States  Environmental  Protection Agency (the
"EPA") and the New York State Department of Environmental  Conservation ("DEC").
These requirements govern both the normal, ongoing operations of the Company and
the  remediation  of  contaminated   properties  historically  used  in  utility
operations.  Potential  liabilities  associated  with the  Company's  historical
operations may be imposed  without regard to fault,  even if the activities were
lawful at the time they occurred.

           Ensuring  continuing  compliance with environmental  requirements may
require  significant  expenditures for capital  improvements or modifications in
some areas.  Total  capital  expenditures  for  environmental  improvements  and
related  studies  amounted  to  approximately  $1.6  million  for the year ended
December  31,  1998,  and are  expected  to be $2.3  million for the year ending
December 31, 1999.

           Except  as set forth  below,  no  material  proceedings  relating  to
environmental  matters have been  commenced or, to the knowledge of the Company,
are contemplated by any federal,  state or local agency against the Company, and
the Company is not a defendant  in any material  litigation  with respect to any
matter relating to the protection of the environment.  The Company believes that
its operations are in substantial  compliance with  environmental  laws and that
requirements  imposed  by  environmental  laws are not likely to have a material
adverse  impact upon the Company.  The Company  believes that all material costs
incurred with respect to environmental requirements will be recoverable from its
customers.  The  Company is  pursuing  claims  against  insurance  carriers  and
potentially  responsible  parties  which  seek the  recovery  of  certain  costs
associated with the investigation and remediation of contaminated properties.

           AIR.  Federal,  state and local laws currently  regulate a variety of
air emissions from new and existing electric  generating plants,  including SO2,
NOx,  opacity and  particulate  matter and,  in the  future,  may also  regulate
emissions of fine  particulate  matter,  hazardous  air  pollutants,  and carbon

                                       23
<PAGE>

dioxide. The Company has submitted timely applications for permits in accordance
with the requirements of Title V of the 1990 amendments to the Federal Clean Air
Act ("CAA").  Final permits have been issued for all of the  Company's  electric
generating facilities with the exception of the Far Rockaway facility,  which is
pending.  The permits allow the Company's electric generating plants to continue
to operate without any additional significant expenditures,  except as described
below.

           The Company's  generating  facilities are located within a CAA severe
ozone  non-attainment  area,  and are  subject  to the Phase I, II,  and III NOx
reduction  requirements  established under the Ozone  Transportation  Commission
("OTC")  memorandum  of  understanding.  The  Company's  investments  in  boiler
combustion modifications and the use of natural gas firing at its steam electric
generating  stations  has  enabled  the  Company  to  achieve  the NOx  emission
reductions  required  under  Phase  I and  II  in a  cost-effective  manner.  In
addition,  software  and  equipment  upgrades  of  approximately  $1 million for
continuous  emissions  monitors ("CEM") may be required in 1999-2000 to meet EPA
requirements  for the NOx allowance  tracking/trading  program and certain other
regulatory changes affecting the operation of CEM systems. The Company currently
estimates  that it may be required to spend  between $10 million and $35 million
by the year 2003 for additional  pollution  control equipment to achieve the OTC
Phase III NOx reduction  requirements and/or new requirements  imposed under the
EPA NOx state implementation plan, depending on the actual level of NOx emission
reductions  which are required when pending  regulations  are implemented by the
State of New York.

           WATER. The Company  possesses  permits for its generating units which
authorize  discharges  from  cooling  water  circulating  systems  and  chemical
treatment  systems.  Several of these permits are being renewed;  one or more of
the new permits are expected to require  biological  monitoring  to determine if
the  cooling  water  intake  structures  meet  the  best  available   technology
requirements of the Federal Clean Water Act ("CWA") for the protection of marine
life.

           On behalf of LIPA,  the Company  provides  management  and operations
support for the LIPA-Connecticut  Light and Power Company electric  transmission
cable  system  located  under the Long  Island  Sound (the "Sound  Cable").  The
Connecticut   Department  of  Environmental   Protection  ("DEP")  and  the  DEC
separately have issued Administrative Consent Orders ("ACOs") in connection with
releases  of  insulating  fluid  from the  Sound  Cable.  The ACOs  require  the
submission of a series of reports and studies describing cable system condition,
operation  and  repair  practices,   alternatives  for  cable   improvements  or
replacement, and environmental impacts associated with prior leaks of fluid into
the  Long  Island  Sound.  Compliance  activities  associated  with the ACOs are
ongoing.

                      REMEDIATION OF CONTAMINATED PROPERTY

           SUPERFUND  SITES.  Federal and New York State  Superfund  laws impose
liability,  regardless of fault,  upon  generators of hazardous  substances  for
costs associated with remediating  contaminated  property.  In the course of its
business operations,  the Company generates materials which are subject to these
laws.  From time to time,  the Company  has  received  notices  under these laws
concerning  possible claims with respect to sites at which hazardous  substances
generated  by the Company and other  potentially  responsible  parties  ("PRPs")
allegedly were disposed.

                                       24
<PAGE>


           The DEC has  notified the  Company,  pursuant to the State  Superfund
program,  that the  Company may be  responsible  for the  disposal of  hazardous
substances at the Huntington/East Northport Site, a municipal landfill property.
The DEC investigation is in its preliminary stages, and the Company currently is
unable to estimate its share,  if any, of the costs required to investigate  and
remediate this site.

           MANUFACTURED   GAS  PLANT  SITES.  The  Company  or  its  predecessor
entities,  including  Brooklyn Union and LILCO,  historically  owned or operated
several  former MGP sites.  Operations  at these  plants in the late  1800's and
early  1900's may have  resulted in the release of hazardous  substances.  These
former sites have been identified to the DEC for inclusion on appropriate  waste
site inventories.  In certain  circumstances,  former MGP sites can give rise to
environmental cleanup responsibilities for the Company.

           The  Company  has  several   former  MGP  sites  that  will   require
investigation and/or remediation.  In 1995, the Company executed an ACO with the
DEC which addressed the  investigation  and remediation of the Brooklyn  Borough
Works site in Coney Island,  Brooklyn.  In 1998, the Company executed an ACO for
the investigation and remediation of the Clifton MGP site in Staten Island. Both
of these properties are owned by the Company.  The City of New York has notified
the Company that a property  now owned by the City which was formerly  owned and
operated  by a  Brooklyn  Union  predecessor,  the  Citizen's  Site,  should  be
investigated.  The  Company  has  submitted  an  investigation  study  plan  and
requested  cost sharing for this property with the City. The Company is awaiting
the City's response.  Finally, the DEC notified the Company in 1998 that two MGP
sites  previously  owned by LILCO would  require  remediation  under the State's
Superfund  program;  pending  discussions  with DEC on those and four additional
former LILCO sites are expected to result in the issuance of additional  ACOs in
the near future.

           The final end uses for these sites and acceptable  remediation  goals
have not been determined in the ACOs. In addition, investigation may be required
at other former MGP sites before  determinations  can be made regarding the need
for or scope of potential remediation at these locations.  Based upon activities
conducted to date,  the Company  estimates  the minimum cost of its  MGP-related
environmental cleanup activities will be approximately $130 million; that amount
has been  accrued  by the  Company  as an  environmental  liability.  The actual
MGP-related  costs  may be  substantially  higher,  depending  upon  remediation
experience,  selected end use for each site, and actual environmental conditions
encountered.

           The  NYPSC-approved  rate plans for Brooklyn Union and Brooklyn Union
of Long Island  provide for the recovery of such costs.  The Brooklyn Union rate
plan provides,  among other things,  that if the total cost of investigation and
remediation  varies from that which is  specifically  estimated for a site under
investigation  and/or remediation,  then Brooklyn Union will retain or absorb up
to 10% of the  variation.  Under prior rate orders,  Brooklyn  Union has already
recovered costs  associated  with certain MGP sites.  The Brooklyn Union of Long
Island  rate plan  provides  for the  complete  recovery  of  investigation  and
remediation  costs.  At December 31, 1998, the Company has reflected a remaining
regulatory  asset of $100  million  of which  $18  million  is  associated  with
Brooklyn  Union sites and $82 million is associated  with Brooklyn Union of Long
Island sites. Expenditures incurred to date by Brooklyn Union and Brooklyn Union
of Long Island with respect to MGP-related  activities total $8.7 million and $5
million, respectively.

                                       25
<PAGE>


           Periodic discussions by the Company with insurance carriers and third
parties  for  reimbursement  of  some  portion  of MGP  site  investigation  and
remediation  costs  continue.  In December 1996,  LILCO filed a complaint in the
United  States  District  Court for the  Southern  District of New York  against
fourteen  insurance  companies  that  issued  general  comprehensive   liability
policies to LILCO. In January 1998, LILCO commenced a similar action against the
same and additional insurance companies in New York State Supreme Court, and the
federal court action subsequently was dismissed.  The outcome of this proceeding
cannot yet be determined.  In addition,  Brooklyn  Union is in discussions  with
insurance carriers regarding the possible  resolution of coverage claims related
to MGP site investigation and remediation activities.

EMPLOYEE MATTERS

           On December 31, 1998, the Company had  approximately  7,950 full-time
employees.  Of that total,  approximately  5,113  employees  are  covered  under
collective bargaining  agreements;  1,603 employees belong to Local 101, Utility
Division,  of the Transport  Workers Union of America,  175 employees  belong to
Local 3 of the  International  Brotherhood  of Electrical  Workers (the "IBEW"),
2,119 employees  belong to Local 1049 of the IBEW and 1,216 employees  belong to
Local 1381 of the IBEW.

           The Company maintains collective  bargaining agreements covering each
of the four collective  bargaining  units detailed above, all of which expire in
2001.  The Company has not  experienced  any work stoppage  during the past five
years and considers its relationship with employees,  including those covered by
collective bargaining agreements, to be good.

EXECUTIVE OFFICERS OF THE COMPANY

           Certain information  regarding the Company's Executive Officers,  all
of whom serve at the will of the Board of Directors, is set forth below:

ROBERT B. CATELL
Mr. Catell, age 61, has been a Director of the Company since its creation in May
1998 and served as its President and Chief Operating  Officer from May 1998-July
1998. He was elected  Chairman of the Board and Chief Executive  Officer in July
1998. Mr. Catell joined Brooklyn Union in 1958 and became an officer in 1974. He
was elected Vice President in 1977,  Senior Vice President in 1981 and Executive
Vice  President  in 1984.  He was elected  Chief  Operating  Officer in 1986 and
President in 1990.  Mr. Catell served as President and Chief  Executive  Officer
from 1991 to 1996, when he was elected Chairman and Chief Executive Officer.  In
1997, Mr. Catell was elected Chairman,  President and Chief Executive Officer of
KSE.

ANTHONY J. DIBRITA
Mr.  DiBrita,  age 58, has been Senior Vice  President of Gas Operations for the
Company since its creation in May 1998. He joined Brooklyn Union in 1962. Since,
then he has held various  engineering  positions.  In 1989,  he was elected Vice
President in charge of Brooklyn Union's Gas Distribution,  Materials Management,
and Research and Development Operations.  From 1991 to 1992, he oversaw the Rate
Recovery, Budgeting and Forecasting, and Financial and Strategic Planning areas.
Mr.  DiBrita  was  promoted  to  Senior  Vice  President  of  Brooklyn   Union's
Engineering and Customer Field Services in 1994.

                                       26
<PAGE>


LAWRENCE S. DRYER
Mr. Dryer,  age 39, was elected Vice President of Internal Audit for the Company
in September  1998. Mr. Dryer joined LILCO in 1992 as Director of Internal Audit
and  has   been   responsible   for   providing   independent   appraisals   and
recommendations  to  improve  management   controls  and  increase   operational
efficiency.

ROBERT J. FANI
Mr. Fani,  age 45, has been Senior Vice President of Gas Marketing and Sales for
the Company since its creation in May 1998.  Mr. Fani joined  Brooklyn  Union in
1976, and held a variety of management  positions in distribution,  engineering,
planning,  marketing, and business development. He was elected Vice President in
1992. In 1997,  Mr. Fani was promoted to Senior Vice  President of Marketing and
Sales for Brooklyn Union.

WILLIAM K. FERAUDO
Mr.  Feraudo,  age 48, has been Senior Vice  President of the Company  since its
creation in May 1998.  He oversees  the KeySpan  Energy  Marketing  Group and is
responsible for the Company's four unregulated domestic  subsidiaries  providing
energy-related  services. Mr. Feraudo began his career at Brooklyn Union in 1971
and rose through a succession of positions in Information Systems,  Engineering,
Customer  Operations,  Sales,  Marketing,  and Product  Development before being
named Senior Vice President of Brooklyn Union in 1994.

RONALD S. JENDRAS
Mr. Jendras,  age 50, was named Vice President,  Controller and Chief Accounting
Officer of the Company in August 1998. He joined Brooklyn Union in 1969 and held
a variety of positions in the  Accounting  Department  before being named budget
director  in 1973.  In 1983,  Mr.  Jendras  was  promoted to manager of Brooklyn
Union's Rate and Regulatory Affairs area and, in 1997, was named general manager
of the Accounting Division.

FREDERICK M. LOWTHER
Mr. Lowther, age 55, was elected to the position of General Counsel in September
1998.  He is also a partner in the law firm  Dickstein  Shapiro Morin & Oshinsky
LLP,  Washington D.C., with which he has been associated since 1973. Mr. Lowther
has  devoted  his career  principally  to the  development  of large  energy and
natural  resource  projects in the United  States and  abroad.  He has served as
project  counsel for a number of important U.S. energy  projects,  including the
Iroquois Gas Transmission System.

CRAIG G. MATTHEWS
Mr.  Matthews,  age 55, has been  President and Chief  Operating  Officer of the
Company  since January  1999.  He has also been Chief  Financial  Officer of the
Company  since May 1998.  He served as Executive  Vice  President of the Company
from May 1998 to January 1999. Mr.  Matthews  joined  Brooklyn Union in 1965 and
held  various  management  positions  in  the  corporate  planning,   financial,
marketing,  and  engineering  areas.  He has been an officer  since 1977. He was
elected Vice  President in 1981 and Senior Vice  President in 1985. In 1991, Mr.
Matthews was named Executive Vice President with  responsibilities  for Brooklyn
Union's  financial,  gas supply,  information  systems,  and strategic  planning
functions, as well as Brooklyn Union's energy-related  investments. In 1996, Mr.
Matthews  was  promoted to  President  and Chief  Operating  Officer of Brooklyn
Union.

                                       27
<PAGE>


ANTHONY NOZZOLILLO
Mr.  Nozzolillo,  age 50, became Senior Vice President of the Company's Electric
Business Unit in January 1999. He previously  served as Senior Vice President of
Finance  since the  Company's  creation in May 1998. He joined LILCO in 1972 and
held various  positions,  including Manager of Financial Planning and Manager of
Systems  Planning.  Mr. Nozzolillo served as LILCO's Treasurer from 1992 to 1994
and as Senior Vice President of Finance and Chief Financial Officer from 1994 to
1998.

WALLACE P. PARKER, JR.
Mr. Parker,  age 49, has served as the Company's  Senior Vice President of Human
Resources  since August 1998. He joined  Brooklyn  Union in 1971 and served in a
wide  variety  of  management  positions.  In 1987 he was named  Assistant  Vice
President for marketing and  advertising and was elected Vice President in 1990.
In 1994 Mr. Parker was promoted to Senior Vice President of Human Resources.

DAVID L. PHILLIPS
Mr.  Phillips,  age 42, has served as the  Company's  Senior Vice  President  of
Strategic  Planning & Corporate  Development since the Company's creation in May
1998.  Previously,  he held the same  position with  Brooklyn  Union.  He joined
Brooklyn  Union in 1996 and was a  consultant  to the merger  process.  Prior to
joining  Brooklyn Union, Mr. Phillips had been a consultant to both the Bush and
Clinton Administrations.  From the mid 1980s through late 1991, Mr. Phillips was
Vice President and General  Counsel to the  Houston-based  Eastex Energy Inc., a
diversified  energy  company.  From  1991  to  1995,  he was an  executive  with
Equitable   Resources,   Inc.,  a  diversified   utility  company  operating  in
Pittsburgh, Pennsylvania. Hired as General Counsel, he was promoted to president
of its  unregulated  companies,  and in 1994,  became a member of its  Executive
Committee.

LENORE F. PULEO
Ms. Puleo, age 45, has served as the Company's Senior Vice President of Customer
Relations  since its creation in May 1998. She joined Brooklyn Union in 1974 and
worked  in  management  positions  in  Brooklyn  Union's  Accounting,  Treasury,
Corporate Planning,  and Human Resources areas. She was given responsibility for
the Human  Resources  Department in 1987 and was named a Vice President in 1990.
Ms.  Puleo was promoted to Senior Vice  President of Customer  Relations in 1995
for Brooklyn Union.

CHERYL SMITH
Ms. Smith,  age 47, joined the Company in November 1998 as Senior Vice President
and Chief Information Officer. She comes to the Company from Bell Atlantic where
she most recently  served as Vice  President of Strategic  Billing and Corporate
Systems. Prior to Bell Atlantic, she worked at Honeywell Federal Systems Inc. as
the  Director of MIS.  Ms.  Smith  brings to the  Company  more than 25 years of
information systems technology experience.

MICHAEL J. TAUNTON
Mr. Taunton, age 43, has been the Company's Vice President of Investor Relations
since September 1998. He joined Brooklyn Union in 1975 and has worked in various
management  positions  in Marketing  and Sales,  Corporate  Planning,  Corporate
Finance and  Accounting.  Most recently he co-managed the day-to-day  transition
process of the  Combination on behalf of Brooklyn Union and LILCO.  Before that,
Mr. Taunton was general manager of the Business Process Improvement for Brooklyn
Union.

                                       28
<PAGE>


ROBERT R. WIECZOREK
Mr.  Wieczorek,  age 56, has been the Company's  Vice  President,  Secretary and
Treasurer since August 1998. Mr.  Wieczorek joined Brooklyn Union as the General
Auditor in 1976 and held a variety of  financial-related  positions.  In 1981 he
was named Treasurer and, subsequently,  Vice President,  Secretary and Treasurer
responsible for all cash management  activities and for overseeing  pension fund
investments and retirement administration, pension manager evaluation, long-term
debt and equity financing, investor relations, and shareholder records.

STEVEN L. ZELKOWITZ
Mr.  Zelkowitz,  age 49, joined the Company as Senior Vice  President and Deputy
General  Counsel in October  1998.  Before  joining the Company,  Mr.  Zelkowitz
practiced  law with  Cullen  and  Dykman  in  Brooklyn,  New York and had been a
partner since 1984. He served on the firm's Executive  Committee and was head of
its Corporate/Energy Department. Mr. Zelkowitz specialized in energy and utility
law and represented  investor-owned  and municipal gas and electric utilities in
New York, New Jersey and Vermont.

ITEM 2.  PROPERTIES

           Information with respect to the Company's material properties used in
the conduct of its business is set forth in, or  incorporated  by reference  in,
Item 1 hereof.  Except where otherwise specified,  all such properties are owned
or,  in the  case  of  certain  rights  of way  used in the  conduct  of its gas
distribution  business,  held  pursuant  to  municipal  consents,  easements  or
long-term  leases,  and in the  case  of oil  and  gas  properties,  held  under
long-term  mineral leases. In addition to the information set forth therein with
respect to  properties  utilized by each business  segment,  the Company owns or
leases a variety  of office  space  used for  administrative  operations  of the
Company.  In the  case of  leased  office  space,  the  Company  anticipates  no
significant  difficulty in leasing  alternative space at reasonable rates in the
event of the expiration,  cancellation or termination of a lease relating to the
Company's leased properties.

ITEM 3.  LEGAL PROCEEDINGS

           From  time  to  time,   the  Company  is  subject  to  various  legal
proceedings  arising  out of the  ordinary  course  of its  business.  Except as
described  below,  the Company does not consider any of such  proceedings  to be
material to its business or likely to result in a material adverse effect on its
results of operations or financial condition.

           Subsequent to the closing of the Combination,  former shareholders of
LILCO  commenced 13 class action  lawsuits in the New York State Supreme  Court,
Nassau County, against the Company and each of the former officers and directors
of LILCO.  These  actions were  consolidated  in August 1998.  The  consolidated
action  alleges that, in connection  with certain  payments LILCO had determined
were payable in connection  with the  Combination  to LILCO's  chairman,  and to
former officers of LILCO (the  "Payments"):  (i) the named  defendants  breached
their  fiduciary  duty  owed to LILCO  and KSE  former  and/or  current  Company
shareholders as a result of the Payments;  (ii) the named defendants intended to
defraud  such  shareholders  by means of  manipulative,  deceptive  and wrongful
conduct, including materially inaccurate and incomplete news reports and filings
with the SEC;  and (iii)  the named  defendants  recklessly  and/or  negligently
failed to disclose material facts associated with the Payments.

                                       29
<PAGE>


           In addition, three shareholder derivative actions have been commenced
pursuant to which such  shareholders  seek the return of the Payments or damages
resulting  from among other things,  an alleged  breach of fiduciary duty on the
part of the former  LILCO  officers  and  directors.  One action was  brought on
behalf of LILCO in federal  court.  The Company  moved to dismiss this action in
September  1998.  The other two actions were brought on behalf of the Company in
New York  State  Supreme  Court,  Nassau  County.  In one of these  state  court
actions,  the Company's  directors  and the  recipients of the Payments are also
named as defendants.

           Finally,  two class  action  securities  suits  were filed in federal
court alleging that certain officers and directors of LILCO violated the federal
securities  laws by failing to  properly  disclose  that the  Combination  would
trigger the Payments. These actions were consolidated in October 1998.

           On March 17, 1999, the Company  signed a Memorandum of  Understanding
to settle the  above-referenced  actions,  except the federal  court  derivative
action,  in exchange for (i) $7.9 million to be  distributed  (less  plaintiffs'
attorneys  fees) to former  LILCO and KSE  shareholders  and (ii) the  Company's
agreement to implement certain corporate  governance and executive  compensation
procedures.  The entire $7.9 million  settlement  commitment will be funded from
insurance.  The parties  intend to submit the  settlement  to the Nassau  County
Supreme  Court  for  its  review  and  approval.  If  that  Court  approves  the
settlement,  the parties will then make an  application to the federal court for
an order  and  final  judgment,  dismissing  the three  federal  court  actions,
including the federal court derivative action, based, among other things, on the
binding effect of the state court judgment.

           In addition to the  above-mentioned  actions,  a class action lawsuit
has also been filed in the New York State Supreme Court,  Suffolk County, by the
County of Suffolk against LILCO's former officers and/or  directors.  The County
of Suffolk  alleges that the Payments  were  improper,  and seeks to recover the
Payments  for the benefit of Suffolk  County  ratepayers.  The Company  moved to
consolidate this action with the above-mentioned  consolidated action in October
1998.

           In October  1998,  the County of Suffolk and the Towns of  Huntington
and Babylon commenced an action against LIPA, the Company,  the NYPSC and others
in the United States  District  Court for the Eastern  District of New York (the
"Huntington Lawsuit").  The Huntington Lawsuit alleges, among other things, that
LILCO  ratepayers  (i) have a property  right to receive or share in the alleged
capital gain that resulted from the transaction with LIPA (which gain is alleged
to be at least $1  billion);  and (ii)  that  LILCO  was  required  to refund to
ratepayers the amount of a Shoreham-related  deferred tax reserve (alleged to be
at least $800 million)  carried on the books of LILCO at the consummation of the
LIPA transaction.  In December 1998, the plaintiffs amended their complaint. The
amended  complaint  contains  allegations  relating to the Payments and adds the
recipients  of the  Payments as  defendants.  In January  1999,  the Company was
served with the amended complaint.

           Finally,  certain other  proceedings have been commenced  relating to
the  Payments  and  disclosures  made  by  LILCO  with  respect  thereto.  These
proceedings include  investigations by the New York State Attorney General,  the
NYPSC and LIPA, joint hearings conducted by two committees of the New York State
Assembly, and an informal,  non-public inquiry by the SEC. In December 1998, the
Company  settled with LIPA and the NYPSC.  The  agreement  includes a payment of
$5.2  million  by the  Company  to LIPA  that  will  be  used by LIPA to  supply
postage-paid  bill return  envelopes to customers for the next three years.  The
Company also agreed to fully  reimburse and indemnify LIPA for costs incurred by

                                       30
<PAGE>

LIPA, amounting to approximately  $765,000,  for attorneys and other consultants
involved in the  investigation.  Such amounts are not covered by insurance.  The
Company  is  cooperating  fully  with the  investigations  of the New York State
Attorney  General and the SEC. To date,  no action has been taken  either by the
New York State Attorney General or the SEC.

           At this time the  Company is unable to  determine  the outcome of the
ongoing proceedings, or any of the remaining lawsuits described above.

           In May 1995,  eight  participants of LILCO's  Retirement  Income Plan
("RIP") filed a lawsuit against LILCO, the RIP and Robert X. Kelleher,  the Plan
Administrator,  in the United States District Court for the Eastern  District of
New York (Becher,  et al. v. Long Island Lighting  Company,  et al.). In January
1996,  the Court ordered that this action be maintained as a class action.  This
proceeding arose in connection with the plaintiffs' withdrawal, approximately 25
years ago, of contributions made to the RIP, thereby resulting in a reduction of
their pension benefits.  The plaintiffs are now seeking,  among other things, to
have these  reduced  benefits  restored to their pension  accounts.  In November
1997, the Company filed a motion for partial summary  judgment with the District
Court.  On April 28, 1998,  the Court denied the Company's  motion and permitted
the Company to file a further motion for partial summary  judgment on additional
grounds.  On January 27, 1999,  the Company  entered a stipulation of settlement
which  was  filed  with  the  Court  pursuant  to  which  the  Company  will pay
approximately  $8 million,  a substantial  portion of which is recoverable  from
LIPA. The settlement is subject to court approval.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

           No matters were submitted to a vote of the Company's security holders
during the last quarter of the nine-month period ended December 31, 1998.

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

           The Company's common stock is listed and traded on the New York Stock
Exchange and the Pacific Stock  Exchange under the symbol "KSE." As of March 22,
1999,  there were 98,901  record  holders of the  Company's  common  stock.  The
following table sets forth, for the quarters  indicated,  the high and low sales
prices  since  consummation  of the  Combination  on May 28, 1998 and  dividends
declared per share for the periods indicated:

<TABLE>
<CAPTION>

1998                                            High          Low        Dividends Per Share
------------------------------------------    ----------   -----------   ---------------------

<S>                                             <C>        <C>                  <C>   
Second Quarter (beginning May 28, 1998)         34 3/16    29 1/8               $0.445
Third Quarter                                   30 3/4     25 3/8               $0.445
Fourth Quarter                                  32 1/4     28 11/16             $0.445
</TABLE>

                                       31
<PAGE>
<TABLE>

ITEM 6.  SELECTED FINANCIAL DATA
<CAPTION>

                                                                                    (In Thousands of Dollars, Except Per Share Data)
====================================================================================================================================
                                          NINE MONTHS       12 Months          12 Months       
                                             ENDED            Ended              Ended           Year Ended            Year Ended
                                      DECEMBER 31, 1998    March 31, 1998    March 31, 1997   December 31, 1996    December 31, 1995
------------------------------------------------------------------------------------------------------------------------------------

INCOME SUMMARY
<S>                                         <C>            <C>                 <C>                <C>                      <C>     
OPERATING REVENUES
Gas distribution                             $849,543       $645,659            $672,705           $684,260           $591,114
Gas exploration and production                 70,812              -                   -                  -                  -
Electric services                             408,305              -                   -                  -                  -
Electric distribution                         330,011      2,478,435           2,464,957          2,466,435          2,484,014
Other                                          63,181              -                   -                  -                  -
-------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING REVENUES                    1,721,852      3,124,094           3,137,662          3,150,695          3,075,128
OPERATING EXPENSES
Purchased gas                                 318,703        299,469             308,400            322,641            264,282
Fuel and purchased power                       91,762        658,338             646,448            640,610            570,697
Operation and maintenance                     848,671        511,165             489,868            499,211            511,393
Depreciation, depletion and amortization      294,864        169,770             154,921            171,681            145,357
Electric regulatory amortization              (40,005)        13,359             121,694             97,698            195,936
General taxes                                 257,124        466,326             469,561            472,076            447,507
Federal income taxes                          (62,506)       237,371             210,610            210,197            208,338
-------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME                               13,239        768,296             736,160            736,581            731,618
OTHER INCOME AND DEDUCTIONS
Transaction related expenses
     (net of $99,701 income tax)             (107,912)             -                   -                  -                  -
Interest income and other- net                 37,314         (1,583)             21,468             27,512             43,703
Minority interest                              29,141              -                   -                  -                  -
Interest charges                             (138,715)      (404,473)           (435,219)          (447,629)          (472,035)
-------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS)                            (166,933)       362,240             322,409            316,464            303,286
Dividends on preferred stock                   28,604         51,813              52,113             52,216             52,620
-------------------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) FOR COMMON STOCK            ($195,537)      $310,427            $270,296           $264,248           $250,666
Foreign currency adjustment                      (952)             -                   -                  -                  -
===============================================================================================================================
COMPREHENSIVE INCOME (LOSS)                 ($196,489)      $310,427            $270,296           $264,248           $250,666
===============================================================================================================================


FINANCIAL SUMMARY

Common stock information
  Per share
   Earnings ($)                                 (1.34)          2.56                2.24               2.20               2.10
   Cash dividends declared ($)                   1.19           1.78                1.78               1.78               1.78
   Book value, year-end ($)                     20.90          21.88               21.07              20.89              20.50
   Market value, year-end ($)                   31.00          31.50               24.00              22.13              16.38
  Shareholders                                103,239         78,314              77,691             86,607             93,088
Capital expenditures ($)                      676,563        297,230             294,943            291,618            314,175
Total assets ($)                            6,895,102      1,900,725          11,849,574         12,209,679         12,527,597
Common equity ($)                           3,022,908      2,662,447           2,549,049          2,523,369          2,452,953
Long term-debt ($)                          1,619,067      4,381,949           4,457,047          4,456,772          4,706,600
Total capitalization ($)                    5,089,948      7,606,996           7,708,194          7,682,305          7,863,037
===============================================================================================================================

UTILITY OPERATING STATISTICS

Gas data ( MDTH)
  Firm gas and transportation sales            87,179         58,304              60,276             62,375             58,704
  Other sales                                  38,088         21,025              19,838             16,588             18,028
  Maximum daily capacity, year end          2,033,000        745,000             772,000            771,995            717,035
Total active gas meters                     1,610,202        464,563             458,910            457,809            453,529
Gas heating customers                         665,000        295,000             289,000            286,000            280,000
===============================================================================================================================

</TABLE>

                                     32

<PAGE>

ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

MarketSpan  Corporation d/b/a KeySpan Energy (the "Company") is the successor to
Long Island  Lighting  Company  ("LILCO") as a result of a transaction  with the
Long Island Power Authority ("LIPA") (the "LIPA  Transaction") and following the
acquisition (the "KeySpan  Acquisition") of KeySpan Energy Corporation  ("KSE").
Both  transactions  occurred on May 28,  1998.  (See Note 2 to the  Consolidated
Financial  Statements,  "Sale of LILCO  Assets,  Acquisition  of KeySpan  Energy
Corporation  and  Transfer  of  Assets  and  Liabilities  to  the  Company"  for
additional  information.)  The Company is a  "predominately  intrastate"  public
utility holding company exempt from most of the provisions of the Public Utility
Holding Company Act of 1935, as amended.

Further,  subsequent  to these events,  the Company  changed its fiscal year end
from March 31 to December 31. Current period consolidated results of operations,
therefore,  are reported for the nine month  transition  period April 1, 1998 to
December 31, 1998 (the "Transition  Period").  The Transition Period consists of
the following: (i) the period April 1, 1998 through May 28, 1998, which reflects
the results of LILCO prior to the LIPA Transaction and KeySpan Acquisition;  and
(ii) the period May 29, 1998 through  December 31, 1998,  which  represents  the
results of the fully  consolidated  Company,  which  includes  all KSE  acquired
companies,  KeySpan Gas East  Corporation  d/b/a  Brooklyn  Union of Long Island
("Brooklyn Union of Long Island"),  which provides gas distribution  services on
Long Island and other  subsidiaries  providing  services  to LIPA under  various
services  agreements with LIPA. As required under purchase accounting rules, the
results for periods prior to May 29, 1998 reflect  results of LILCO only, and do
not include results of KSE.

As discussed in more detail below,  the Transition  Period being reported is not
comparable  either in time frame or composition  of the Company's  operations to
any prior  historical  period.  The analysis that follows is an  explanation  of
consolidated   results  of  operations  during  the  Transition  Period  and  an
explanation  of results of operations  applicable to the operations of LILCO for
the twelve  month  periods  ended March 31, 1998 and 1997 and December 31, 1996.
Further,  the results of operations reported herein are not indicative of future
results or operating trends.

EARNINGS

Consolidated  results  for the  Transition  Period  reflected  a loss of  $195.5
million,  or $1.34 per share. During the Transition Period, the Company incurred
substantial  non-recurring  charges associated with the LIPA Transaction.  These
non-recurring charges principally reflected the following: taxes associated with
the sale of assets  (the  "Transferred  Assets")  to the  Company  by LIPA;  the
write-off of certain regulatory assets that were no longer recoverable under the
various LIPA agreements;  and other transaction costs incurred to consummate the
LIPA  Transaction.  These charges were partially offset by tax benefits relating
to the deferred  federal  income taxes  necessary to account for the  difference
between the carryover  basis of the Transferred  Assets for financial  reporting
purposes and the new  increased  tax basis,  and tax benefits  recognized on the
funding  of  certain  postretirement   benefits.   These  non-recurring  charges
associated with the

                                       33
<PAGE>




LIPA Transaction were $107.9 million after-tax, or $0.74 per share.

Further, during the Transition Period, the Company also incurred special charges
amounting to $83.5 million after-tax,  or $0.57 per share. These items were: (i)
a $42  million  after-tax,  or $0.29 per share,  charge for an early  retirement
program  implemented  in  December  1998 in which  approximately  600  employees
participated;  and (ii) a $41.5 million  after-tax,  or $0.28 per share,  charge
associated  with  the  write-off  of  a  customer-billing  system  that  was  in
development.

Also,  in December  1998,  the Company made a $20 million  donation ($13 million
after-tax,  or  $0.09  per  share)  to  establish  the  KeySpan  Foundation,   a
not-for-profit  philanthropic  foundation  that  will  make  donations  to local
charitable  community  organizations.   Earnings  also  reflected  an  after-tax
non-cash  impairment charge recorded in December 1998 of $54.1 million, or $0.37
per  share,  which  represents  the  Company's  share of the  impairment  charge
recorded  by  its  gas  exploration  and  production  subsidiary,   The  Houston
Exploration Company ("THEC"),  to recognize the effect of low wellhead prices on
its valuation of proved gas reserves.

Consolidated income available for common stock,  excluding the non-recurring and
special charges discussed above, by reporting segment, for the Transition Period
and for the twelve months ended March 31, 1998 and 1997 and December 31, 1996 is
set forth in the following summary:
<TABLE>
<CAPTION>
                                                                               (IN THOUSANDS OF DOLLARS)
--------------------------------------------------------------------------------------------------------
                                    For the Transition Period             For the Twelve Months Ended
---------------------------  ---------------------------------------    --------------------------------
                             Prior to the Subsequent to              
                             Acquisition  the Acquisition   Total          3/31/98    3/31/97   12/31/96
---------------------------  -----------  -------------- ----------- -- ---------- ---------- ----------
Income (Loss) Available for
           Common Stock:
<S>                             <C>             <C>          <C>         <C>         <C>        <C>     
Gas Distribution                $(4,659)        $ 13,241     $ 8,582     $  33,815   $ 41,621   $ 38,471
Electric Services                 45,141          11,978      57,119       276,612    228,675    225,777
Gas Exploration and Production    -                2,218       2,218        -          -          -
Energy Related Investments        -               (4,186)     (4,186)       -          -          -
Energy Related Services           -               (3,708)     (3,708)       -          -          -
Other                             -                2,959       2,959        -          -          -
Total Consolidated               $40,482         $22,502     $62,984      $310,427   $270,296   $264,248
---------------------------  -----------  -------------- ----------- -- ---------- ---------- ----------

</TABLE>

The  Gas  Distribution  segment  consists  of The  Brooklyn  Union  Gas  Company
("Brooklyn  Union") and Brooklyn  Union of Long Island,  the  Company's  two gas
distribution  subsidiaries.  These subsidiaries provide natural gas to customers
in the New York City boroughs of Brooklyn, Queens and Staten Island and the Long
Island  counties  of Nassau and  Suffolk and the  Rockaway  Peninsula  of Queens
County,  respectively.  Gas Distribution  segment  earnings,  excluding  special
charges for the Transition Period, reflected the fact that gas utility customers
received the benefit of synergy  savings-related rate reductions,  authorized by
the Public Service Commission of the State of New York ("NYPSC"), before synergy
savings could begin to be achieved through cost reduction measures.  The Company
expects that the effect of these rate reductions will begin to be offset in


                                       34
<PAGE>




fiscal 1999 as synergy  savings are realized  through cost  reduction  measures,
principally  the early  retirement  program  implemented in December 1998.  Most
importantly,  earnings for the  Transition  Period do not include  earnings from
heating  season  operations  (months of January  through March) when the Company
realizes the major portion of its gas related earnings.

The Electric Services segment consists of subsidiaries that: (i) own and operate
oil and gas-fired  generating  facilities located on Long Island and deliver the
power  generated by these  facilities  to LIPA;  (ii) manage and operate  LIPA's
transmission and distribution  ("T&D") system;  and (iii) manage LIPA's fuel and
electric purchases and any off-system sales.  Earnings for the Electric Services
segment for the period May 29, 1998 through December 31, 1998, excluding special
charges,  reflected  service-fees under various service contracts with LIPA. The
Company's  operating  margins  under  such  arrangements  are lower  than  those
experienced prior to the LIPA  Transaction,  reflecting the change in the nature
of the Company's Electric Services business.

Earnings for Electric Services for the period April 1, 1998 through May 28, 1998
were positively impacted by a change in the method of recording the monthly Rate
Moderation Component ("RMC")  amortization.  As a result of this change, for the
period April 1, 1998 through May 28, 1998,  the Company  recorded  $51.5 million
more of non-cash  RMC credits to income,  or $33.5  million  after-tax,  than it
would have under the previous method. For a further  discussion,  see "Operating
Expenses."

The Gas Exploration and Production  segment consists of the Company's 64% equity
interest in THEC, an independent  natural gas and oil  exploration  company with
properties  located in the Gulf of Mexico,  Texas,  the Arkoma Basin of Oklahoma
and Arkansas,  South Louisiana and West Virginia.  Earnings  associated with Gas
Exploration  and  Production,  excluding  special  charges,  were  significantly
affected by low gas prices during the Transition Period and increased  operating
expenses due  primarily to increased  production  activity.  See "Revenues - Gas
Exploration and Production" for further discussion.

The Energy Related  Investments  segment primarily consists of the Company's 20%
investment  in the  Iroquois  Gas  Transmission  System LP,  investments  in The
Premier  Transco  Pipeline  and  Phoenix  Natural  Gas in  Northern  Ireland and
investments  in certain  midstream  natural gas assets in Western  Canada  owned
jointly with Gulf Canada Resources  Limited.  The Company recently has increased
its investment in The Premier Transco  Pipeline,  a gas pipeline  extending from
Scotland to  Northern  Ireland,  from a 24.5%  interest  to a 50%  interest.  In
addition,  the Company has a 24.5%  interest in Phoenix  Natural  Gas,  which is
expanding and refurbishing  the gas distribution  system that serves the City of
Belfast in Northern Ireland. Results from these investments reflect the start-up
nature of their operations,  while results relating to the Company's  investment
in the Iroquois Gas  Transmission  System LP are  consistent  with  management's
expectations. The Company completed its acquisition of a 50% interest in certain
midstream  natural gas assets in Western Canada in December 1998, and therefore,
earnings from this investment will begin to be realized in 1999. (See "Liquidity
and Capital Resources" for additional information.) Results also reflected costs
of approximately  $5.2 million after-tax to settle certain contracts  associated
with the sale of the

                                       35

<PAGE>




Company's  domestic  cogeneration  investments and fuel  management  operations,
which took place in 1997.

The Company's Energy Related Services segment primarily  includes KeySpan Energy
Management Inc. ("KEM"), KeySpan Energy Services Inc. ("KES") and KeySpan Energy
Solutions,  LLC ("KESol").  KEM provides a variety of technical and  maintenance
services to customers that operate commercial and industrial  facilities located
primarily within the New York City metropolitan area. Results from operations of
KEM were  profitable  during the  Transition  Period and reflected the continued
integration of companies acquired during the past two years. KES markets gas and
electricity, and arranges transportation and related services, largely to retail
customers,  including  those  served  by  the  Company's  two  gas  distribution
subsidiaries.  KES  incurred  losses  related  to  the  start-up  nature  of its
operations during the Transition Period. Results from operations of KESol, which
provides appliance repair service to residential  customers primarily within the
Company's  service  territory,  were also  unprofitable  during  the  Transition
Period.  The Company will  continue to realign these  non-utility  operations to
maximize  earnings  potential,  and  where  appropriate,   possibly  discontinue
non-profitable activities.

Results  reflected in the Other  segment,  excluding  special  charges,  include
interest income earned on investments from the proceeds of the LIPA Transaction,
offset, in part, by costs incurred by the corporate and administrative  areas of
the Company that have not been allocated to the various business segments.

Gas  Distribution  results were  affected by warmer than normal  weather for the
twelve months ended March 31, 1998 and 1997.  Gas  Distribution  results for the
year ended  December  31,  1996 were  positively  affected by colder than normal
weather,  a 3.2% rate  increase  which  became  effective  December  1, 1995 and
increased  off-system sales. Results from electric operations for the year ended
March  31,  1998  were  positively  affected  by the  change  in the  method  of
amortizing the RMC to eliminate the effects of seasonality on monthly  operating
income (See "Operating  Expenses" for additional  details on the RMC).  Earnings
for the twelve  months ended March 31, 1997 and for the year ended  December 31,
1996 were favorably  affected by the benefits derived from increased  investment
in electric  plants,  continued  efforts to reduce  operations  and  maintenance
expenses and the use of cash generated by operations to retire maturing debt.

                                       36


<PAGE>




REVENUES

Set forth below are the Company's revenues for the Transition Period and for the
twelve months ended March 31, 1998 and 1997 and December 31, 1996:
<TABLE>

                                                                             (IN THOUSANDS OF DOLLARS)
------------------------------------------------------------------------------------------------------
                              For the Transition Period                For the Twelve Months Ended
--------------------- -----------------------------------------     ----------------------------------
                      Prior to the  Subsequent to               
                      Acquisition  the Acquisition    Total            3/31/98     3/31/97    12/31/96
--------------------- ------------ --------------- ------------  -  ----------  ----------  ----------
Operating revenues:
<S>                      <C>            <C>          <C>            <C>         <C>         <C>        
Gas distribution         $  79,979      $  769,564   $  849,543     $  645,659  $  672,705  $   684,260
Gas exploration and        -                70,812       70,812         -           -           -
        Production
Electric services          -               408,305      408,305         -           -           -
Electric distribution      330,011        -             330,011      2,478,435   2,464,957   2,466,435
Other                      -                63,181       63,181         -           -           -
                          $409,990      $1,311,862   $1,721,852     $3,124,094  $3,137,662  $3,150,695
--------------------- ------------ --------------- ------------  -  ----------  ----------  ----------

</TABLE>

GAS DISTRIBUTION
Gas  Distribution  revenues  for the  Transition  Period  were  impacted by rate
reductions which were reflected at the time of the KeySpan Acquisition. Brooklyn
Union  reduced  rates to its core  customers by $23.9 million on an annual basis
effective  May 29, 1998 and Brooklyn  Union of Long Island  reduced its rates to
core customers by $12.2 million  annually  effective  February 5, 1998 and by an
additional  $6.3  million  annually  effective  May 29, 1998.  Gas  Distribution
revenues for the Transition  Period do not include  revenues from heating season
operations (January through March). In addition,  revenues of Brooklyn Union are
not  reflected  for  periods  prior to the KeySpan  Acquisition.  The effects of
weather on gas  distribution  revenues  are  largely  mitigated  by the  weather
normalization  adjustment  included  in the  tariffs  of both  gas  distribution
utilities.  The weather  normalization  adjustment contained in Brooklyn Union's
tariff provides for the Company to retain or absorb 12.8% of differences between
actual margin  revenues and margin  revenues that would be produced under normal
weather conditions.  The weather normalization  adjustment contained in Brooklyn
Union  of Long  Island's  tariff  requires  the  Company  to  retain  or  absorb
variations  in margin  revenues to the extent that  actual  heating  degree days
experienced during a billing cycle vary from normal heating degree days for that
cycle by 2.2%.

Gas  Distribution  revenues for the twelve  months ended March 31, 1998 and 1997
and  December  31,  1996  reflected  the  continued  growth in the number of gas
heating  customers in all periods.  However,  Gas Distribution  revenues for the
twelve  months ended March 31, 1998 and 1997 were affected by warmer than normal
weather  during both periods.  Revenues for the twelve months ended December 31,
1996 reflected the effects of colder than normal weather during that time period
as well as the growth in the number of gas heating  customers.  Gas Distribution
revenues for the twelve months ended December 31, 1996 also reflected a 3.2% gas
rate increase that became effective on December 1, 1995.

                                       37

<PAGE>

GAS EXPLORATION AND PRODUCTION
Gas Exploration and Production  revenues reflected the continued  development of
natural  gas  properties  acquired  by THEC  during  the past three  years.  The
benefits  derived from  increased  production  levels,  however,  were offset by
decreases in average realized prices. In 1998, production was approximately 62.8
billion cubic feet (BCFe),  or 11.5 BCFe above the level of production for 1997.
In 1998,  wellhead  prices  averaged  approximately  $1.96 per MCF compared with
$2.45 per MCF in 1997.  The effective  price  realized  (average  wellhead price
received for production including recognized hedging gains and losses) was $2.02
per MCF in 1998 compared with $2.25 per MCF in 1997.

ELECTRIC SERVICES
Revenues for the Transition Period are derived from service agreements with LIPA
for the  period  May 29,  1998  through  December  31,  1998.  Prior to the LIPA
Transaction,  LILCO provided fully integrated electric service to its customers.
Included  within  rates  charged  to  customers  was the  return on the  capital
investment in the generation and T&D assets, as well as recovery of the electric
business costs to operate the system.  Upon completion of the LIPA  Transaction,
the nature of the Company's  electric business has changed from that of owner of
an electric generation and T&D system, with significant capital investment, to a
new role as owner of the non-nuclear generation facilities and as manager of the
T&D system now owned by LIPA. In its new role, the Company's capital  investment
is significantly reduced and accordingly,  its revenues under the LIPA contracts
reflect that  reduction.  Revenues  after May 28, 1998 reflect the impact of the
LIPA agreements which contribute marginally to earnings.

Revenues  realized under the Management  Services  Agreement ("MSA") were $226.3
million for the period May 29, 1998 through  December 31, 1998.  These  revenues
were derived from the performance of the day-to-day operation and maintenance of
LIPA's T&D system,  management of construction  additions to the T&D system, and
the management of LIPA's  interest in the Nine Mile Point Nuclear Power Station,
Unit 2 ("NMP2").

Revenues under the Power Supply Agreement ("PSA"),  including incentives earned,
were $178.3  million for the period May 29, 1998  through  December 31, 1998 and
were  derived  from the sale of capacity  and energy to LIPA from the  Company's
generating  facilities  at  rates  approved  by the  Federal  Energy  Regulatory
Commission.

Revenues under the Energy Management  Agreement  ("EMA"),  including  incentives
earned,  were $3.7 million for the period May 29, 1998 through December 31, 1998
and resulted from the management of fuel supplies for LIPA to fuel the Company's
generating  facilities  and the  management of energy  purchases on a least-cost
basis to meet LIPA's needs.

See "Electric Services-LIPA  Agreements" for a more detailed description of each
of these agreements.

                                       38

<PAGE>

ELECTRIC DISTRIBUTION
Electric  revenues for the period April 1, 1998 through May 28, 1998  fluctuated
mainly as a result of system  growth,  and variations in weather and fuel costs.
However,  these  variations  had no impact on earnings due to the electric  rate
structure  in effect  at that  time,  which  included  a revenue  reconciliation
mechanism to eliminate the impact on earnings  caused by sales volumes that were
above or below  adjudicated  levels.  Base electric rates were  unchanged  since
December 1993.

OTHER REVENUES
Other  revenues for the Transition  Period  primarily  included  revenues of the
Company's  energy  management  subsidiary,  KEM,  and  the  Company's  marketing
subsidiary,  KES.  KEM  provides a variety of  services  in all facets of energy
management   services  to  customers  that  operate  commercial  and  industrial
facilities,  primarily within the New York City metropolitan area. Revenues have
been enhanced  through the continued  integration  of an  engineering  firm, and
heating,  ventilation and air conditioning  companies  purchased during the past
two years.  KES markets gas and  electricity,  and arranges  transportation  and
related  services,  largely  to retail  customers,  and has been  expanding  its
customer base.

OPERATING EXPENSES

GAS PURCHASED
Variations in gas costs have little  impact on operating  results as the current
gas rate  structure  of each of the  Company's  two gas  distribution  utilities
include a gas adjustment clause pursuant to which variations  between actual gas
costs and gas cost  recoveries  are  deferred and  subsequently  refunded to, or
collected from customers.

The cost of gas for the  Transition  Period was $318.7  million,  reflecting the
inclusion of gas costs for KSE subsequent to May 28, 1998,  offset,  in part, by
warmer than normal weather and the fact that the  Transition  Period covers only
nine months. The cost of gas for the twelve months ended March 31, 1998 and 1997
was $299.5 million and $308.4 million,  respectively,  and reflected warmer than
normal weather in both periods.  The cost of gas for the year ended December 31,
1996 was $322.6  million and reflected  colder than normal  weather  during that
time  period.  The  average  cost of gas has  decreased  in 1998 as  compared to
increases in 1997 and 1996.

FUEL AND PURCHASED POWER
Electric  fuel  expense  for the period  April 1, 1998  through May 28, 1998 was
$91.8  million.  In  accordance  with the EMA,  LIPA is  responsible  for paying
directly the costs of fuel and  purchased  power and, as a result,  the Company,
since May 29, 1998, no longer incurs any electric fuel expense.

Electric  fuel  expenses for the twelve months ended March 31, 1998 and 1997 and
December  31,  1996 were $658.3  million,  $646.4  million  and $640.6  million,
respectively.  Electric  fuel expense in all periods  reflected  growing  system
sales  quantities in each period and increased cost of fuel and purchased  power
each year. Variations in fuel and purchased power costs had little impact on

                                       39

<PAGE>

operating  results  during  these  periods as LILCO's  electric  rate  structure
included a mechanism  that  provided  for the  recovery or refund of actual fuel
costs which varied from the level collected in rates.

OPERATIONS AND MAINTENANCE EXPENSE
Operations and maintenance  expense for the Transition Period was $848.7 million
and included $63.8 million of costs  associated with the write-off of a customer
billing  system that was in  development.  Additionally,  in  December  1998 the
Company  completed  an  early  retirement  program  in which  approximately  600
employees  elected early  retirement and a related  expense of $64.6 million was
charged to  operations.  Moreover,  for the  Transition  Period,  operations and
maintenance expense included the costs associated with the management of the T&D
assets acquired by LIPA. Prior to the LIPA Transaction,  all T&D related capital
costs were  capitalized and charged to  depreciation  expense over the estimated
useful life of the related asset.  Since the LIPA  Transaction,  all T&D related
costs are  expensed  when  incurred  and  recovered  from LIPA  through  monthly
billings.

Operation and maintenance expense for the twelve months ended March 31, 1998 and
1997 and  December  31,  1996 was  $511.2  million,  $489.9  million  and $499.2
million,  respectively.   Reflected  in  all  periods  were  the  on-going  cost
containment  programs  implemented  by LILCO  which  resulted in  reductions  to
maintenance, distribution, and administrative and general expenses. However, for
the twelve months ended March 31, 1998,  operation and maintenance  expense also
reflected the recognition of higher  performance-based  employee  incentives and
certain other charges for employee benefits.

ELECTRIC REGULATORY AMORTIZATIONS
Prior to the LIPA  Transaction,  the RMC  included  within  electric  regulatory
amortizations  represented the difference  between LILCO's revenue  requirements
under  conventional  ratemaking  and the revenues  provided by its electric rate
structure.  The RMC  was  adjusted  for the  operation  of the  Fuel  Moderation
Component ("FMC")  mechanism and the difference  between LILCO's share of actual
operating costs at NMP2 and amounts provided for in electric rates.

In April 1998, the NYPSC authorized a revision,  effective  December 1, 1997, to
LILCO's method of recording its monthly RMC  amortization  from a  straight-line
levelized  basis over LILCO's rate year,  to a monthly  amortization  based upon
each month's  forecasted  revenue  requirement,  which more closely aligned such
amortization with LILCO's cost of service.  As a result of this change,  for the
period April 1, 1998 through May 28, 1998,  LILCO recorded $51.5 million more of
non-cash RMC credits to income (representing  accretion of the RMC balance),  or
$33.5  million  after-tax,  than it would have  under the  previous  method.  In
addition,  for the year ended March 31, 1998, LILCO recorded approximately $65.1
million more of non-cash RMC credits to income, or $42.5 million after-tax, than
it  would  have  under  the  previous  method.   In  connection  with  the  LIPA
Transaction,  which included the sale of electric related regulatory assets, the
RMC and all other electric regulatory  amortizations were discontinued.  Had the
RMC amortization  continued,  the total RMC amortization for the rate year ended
November  30,  1998,  would have been  equal to the amount  that would have been
provided for under the previous method.

                                       40

<PAGE>


OTHER OPERATING EXPENSES
Depreciation and depletion  expense  reflected gas utility property and electric
generation  property  additions  for  all  periods  and  electric  T&D  property
additions for the periods prior to the LIPA  Transaction.  In addition,  for the
period May 29, 1998  through  December  31,  1998,  depreciation  and  depletion
expense reflected the gas production activities of the Company's gas exploration
and production subsidiary. This subsidiary recorded an impairment charge of $130
million in  December  1998 to reduce the value of its  proved  gas  reserves  in
accordance  with the  asset  ceiling  test  limitations  of the  Securities  and
Exchange  Commission  applicable to gas exploration  and development  operations
accounted  for under the full cost  method.  Offsetting  these  increases is the
effect  on  depreciation  expense  from  the  sale  of T&D  assets  and  nuclear
generation assets to LIPA.

Operating taxes  principally  included state and local taxes on utility revenues
and  property.  The  applicable  property  base  and tax  rates  generally  have
increased in all periods. However, significant property related assets were sold
to LIPA as part of the LIPA Transaction and, as a result,  subsequent to May 28,
1998,  property taxes on the sold assets are no longer  incurred by the Company.
For the twelve  months  ended March 31,  1998,  operating  taxes  reflected  the
expiration of a temporary  corporate surcharge on revenues previously imposed by
New York State.

Federal  income tax expense in all years  reflected  changes in pre-tax  income.
Pre-tax  income and the related  federal  income tax expense for the  Transition
Period  were  significantly  affected  by the  write-off  of a customer  billing
system, charges related to the early retirement program,  charges related to the
LIPA Transaction,  and the write-down of proved gas reserves. (See Note 3 to the
Consolidated Financial Statements, "Federal Income Tax.")

OTHER INCOME AND DEDUCTIONS

Other income and deductions for the Transition  Period  primarily  reflected the
non-recurring  charges  associated  with the LIPA  Transaction of $107.9 million
after-tax  and a $13  million  after-tax  charge for the  funding of the KeySpan
Foundation.  (See  Note  11 to the  Consolidated  Financial  Statements,  "Costs
Related to the LIPA  Transaction  and  Special  Charges.")  These  charges  were
offset,  in part,  by  earnings  of $49.2  million  from the  investment  of the
proceeds  from the LIPA  Transaction  and  earnings  from the  Company's  equity
investment in the Iroquois Gas Transmission System LP.

Other income and deductions for the twelve months ended March 31, 1998 primarily
included a charge of $31  million  with  respect to certain  benefits  earned by
former officers of LILCO offset by carrying  charges on certain of the Company's
electric regulatory assets resulting from electric ratemaking mechanisms.  Other
income and deductions  for the year ended December 31, 1996 consisted  primarily
of non-cash carrying charge income associated with regulatory assets.

INTEREST EXPENSE

As part of the LIPA  Transaction,  LIPA  has  assumed  substantially  all of the
outstanding debt of LILCO. The Company, in connection with the LIPA Transaction,
issued promissory notes to LIPA



                                       41
<PAGE>

for its continuing obligation to pay principal and interest on certain series of
debt that has been assumed by LIPA . (See Note 7 to the  Consolidated  Financial
Statements,  "Long Term Debt," for additional  information.) Interest expense of
$138.7 million for the Transition  Period  reflected the  significantly  reduced
level of outstanding debt resulting from the LIPA Transaction.

Interest  expense for the twelve months ended March 31, 1998 and 1997 was $404.5
million  and $435.2  million,  respectively.  Interest  expense in both  periods
reflected the lower outstanding debt level resulting from the retirement of $250
million of indebtness in February 1997. For the twelve months ended December 31,
1996, interest expense was $447.6 million reflecting  increased letter of credit
and commitment fees associated with a change in LILCO's credit rating in 1996.

LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY
At December 31, 1998,  the Company had cash and temporary  cash  investments  of
$942.8 million.  Effective January 1, 1999, the Company has available  unsecured
bank lines of credit of $300 million.

In addition,  THEC also has an  available  line of credit of $150 million with a
commercial  bank. At December 31, 1998, $133 million was outstanding  under this
facility.  Moreover,  in March 1998,  THEC issued $100 million of 8.625%  Senior
Subordinated Notes due 2008 that are subordinate to borrowings under THEC's line
of credit.  (See Note 7 to the  Consolidated  Financial  Statements,  "Long Term
Debt," for additional information.)

Prior to the LIPA  Transaction,  LILCO had available,  through  October 1, 1998,
$250 million under its  Revolving  Credit  Agreement,  of which $100 million was
borrowed for interim  financing.  In  addition,  LILCO had a bridge loan of $250
million to fund  certain  obligations  for  postretirement  benefits  other than
pensions.  A portion of the proceeds from the LIPA Transaction was used to repay
the  $350  million  of  borrowings  and  the  Revolving   Credit  Agreement  was
terminated.

During 1998, KSE had an available bank line of credit of $150 million, which was
available to finance  commercial  paper for Brooklyn Union.  This line of credit
applied  jointly to KSE and Brooklyn  Union.  Effective  December 31, 1998, this
line of credit  terminated.  There were no  outstanding  borrowings on this line
from May 29, 1998 through December 31, 1998.

As a result of the LIPA  Transaction,  the Company has a  significant  amount of
cash which it has used and intends to continue to use for,  among other  things,
the repurchase of shares of its common stock on the open market (as discussed in
greater detail below) and the expansion of its operations through one or more of
the  following  types of  transactions:  mergers with or  acquisitions  of other
utilities;  investments in new gas pipelines (and related assets such as storage
fields and  processing  plants)  and gas  exploration;  or the  purchase  and/or
construction of additional  electric power plants.  However, no assurance can be
given that any of the foregoing  types of  transactions  will occur or that such
transactions,  if completed, will be integrated with the Company's operations or
prove to be profitable.


                                    42
<PAGE>

In August 1998, the Company announced that the Board of Directors authorized the
purchase  of up to 10 percent of the  Company's  outstanding  common  stock,  or
approximately 15 million shares, through open market purchases.  In addition, on
October 30, 1998, the Company  announced that the Board of Directors  authorized
using up to an additional $500 million of cash for the purchase of common shares
in addition to the Board's  previous  authorization.  Purchases from the initial
authorization commenced on August 17, 1998. As of February 28, 1999, the Company
repurchased 15.9 million of its common shares for $472.5 million.

In December 1998, the Company  acquired,  through a subsidiary a 50% interest in
certain  midstream  natural gas assets  owned by Gulf Canada  Resources  Limited
("Gulf  Canada")  in western  Canada and formed a  partnership  with Gulf Canada
called Gulf Midstream Services Partnership ("GMS"). The Company paid Gulf Canada
$189  million and has  provided a three-year  $64.8  million loan on  commercial
terms  that,  at  Gulf  Canada's  option,  can be  repaid  or  exchanged  for an
additional  19.7%  interest  in GMS. In  connection  with this  investment,  the
Company has agreed to fund capital  expenditures of GMS for the next three years
up to a maximum of $36 million  including Gulf Canada's share, in exchange for a
proportionately increased share of GMS's cash flow.

In  December  1998,  the  Company,  through a  subsidiary,  paid $32  million to
increase its  investment in The Premier  Transco  Pipeline from 24.5% to 50%. In
addition,  during the quarter ended December 31, 1998 the Company  provided THEC
with a $150  million  line of credit.  As of December 31, 1998 THEC had borrowed
$80 million under this facility, which was used to fund a substantial portion of
the acquisition of three producing  offshore blocks in the Mustang Island region
of the Gulf of Mexico. Further, in December 1998, the Company made a $20 million
donation to establish the KeySpan  Foundation,  a  not-for-profit  philanthropic
foundation that will make donations to various charitable organizations.

In May 1998,  LILCO  reached a  settlement  with the  Internal  Revenue  Service
resolving  all audit  issues on federal  income tax returns  filed for the years
1981 through 1989. The settlement  required the payment of taxes and interest of
$9 million and $35 million,  respectively.  Adequate reserves for the payment of
such taxes and interest were provided in prior fiscal years.

The negative cash flow from operating  activities  for the Transition  Period is
due primarily to the fact that  significant  positive cash flows that arise from
revenues  generated  during a  heating  season  have not been  reflected  in the
Transition  Period.  Approximately 75% of total annual gas revenues are realized
during  the  heating  season  (November  1 to April 30) as a result of the large
proportion of heating  sales,  primarily  residential,  compared to total sales.
Moreover,  during the Transition  Period,  the Company funded an additional $250
million into Voluntary Employee's Beneficiary  Association trusts (see Note 4 to
the Consolidated Financial Statements,  "Postretirement Benefits").  Annual cash
flow from core utility  operations  has remained  strong and should  continue to
provide the Company with a substantial source of funds.

                                       43

<PAGE>


CAPITAL RESOURCES
Consolidated  capital expenditures for the Transition Period were $676.5 million
and are estimated to be $1.2 billion for the year ended December 31, 1999.

Capital expenditures related to the Gas Distribution segment were $128.4 million
during the Transition  Period and were primarily for the renewal and replacement
of mains and  services  and  expansion  of the gas  distribution  system on Long
Island. Gas Distribution capital expenditures are estimated to be $205.7 million
for 1999.

Capital  expenditures related to Electric Services were $54.1 million during the
Transition Period and were primarily for the renewal and replacement of electric
lines prior to May 28, 1998.  Capital  expenditures for 1999 are estimated to be
$684.4 million  including  approximately  $597 million  related to the Company's
January 1999 agreement  with  Consolidated  Edison Company of New York,  Inc. to
purchase  the 2,168  megawatt  Ravenswood  electric  generating  facility.  This
facility,  located in Long Island  City,  Queens,  includes  the 1,753  megawatt
Ravenswood  Generating  Station and the 415 megawatt  Ravenswood  Gas  Turbines.
Common plant  capital  expenditures  were $51.1  million  during the  Transition
Period and are estimated to be $28.4 million for 1999.

Capital  expenditures  related to Gas  Exploration  and  Production  were $182.7
million for the Transition  Period.  These capital  expenditures  reflected,  in
part, costs related to development of additional properties acquired in Southern
Louisiana and properties acquired in the Gulf of Mexico and costs related to the
continued  development of property  additions acquired in 1997 and 1996. Capital
expenditures  for 1999 are estimated to be $126.6 million,  which includes $81.9
million  related  to  the  Company's  share  of  costs  for   developmental  and
exploratory drilling and $44.7 million related to the Company's March 1999 joint
venture  agreement  with THEC to explore  for natural gas and oil over a term of
three years. Under the terms of this agreement,  the Company will acquire 45% of
THEC's  interest in certain  offshore  undeveloped  leases and will commit up to
$100 million per year to explore and develop these leases.

Capital expenditures related to equity investments in Energy Related Investments
during the Transition  Period were $231.8  million.  These capital  expenditures
included $42 million of equity  investments  primarily to increase the Company's
interest in The Premier Transco Pipeline.  The Company also has a 24.5% interest
in a gas distribution  system in Northern Ireland that is being  refurbished and
expanded.  Also included in capital  expenditures  for the Transition  Period is
$189 million of equity  investments  related to the  formation of a  partnership
with  Gulf  Canada,  discussed  previously.  Capital  expenditures  for 1999 are
estimated  to be  $84.7  million,  including  the  Company's  share  of  capital
expenditures  in GMS of $12  million  and costs  related to the first stage of a
joint  venture  with Duke  Energy  Corporation  and the  Williams  Companies  in
developing  the Cross Bay(sm)  pipeline,  which will transport gas from existing
interstate pipelines in New Jersey to New York City and Long Island.

Capital  expenditures  of $28.4  million for the  Transition  Period  related to
Energy  Related  Services  reflected  primarily  the  acquisition  of a heating,
ventilating and air-conditioning ("HVAC") company.

                                       44

<PAGE>

The HVAC company,  located in New Jersey, designs, builds, installs and services
HVAC systems for commercial and residential customers.  Through this acquisition
the Company will be able to expand its management and marketing  activities into
the  middle-market  segment.  The  balance is related  to  expansion  of ongoing
operations of subsidiaries within this segment.  Capital expenditures for fiscal
1999 are estimated to be $57.4 million relating to acquisitions and expansion of
ongoing operations.

The level of future capital expenditures is reviewed on an ongoing basis and can
be affected by timing, scope and changes in investment opportunities.

FINANCING

Proceeds  from common  stock  issued  through  employee  and  shareholder  stock
purchase  plans have  provided  equity of $10.2  million  during the  Transition
Period.

Prior to the LIPA  Transaction,  all of the outstanding  shares of the following
preferred stock series were called for redemption:  Series UU, Series GG, Series
QQ,  Series  CC,  Series B,  Series  D,  Series E,  Series F,  Series H,  Series
I-Convertible,  Series L and  Series  NN.  These  preferred  stock  series  were
redeemed at an aggregate cost of $363.2 million, including $25.2 million of call
premiums and accrued  dividends.  On May 28, 1998,  LIPA  reimbursed the Company
$339.1 million for the preferred stock series that were redeemed. (See Note 5 to
the  Consolidated   Financial   Statements,   "Capital  Stock,"  for  additional
information.)

Upon  consummation of the LIPA  Transaction,  all of the  outstanding  long-term
debt,  except  for the 1997  Series A  Electric  Facilities  Revenue  Bonds  due
December 1, 2027, was transferred to LIPA. The Company issued  promissory  notes
to LIPA for $1.048 billion,  which  represented an amount  equivalent to the sum
of: (i) the  principal  amount of 7.3% Series  Debentures  due July 15, 1999 and
8.2% Series  Debentures due March 15, 2023 outstanding at May 28, 1998, and (ii)
an allocation of certain of the Authority  Financing Notes. The promissory notes
contain identical terms to the debt referred to in items (i) and (ii) above.

On November 3, 1998, the Company extinguished a portion of its obligation of the
promissory notes relating to certain series of bonds that were called by LIPA on
December 1, 1998.  The  Company's  obligation  for these  bonds of $2.1  million
consisted  of the  principal  amount and the  interest  accrued and  unpaid.  An
additional  portion of the promissory notes was also extinguished on December 1,
1998 due to the  mandatory  sinking fund  redemption  of $1 million on a certain
series of Authority Financing Notes.

On  March  1,  1999,  LIPA  converted  all of  the  transferred  long-term  debt
outstanding at variable rates to fixed rates of 5.15% and 5.30% per annum. As of
March 1, 1999,  the  remaining  debt  instruments  that  include  variable  rate
features  had a carrying  value of $149.9  million.  If  interest  rates were to
change on this variable rate debt by 100 basis points,  interest expense, net of
tax,  would  change  by less than a  million  dollars.  The rates of each of the
Company's gas utilities reflect the recovery of



                                    45
<PAGE>

a fixed level of interest  expense and, in addition,  the LIPA  agreements  also
include  recovery  of a base  level  of  interest  expense.  (See  Note 7 to the
Consolidated  Financial Statements,  "Long Term Debt" for additional information
on debt obligations.)

In December 1998, the Company  purchased a portfolio of securities  representing
direct purchase obligations of the U.S. Government. These securities were placed
in trust,  irrevocably  dedicated  to the  repayment  of certain Gas  Facilities
Revenue  Bonds  ("GFRB"),   thereby  effecting  an  in-substance  defeasance  of
approximately  $8.9 million  including  interest.  The  in-substance  defeasance
represents $4 million of outstanding bonds of each of the 6.75% Series 1989A due
February 2024 and the 6.75% Series 1989B due February  2024. The Company has not
been  relieved  of its  obligation  to service  the debt and remains the primary
obligor.  As a  result,  the  liability  is not  considered  extinguished  under
Statement of Financial  Accounting  Standards ("SFAS") No. 125,  "Accounting for
Transfers and Servicing of Financial Assets and  Extinguishment of Liabilities."
(See Note 7 to the  Consolidated  Financial  Statements,  "Long  Term  Debt" for
additional information on debt obligations.)

The  Company  intends  to  use a  combination  of  existing  cash  balances  and
internally  generated cash from operations to the maximum extent  practicable to
satisfy  stock  dividends  and  on-going  enhancements  to its gas  distribution
system.  The  Company  expects to access the  financial  markets  during 1999 to
satisfy approximately $400 million of maturing debt obligations. With respect to
the acquisition of the Ravenswood facilities discussed  previously,  the Company
intends to use some form of project financing for approximately  $425 million of
the purchase price. To the extent  necessary,  the Company can issue  short-term
commercial paper to finance  seasonal  working capital  requirements and if need
be, the Company has the ability to issue  tax-exempt  bonds through the New York
State Energy Research and Development Authority.

DIVIDENDS

The Company is currently paying a dividend at an annual rate of $1.78 per common
share.  The  Company's  dividend  policy is  reviewed  annually  by the Board of
Directors.  The  amount and timing of all  dividend  payments  is subject to the
discretion of the Board of Directors  and will depend upon business  conditions,
results of operations, financial conditions and other factors.

Common stock  dividends are payable on February 1, May 1, August 1, and November
1. In addition,  the Company pays an annual  dividend at the rate of $1.9875 per
share on the 7.95%  Preferred  Stock  Series  AA.  Common  and  preferred  stock
dividend  payments  made by the  Company  after  June 17,  1998 were a return of
capital for Federal income tax purposes for 1998.

Pursuant  to the  NYPSC's  orders  dated  February  5, 1998 and  April 14,  1998
approving the KeySpan  Acquisition,  Brooklyn Union's and Brooklyn Union of Long
Island's  ability to pay  dividends to the parent  company is  conditioned  upon
maintenance of a utility capital  structure with debt not exceeding 55% and 58%,
respectively,  of  total  utility  capitalization.  In  addition,  the  level of
dividends  paid by both  utilities may not be increased from current levels if a
40 basis point penalty


                                       46
<PAGE>

is  incurred  under the  customer  service  performance  program.  At the end of
Brooklyn  Union's and Brooklyn  Union of Long Island's rate years,  the ratio of
debt to total utility capitalization was 44% and 50%, respectively.

GAS DISTRIBUTION - RATE MATTERS

By  orders  dated  February  5, 1998 and April  14,  1998 the NYPSC  approved  a
Stipulation Agreement  ("Stipulation") among Brooklyn Union, LILCO, the Staff of
the Department of Public  Service and six other parties that in effect  approved
the KeySpan  Acquisition  and  established gas rates for both Brooklyn Union and
Brooklyn Union of Long Island.  Under the Stipulation,  $1 billion of efficiency
savings,  excluding  gas costs,  attributable  to operating  synergies  that are
expected to be realized over the 10 year period following the  combination,  are
to be allocated to ratepayers net of transaction costs.

Under the  Stipulation,  effective May 29, 1998,  Brooklyn Union's base rates to
core customers  were reduced by $23.9 million  annually.  In addition,  Brooklyn
Union is now subject to an earnings sharing provision  pursuant to which it will
be required to credit core customers with 60% of any utility  earnings up to 100
basis points above  certain  threshold  return on equity levels over the term of
the rate plan (other than any earnings associated with discrete  incentives) and
50% of any utility  earnings in excess of 100 basis points above such  threshold
levels.  The threshold  levels are 13.75% for the rate year ended  September 30,
1998,  13.50% for the rate years 1999 through 2001, and 13.25% for the rate year
2002. A safety and  reliability  incentive  mechanism was implemented on May 29,
1998, with a maximum 12 basis point pre-tax return on equity penalty if Brooklyn
Union fails to achieve certain safety and reliability performance standards.

The Stipulation also required Brooklyn Union of Long Island to reduce base rates
to its customers by $12.2 million annually  effective February 5, 1998 and by an
additional $6.3 million annually effective May 29, 1998.  Brooklyn Union of Long
Island is subject  to an  earnings  sharing  provision  pursuant  to which it is
required to credit to firm  customers  60% of any  utility  earnings in any rate
year up to 100 basis  points  above a return on equity of 11.10%  and 50% of any
utility  earnings  in excess of a return on equity of  12.10%.  Both a  customer
service  and a safety  and  reliability  incentive  performance  mechanism  were
implemented  effective  December 1, 1997 with maximum  pre-tax  return on equity
penalties of 40 and 12 basis  points,  respectively,  if Brooklyn  Union of Long
Island fails to achieve certain performance standards in these areas.

As a result of the  Stipulation,  synergy  savings  have been  reflected in base
rates  before  they  actually  will be realized  by the  Company.  As part of an
overall  plan to realize the synergy  savings,  the Company  initiated  an early
retirement  program  in  December  1998 in  which  approximately  600  employees
participated.  The Company is committed to realizing the $1 billion of operating
synergy  savings over a 10-year period  through an on-going  combination of cost
reductions and increased  operating  efficiencies.  However, no assurance can be
given as to what savings may be obtained from these efforts.

                                       47

<PAGE>


ELECTRIC SERVICES - LIPA AGREEMENTS

The Company,  through  certain of its  subsidiaries,  provides  services to LIPA
under the following agreements:

MANAGEMENT SERVICES AGREEMENT ("MSA")

A Company subsidiary manages the day-to-day operations,  maintenance and capital
improvements of the T&D system.  LIPA will exercise control over the performance
of the T&D system through specific standards for performance and incentives.  In
exchange for providing the services,  the Company will earn a $10 million annual
management fee and will be operating under an eight-year contract which provides
certain  incentives and imposes certain  penalties  based upon its  performance.
Annual service  incentives or penalties  exist under the MSA if certain  targets
are  achieved  or not  achieved.  In  addition,  the  Company  can earn  certain
incentives  for  cost  reductions  associated  with the  day-to-day  operations,
maintenance  and capital  improvements  of LIPA's T&D system.  These  incentives
provide for the Company to (i) retain  100% of cost  reductions  on the first $5
million in reductions,  and (ii) retain 50% of additional  cost reductions up to
15% of the total cost budget,  thereafter all savings will accrue to LIPA.  With
respect to cost  overruns,  the  Company  will  absorb the first $15  million of
overruns,  with a sharing  of  overruns  above $15  million.  There are  certain
limitations on the amount of cost sharing of overruns.  To date, the Company has
performed its obligations  under the MSA within the agreed to budget  guidelines
and the Company is committed to providing  on-going  services to LIPA within the
established  cost  structure.  However,  no assurances can be given as to future
operating results under this agreement.

POWER SUPPLY AGREEMENT ("PSA")

A  Company  subsidiary  sells to LIPA all of the  capacity  and,  to the  extent
requested,  energy from the  Company's  existing  oil and  gas-fired  generating
plants. Sales of capacity and energy are made with rates approved by the Federal
Energy Regulatory  Commission ("FERC").  The rates may be modified in the future
in  accordance  with the terms of the PSA for (i) agreed  upon labor and expense
indices applied to the base year, (ii) a return of and on net capital  additions
required for the generating  facilities,  and (iii) reasonably incurred expenses
that are outside the control of the  Company.  Rates  charged to LIPA  include a
fixed and  variable  component.  The  variable  component is billed to LIPA on a
monthly basis and is dependent on the amount of megawatt hours dispatched.  LIPA
has no  obligation  to purchase  energy from the Company and is able to purchase
energy on a least-cost basis from all available sources consistent with existing
interconnection  limitations  of the T&D System.  The Company  must,  therefore,
operate its  generating  facilities in a manner such that the Company can remain
competitive with other producers of energy.  To date, the Company has dispatched
to LIPA and LIPA has  accepted  the level of energy  generated  at the agreed to
price per megawatt hour . However,  no  assurances  can be given as to the level
and price of energy to be  dispatched  to LIPA in the future.  The PSA  provides
incentives and penalties that can total $4 million  annually for the maintenance
of the output capability of the generating  facilities.  The PSA runs for a term
of fifteen years.

                                       48

<PAGE>


In addition,  three years after the LIPA  Transaction is consummated,  LIPA will
have the right for a one-year period to acquire all of the Company's  generating
assets  included in the PSA at the fair market value at the time of the exercise
of the right, which value will be determined by independent appraisers.

ENERGY MANAGEMENT AGREEMENT ("EMA")

The EMA provides for a Company  subsidiary  to procure and manage fuel  supplies
for LIPA to fuel the  generating  facilities  under  contract  to it and perform
off-system  capacity and energy  purchases on a least-cost  basis to meet LIPA's
needs.  In exchange for these  services the Company  earns an annual fee of $1.5
million. In addition, the Company will arrange for off-system sales on behalf of
LIPA of excess output from the  generating  facilities  and other power supplies
either owned or under  contract to LIPA.  LIPA is entitled to  two-thirds of the
profit  from  any  off-system  energy  sales.  In  addition,  the  EMA  provides
incentives  and  penalties  that can total $7 million  annually for  performance
related to fuel  purchases  and  off-system  power  purchases.  The EMA covers a
period of fifteen years for the procurement of fuel supplies and covers a period
of eight years for off-system management services.

ENVIRONMENTAL

The Company  will be required to complete  the  investigation  and  undertake an
appropriate  level of  remediation  at  manufactured  gas  plant  ("MGP")  sites
formerly  operated by  Brooklyn  Union (or its  predecessors)  and LILCO (or its
predecessors).  With  respect to the Brooklyn  Union MGP sites,  the Company has
recently completed a Focused  Feasibility Study ("FFS") for the Brooklyn Borough
Works Site in Coney Island in  accordance  with the terms of its  Administrative
Order on Consent  ("ACO") with the New York State  Department  of  Environmental
Conservation ("DEC"). The FFS identified remedial action alternatives consistent
with  potential  future  commercial  re-use of the  property in the future;  the
Company anticipates  finalizing and implementing its choice of a remedial action
alternative  in the near  future.  At the  Clifton  site in Staten  Island,  the
Company is in the early stage of its  investigation  pursuant  to its ACO.  With
respect to the  Citizens  site,  the Company is waiting for a response  from the
City of New York regarding a  cost-sharing  agreement for the  investigation  of
that site;  although there is no current legal  obligation to address this site,
the Company  anticipates that a site  investigation will likely be undertaken in
the future.  Although the Company has identified other former Brooklyn Union MGP
sites to governmental authorities,  based upon current information,  the Company
does not believe  that an  obligation  to  investigate  and/or  remediate  these
properties is likely.

With respect to six of the former LILCO MGP sites,  it is  anticipated  that two
ACO's with the New York DEC will be finalized  in the near  future.  These ACO's
will establish an obligation to investigate  and remediate these six properties.
After the execution of the ACO for these six sites, the Company anticipates that
it will  enter  into  further  negotiations  with  the DEC with  respect  to the
preliminary investigation of other former LILCO MGP sites not currently owned by
the Company.

                                       49

<PAGE>


Although it is likely that such a preliminary  investigation  will be undertaken
in the future,  it is not currently known whether there will be an obligation to
remediate any of these properties.

The Company estimates the minimum cost of its MGP-related  environmental cleanup
activities will be $130.3 million and has recorded a related  liability for such
amount.  Further,  as of December  31,  1998,  the Company  has  expended  $13.7
million.

The  Company is  awaiting  final  development  of state and  federal  regulatory
programs  with respect to NOX  reduction  requirements  for its  existing  power
plants.  The  Company's  compliance  strategy  may be  composed  of fuel  choice
decisions,  acquisition of pollution credits,  and/or  installation of pollution
control   equipment.   Although  the  Company  is  currently   considering   its
alternatives,  final decisions cannot be made until the regulatory  requirements
are  clarified.  Expenditures  to implement a final strategy are not expected to
begin until 2001.

Additional capital expenditures associated with the renewal of the surface water
discharge  permits for the  Company's  power  plants may be required by the DEC.
Until the final  permits  are  issued,  the Company  cannot  determine  what the
monitoring  obligations  will be,  the  results of any such  monitoring,  or the
impact that any required equipment upgrades would have on Company operations.

YEAR 2000 ISSUES

The Company has  evaluated  the extent to which  modifications  to its  computer
software, hardware and databases will be necessary to accommodate the year 2000.
The Company's  computer  applications  are generally  based on two digits and do
require  some  additional   programming  to  recognize  the  start  of  the  new
millennium.

System Readiness

A  corporate-wide  program  has been  established  to review  Company  software,
hardware, embedded systems and associated compliance plans. The program includes
both  information  technology  ("IT") and non-IT  systems.  Non-IT  systems  are
basically  vendor  supplied  embedded  systems  that are  critical  to the daily
operations of the Company.  These systems are generally in the areas of electric
production, distribution, transmission, gas distribution and communications. The
readiness of suppliers and vendor  systems is also under review.  The project is
under  the  direction  of the Year  2000  Program  Office,  chaired  by the Vice
President, Technology Operations and Corporate Y2K Officer.

The critical areas of operations are being addressed  through a business process
review  methodology.  Each of the Company's critical business processes is being
reviewed  to:  identify  and  inventory  sub-  components;  assess for year 2000
compliance;  establish  repair  plans  as  necessary;  and  test in a year  2000
environment.  The inventory  phase for both the IT systems and non-IT systems is
complete. The total assessment phase is 100% complete for the IT systems, and as
of December 31, 1998, over 90% complete for non-IT systems.

                                       50

<PAGE>


Hardware,  software  and embedded  systems are being tested and  certified to be
year 2000 ready.  As of December 31,  1998,  repair and testing was 70% complete
for the IT systems and 22% complete for the non-IT systems. Components needed to
support the critical  business  processes and  associated  business  contingency
plans are expected to be year 2000 ready by July 1, 1999.

Vendors and business partners needed to support the critical business  processes
are also being  reviewed for their year 2000  readiness.  At this time,  none of
these  vendors  have  indicated  to the  Company  that they  will be  materially
adversely affected by the year 2000 problem.

Risk Scenarios and Contingency Plans

The Company has  analyzed  each of the critical  business  processes to identify
possible year 2000 risks.  Each critical  business  process will be certified by
the responsible  corporate officer as being year 2000 ready.  However,  the most
reasonably  likely  worst case  scenarios  are also being  identified.  Business
operating  procedures are being reviewed to ensure that risks are minimized when
entering  the year 2000 and other high risk dates.  Contingency  plans are being
developed to address possible failure points in each critical  business process,
and are scheduled to be completed by July 1999.

While the Company must plan for the  following  possible  worst case  scenarios,
management believes that these events are improbable:

LOSS OF GAS PIPELINE DELIVERY
The  Company's  gas utility  subsidiaries  receive gas  delivery  from  multiple
national and international  pipelines and therefore the effects of a loss in any
one pipeline can be mitigated through the use of other pipelines.  Complete loss
of all the supply lines is not considered a reasonable  scenario.  Nevertheless,
the impact of the loss of any one  pipeline  is  dependent  on  temperature  and
vaporization rate. Should gas supply be decreased due to the loss of a pipeline,
each of the  Company's  gas  utility  subsidiaries  also  has a local  liquefied
natural gas  facility  under its direct  control that stores  sufficient  gas to
offset the temporary  loss of any one  pipeline.  The partial loss of gas supply
will not affect the Company's  ability to supply  electricity  since most of the
plants have the ability to operate on oil.

LOSS OF ELECTRIC GENERATION OR ELECTRIC TRANSMISSION AND DISTRIBUTION
Electric  utilities  are  physically  connected  on a  regional  basis to manage
electric load.  This is often  referred to as the regional  grid.  Presently the
Company is working,  on behalf of LIPA, with other regional utilities to develop
a coordinated  operating  plan.  Should there be an instability in the grid, the
Company has the ability to remove LIPA's facilities and operate independently.

Certain  electric system  components such as individual  generating  units,  T&D
control facilities, and the electric energy management system have the potential
to be affected by the year 2000 problem.  The Company has  inventoried  both its
and LIPA's  electric  system  components and developed a plan to certify mission
critical  processes as year 2000 ready.  As manager of the T&D  facilities,  the
Company is responsible for ensuring that these  facilities  operate properly and
that related systems


                                       51

<PAGE>


are year 2000 ready.  Under the terms of the various LIPA  contracts,  LIPA will
reimburse  the Company for certain  year 2000 costs  incurred by the Company for
these facilities.  Contingency plans are being developed, where appropriate, for
loss  of  critical  system  elements.   The  Company  presently  estimates  that
contingency plans regarding its electric  facilities should be completed by July
1999.

LOSS OF TELECOMMUNICATIONS
The Company has a substantial dependency on many  telecommunication  systems and
services  for both  internal  and  external  communication  providers.  External
communications  with the public  and the  ability of  customers  to contact  the
Company in cases of  emergency  response is  essential.  The Company  intends to
coordinate  its  emergency  response  efforts  with  the  offices  of  emergency
management  of the  various  local  governments  within its  service  territory.
Internally,  there  are a  number  of  critical  processes  in both  the gas and
electric  operating  areas  that  rely  on  external  communication   providers.
Contingency  plans will address methods for manually  monitoring these functions
and/or utilizing  alternative  communication  methods.  These  contingency plans
should be finalized by July 1999.

In  addition  to the above,  the  Company  is also  planning  for the  following
scenarios:   short  term  reduction  in  system  power  generating   capability;
limitation to fuel oil operations; reduction in quality of power output; loss of
automated meter reading; loss of ability to read customer meters,  prepare bills
and collect and process customer payments; and loss of the  purchasing/materials
management system.

The  Company  believes  that,  with   modifications  to  existing  software  and
conversions  to new  hardware  and  software,  the year 2000 issue will not pose
significant  operational  problems for its computer  systems.  However,  if such
modifications  and  conversions  are not made, or are not completed on time, and
contingency plans fail, the year 2000 issue could have a material adverse impact
on the  operations  of the  Company,  the extent of which  cannot  currently  be
determined.

Cost of Remediation

The Company expects to spend a total of approximately $32 million to address the
year 2000 issue. As of December 31, 1998, $15.8 million had been expended on the
project.  The largest  percentage  expended is  attributable  to the assessment,
repair and testing of  corporate  IT  supported  computer  software and in-house
written applications, which total $12.3 million. In 1999, the IT year 2000 costs
are  expected to be 8.3% of the IT budget.  The year 2000 issue has not directly
resulted in delaying any IT projects.  Presently,  the Company expects that cash
flow from  operations  and cash on-hand will be sufficient to fund the year 2000
project expenditures.


                                       52

<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK

The  Company and its  subsidiaries  are subject to various  risk  exposures  and
uncertainties  associated with their operations.  The primary risk exposures are
related  to  firm  gas  contracts,  financial  instruments,  various  regulatory
initiatives  of  the  NYPSC  and  FERC,  the  increasingly   competitive  energy
environment,  and to a lesser extent foreign  currency  fluctuations.  Set forth
below is a  description  of these  exposures  and an  explanation  as to how the
Company and its subsidiaries have managed and, to the extent possible, sought to
reduce these risks.

FIXED CHARGES UNDER FIRM CONTRACTS
The  Company's  gas utility  subsidiaries  have entered  into various  long-term
contracts  for gas  delivery,  storage  and supply  services in order to provide
sufficient  supply for their customers.  The contracts have remaining terms that
cover from one to fourteen years.  Certain of these contracts require payment of
monthly  charges  (demand  charges) in the aggregate  amount of $5.1 million per
month in all events regardless of the level of service available.  At this time,
the Company's exposure is minimal since these charges are currently recovered as
gas cost under the respective gas adjustment clauses contained in the tariffs of
the  Company's  gas  utility  subsidiaries.  The  Company  does not expect  rate
regulation  to change  in the  immediate  future  regarding  recovery  of demand
charges;  however,  the  Company  is unable to  predict  the  evolution  of rate
regulation. In addition,  Company subsidiaries have entered into agreements with
Enron  Corporation  and  Coral  Energy  Resources,  LP which  provide  for these
companies to engage in overall gas supply  management  arrangements  with and on
behalf of the Company.

DERIVATIVE FINANCIAL INSTRUMENTS
The  Company's  gas utility  subsidiaries,  marketing  and gas  exploration  and
production   subsidiaries  employ,  from  time  to  time,  derivative  financial
instruments,  such as natural gas and oil  futures,  options and swaps,  for the
purpose of hedging  exposure to commodity  price risk. At December 31, 1998, the
value at risk of the related  positions as measured by the maximum adverse price
movement in a single day was not material.

Whenever hedge positions are in effect,  the Company's  subsidiaries are exposed
to credit risk in the event of  nonperformance  by counter parties to derivative
contracts,  as well as nonperformance by the counter parties of the transactions
against which they are hedged. The Company believes that the credit risk related
to the futures,  options and swap instruments is no greater than that associated
with the  primary  commodity  contracts  which  they  hedge,  as the  instrument
contracts  are with major  investment  grade  financial  institutions,  and that
reduction of the exposure to price risk lowers the  Company's  overall  business
risk.  (See  Note  8 to  the  Consolidated  Financial  Statements,  "Contractual
Obligations, Financial Instruments and Contingencies.")

REGULATORY ISSUES AND THE COMPETITIVE ENVIRONMENT
The energy  industry  continues to undergo  fundamental  changes as  regulators,
elected officials and customers seek lower energy prices.  These changes,  which
may have a significant impact on the future financial  performance of utilities,
are being driven by a number of factors including a


                                       53

<PAGE>


regulatory  environment in which traditional  cost-based regulation is seen as a
barrier to lower energy prices.

Over the past few years,  the NYPSC has been  formulating a policy  framework to
guide the  transition  of New York  State's  gas  distribution  industry  in the
deregulated gas industry environment.  Since 1996, customers in the small-volume
market have been given the option to purchase  their gas  supplies  from sources
other than the Company's two gas utility  subsidiaries.  Large-volume  customers
have had this option for a number of years. In addition to transporting gas that
customers purchase from marketers,  the Company's  utilities have been providing
billing,  meter reading and other  services for  aggregate  rates that match the
distribution  charge  reflected  in otherwise  applicable  sales rates to supply
these customers.

In November 1998, the NYPSC issued a policy  statement  setting forth its vision
for  furthering  competition  in the natural gas  industry.  Under this  vision,
regulated natural gas utilities or local distribution  companies ("LDC's") would
plan to exit the  business of  purchasing  gas for and selling gas to  customers
(the merchant  function) over the next three to seven years.  LDC's would remain
the operators of the gas system (the distribution  function) and the provider of
last resort of natural gas  supplies  during that period and until  alternatives
are developed.  The NYPSC's goal is to encourage  more  competition at the local
level by separating the merchant function from the distribution function.

The NYPSC has acknowledged that each utility has operating  circumstances unique
to  its  service  territory  and  therefore   separation  of  the  merchant  and
distributions functions should be done on a utility-by-utility  basis. With this
in mind,  the NYPSC will  institute  individual  proceedings  for each regulated
natural gas utility so that the parties can determine the most  effective  means
of  achieving  the NYPSC's  goals.  In addition,  the NYPSC will also  institute
generic proceedings to examine reliability and other issues.

The  Company  conceptually   supports  the  vision  articulated  in  the  policy
statement.  However,  in the Company's  view,  any  transition to a new industry
structure must adequately  address a number of unresolved  issues to ensure that
separating  the merchant and  distribution  functions is in the best interest of
natural gas customers  and is equitable to LDC's.  Such issues  include:  system
reliability,  recovery of prudently  incurred  costs,  the obligation to provide
service to all firm  customers,  tax disparity among  suppliers,  administrative
overheads,  customer  acceptance  and the  obligation  to be  "supplier  of last
resort." Further, the Company will also pursue legislative changes where needed.
The Company  currently is not able to determine  what effect these  changes,  if
implemented, may have on its operations.

FOREIGN CURRENCY FLUCTUATIONS
The  Company  follows  the  principles  of  SFAS  No.  52,   "Foreign   Currency
Translation"  for recording its investments in foreign  affiliates.  At December
31, 1998, the foreign currency translation  adjustment was immaterial.  However,
due to the  Company's  recent  purchase of certain  Canadian  interests  and its
continued and possibly expanded activities internationally, foreign currency
translation  adjustments in the future could become  material,  the magnitude of
which  cannot  be  predicted  at  this  time.  (See  Note 1 to the  Consolidated
Financial Statements, "Summary of Significant Accounting Policies.")


                                       54

<PAGE>


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



FINANCIAL STATEMENT RESPONSIBILITY

The Consolidated  Financial  Statements of the Company and its subsidiaries were
prepared  by  management  in  conformity  with  generally  accepted   accounting
principles.

The  Company's  system of internal  controls  is designed to provide  reasonable
assurance  that assets are  safeguarded  and that  transactions  are executed in
accordance with management's  authorizations  and recorded to permit preparation
of financial statements that present fairly the financial position and operating
results of the Company.  The Company's  internal  auditors evaluate and test the
system of internal  controls.  The Company's Vice President and General  Auditor
reports  directly to the Audit  Committee  of the Board of  Directors,  which is
composed entirely of outside  directors.  The Audit Committee meets periodically
with management,  the Vice President and General Auditor and Arthur Andersen LLP
to review and discuss internal accounting  controls,  audit results,  accounting
principles and practices and financial reporting matters.

<TABLE>
<CAPTION>

CONSOLIDATED BALANCE SHEET
                                                                                           (In Thousands of Dollars)
====================================================================================================================
                                                                   DECEMBER 31, 1998                March 31, 1998
====================================================================================================================

ASSETS

PROPERTY
<S>                                                                  <C>                          <C>              
Electric                                                             $       1,109,199            $       4,102,166
Gas                                                                          3,257,726                    1,246,432
Common                                                                         345,007                      343,341
Accumulated depreciation                                                    (1,480,038)                  (1,877,858)
Gas exploration and production, at cost                                        994,104                            -
Accumulated depletion                                                         (447,733)                           -
--------------------------------------------------------------------------------------------------------------------
                                                                             3,778,265                    3,814,081
--------------------------------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------------------------------
EQUITY INVESTMENTS AND OTHER                                                   341,346                       50,816
--------------------------------------------------------------------------------------------------------------------

CURRENT ASSETS
Cash and temporary cash investments                                            942,776                      180,919
Customer accounts receivable                                                   142,307                      321,372
Accrued revenues                                                               178,529                      124,464
Other accounts receivable                                                      230,479                       43,744
Allowance for uncollectible accounts                                           (20,026)                     (23,483)
Special deposits                                                               145,684                       95,790
Gas in storage, at average cost                                                145,277                       14,634
Fuel oil, at average cost                                                            -                       32,142
Materials and supplies, at average cost                                         74,193                       54,883
Other                                                                           72,818                       13,807
--------------------------------------------------------------------------------------------------------------------
                                                                             1,912,037                      858,272
--------------------------------------------------------------------------------------------------------------------
DEFERRED CHARGES
Regulatory assets
   Electric related                                                                  -                    6,768,148
   Other                                                                       279,524                      163,765
Goodwill                                                                       201,887                            -
Other                                                                          382,043                      245,643
--------------------------------------------------------------------------------------------------------------------
                                                                               863,454                    7,177,556
--------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS                                                         $       6,895,102            $      11,900,725
====================================================================================================================
</TABLE>

The Notes to  Consolidated  Financial  Statements  are an integral part of these
statements.


                                       55
<PAGE>
<TABLE>
<CAPTION>


CONSOLIDATED BALANCE SHEET
                                                                                           (In Thousands of Dollars)
====================================================================================================================
                                                              DECEMBER 31, 1998                     March 31, 1998
====================================================================================================================

CAPITALIZATION AND LIABILITIES

CAPITALIZATION
<S>                                                                  <C>                          <C>              
Common stock                                                         $       2,973,388            $       1,707,559
Retained earnings                                                              474,188                      956,092
Accumulated foreign currency adjustment                                           (952)                           -
Treasury stock purchased                                                      (423,716)                      (1,204)
--------------------------------------------------------------------------------------------------------------------
   Total common shareholders' equity                                         3,022,908                    2,662,447
Preferred stock                                                                447,973                      562,600
Long-term debt                                                               1,619,067                    4,381,949
--------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION                                                         5,089,948                    7,606,996
--------------------------------------------------------------------------------------------------------------------

CURRENT LIABILITIES
Current maturities of long-term debt                                           398,000                      101,000
Current redemption requirements of preferred stock                                   -                      139,374
Accounts payable and accrued expenses                                          519,288                      318,701
Dividends payable                                                               66,232                       58,748
Taxes accrued                                                                   69,742                       34,753
Customer deposits                                                               29,774                       28,627
Interest accrued                                                                19,965                      146,607
--------------------------------------------------------------------------------------------------------------------
                                                                             1,103,001                      827,810
--------------------------------------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES
Regulatory liabilities
   Electric related                                                                  -                      358,363
   Other                                                                        53,137                       31,068
Deferred federal income tax                                                     71,549                    2,539,364
Postretirement benefits, claims & other reserves                               457,459                      467,655
Other                                                                           50,457                       69,469
--------------------------------------------------------------------------------------------------------------------
                                                                               632,602                    3,465,919
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
MINORITY INTEREST IN SUBSIDIARY COMPANY                                         69,551                            -
--------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES                                 $       6,895,102            $      11,900,725
====================================================================================================================
</TABLE>

The Notes to  Consolidated  Financial  Statements  are an integral part of these
statements.

                                       56

<PAGE>

<TABLE>
<CAPTION>

CONSOLIDATED STATEMENT OF INCOME

                                                                                (In Thousands  of Dollars, Except Per Share Amounts)
------------------------------------------------------------------------------------------------------------------------------------
                                                         NINE MONTHS          Twelve Months      Three Months
                                                             ENDED                Ended              Ended           Year Ended
                                                      DECEMBER 31, 1998      March 31, 1998     March 31, 1997   December 31, 1996
------------------------------------------------------------------------------------------------------------------------------------

REVENUES
<S>                                                   <C>                  <C>                <C>                 <C>              
Gas distribution                                      $           849,543  $         645,659  $         293,391   $         684,260
Gas exploration and production                                     70,812                  -                  -                   -
Electric services                                                 408,305                  -                  -                   -
Electric distribution                                             330,011          2,478,435            557,791           2,466,435
Other                                                              63,181                  -                  -                   -
------------------------------------------------------------------------------------------------------------------------------------
Total Revenues                                                  1,721,852          3,124,094            851,182           3,150,695
------------------------------------------------------------------------------------------------------------------------------------

OPERATING EXPENSES
Purchased gas                                                     318,703            299,469            136,727             322,641
Fuel and purchased power                                           91,762            658,338            165,140             640,610
Operations                                                        734,957            400,045             95,673             381,076
Maintenance                                                       113,714            111,120             29,340             118,135
Depreciation, depletion and amortization                          294,864            169,770             39,820             171,681
Electric regulatory amortizations                                 (40,005)            13,359             19,966              97,698
Operating taxes                                                   257,124            466,326            117,513             472,076
Federal income taxes (credit)                                     (62,506)           237,371             57,002             210,197
------------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses                                        1,708,613          2,355,798            661,181           2,414,114
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME                                                   13,239            768,296            190,001             736,581
------------------------------------------------------------------------------------------------------------------------------------

OTHER INCOME AND (DEDUCTIONS)
Transaction related expenses                                     (107,912)                 -                  -                   -
   (net of $99,701 income tax )
Interest and other-net                                             37,314             (1,583)             3,574              27,512
Minority interest                                                  29,141                  -                  -                   -
------------------------------------------------------------------------------------------------------------------------------------
Total Other Income and (Deductions)                               (41,457)            (1,583)             3,574              27,512
------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INTEREST CHARGES                             (28,218)           766,713            193,575             764,093

------------------------------------------------------------------------------------------------------------------------------------
Interest charges                                                  138,715            404,473            105,878             447,629
------------------------------------------------------------------------------------------------------------------------------------

NET INCOME (LOSS)                                                (166,933)           362,240             87,697             316,464
Preferred stock dividend requirements                              28,604             51,813             12,969              52,216
------------------------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) FOR COMMON STOCK                      $          (195,537) $         310,427  $          74,728   $         264,248
------------------------------------------------------------------------------------------------------------------------------------
Foreign currency adjustment                                          (952)                 -                  -                   -
====================================================================================================================================
COMPREHENSIVE INCOME (LOSS)                           $          (196,489) $         310,427  $          74,728   $         264,248
====================================================================================================================================
Average common shares outstanding (000)                           145,767            121,415            120,995             120,360

BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE    $             (1.34) $            2.56  $            0.62   $            2.20
====================================================================================================================================
</TABLE>

                                       57
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS

                                                                                                          (In Thousands of Dollars)
------------------------------------------------------------------------------------------------------------------------------------
                                                                 NINE MONTHS      Twelve Months     Three Months
                                                                    ENDED             Ended             Ended          Year Ended
                                                              DECEMBER 31, 1998   March 31, 1998   March 31, 1997  December 31, 1996
------------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES

<S>                                                          <C>                  <C>               <C>               <C> 
Net Income (Loss)                                            $         (166,933)  $       362,240   $        87,697   $      316,464
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
      CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
  Depreciation, depletion and amortization                             294,864         169,770            39,820            171,681
  Regulatory amortization and other                                    (40,005)        (10,273)           14,047             72,439
  Deferred federal income tax                                          (85,936)        146,859            32,835            167,060
  Income from equity investments                                        (5,842)              -                 -                  -
  Dividends from equity investments                                      4,219               -                 -                  -
CHANGES IN ASSETS AND LIABILITIES (NET OF ACQUISITION)
  Accounts receivable and accrued revenues                             (81,024)          8,334           (26,817)            92,334
  Pensions and other postretirement benefits                          (283,774)              -                 -                  -
  Materials and supplies, fuel oil and gas in storage                  (63,195)         14,391            67,242            (34,531)
  Accounts payable and accrued expenses                                132,028         (54,835)          (69,958)           (13,826)
  Interest accrued                                                    (151,268)         (2,624)           16,632             (2,289)
  Special deposits                                                     (41,040)        (58,159)              635             25,146
  Other                                                                 27,618          98,381            (2,566)            97,835
------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Operating Activities                   (460,288)          674,084           159,567          892,313
------------------------------------------------------------------------------------------------------------------------------------

INVESTING ACTIVITIES

Capital expenditures                                                  (676,563)       (297,230)          (62,479)          (291,618)
Net cash from KeySpan Acquisition                                      165,168               -                 -                  -
Net proceeds from LIPA Transaction                                   2,314,588               -                 -                  -
Miscellaneous investment                                                13,466         (31,987)              160             (4,806)
------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities                  1,816,659          (329,217)          (62,319)        (296,424)
------------------------------------------------------------------------------------------------------------------------------------

FINANCING ACTIVITIES

Proceeds from sale of common stock                                      10,170          43,218             4,640             18,837
Treasury stock purchased                                              (423,716)              -                 -                  -
Issuance of preferred stock                                             84,973               -                 -                  -
Issuance of long-term debt                                             112,535               -                 -                  -
Redemption of long-term debt                                          (103,000)         (2,050)         (250,000)          (419,800)
Preferred stock dividends paid                                         (28,604)        (51,833)          (12,969)           (52,264)
Common stock dividends paid                                           (210,177)       (215,790)          (53,749)          (213,753)
Other                                                                  (36,695)         (2,032)             (624)              (369)
------------------------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Financing Activities                               (594,514)         (228,487)         (312,702)        (667,349)
------------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents                   761,857           116,380          (215,454)         (71,460)
====================================================================================================================================
Cash and cash equivalents at beginning of period           $           180,919 $        64,539   $       279,993   $        351,453
Net increase (decrease) in cash and cash equivalents                   761,857           116,380          (215,454)         (71,460)
------------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period                 $           942,776 $         180,919 $          64,539 $        279,993
====================================================================================================================================

Interest paid                                                         $125,914        $364,864          $112,981           $404,663
Federal income tax paid                                              $94,680          $108,980                 -            $45,050

</TABLE>

The Notes to  Consolidated  Financial  Statements  are an integral part of these
statements.

                                       58

<PAGE>

<TABLE>
<CAPTION>

CONSOLIDATED STATEMENT OF RETAINED EARNINGS
                                                                                                     (In Thousands of Dollars)
==============================================================================================================================
                                                 DECEMBER 31, 1998     March 31, 1998     March 31, 1997   December 31, 1996
==============================================================================================================================
<S>                                             <C>                  <C>                <C>                 <C>              
Balance at beginning of period                  $           956,092  $         861,751  $         840,867   $         790,919
Net income (loss) for period                               (166,933)           362,240             87,697             316,464
------------------------------------------------------------------------------------------------------------------------------
                                                            789,159          1,223,991            928,564           1,107,383
------------------------------------------------------------------------------------------------------------------------------
Deductions
Cash dividends declared on common stock                     214,012            216,086             53,844             214,255
Cash dividends declared on preferred stock                   28,604             51,813             12,969              52,240
Other, primarily write-off of                                72,355                  -                  -                  21
   capital stock expense
------------------------------------------------------------------------------------------------------------------------------
Balance at end of period                        $           474,188  $         956,092  $         861,751   $         840,867
------------------------------------------------------------------------------------------------------------------------------
</TABLE>

The Notes to  Consolidated  Financial  Statements  are an integral part of these
statements.

                                       59
<PAGE>

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CAPITALIZATION
==================================================================================================================================
                                                                    Shares Issued                        (In Thousands of Dollars)
----------------------------------------------------------------------------------------------------------------------------------
                                                   DECEMBER 31, 1998   March 31, 1998         DECEMBER 31, 1998     March 31, 1998
----------------------------------------------------------------------------------------------------------------------------------

COMMON SHAREHOLDERS' EQUITY
<S>                                                     <C>             <C>                <C>                  <C>              
Common stock, $0.01 par value                           144,628,654                        $          1,446     $               -
              $5.00 par value                                           121,727,040                       -               608,635
Premium on capital stock                                                                          2,971,942             1,098,924
Retained earnings                                                                                   474,188               956,092
Accumulated foreign currency adjustment                                                                (952)                    -
Treasury stock, at cost                                  14,209,000          46,281                (423,716)               (1,204)
----------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON SHAREHOLDERS' EQUITY                                                                 3,022,908             2,662,447
----------------------------------------------------------------------------------------------------------------------------------

PREFERRED STOCK - REDEMPTION REQUIRED
Par value $100 per share
    7.40% Series L                                                -         150,500                       -                15,050
    7.66% Series CC                                               -         570,000                       -                57,000
Less - Series called for redemption                               -               -                       -                15,050
----------------------------------------------------------------------------------------------------------------------------------
                                                                                                          -                57,000
----------------------------------------------------------------------------------------------------------------------------------

Par value $25 per share
    7.95% Series AA                                      14,520,000      14,520,000                 363,000               363,000
    $1.67 Series GG                                               -         880,000                       -                22,000
    $1.95 Series NN                                               -       1,554,000                       -                38,850
    7.05% Series QQ                                               -       3,464,000                       -                86,600
    6.875% Series UU                                              -       2,240,000                       -                56,000
Less - Series called for redemption                               -               -                       -                38,850
Less - Mandatory redemption of preferred stock                    -               -                       -                22,000
----------------------------------------------------------------------------------------------------------------------------------
                                                                                                    363,000               505,600
----------------------------------------------------------------------------------------------------------------------------------
Total Preferred Stock - Redemption Required                                                         363,000               562,600
----------------------------------------------------------------------------------------------------------------------------------

PREFERRED STOCK - NO REDEMPTION REQUIRED
Par value $100 per share
    7.07% Series B - private placement                      553,000               -                  55,300                     -
    7.17% Series C - private placement                      197,000               -                  19,700                     -
    6.00% Series A - private placement                       99,727               -                   9,973                     -
    5.00% Series B                                                -         100,000                       -                10,000
    4.25% Series D                                                -          70,000                       -                 7,000
    4.35% Series E                                                -         200,000                       -                20,000
    4.35% Series F                                                -          50,000                       -                 5,000
    5 1/8% Series H                                               -         200,000                       -                20,000
    5 3/4% Series I - Convertible                                 -          14,743                       -                 1,474
Less - Series called for redemption                               -                         -             -                63,474
----------------------------------------------------------------------------------------------------------------------------------
Total Preferred Stock - No Redemption Required                                                       84,973                     -
----------------------------------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK                                                                      $        447,973     $         562,600
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

The Notes to  Consolidated  Financial  Statements  are an integral part of these
statements.

<PAGE>

                                       60

<TABLE>
<CAPTION>

CONSOLIDATED STATEMENT OF CAPITALIZATION (CONTINUED)
==================================================================================================================================
                                                                                                         (In Thousands of Dollars)
                Long-Term Debt                      Interest Rate         Series              DECEMBER 31, 1998     March 31, 1998
----------------------------------------------------------------------------------------------------------------------------------
GENERAL AND REFUNDING BONDS
<S>                                                <C>                   <C>                <C>                   <C>            
        April 15, 1998  through  July 1, 2024      9 5/8% - 7 5/8%       various            $             -       $     1,286,000
----------------------------------------------------------------------------------------------------------------------------------
Total General and Refunding Bonds                                                                         -             1,286,000
----------------------------------------------------------------------------------------------------------------------------------
DEBENTURES
        July 15, 1999  through  March 15, 2023      9.00% - 6.25%        various                          -             2,270,000
----------------------------------------------------------------------------------------------------------------------------------
Total Debentures                                                                                          -             2,270,000
----------------------------------------------------------------------------------------------------------------------------------
AUTHORITY FINANCING NOTES
INDUSTRIAL DEVELOPMENT REVENUE BONDS
        December 1, 2006                                7.50%            1976 A,B                         -                 2,000
POLLUTION CONTROL REVENUE BONDS
        December 1, 2006 through  March 1, 2016    8.25%  -  3.58%       various                          -               213,675
ELECTRIC FACILITIES REVENUE BONDS
        September 1, 2019 through  August 1, 2025  7.15%  -  3.70%       various                          -               724,880
        December 1, 2027                               variable           1997 A                     24,880                     -
----------------------------------------------------------------------------------------------------------------------------------
Total Authority Financing Notes                                                                      24,880               940,555
----------------------------------------------------------------------------------------------------------------------------------
PROMISSORY NOTES TO LIPA
DEBENTURES
        July 15, 1999                                   7.30%                                       397,000                     -
        March 15, 2023                                  8.20%                                       270,000                     -
POLLUTION CONTROL REVENUE BONDS
        December 1, 2006                                7.50%             1976 A                     26,375                     -
        December 1, 2009                                7.80%             1979 B                     19,100                     -
        March 1, 2016                                  variable           1985 A                     58,022                     -
        March 1, 2016                                  variable           1985 B                     50,000                     -
ELECTRIC FACILITIES REVENUE BONDS
        September 1, 2019                               7.15%             1989 B                     35,030                     -
        June 1, 2020                                    7.15%             1990 A                     73,900                     -
        December 1, 2020                                7.15%             1991 A                     26,560                     -
        February 1, 2022                                7.15%             1992 B                     13,455                     -
        August 1, 2022                                  6.90%             1992 D                     28,060                     -
        November 1, 2023                               variable           1993 B                     29,600                     -
        October 1, 2024                                variable           1994 A                      2,600                     -
        August 1, 2025                                 variable           1995 A                     15,200                     -
----------------------------------------------------------------------------------------------------------------------------------
Total Promissory Notes to LIPA                                                                    1,044,902                     -
----------------------------------------------------------------------------------------------------------------------------------
GAS FACILITIES REVENUE BONDS
        April 1, 2020                                   6.368%           1993 A,B                    75,000                     -
        January 1, 2021                                 5.50%              1996                     153,500                     -
        February 1,  2024                               6.75%             1989 A                     45,000                     -
        February 1,  2024                               6.75%             1989 B                     45,000                     -
        June 1, 2025                                    5.60%             1993 C                     55,000                     -
        July 1, 2026                                    6.95%           1991 A, B                   100,000                     -
        July 1, 2026                                    5.635%         1993 D-1, D-2                 50,000                     -
        December 1, 2020                               variable            1997                     125,000                     -
----------------------------------------------------------------------------------------------------------------------------------
Total Gas Facilities Revenue Bonds                                                                  648,500                     -
----------------------------------------------------------------------------------------------------------------------------------
Unamortized Discount on Debt                                                                         (1,750)              (13,606)
----------------------------------------------------------------------------------------------------------------------------------
Total                                                                                             1,716,532             4,482,949
Less Current Maturities                                                                             398,000               101,000
Other Subsidiary Debt                                                                               300,535                     -
----------------------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT                                                                              1,619,067             4,381,949
----------------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION                                                                       $      5,089,948     $       7,606,996
==================================================================================================================================
</TABLE>

The Notes to  Consolidated  Financial  Statements  are an integral part of these
statements.


                                       61

<PAGE>

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A.  REORGANIZATION

MarketSpan  Corporation d/b/a KeySpan Energy (the "Company") is the successor to
Long Island Lighting  Company  ("LILCO"),  as a result of a transaction with the
Long Island Power Authority ("LIPA") (the "LIPA  Transaction") and following the
acquisition (the "KeySpan  Acquisition") of KeySpan Energy Corporation  ("KSE").
The Company is a  "predominately  intrastate"  public  utility  holding  company
exempt from most of the provisions of the Public Utility  Holding Company Act of
1935,  as amended.  As a result of the  transaction  with LIPA,  LILCO  became a
wholly-owned  subsidiary of LIPA, a public authority and a political subdivision
of New York State.  KSE, a  wholly-owned  subsidiary  of the Company and also an
exempt utility  holding  company under the Public Utility Holding Company Act of
1935, as amended, is no longer a registrant under the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended.

On May 28, 1998, the Company completed two business  combinations as a result of
which  it  (i)  became  the  successor  operator  of  the  non-nuclear  electric
generating  facilities,  gas  distribution  operations and common plant formerly
owned by LILCO and entered  into  long-term  service  agreements  to operate the
electric  transmission  and  distribution  system  acquired  by  LIPA;  and (ii)
acquired KSE, the parent  company of The Brooklyn  Union Gas Company  ("Brooklyn
Union").  (See Note 2, "Sale of LILCO  Assets,  Acquisition  of  KeySpan  Energy
Corporation and Transfer of Assets and Liabilities to the Company.")

With  the  exception  of  a  small  portion  of  Queens  County,  the  Company's
subsidiaries are the only providers of gas distribution services in the New York
City  counties of Kings,  Richmond  and Queens and the Long  Island  counties of
Nassau and  Suffolk.  Brooklyn  Union  provides  gas  distribution  services  to
customers in the New York City boroughs of Brooklyn,  Queens and Staten  Island,
and KeySpan Gas East d/b/a  Brooklyn  Union of Long Island  ("Brooklyn  Union of
Long  Island"),  a Company  subsidiary,  provides gas  distribution  services to
customers  in the Long Island  counties  of Nassau and Suffolk and the  Rockaway
Peninsula of Queens County.

On September 10, 1998, the Company's  Board of Directors  authorized  filings to
permit the Company to conduct its business  under the name KeySpan  Energy.  The
Company will propose a formal name change for  shareholder  approval at its 1999
Annual Meeting of Shareholders. On October 20, 1998 the Company's symbol for its
common  stock and  preferred  stock Series AA listed on the New York and Pacific
Stock Exchanges was changed to "KSE."

B.  BASIS OF PRESENTATION

The Consolidated  Financial  Statements presented herein reflect the accounts of
the Company and its  subsidiaries.  Subsidiaries  comprising the Gas Exploration
and Production reportable segment

                                       62
<PAGE>




and the Energy Related Services reportable segment are fully consolidated in the
financial information presented.  All other subsidiary investments are accounted
for on the  equity  method as the  Company  does not have a  controlling  voting
interest or otherwise  have control over the  management of investee  companies.
All significant intercompany transactions have been eliminated.

Certain reclassifications were made to conform prior period financial statements
with the current period financial statement presentation.

For financial reporting purposes, LILCO is deemed the acquiring company pursuant
to a purchase accounting transaction,  in which KSE was acquired.  Consequently,
financial  results of the Company  prior to May 29, 1998 reflect  those of LILCO
only.  Since the  acquisition  of KSE was accounted  for as a purchase,  related
accounting adjustments, including goodwill, have been reflected in the financial
statements  herein.  Further,  the financial  statements  presented  reflect the
results of  operations  of LILCO from April 1, 1998  through May 28, 1998 and of
the fully  consolidated  entity from May 29, 1998 through  December 31, 1998. In
September 1998, the Company changed its fiscal year end to December 31. Further,
in April 1997,  LILCO  changed  its year end from  December 31 to March 31. As a
result,  the  financial  statements  presented  herein  include  the nine  month
transition  period  April 1, 1998  through  December  31, 1998 (the  "Transition
Period"),  the twelve  months ended March 31 1998,  the three months ended March
31, 1997 and the twelve months ended December 31, 1996.

The weighted average number of common shares outstanding used in the calculation
of earnings per share for the nine months ended  December 31, 1998 reflected the
issuance of common stock to consummate the KeySpan Acquisition and the reduction
associated with  repurchases of common stock subsequent to August 17, 1998. (See
Note 5,  "Capital  Stock.")  Further,  as of December 31, 1998,  the Company had
outstanding  921,066  unexercised  common  stock  options  held  by key  Company
employees.  These options have not been considered in measuring diluted earnings
per  share,  since  inclusion  of these  options in the  calculation  would have
resulted in an antidilutive effect for the Transition Period.

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates.


                                       63
<PAGE>




C.  ACCOUNTING FOR THE EFFECTS OF RATE REGULATION

The  Company's  accounting  records for its two  regulated gas utilities and its
generation  subsidiary are  maintained in accordance  with the Uniform System of
Accounts  prescribed by the Public  Service  Commission of the State of New York
("NYPSC") and the Federal Energy Regulatory  Commission ("FERC"),  respectively.
The Company's  financial  statements reflect the ratemaking policies and actions
of these regulators in conformity with generally accepted accounting  principles
for rate- regulated enterprises.

The Company's two regulated gas utilities and its electric generation subsidiary
are subject to the  provisions  of Statement of Financial  Accounting  Standards
("SFAS") No. 71,  "Accounting  for the Effects of Certain Types of  Regulation."
This  statement  recognizes  the ability of  regulators,  through the ratemaking
process,   to  create  future  economic   benefits  and  obligations   affecting
rate-regulated companies. Accordingly, the Company records these future economic
benefits  and  obligations  as  regulatory  assets and  regulatory  liabilities,
respectively.

The  Company's  regulatory  assets of $279.5  million at  December  31, 1998 are
primarily comprised of regulatory tax assets, certain environmental  remediation
and investigation costs,  postretirement  benefits other than pensions and costs
associated with the KeySpan Acquisition.

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 the Company to recover its costs in the future, all or a portion
of the Company's  regulated  operations  may no longer meet the criteria for the
application  of SFAS No. 71. In that event,  a write-down of all or a portion of
the Company's  existing  regulatory  assets and liabilities could result. If the
Company had been unable to  continue to apply the  provisions  of SFAS No. 71 at
December 31, 1998, the Company would have applied the provisions of SFAS No. 101
"Regulated  Enterprises - Accounting for the  Discontinuation  of Application of
FASB  Statement  No. 71." The Company  estimates  that the  write-off of its net
regulatory asset (regulatory assets less regulatory liabilities) could result in
a charge to net  income of $147.2  million  or $1.01 per share of common  stock,
which would be classified as an extraordinary item. In management's opinion, the
Company's  regulated  subsidiaries  will  be  subject  to  SFAS  No.  71 for the
foreseeable future.

As part of the LIPA  Transaction,  the Company has entered into various  service
agreements  with LIPA that  prescribe  the  conduct  of the  Company's  electric
operations.  These agreements allow the Company to recover its costs, subject to
negotiation,  incurred  to service  the  agreements  and  potentially  allow the
Company to earn a certain level of profit.  The Company's  electric  operations,
other  than the  generation  function  which is FERC  regulated,  are no  longer
subject to NYPSC rate  regulation  and as a result the Company no longer applies
SFAS No. 71 to its electric operations. As a result of the LIPA Transaction, all
regulatory assets and liabilities outstanding as of May 28, 1998 associated with
the  Company's  electric  operations  have been either sold or  written-off  and
therefore,  are no longer recorded in the accounts of the Company.  In addition,
certain issues relating to prior

                                       64
<PAGE>




electric  operations,  such as nuclear plant  decommissioning  and nuclear plant
insurance  are no longer  applicable to the Company since these assets were sold
to LIPA.  The net  regulatory  assets that were sold to LIPA as part of the LIPA
Transaction  amounted to $6.3  billion.  See Note 13,  "Disaggregated  Condensed
Balance Sheet (Unaudited)" for additional information.

D.  REVENUES

Utility gas  customers  are billed  monthly  and  bi-monthly  on a cycle  basis.
Revenues  include  unbilled  amounts  related  to the  estimated  gas usage that
occurred from the most recent meter reading to the end of each month.

The cost of gas is recovered as incurred when billed to firm  customers  through
the operation of the gas adjustment  clause ("GAC") included in utility tariffs.
The GAC provision requires an annual reconciliation of recoverable gas costs and
GAC revenues. Any difference is deferred pending recovery from or refund to firm
customers during a subsequent  twelve-month  period.  Further, net revenues from
tariff  gas  balancing   services,   off-system  sales  and  certain   on-system
interruptible  sales are refunded to firm customers  subject to certain  sharing
provisions.

The gas utility tariffs contain a weather normalization  adjustment that largely
offsets  shortfalls or excesses of firm net revenues  (revenues  less gas costs)
during a heating season due to variations from normal weather.

Electric revenues since the LIPA Transaction are primarily derived from billings
to LIPA for management of LIPA's  transmission and distribution  ("T&D") system,
electric  generation,  and procurement of fuel. The agreements with LIPA include
provisions  for  the  Company,  to earn in the  aggregate,  approximately  $11.5
million per year (plus up to an  additional  $5 million per year if certain cost
savings  are  achieved)  in  annual  management  service  fees from LIPA for the
management of the LIPA T&D system and the  management of all aspects of fuel and
power supply.  Costs in excess of budgeted  levels are assumed by the Company up
to $15 million,  while cost  reductions  in excess of $5 million  from  budgeted
levels are shared with LIPA.  These  agreements  also contain  certain  non-cost
incentive  and  penalty   provisions  which  could  impact  earnings.   Billings
associated with generation capacity are based on pre-determined levels of supply
to be dispatched to LIPA on a yearly basis.  Rates charged to LIPA include fixed
and variable  components.  The variable component is billed to LIPA on a monthly
basis and is dependent on the amount of megawatt hours dispatched.  In addition,
billings related to transmission,  distribution and delivery services are based,
in part, on negotiated budgeted levels.

Prior  to the  LIPA  Transaction,  electric  revenues  were  comprised  of cycle
billings  rendered to residential,  commercial and industrial  customers and the
accrual of electric  revenues for services  rendered to customers  not billed at
month-end.   In  addition,   LILCO's  rate  structure  provided  for  a  revenue
reconciliation  mechanism  which  eliminated  the impact on earnings of electric
sales that were above or below the levels reflected in rates. Moreover,  LILCO's
electric tariff  included a fuel cost  adjustment  ("FCA") clause which provided
for the disposition of the difference between actual



                                       65
<PAGE>




fuel costs and the fuel costs  allowed in base tariff  rates (base fuel  costs).
LILCO deferred  these  differences to future periods for recovery from or refund
to customers,  except for base electric fuel costs in excess of actual  electric
fuel costs, which were credited to the Rate Moderation Component as incurred.

E.  UTILITY PROPERTY - DEPRECIATION AND MAINTENANCE

Utility gas property is stated at original cost of construction,  which includes
allocations  of  overheads  and taxes and an  allowance  for funds  used  during
construction.  Mass properties  associated with gas operations,  such as meters,
are accounted for on an average unit cost basis by year of  installation.  Prior
to the LIPA Transaction,  electric T&D mass properties,  such as poles and wire,
were  accounted  for on an average unit cost basis by year of  installation.  As
part of the LIPA Transaction, all T&D assets were sold to LIPA, and as a result,
all costs  associated with the  maintenance of the T&D system  subsequent to May
28, 1998 are expensed and charged to LIPA.

Depreciation  is  provided on a  straight-line  basis in amounts  equivalent  to
composite rates on average depreciable  property.  The cost of property retired,
plus the cost of removal less salvage,  is charged to accumulated  depreciation.
The cost of repair and minor  replacement  and renewal of property is charged to
maintenance expense. The composite rates on average depreciable property were as
follows:

            Period                  Electric          Gas
            ------                  --------          ---
      9 Months Ended 12/31/98       2.40%             1.75%
      12 Months Ended 3/31/98       3.07%             2.04%
      3 Months Ended 3/31/97         .78%              .51%
      12 Months Ended 12/31/96      3.00%             2.00%


F.  GAS EXPLORATION AND PRODUCTION PROPERTY- DEPLETION AND DEPRECIATION

The full cost method of  accounting is used for  investments  in natural gas and
oil properties.  Under this method,  all costs of  acquisition,  exploration and
development  of natural gas and oil reserves are  capitalized  into a "full cost
pool" as  incurred,  and  properties  in the pool are  depleted  and  charged to
operations  using the  unit-of-production  method  based on the ratio of current
production to total proved natural gas and oil reserves. To the extent that such
capitalized costs (net of accumulated depreciation,  depletion and amortization)
less  deferred  taxes exceed the present  value  (using a 10% discount  rate) of
estimated future net cash flows from proved natural gas and oil reserves and the
lower of cost or fair  value of  unproved  properties,  such  excess  costs  are
charged to operations.  If a write-down is required, it would result in a charge
to  earnings  but  would  not  have an  impact  on  cash  flows  from  operating
activities.  Once incurred,  such impairment of gas properties is not reversible
at a later date even if gas prices  increase.  At December 31, 1998, The Houston
Exploration  Company  ("THEC"),  the Company's 64% owned gas and oil exploration
and production subsidiary,  recorded a $130 million write-down to its investment
in its proved gas reserves, which


                                       66
<PAGE>




is reflected  in the  accompanying  financial  statements.  As  permitted  under
generally accepted accounting principles,  THEC utilized February 1999 prices to
measure the write-down. If THEC had utilized December 1998 prices to measure the
write-down, the write-down would have been $66.6 million less.

Provisions for depreciation of all other non-utility  property are computed on a
straight line basis over useful lives of three to ten years.

G.  DERIVATIVE FINANCIAL INSTRUMENTS

The Company's  utility,  marketing and gas and oil  exploration  and  production
subsidiaries  employ,  from time to time,  derivative  financial  instruments to
hedge  exposure in cash flows due to  fluctuations  in the price of natural gas.
Utility hedging activities also involve use of derivatives  related to fuel oil,
which in certain markets  strongly  influence the selling price for natural gas.
The  Company's  hedging  strategies  meet  the  criteria  for  hedge  accounting
treatment under SFAS No. 80,  "Accounting for Futures  Contracts."  Accordingly,
gains and  losses on these  instruments  are  recognized  concurrently  with the
recognition of the related physical transactions.

The subsidiaries regularly assess the relationship between natural gas commodity
prices in "cash" and futures  markets.  The correlation  between prices in these
markets  has been  within a range  generally  deemed  to be  acceptable.  If the
correlation were not to remain in an acceptable  range,  the subsidiaries  would
account for financial instrument positions as trading activities.

H.  EQUITY INVESTMENTS

Certain  subsidiaries  own as  their  principal  assets  investments,  including
goodwill,  representing  ownership  interests  of 50% or less in  energy-related
businesses that are accounted for under the equity method. Goodwill, at December
31,  1998,  was $52.2  million for certain  investments  in Canada and  Northern
Ireland. The amortization period for the goodwill is over 15 and 40 years.

I.  FEDERAL INCOME TAX

In accordance with SFAS No. 109, "Accounting for Income Taxes" and NYPSC policy,
certain of the Company's regulated  subsidiaries recorded a regulatory asset for
the net cumulative  effect of having to provide deferred federal income taxes on
all  differences  between  tax and book bases of assets and  liabilities  at the
current  tax  rate  which  have  not yet been  included  in rates to  customers.
Investment  tax  credits,  which were  available  prior to the Tax Reform Act of
1986,  were  deferred in operating  expense and are  amortized as a reduction of
federal  income tax in other  income  over the  estimated  lives of the  related
property.


                                       67
<PAGE>

J.  SUBSIDIARY COMMON STOCK ISSUANCES TO THIRD PARTIES

The Company  follows an accounting  policy of income  statement  recognition for
parent company gains or losses from issuances of common stock by subsidiaries.

K.  Foreign Currency Translation

The  Company  follows  the  principles  of  SFAS  No.  52,   "Foreign   Currency
Translation,"  for recording its investments in foreign  affiliates.  Under this
statement,  all  elements of  financial  statements  are  translated  by using a
current exchange rate.  Translation  adjustments result from changes in exchange
rates from one reporting  period to another.  At December 31, 1998,  the foreign
currency  translation  adjustment  was  included  in  a  separate  component  of
shareholders' equity.

L.  GOODWILL

At December 31, 1998, the Company has recorded  goodwill in the amount of $201.9
million,  representing the excess of acquisition cost over the fair value of net
assets acquired related to its purchases of certain  consolidated  subsidiaries.
Goodwill is  amortized  over 20 to 40 years.  The Company  recorded  goodwill of
approximately  $177.4  million net of accumulated  amortization  of $2.5 million
relating to the KeySpan  Acquisition and approximately  $24.5 million related to
the acquisition of a heating,  ventilating, and air-conditioning company and the
acquisition of an engineering firm.

M.  RECENT ACCOUNTING PRONOUNCEMENTS

COMPREHENSIVE INCOME
The Company  has  adopted  SFAS No. 130  "Comprehensive  Income."  Comprehensive
income is the change in the equity of a company,  not  including  those  changes
that result from  shareholder  transactions.  All  components  of  comprehensive
income  are  required  to be  reported  in a new  financial  statement  that  is
displayed with equal prominence as existing financial statements.

SEGMENT DISCLOSURES
At December  31, 1998,  the Company  adopted  SFAS No. 131,  "Disclosures  about
Segments of an Enterprise  and Related  Information."  SFAS No. 131  establishes
standards for additional  disclosure  about  operating  segments for interim and
annual  financial   statements.   More   specifically,   it  requires  financial
information to be disclosed for segments whose operating results are reviewed by
the chief operating decision-maker for decisions on resource allocation. It also
requires related  disclosures about products and services,  geographic areas and
major customers.  The Company's segments are based on how management  internally
analyzes the business and allocates resources. (See Note 10, "Business Segments"
for additional information.)

                                       68

<PAGE>




PENSION AND OTHER POSTRETIREMENT BENEFIT DISCLOSURES
At December 31, 1998, the Company  adopted SFAS No 132,  "Employers'  Disclosure
about  Pensions  and Other  Postretirement  Benefits."  This  statement  revises
employers' disclosure about pensions and other postretirement  benefit plans. It
does not change the  measurement or  recognition  of those plans.  The statement
standardizes the disclosure  requirements for pensions and other  postretirement
benefits,  requires additional information on changes in the benefit obligations
and fair values of plan  assets that will  facilitate  financial  analysis,  and
eliminates certain disclosures that are no longer considered useful.

DERIVATIVE INSTRUMENTS
In June 1998, the Financial  Accounting Standards Board ("FASB") issued SFAS No.
133,  "Accounting  for  Derivative  Instruments  and Hedging  Activities."  This
Statement   establishes   accounting  and  reporting  standards  for  derivative
instruments and for hedging activities. It requires that an entity recognize all
derivatives  as either  assets or  liabilities  in the  statement  of  financial
position and measure  those  instruments  at fair value.  The Company will adopt
SFAS No. 133 in the first  quarter of fiscal  year 2000.  The  Company  does not
expect any  material  earnings  effect  from  adoption of this  statement  as it
presently utilizes derivatives for hedging activities.

NOTE 2. SALE OF LILCO ASSETS,  ACQUISITION  OF KEYSPAN  ENERGY  CORPORATION  AND
TRANSFER OF ASSETS AND LIABILITIES TO THE COMPANY

On May 28, 1998, pursuant to the Agreement and Plan of Merger,  dated as of June
26, 1997 as amended, by and among the Company, LILCO, LIPA, and LIPA Acquisition
Corp.  (the "Merger  Agreement"),  LIPA acquired all of the  outstanding  common
stock of LILCO for $2.4975 billion in cash and thereafter directly or indirectly
assumed certain  liabilities  including  approximately  $3.4 billion in debt. In
addition,  LIPA  reimbursed  LILCO $339.1  million  related to certain series of
preferred stock which were redeemed by LILCO prior to May 28, 1998.  Immediately
prior to such acquisition,  all of LILCO's assets employed in the conduct of its
gas distribution business and its non-nuclear electric generation business,  and
all common assets used by LILCO in the operation and  management of its electric
T&D business and its gas distribution  business and/or its non-nuclear  electric
generation  business  (the  "Transferred  Assets")  were sold to the Company and
transferred  to  wholly-owned  subsidiaries  of the  Company  at  the  Company's
direction.

The consideration  for the Transferred  Assets consisted of (i) 3,440,625 shares
of the common stock of the Company (ii) 553,000 shares of the Series B preferred
stock of the Company,  (iii) 197,000  shares of the Series C preferred  stock of
the Company,  and (iv) the  assumption by the Company of certain  liabilities of
LILCO.  In connection  with the transfer and prior to the  effectiveness  of the
LIPA Transaction, LILCO sold Series B and C preferred stock for $75 million in a
private placement.


                                       69
<PAGE>




Moreover,  all of LILCO's outstanding  long-term debt as of May 28, 1998, except
for its 1997 Series A Electric  Facilities  Revenue  Bonds due  December 1, 2027
which were assigned to the Company,  was assumed by LIPA. In accordance with the
LIPA  Transaction,  the Company  issued  promissory  notes to LIPA  amounting to
$1.048  billion  which  represented  an amount  equivalent to the sum of (i) the
principal  amount of 7.3%  Series  Debentures  due July 15, 1999 and 8.2% Series
Debentures  due March  15,  2023  outstanding  as of May 28,  1998,  and (ii) an
allocation of certain of the Authority  Financing  Notes.  The promissory  notes
contain  identical  terms to the debt  referred  to in items (i) and (ii) above.
(See Note 7, "Long-Term Debt" for additional information.)

On May 28, 1998, immediately subsequent to the LIPA Transaction,  KSE was merged
with and into a subsidiary of the Company,  pursuant to an Agreement and Plan of
Exchange and Merger,  dated as of December 29, 1996,  between LILCO and Brooklyn
Union.  This agreement was amended and/or  restated as of February 7, 1997, June
26, 1997, and September 29, 1997, to reflect certain  technical  changes and the
assignment  by  Brooklyn  Union of all of its rights and  obligations  under the
agreement  to KSE.  On  September  29,  1997,  KSE became the parent  company of
Brooklyn Union when Brooklyn Union reorganized into a holding company structure.

As a result of these  transactions,  holders of KSE common  stock  received  one
share of the Company's common stock, par value $.01 per share, for each share of
KSE they owned and holders of LILCO  common stock  received  0.880 of a share of
the Company's common stock for each share of LILCO they owned.  Upon the closing
of these  transactions,  former  holders  of KSE and  LILCO  owned  32% and 68%,
respectively, of the Company's common stock.

The  purchase  price  of  $1.223  billion  for the  acquisition  of KSE has been
allocated to assets acquired and liabilities  assumed based upon their estimated
fair values. The fair value of the utility assets acquired is represented by its
book value which  approximates the value recognized by the NYPSC in establishing
rates  for  regulated  utility  services.  The  estimated  fair  value  of KSE's
non-utility  assets  approximated  their carrying  values.  At May 28, 1998, the
Company  recorded  goodwill  in  the  amount  of  $179.9  million,  representing
primarily  the  excess of the  acquisition  cost over the fair  value of the net
assets acquired; the goodwill is being amortized over 40 years.

The following is the comparative unaudited proforma combined condensed financial
information  for the nine months ended  December 31, 1998 and the twelve  months
ended March 31,  1998.  The  proforma  disclosures  are  intended to reflect the
results of operations as if the KeySpan Acquisition was consummated on the first
day of each of the reporting  periods below. The effects of the LIPA Transaction
have been reflected for the period May 29, 1998 through December 31, 1998. These
disclosures may not be indicative of future results.

                                       70

<PAGE>
<TABLE>
<CAPTION>
                                                       Nine Months       Twelve Months
Proforma Results                                          Ended              Ended
(in thousands of dollars except per share amounts): December 31, 1998   March 31, 1998
-------------------------------------------------- ------------------- -----------------
<S>                                                <C>                 <C>              
Revenues                                           $         1,907,129 $       4,554,093
Operating Income                                   $             4,416 $         914,272
Net Income (Loss)                                  $         (212,424) $         436,794
Basic and Diluted Earnings (Loss) per Share        $            (1.38) $            2.78
</TABLE>


The  decrease in revenues  for the  Transition  Period as compared to the twelve
months ended March 31, 1998 is due primarily to the LIPA Transaction consummated
on May 28, 1998.  Electric  revenues for the Transition  Period are derived from
service  agreements  with LIPA for the period May 29, 1998 through  December 31,
1998.  For the period  April 1, 1998  through May 28,  1998,  and for the twelve
months  ended March 31,  1998,  revenues  reflected  fully  integrated  electric
service to customers.  Included within rates charged to customers,  prior to the
LIPA Transaction, was the return on the capital investment in the generation and
T&D assets  required to operate  the system as well as recovery of the  electric
business costs to operate the system.  Upon completion of the LIPA  Transaction,
the nature of the Company's  electric business has changed from that of an owner
of an electric  generation and T&D system,  with significant capital investment,
to a new role as owner of the non-nuclear  generation  facilities and as manager
of the T&D  system now owned by LIPA.  In its new role,  the  Company's  capital
investment is significantly reduced and accordingly, its revenues under the LIPA
contracts reflect that reduction. Revenues after May 28, 1998 reflect the impact
of the LIPA agreements which contribute marginally to earnings.

Gas distribution revenues for the Transition Period do not include revenues from
heating season operations  (January through March) when the Company realizes the
major  portion  of its  gas  revenues.  Gas  distribution  revenues  during  the
Transition  Period were also impacted by rate reductions which were reflected at
the time of the KeySpan  Acquisition.  Brooklyn  Union reduced rates to its core
customers by $23.9 million annually effective May 29, 1998 and Brooklyn Union of
Long  Island  reduced  its rates to core  customers  by $12.2  million  annually
effective  February 5, 1998 and by an additional $6.3 million annually effective
May 29, 1998.

Net income for the Transition  Period also reflected  substantial  non-recurring
charges  associated  with the LIPA  Transaction  of  $107.9  million  after-tax,
special  charges related to the KeySpan  Acquisition of $83.5 million  after-tax
and a $13  million  after-tax  donation  made by the  Company to  establish  the
KeySpan  Foundation.  See Note 11, "Costs  Related to the LIPA  Transaction  and
Special Charges" for additional details.

                                       71

<PAGE>


NOTE 3. FEDERAL INCOME TAX

Income tax  expense  (benefit)  is  reflected  as  follows  in the  Consolidated
Statement of Income:
<TABLE>
<CAPTION>
                                                                             (IN THOUSANDS OF DOLLARS)
------------------------------------------------------------------------------------------------------
                               Nine Months       Twelve Months      Three Months           Year
                                  Ended              Ended              Ended             Ended
                           December 31, 1998    March 31, 1998     March 31, 1997   December 31, 1996
------------------------------------------------------------------------------------------------------ 
<S>                              <C>            <C>                   <C>             <C>       
Operating Expenses
     Current                     $   20,144     $    86,388           $ 23,378        $   42,197
     Deferred                       (82,650)        150,983             33,624           168,000
                                    (62,506)        237,371             57,002           210,197
Other Income
     Current                          5,998            (594)                 -                 -
     Deferred                        (3,286)         (4,124)              (789)             (940)
                                      2,712          (4,718)              (789)             (940)
Transaction Related                 (99,701)              -                  -                 -
Total Federal Income Tax          $(159,495)       $232,653           $ 56,213          $209,257
</TABLE>



The  components  of  deferred  tax  assets  and  liabilities  reflected  in  the
Consolidated Balance Sheet are as follows:
<TABLE>
<CAPTION>
                                                     (IN THOUSANDS OF DOLLARS)
--------------------------------------------------------------------------------
                                       December 31, 1998          March 31, 1998
--------------------------------------------------------------------------------
<S>                                     <C>                      <C>        
Deferred Tax Assets
Property related differences            $ 151,430                $     10,559
Benefits of tax loss carryforwards         52,157                      65,176
Reserves not currently deductible          44,263                      39,667
Other items - net                          52,629                     261,729
Total Deferred Tax Assets               $ 300,479                 $   377,131
--------------------------------------------------------------------------------
Deferred Tax Liabilities
1989 Settlement                       $         -                  $2,169,909
Property related differences              179,583                     650,562
Regulatory tax asset                       69,277                           -
Other items - net                         123,168                      96,024
Total Deferred Tax Liabilities          $ 372,028                  $2,916,495
--------------------------------------------------------------------------------
Net Deferred Tax Liabilities           $   71,549                  $2,539,364
--------------------------------------------------------------------------------
</TABLE>


                                       72
<PAGE>




The following is a  reconciliation  between reported income tax and tax computed
at the statutory rate of 35%:
<TABLE>
<CAPTION>

                                                                                (IN THOUSANDS OF DOLLARS)
---------------------------------------------------------------------------------------------------------
                                           Nine Months    Twelve Months     Three Months         Year
                                              Ended           Ended             Ended            Ended
                                           December 31,      March 31,         March 31,      December 31,
                                               1998             1998             1997             1996
---------------------------------------------------------------------------------------------------------
<S>                                        <C>               <C>               <C>              <C>     
Computed at the statutory rate             $(114,249)        $208,213          $50,369          $184,002
Adjustments related to:
  Net benefit from LIPA Transaction (1)      (31,503)               -                -                 -
  Tax credits                                 (1,809)          (2,464)            (940)           (4,383)
  Excess of book over tax depreciation         2,859           17,912            4,356            18,339
  Minority interest in THEC                  (10,220)               -                -                 -
  Other items - net                           (4,573)           8,992            2,428            11,299
---------------------------------------------------------------------------------------------------------
    Total Federal income tax               $(159,495)        $232,653          $56,213          $209,257
=========================================================================================================
    Effective income tax rate                   (49%)             39%              39%               40%
---------------------------------------------------------------------------------------------------------
</TABLE>

(1)  Includes tax benefits  relating to (a) the  deferred  federal  income taxes
     necessary to account for the difference  between the carryover basis of the
     Transferred  Assets for financial  reporting purposes and the new increased
     tax  basis  and (b)  certain  credits  for  financial  reporting  purposes,
     including  tax  benefits   recognized  on  the  funding  of  postretirement
     benefits,  partially offset by income taxes associated with the sale of the
     Transferred Assets to the Company by LIPA which taxes are to be paid by the
     Company.

The Company currently has federal income tax loss carryforwards of approximately
$149.1  million  that  expire in twenty  years or in 2017,  representing  losses
incurred by the Company for the nine months ended December 31, 1998.

In 1990 and 1992,  LILCO  received an Internal  Revenue  Service  Agents' Report
disallowing  certain  deductions  and  credits  claimed by LILCO on its  federal
income tax returns for the years 1981 through  1989. A settlement  resolving all
audit issues was reached  between LILCO and the Internal  Revenue Service in May
1998.  The  settlement  required the payment of taxes and interest of $9 million
and $35  million,  respectively,  which the Company  made in May 1998.  Adequate
reserves to cover such taxes and interest were previously provided.


                                       73

<PAGE>




NOTE 4.  POSTRETIREMENT BENEFITS

PENSION PLANS: The following information represents consolidated results for the
Company and its subsidiaries  (Brooklyn Union, Brooklyn Union of Long Island and
the former LILCO),  whose  noncontributory  defined  benefit pension plans 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. Prior to the KeySpan Acquisition, pension benefits had been
managed separately by the Company's regulated subsidiaries,  which were the only
subsidiaries  with  defined  benefit  plans.  The  Company is in the  process of
examining the  feasibility of  integrating  these plans into a more unified form
within the holding company structure.

The amounts  presented are consolidated for periods  subsequent to May 28, 1998.
Prior to that date the  amounts  pertain  solely to the plan of LILCO.  Brooklyn
Union of Long  Island is  subject to certain  deferral  accounting  requirements
mandated by the NYPSC for pension costs and other postretirement  benefit costs.
Amounts included herein also include accruals  pertaining to supplemental  plans
of the Company for obligations arising subsequent to May 28, 1998.

The calculation of net periodic pension cost follows:
<TABLE>
<CAPTION>

                                                                                            (In Thousands of Dollars)
---------------------------------------------------------------------------------------------------------------------
                                Nine Months Ended    Twelve Months Ended   Three Months Ended       Year Ended
                                December 31,1996        March 31, 1998        March 31, 1997        December 31, 1996
---------------------------------------------------------------------------------------------------------------------
<S>                                <C>                 <C>                      <C>                <C>      
Service cost, benefits earned
    during the period              $   24,608          $   21,114               $   4,645          $  17,384
Interest cost on projected
     benefit  obligation               66,341              56,379                  12,494             47,927
Return on plan assets                 (51,745)           (196,300)                 (3,500)           (81,165)
Special termination charge (1)         61,558                   -                       -                  -
Net amortization and deferral         (33,942)            147,713                  (9,640)            33,541
Total pension cost                 $   66,820          $   28,906               $   3,999         $   17,687
---------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Early retirement plan completed in December 1998.


                                       74

<PAGE>




The following  table sets forth the pension plans' funded status at December 31,
1998 and March 31,  1998.  Plan assets  principally  are common  stock and fixed
income securities:
<TABLE>
<CAPTION>

                                                        (IN THOUSANDS OF DOLLARS)
--------------------------------------------------------------------------------
                                        December 31,1998        March 31, 1998
--------------------------------------------------------------------------------
<S>                                           <C>                <C>          
Change in benefit obligation:
Benefit obligation at beginning of period     $   (825,159)      $   (807,703)
    Benefit obligation of KSE                     (674,100)                 -
    Service cost                                   (24,608)           (21,114)
    Interest cost                                  (66,341)           (56,379)
    Actuarial (loss) gain                          (61,929)            16,737
    Special termination benefits (1)               (61,558)                 -
    Total benefits paid                             63,575             43,300
--------------------------------------------------------------------------------
Benefit obligation at end of period             (1,650,120)          (825,159)
--------------------------------------------------------------------------------
Change in plan assets:                 
  Fair value of plan assets at beginning of
               period                              919,100            744,400
    Fair value of KSE plan assets                  754,127                  -
    Actual return on plan assets                    51,745            196,300
    Employer contribution                           13,500             18,000
    Benefits paid from trust                       (62,868)           (39,600)
--------------------------------------------------------------------------------
Fair value of plan assets at end of period       1,675,604            919,100
--------------------------------------------------------------------------------
Funded status                                       25,484             93,941
Unrecognized net (gain) from past experience
different from that assumed and from changes
in assumptions                                    (158,103)          (163,034)

Unrecognized prior service cost                     54,234                  -
Unrecognized transition obligation                   4,138             62,652
--------------------------------------------------------------------------------
Net accrued pension cost reflected
on consolidated balance sheet               $      (74,247)        $   (6,441)
================================================================================
(1)     Early retirement plan completed in December 1998.
</TABLE>


<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------
                                               Nine Months     Twelve Months    Three Months                     
                                                  Ended            Ended            Ended             Year Ended
                                             December 31,1998  March 31, 1998    March 31, 1997   December 31, 1996
-------------------------------------------------------------------------------------------------------------------
   <S>                                            <C>              <C>              <C>              <C>  
   Obligation discount                            6.50%            7.00%            7.00%            7.25%
   Asset return                                   8.50%            8.50%            7.50%            7.50%
   Average annual increase in compensation        5.00%            4.50%            5.00%            5.00%

</TABLE>

                                       75

<PAGE>


INFORMATION ON THE LILCO SUPPLEMENTAL PLAN
The  Supplemental  Plan in effect  prior to May 28, 1998  provided  supplemental
death and  retirement  benefits for officers  and other key  executives  without
contribution from such employees. The Supplemental Plan was a non-qualified plan
under the Internal Revenue Code of 1986, as amended (the "Code").  The provision
for plan benefits totaled $0.7 million for the three months ended March 31, 1997
and $2.7 million for the year ended  December 31,  1996.  For the twelve  months
ended March 31, 1998,  a charge of $31 million was recorded  relating to certain
benefits earned by former officers of LILCO relating to the termination of their
annuity  benefits  earned  through the  supplemental  retirement  plan and other
executive  retirement  benefits.  This charge, which was borne by LILCO, and not
recovered from ratepayers,  resulted from provisions in the employment contracts
of LILCO officers.

OTHER  POSTRETIREMENT  BENEFITS - RETIREE  HEALTH CARE AND LIFE  INSURANCE:  The
following  information  represents  consolidated results for the Company and its
subsidiaries  (Brooklyn  Union,  Brooklyn  Union of Long  Island  and the former
LILCO) who sponsor noncontributory defined benefit plans under which is provided
certain  health care and life  insurance  benefits  for retired  employees.  The
Company has 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 Code.  Prior to the KeySpan  Acquisition  other  postretirement
benefits had been managed  separately by the Company's  regulated  subsidiaries,
which were the only  subsidiaries  with defined benefit plans. The Company is in
the process of examining the feasibility of integrating  these plans into a more
unified form within the holding company structure.

The amounts  presented herein are  consolidated  for periods  subsequent May 28,
1998. Prior to that date the amounts pertain solely to the plan of LILCO.


Net  periodic   other   postretirement   benefit  cost  included  the  following
components:
<TABLE>
<CAPTION>

                                                                          (IN THOUSANDS OF DOLLARS)
--------------------------------------------------------------------------------------------------------
                                    Nine Months     Twelve Months    Three Months                      
                                        Ended            Ended            Ended          Year Ended
                                   December 31, 1998  March 31, 1998  March 31, 1997   December 31, 1996
--------------------------------------------------------------------------------------------------------
<S>                                   <C>             <C>                <C>              <C>      
Service cost, benefits earned
        during the period             $   9,569       $  12,204          $  2,821         $  10,690
Interest cost on accumulated post-
        retirement benefit obligation    26,414          27,328             6,642            25,030
Return on plan assets                   (13,857)         (6,164)             (628)           (3,046)
Special termination charge (1)            3,073               -                 -                 -
Net amortization and deferral           (14,665)        (10,468)           (3,409)          (12,175)
--------------------------------------------------------------------------------------------------------
Other postretirement benefit cost     $  10,534       $  22,900          $  5,426         $  20,499
--------------------------------------------------------------------------------------------------------
</TABLE>
(1) Early retirement plan completed in December 1998.

                                       76

<PAGE>

The following table sets forth the plan's funded status at December 31, 1998 and
March 31,  1998.  Plan  assets  principally  are common  stock and fixed  income
securities:

<TABLE>
<CAPTION>

                                                               (IN THOUSANDS OF DOLLARS)
----------------------------------------------------------------------------------------
                                                     December 31, 1998    March 31, 1998
----------------------------------------------------------------------------------------
<S>                                                   <C>                <C>          
Change in benefit obligation:
        Benefit obligation at beginning of period      $   (358,941)      $   (415,672)
        Benefit obligation of KSE                          (226,645)                 -
        Service cost                                         (9,569)           (12,204)
        Interest cost                                       (26,414)           (27,328)
        Plan participants' contributions                       (900)                 -
        Actuarial (loss) gain                              (121,228)            83,793
        Special termination benefits (1)                     (3,073)                 -
Total benefits paid                                          18,515             12,470
----------------------------------------------------------------------------------------
Benefit obligation at end of period                        (728,255)          (358,941)
----------------------------------------------------------------------------------------
Change in plan assets:
        Fair value of plan assets at beginning of period    108,165             80,533
        Fair value of KSE plan assets                       113,917                  -
        Actual return on plan assets                         13,857              6,164
        Employer contribution                               250,000             21,592
        Plan participants' contributions                          -                  -
        Benefits paid from trust                             (7,161)              (124)
----------------------------------------------------------------------------------------
Fair value of plan assets at end of period                  478,778            108,165
----------------------------------------------------------------------------------------
Funded status                                              (249,477)          (250,776)

Unrecognized net loss (gain) from past  experience
different from that assumed and from changes in
assumptions                                                 145,834           (102,346)

Unrecognized prior service cost                                 166                175
----------------------------------------------------------------------------------------
Accrued benefit cost reflected on
consolidated balance sheet                             $   (103,477)      $   (352,947)
----------------------------------------------------------------------------------------
</TABLE>
(1) Early retirement plan completed in December 1998.


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
                               Nine Months     Twelve Months     Three Months                     
                                  Ended            Ended            Ended          Year Ended
                             December 31, 1998 March 31, 1998   March 31, 1997   December 31, 1996
--------------------------------------------------------------------------------------------------
<S>                               <C>              <C>              <C>               <C>  
Assumptions:
 Obligation discount              6.50%            7.00%            7.00%             7.25%
 Asset return                     8.50%            8.50%            7.50%             7.50%
 Average annual increase in       5.00%            4.50%            5.00%             5.00%
     compensation
</TABLE>

                                       77

<PAGE>

The measurement of plan  liabilities  also assumes a health care cost trend rate
of 6% annually.  A 1% increase in the health care cost trend rate would have the
effect of increasing the  accumulated  postretirement  benefit  obligation as of
December 31, 1998 by $103.8 million and the net periodic  health care expense by
$7.9  million.  A 1%  decrease in the health care cost trend rate would have the
effect of decreasing the  accumulated  postretirement  benefit  obligation as of
December 31, 1998 by $82.3  million and the net periodic  health care expense by
$6.2 million.

In 1993,  LILCO adopted the provisions of SFAS No. 106,  "Employer's  Accounting
for Post- Employment  Benefits Other Than Pensions," and recorded an accumulated
postretirement benefit obligation and a corresponding regulatory asset of $376.0
million.  LIPA will  reimburse the Company for costs  related to  postretirement
benefits of the electric  business unit  employees;  therefore,  the Company has
reclassified  the regulatory asset for  postretirement  benefits to a receivable
from LIPA.

In 1994, LILCO established VEBA trusts for union and non-union employees for the
funding of costs collected in rates for postretirement benefits. The trusts were
funded with contributions of $21.0 million for the twelve months ended March 31,
1998,  $5.0 million for the three months ended March 31, 1997 and $18.0  million
for the year ended December 31, 1996. In May 1998, an additional  $250.0 million
was funded into the trusts.

NOTE 5. CAPITAL STOCK

COMMON STOCK:  Currently the Company has 450,000,000 shares of authorized common
stock.  In the nine month  period  ended  December  31, 1998 the Company  issued
396,570  shares for $10.2  million  under the  Dividend  Reinvestment  and Stock
Purchase Plan, the Discount Stock Purchase Plan for Employees,  and the Employee
Savings Plan. In October 1998, the Company announced that the Board of Directors
authorized  using up to $500  million  for the  purchase  of  common  shares  in
addition  to the  Board's  previous  authorization  to purchase up to 15 million
common shares. As of December 31, 1998, the Company had repurchased 14.2 million
common shares for $423.7 million.

PREFERRED  STOCK: The Company has the authority to issue  100,000,000  shares of
preferred  stock  with  the  following  classifications:  16,000,000  shares  of
preferred stock,  par value $25 per share,  1,000,000 shares of preferred stock,
par value $100 per share and  83,000,000  shares of preferred  stock,  par value
$.01 per share.

At December 31, 1998,  14,520,000  redeemable  shares of 7.95%  Preferred  Stock
Series AA par value $25 was outstanding  totaling  $363.0  million,  which has a
mandatory  redemption  requirement on June 1, 2000. The Company also had 553,000
shares outstanding of private placement 7.07% Preferred Stock Series B par value
$100 and 197,000 shares  outstanding of private  placement 7.17% Preferred Stock
Series C par value $100 totaling $75.0 million. In addition, during the year the
Company issued, in a private  placement,  99,727  nonredeemable  shares totaling
approximately $10.0


                                       78

<PAGE>




million of 6% Preferred  Stock Series A par value $100 to employees as incentive
compensation.  Preferred  Stock Series A, B and C were privately  issued and are
not publicly traded.

On April 17, 1998,  LILCO exercised its option to redeem the callable  preferred
stock and called for redemption on May 19, 1998 all of the outstanding shares of
preferred  stock  Series B,  Series  D,  Series E,  Series F,  Series H,  Series
I-Convertible,  Series L and  Series  NN.  These  preferred  stock  series  were
redeemed for $117.5 million,  including accrued and unpaid dividends,  plus $4.5
million of call premiums.  In addition,  pursuant to the LIPA  Transaction  each
share of  non-redeemable  preferred  stock Series CC,  Series GG,  Series QQ and
Series UU was canceled and  converted to cash in the amount of the present value
plus  accrued  and unpaid  dividends.  The  non-redeemable  preferred  stock was
converted for $223.2 million,  including accrued and unpaid dividends,  plus $18
million of call premiums.  On May 28, 1998,  LIPA  reimbursed the Company $339.1
million for the preferred stock series that were redeemed.

Dividends on preferred stock are paid in preference to dividends on common stock
or any other stock ranking junior to preferred stock.

NOTE 6.  NONQUALIFIED STOCK OPTIONS

At December 31, 1998, the Company had  stock-based  compensation  plans that are
described  below.  Moreover,  under a separate plan,  THEC has issued  2,124,438
stock options to key THEC employees.  The Company and THEC apply APB Opinion 25,
"Accounting  for Stock  Issued to  Employees,"  and related  Interpretations  in
accounting  for  their  plans.  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,
"Accounting for Stock-Based  Compensation,"  the Company's net loss and loss per
share would have been increased to the proforma amounts indicated below:

<TABLE>
<CAPTION>

--------------------------------------------------------------------------------
                                                               Nine Months Ended
                                                               December 31, 1998
--------------------------------------------------------------------------------
<S>                                             <C>                   <C>       
Income (loss) available for common stock (000):  As reported          $(195,537)
                                                 Proforma             $(198,996)

Primary earnings (loss) per share:               As reported            $(1.34)
                                                 Proforma               $(1.37)
--------------------------------------------------------------------------------
</TABLE>


Prior to the KeySpan Acquisition, KSE had reserved for issuance 1,500,000 shares
of  nonqualified  stock  options  and had issued  426,000,  363,500  and 202,800
nonqualified stock options in November 1997, 1996 and 1995, respectively.  These
options have remained outstanding and, under the terms

                                       79
<PAGE>




of the Merger  Agreement,  all options vested upon  consummation  of the KeySpan
Acquisition.  Holders are now permitted to exercise  vested  options for Company
common stock.

The fair  values of grants  issued in November  1997,  1996 and 1995 were $4.62,
$4.27 and $2.78,  respectively.  All grants were  estimated on the date of grant
using the  Black-Scholes  option-pricing  model. The following  weighted-average
assumptions  were  used for  grants  issued  in  November  1997,  1996 and 1995:
dividend yield of 5.00%, 4.66% and 5.57%;  expected volatility of 16.24%, 16.56%
and 16.879%;  risk free  interest rate of 6.00%,  6.00% and 6.28%;  and expected
lives of 6 years,  respectively.  The  exercise  prices are  $32.63,  $30.50 and
$27.00, respectively.

A summary of the status of the Company's fixed stock option plans as of December
31, 1998 and changes during the period is presented below:

<TABLE>
<CAPTION>

                                             Nine Months Ended December 31, 1998
--------------------------------------------------------------------------------
                                                                  Weighted Avg.
Fixed Options                                          Shares     Exercise Price
--------------------------------------------------------------------------------
<S>                                                    <C>             <C>   
Outstanding at beginning of period                     992,300         $30.70
Exercised                                              (13,631)        $28.67
Forfeited                                              (57,603)        $29.45
Outstanding and exercisable at end of period           921,066         $30.80
--------------------------------------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>

                       Options Outstanding and Exercisable
--------------------------------------------------------------------------------
                            Number       Weighted Avg.
                         Outstanding        Remaining          Weighted Avg.
 Exercise Price          at 12/31/98     Contractual Life      Exercise Price
--------------------------------------------------------------------------------
<S> <C>                   <C>               <C>                    <C>   
    $27.00                168,066           7 years                $27.00
    $30.50                344,000           8 years                $30.50
    $32.63                409,000           9 years                $32.63
--------------------------------------------------------------------------------
                          921,066
--------------------------------------------------------------------------------
</TABLE>

At the 1999 Annual Meeting of  Shareholders,  the Company will seek  shareholder
approval of its Long-Term Performance and Compensation Plan ("Plan"). This Plan,
if approved,  will allow the Company to issue to key employees stock options and
incentive  stock  options,  as well as restricted  stock awards and  performance
stock  awards.  The total  shares to be issued  under  this Plan will not exceed
10,500,000 shares.

                                       80


<PAGE>




NOTE 7. LONG-TERM DEBT

Gas Facilities Revenue Bonds:  Brooklyn Union can issue tax-exempt bonds through
the New York State Energy Research and Development Authority. Whenever bonds are
issued for new gas  facilities  projects,  proceeds  are  deposited in trust and
subsequently withdrawn to finance qualified  expenditures.  There are no sinking
fund  requirements  on any of the Company's Gas  Facilities  Revenue  Bonds.  At
December 31, 1998,  Brooklyn Union had $648.5 million of Gas Facilities  Revenue
Bonds outstanding. The interest rate on the Variable Rate Series due December 1,
2020 is reset weekly and ranged from 2.48% to 4.23%  through  December 31, 1998,
at which time the average rate was 3.90%.

In December 1998, the Company  purchased a portfolio of securities  representing
direct purchase  obligations of the United States  Government.  These securities
were placed in trust,  irrevocably  dedicated  to the  repayment  of certain Gas
Facilities  Revenue  Bonds,  thereby  effecting an  in-substance  defeasance  of
approximately  $8.9 million  including  interest.  The  in-substance  defeasance
represented  $4 million of  outstanding  bonds of each of the 6.75% Series 1989A
due February 1, 2024 and 6.75%  Series  1989B due February 1, 2024.  The Company
has not been relieved of its obligation and remains the primary obligor for this
debt.  Based on the accounting  requirements  of SFAS No. 125,  "Accounting  for
Transfers  and  Servicing  of  Financial  Assets  and  the   Extinguishment   of
Liabilities," the liability is not considered  extinguished and is recognized on
the accompanying Consolidated Balance Sheet.

AUTHORITY FINANCING NOTES: The Company's electric generation subsidiary can also
issue   tax-exempt  bonds  through  the  New  York  State  Energy  Research  and
Development  Authority.  At  December  31,  1998,  $24.9  million  of  Authority
Financing Notes were  outstanding.  The interest rate on these notes is variable
and  ranged  from 2.65% to 4.75%  through  December  31,  1998 at which time the
average rate was 4.10%.

PROMISSORY NOTES: At March 31, 1998, total long-term debt outstanding was $4.497
billion. In accordance with the LIPA Agreement,  LIPA has assumed  substantially
all of the  outstanding  long-term  debt of LILCO  except for the 1997  Series A
Electric  Facilities  Revenue  Bonds due December 1, 2027 which were assigned to
the  Company.  In  accordance  with  the  LIPA  Agreement,  the  Company  issued
promissory  notes  to LIPA  for  $1.048  billion  which  represented  an  amount
equivalent to the sum of: (i) the principal amount of 7.3% Series Debentures due
July 15, 1999 and 8.2% Series  Debentures due March 15, 2023  outstanding at May
28, 1998,  and (ii) an allocation of certain of the Authority  Financing  Notes.
The promissory  notes contain  identical  terms as the debt referred to in items
(i) and (ii) above.

On November 3, 1998, the Company extinguished a portion of its obligation of the
promissory notes to LIPA relating to certain series of bonds that were called by
LIPA on  December  1, 1998.  The  Company's  obligation  for these bonds of $2.1
million  consisted of the principal  amount and the interest accrued and unpaid.
In addition, on December 1, 1998, the Company extinguished a portion

                                       81
<PAGE>




of its obligation of the promissory  notes on a certain series of bonds due to a
mandatory sinking fund redemption  payment of $1 million.  The carrying value of
the promissory notes at December 31, 1998 was $1.045 billion.

The  promissory  notes issued to LIPA included an allocation  for certain of the
Authority  Financing Notes.  Authority Financing Notes Series 1993B due November
1, 2023,  Series  1994A due October 1, 2024 and Series  1995A due August 1, 2025
have  variable  interest  rate features in which the interest rate is reset on a
weekly  basis.  The  interest  rates for these notes  ranged from 2.30% to 4.35%
during the nine months  ended  December  31, 1998 at which time the average rate
was 4.10%.  Authority  Financing Notes Series 1985A due March 1, 2016 and Series
1985B due  March 1,  2016 have  variable  interest  rate  features  in which the
interest rate is reset on an annual basis.  The interest rate for these notes at
December 31, 1998 was 3.58%.  On March 1, 1999, LIPA converted the variable rate
features of these notes to fixed interest rates.  Series 1993B, Series 1994A and
Series 1995A were converted to a fixed rate of 5.30% and Series 1985A and Series
1985B were converted to a fixed rate of 5.15%.

GENERAL &  REFUNDING  ("G&R")  MORTGAGE  BONDS:  Upon  consummation  of the LIPA
Transaction,  all of the series of G&R Bonds have been  assumed and  redeemed by
LIPA resulting in the termination of the G&R Mortgage.

OTHER LONG-TERM DEBT: THEC has an available line of credit of $150 million which
supports  borrowings under a revolving loan agreement.  Up to $5 million of this
line is available  for the issuance of letters of credit to support  performance
guarantees.  This credit facility matures on July 1, 2000. At December 31, 1998,
borrowings of $133 million were  outstanding  under this line of credit and $0.4
million was committed under outstanding letter of credit obligations. Borrowings
under this  facility  bear  interest,  at THEC's  option,  at rates indexed at a
premium to the Federal Funds rate or LIBOR rate, or based on the prime rate. The
weighted  average  interest  rate on this debt was 6.44% at December  31,  1998.
Covenants  related to this line of credit  require  the  maintenance  of certain
financial ratios and involve other  restrictions  regarding cash dividends,  the
purchase  or  redemption  of stock and the  pledging  of  assets.  Moreover,  at
December 31, 1998, THEC had $100 million of 8.625% Senior Subordinated Notes due
2008  outstanding.  These notes were issued in a private placement in March 1998
and are subordinate to borrowings under THEC's line of credit.

A subsidiary of the Energy  Related  Investment  segment had borrowings of $67.5
million  outstanding  at December 31, 1998, at an interest  rate of 5.25%.  Gulf
Midstream  Services  Partnership  ("GMS") was then provided with a loan of $64.8
million that bears interest on commercial terms.

DEBT MATURITY  SCHEDULE:  The total  long-term debt maturing in each of the next
five years ending  December 31 is as follows:  1999,  $398 million;  2000,  $1.0
million; 2001, $1.0 million; 2002, $3.5 million; and 2003, $3.5 million.

                                       82

<PAGE>




NOTE 8. CONTRACTUAL OBLIGATIONS,  FINANCIAL INSTRUMENTS AND CONTINGENCIES:

FIXED OBLIGATIONS:  Lease costs included in operation expense were $28.9 million
in 1998. The future minimum lease  payments under various  leases,  all of which
are  operating  leases,  are $22.1 million per year over the next five years and
$119.2 million, in the aggregate, for all years thereafter.

FIXED CHARGES UNDER FIRM  CONTRACTS:  The Company's  utility  subsidiaries  have
entered into various  contracts for gas delivery,  storage and supply  services.
The  contracts  have  remaining  terms that cover  from one to  fourteen  years.
Certain of these  contracts  require payment of monthly charges in the aggregate
amount  of $5.1  million  per  month in all  events  regardless  of the level of
service  available.  Such charges are  recovered  from utility  customers as gas
costs.

FAIR VALUE OF FINANCIAL  INSTRUMENTS:  The fair value of the Company's preferred
stock at December 31, 1998 was $471.6  million and the carrying value was $448.0
million.

The  Company's   long-term  debt  consists  primarily  of  publicly  traded  Gas
Facilities  Revenue Bonds,  Authority  Financing Notes and Debentures,  the fair
value of which is  estimated  on quoted  market  prices  for the same or similar
issues.  The  Authority  Financing  Notes and  Debentures  are  included  in the
promissory  notes to LIPA.  (See Note 2, "Sale of LILCO Assets,  Acquisition  of
KeySpan  Energy  Corporation  and  Transfer  of Assets  and  Liabilities  to the
Company" and Note 7, "Long-Term Debt" for additional information.)

The carrying amounts and fair values of the Company's long-term debt at December
31, 1998 and March 31, 1998 were as follows:

<TABLE>
<CAPTION>

FAIR VALUE                                       (IN THOUSANDS OF DOLLARS)
--------------------------------------------------------------------------------
                                   DECEMBER 31, 1998      March 31, 1998
--------------------------------------------------------------------------------
<S>                                 <C>                     <C>       
Gas facilities revenue bonds          687,863                       -
General and refunding bonds                 -               1,288,470
Debentures                                  -               2,407,178
Authority financing notes              24,880                 987,646
Promissory notes                    1,097,226                       -
--------------------------------------------------------------------------------
Total                               1,809,969               4,683,294
================================================================================
</TABLE>
<TABLE>
<CAPTION>



CARRYING AMOUNT                                   (IN THOUSANDS OF DOLLARS)
--------------------------------------------------------------------------------
                                   DECEMBER 31, 1998       March 31, 1998
--------------------------------------------------------------------------------
<S>                                  <C>                    <C>       
Gas facilities revenue bonds           648,500                      -
General and refunding bonds                  -              1,286,000
Debentures                                   -              2,270,000
Authority financing notes               24,880                940,555
Promissory notes                     1,044,902                      -
--------------------------------------------------------------------------------
Total                                1,718,282              4,496,555
</TABLE>
================================================================================

                                       83
<PAGE>


At December 31, 1998, THEC's $100 million 8.625% Senior  Subordinated  Notes due
2008 had a fair  market  value of $98  million.  All  other  THEC debt and other
subsidiary  debt is  carried  at an  amount  approximating  fair  value  because
interest  rates  are  based  on  current  market  rates.   All  other  financial
instruments  included in the  Consolidated  Balance  Sheet are stated at amounts
that approximate fair values.

DERIVATIVE  FINANCIAL  INSTRUMENTS:  The  Company's  utility,  marketing and gas
exploration and production subsidiaries employ derivative financial instruments,
such as natural  gas and oil  futures,  options  and swaps,  for the  purpose of
hedging exposure to commodity price risk.

Utility tariffs  applicable to certain  large-volume  customers permit gas to be
sold at prices  established  monthly  within a specified  range  expressed  as a
percentage of prevailing  alternate  fuel oil prices.  The Company uses standard
New York Mercantile  Exchange  ("NYMEX") futures contracts to fix profit margins
on  specified  portions  of the  sales  to  this  market  in line  with  pricing
objectives.  Implementation of the strategy involves establishment of long (buy)
positions in gas futures contracts with offsetting short (sell) positions in oil
futures  contracts of  equivalent  energy value.  The long gas futures  position
follows,  generally within a range of 80% to 120%, the cost of gas to serve this
market while the short oil futures position correspondingly  replicates,  within
the same range, the selling price of gas.

KeySpan  Energy  Services  ("KES"),  the  Company's  gas and electric  marketing
subsidiary,  sells gas at fixed annual rates and utilizes standard NYMEX futures
contracts and swaps to fix profit margins.  In the swap  instruments,  which are
employed to hedge  exposure to basis risk, KES pays the other parties the amount
by which the floating variable price (settlement price) is below the fixed price
and receives the amount by which the settlement price exceeds the fixed price.

THEC utilizes derivative commodity instruments to hedge future sales prices on a
portion of its natural gas production to achieve a more  predictable  cash flow,
as well as to reduce its exposure to adverse price  fluctuations of natural gas.
Hedging instruments used include swaps, collars and options. With respect to any
particular swap transaction,  the counter party is required to make a payment to
THEC in the event that the settlement  price for any  settlement  period is less
than the swap price for such  transaction,  and THEC is required to make payment
to the counter party in the event that the  settlement  price for any settlement
period is greater than the swap price for such  transaction.  For any particular
collar  transaction,  the counter party is required to make a payment to THEC if
the settlement price for any settlement period is below the floor price for such
transaction,  and THEC is required to make  payment to the counter  party if the
settlement  price for any settlement  period is above the ceiling price for such
transaction. For any particular floor transaction, the counter party is required
to make a payment to THEC if the settlement  price for any settlement  period is
below the floor  price for such  transaction.  THEC is not  required to make any
payment in connection with a floor transaction.  For option contracts,  THEC has
the option,  but not the  obligation,  to buy contracts up to the day before the
last trading day for that NYMEX contract.

                                       84

<PAGE>


The following table  summarizes the notional  amounts and related fair values of
the derivative financial instrument positions  outstanding at December 31, 1998.
Fair values are based on quotes for the same or similar instruments.

<TABLE>
<CAPTION>


----------------------------------------------------------------------------------------------
 Gas: Type of    Fiscal Year of    Fixed Price Per     Volume         Notional                   
   Contracts        Maturity            Mcf            (Mcf)          Amount        Fair Value
---------------    -----------    -------------    -----------     -----------    ------------
                                                                    (In Thousands of Dollars)
<S>                 <C>            <C>              <C>                <C>             <C>    
Futures             1999/2000      $1.90-$2.55      12,270,000         $28,295         $24,190

Collars               1999
  Ceiling                             $2.90            280,000            $812               -
  Floor                               $2.40            280,000            $672            $126

Swaps                 1999            $2.50            755,000          $1,887            $534

</TABLE>

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
 Oil: Type of    Fiscal Year of   Fixed Price Per     Volume         Notional                   
   Contracts        Maturity         Gallon          (Gallons)        Amount        Fair Value
---------------    -----------    -------------    -----------     -----------    ------------
                                                                    (In Thousands of Dollars)

<S>                   <C>          <C>               <C>                  <C>           <C>   
Futures               1999         $0.56-$0.58       4,284,000            $476          $1,474
----------------------------------------------------------------------------------------------
</TABLE>

As of December 31, 1998, no futures  contract  extended beyond May 2000.  Margin
deposits  with  brokers at December 31, 1998 of $10.7  million were  recorded in
Other in the Current Assets section of the Consolidated Balance Sheet.  Deferred
losses  on closed  positions  were $4.0  million  at  December  31,  1998.  Such
deferrals are generally recorded in net income within one month.

The  Company's  subsidiaries  are  exposed  to  credit  risk  in  the  event  of
nonperformance  by  counter  parties  to  derivative   contracts,   as  well  as
nonperformance by the counter parties of the transactions against which they are
hedged.  The  Company  believes  that the credit  risk  related to the  futures,
options and swap contracts is no greater than that  associated  with the primary
contracts which they hedge, as these contracts are with major  investment  grade
financial  institutions,  and that  elimination of the price risk lowers overall
business risk.

In addition to the derivative instruments discussed above, at December 31, 1998,
THEC had one interest rate swap agreement to exchange the differential between a
fixed  rate of  6.025%  and a market  LIBOR  rate  using an  aggregate  notional
principal of $30.0  million  over various  90-day  periods  from  November  1998
through November 1999.

LEGAL  MATTERS:  From time to time,  the  Company is  subject  to various  legal
proceedings  arising  out of the  ordinary  course  of its  business.  Except as
described  below,  the Company does not consider any of such  proceedings  to be
material to its business or likely to result in a material adverse effect on its
results of operations or financial condition.


                                       85
<PAGE>


Subsequent to the LIPA Transaction and KeySpan Acquisition,  former shareholders
of LILCO commenced 13 class action lawsuits in the New York State Supreme Court,
Nassau  County,  against each of the former  officers and directors of LILCO and
the Company.  These actions were  consolidated in August 1998. The  consolidated
action  alleges that in connection  with certain  payments  LILCO had determined
were payable in connection with the LIPA Transaction and KeySpan  Acquisition to
LILCO's chairman,  and to former officers of LILCO  ("Payments"):  (i) the named
defendants  breached  their  fiduciary  duty owed to LILCO and KSE former and/or
current  Company  shareholders  as a result  of the  Payments;  (ii)  the  named
defendants  intended  to defraud  such  shareholders  by means of  manipulative,
deceptive and wrongful conduct,  including materially  inaccurate and incomplete
news reports and filings with the  Securities and Exchange  Commission  ("SEC");
and (iii) the named defendants  recklessly and/or negligently failed to disclose
material facts associated with the Payments.

In addition,  three shareholder  derivative actions have been commenced pursuant
to which such  shareholders seek the return of the Payments or damages resulting
from among other things,  an alleged breach of fiduciary duty on the part of the
former LILCO officers and  directors.  One action was brought on behalf of LILCO
in federal  court.  The Company moved to dismiss this action in September  1998.
The other two  actions  were  brought on behalf of the Company in New York State
Supreme Court, Nassau County. In one of these state court actions, the Company's
directors and the recipients of the Payments are also named as defendants.

Finally,  two class action securities suits were filed in federal court alleging
that certain  officers and  directors of LILCO  violated the federal  securities
laws by failing to  properly  disclose  that the LIPA  Transaction  and  KeySpan
Acquisition  would trigger the  Payments.  These  actions were  consolidated  in
October 1998.

On March 17, 1999,  the Company signed a Memorandum of  Understanding  to settle
the  above-referenced  actions,  except the federal court derivative  action, in
exchange  for (i) $7.9 million to be  distributed  (less  plaintiffs'  attorneys
fees) to former LILCO and KSE shareholders  and (ii) the Company's  agreement to
implement certain corporate  governance and executive  compensation  procedures.
The entire $7.9 million settlement commitment will be funded from insurance. The
parties  intend to submit the  settlement to the Nassau County Supreme Court for
its review and approval. If that Court approves the settlement, the parties will
then make an application  to the federal court for an order and final  judgment,
dismissing  the  three  federal  court  actions,  including  the  federal  court
derivative action, based, among other things, on the binding effect of the state
court judgment.

In addition to the above mentioned actions, a class action lawsuit has also been
filed in the New York State  Supreme  Court,  Suffolk  County,  by the County of
Suffolk against LILCO's former officers and/or directors.  The County of Suffolk
alleges that the Payments were  improper,  and seeks to recover the Payments for
the benefit of Suffolk County ratepayers.  The Company moved to consolidate this
action with the above-mentioned consolidated action in October 1998.


                                       86

<PAGE>


In October 1998,  the County of Suffolk and the Towns of Huntington  and Babylon
commenced  an action  against  LIPA,  the  Company,  the NYPSC and others in the
United  States  District  Court  for  the  Eastern  District  of New  York  (the
"Huntington Lawsuit").  The Huntington Lawsuit alleges, among other things, that
LILCO  ratepayers  (i) have a property  right to receive or share in the alleged
capital gain that resulted from the transaction with LIPA (which gain is alleged
to be at least $1  billion);  and (ii)  that  LILCO  was  required  to refund to
ratepayers the amount of a Shoreham-related  deferred tax reserve (alleged to be
at least $800 million)  carried on the books of LILCO at the consummation of the
LIPA Transaction.  In December 1998, the plaintiffs amended their complaint. The
amended  complaint  contains  allegations  relating to the Payments and adds the
recipients  of the  Payments as  defendants.  In January  1999,  the Company was
served with the amended complaint.

Finally,  certain other proceedings have been commenced relating to the Payments
and disclosures made by LILCO with respect thereto.  These  proceedings  include
investigations by the New York State Attorney General, the NYPSC and LIPA, joint
hearings  conducted by two  committees  of the New York State  Assembly,  and an
informal,  non-public  inquiry by the SEC. In December 1998, the Company settled
with LIPA and the NYPSC. The agreement included a payment of $5.2 million by the
Company  to LIPA that will be used by LIPA to supply  postage-paid  bill  return
envelopes  to  customers  for the next three  years.  The Company also agreed to
fully  reimburse and  indemnify  LIPA for costs  incurred by LIPA,  amounting to
approximately  $765,000,  for  attorneys and other  consultants  involved in the
investigation.  Such  amounts  are not  covered  by  insurance.  The  Company is
cooperating fully with the investigations of the New York State Attorney General
and the SEC.  To date,  no action  has been  taken  either by the New York State
Attorney General or the SEC.

At this time the  Company is unable to  determine  the  outcome  of the  ongoing
proceedings, or any of the remaining lawsuits described above.

THE CLASS SETTLEMENT: The Class Settlement, which became effective in June 1989,
resolved a civil  lawsuit  against  LILCO  brought  under the federal  Racketeer
Influenced  and  Corrupt  Organizations  Act.  The  lawsuit,   which  the  Class
Settlement resolved,  had alleged that LILCO made inadequate  disclosures before
the NYPSC  concerning  the  construction  and  completion of nuclear  generating
facilities.   The  Class  Settlement   provided  electric  customers  with  rate
reductions of $390.0  million that were being  reflected as adjustments to their
monthly  electric bills over a ten-year period which began on June 1, 1990. Upon
its  effectiveness,  a liability  was  recorded  for the Class  Settlement  on a
present  value  basis at $170.0  million.  The Class  Settlement  obligation  of
approximately  $75.0  million at December 31, 1998 reflects the present value of
the  remaining  reductions  to be refunded to  customers.  The  reduction in the
present  value  of  this  liability  has  been  included  in  the   accompanying
Consolidated  Income Statement.  As a result of the LIPA Transaction,  LIPA will
reimburse  the remaining  balance to its electric  customers as an adjustment to
their monthly electric bills. The Company will then, in turn,  reimburse LIPA on
a monthly basis for such reductions on the customer's  monthly bill. The Company
remains ultimately obligated for the refund of the Class Settlement.


                                       87

<PAGE>





ENVIRONMENTAL  MATTERS:  The Company  has  recorded a $130.3  million  liability
associated with  investigation and remedial  obligations with respect to nine of
the Company's former  manufactured gas plants ("MGP").  Three of these MGP sites
are associated with Brooklyn  Union's  operations or its  predecessors;  six MGP
sites are associated with the operations of Brooklyn Union of Long Island or its
predecessors.  With respect to the former  Brooklyn  Union MGP sites, a total of
$48.3 million has been accrued  representing the best estimate of remedial costs
for one site and the minimum range of an estimate for the  investigation  and/or
remediation  of the other sites.  With respect to Brooklyn  Union of Long Island
MGP sites, a total of $82 million has been reserved as a minimum of an estimated
range of costs for the six sites which will be investigated/remediated  pursuant
to upcoming  Administrative  Orders on Consent ("ACO's") with the New York State
Department of Environmental  Conservation  ("DEC"). As the Company continues its
investigations and makes remedial decisions pursuant to its ACO obligations, the
environmental  conditions at each site will be clarified and the Company's total
remedial obligations are likely to be higher.

Under prior rate orders,  the NYPSC has allowed recovery of investigation  costs
related to certain  Brooklyn Union MGP sites.  Therefore,  at December 31, 1998,
the Company had reflected a total remaining  regulatory  asset of  approximately
$100.5 million.  The Company  believes that current rate plans in effect provide
for recovery of environmental costs.

NOTE 9. KSE AND SUBSIDIARIES

The following is the condensed  consolidated statement of income for KSE and its
subsidiaries  for the eight months  ended May 28, 1998.  As a result of purchase
accounting, such amounts have been excluded from the financial statements of the
Company  and are  disclosed  here  for  informational  purposes.  The  financial
statements for KSE's most recent fiscal year end were as of September 30, 1997.

                             KSE AND SUBSIDIARIES
                  CONDENSED CONSOLIDATED STATEMENT OF INCOME
                  FOR THE PERIOD OCTOBER 1, 1997 - MAY 28, 1998
                           (In Thousands of Dollars)


                                             Eight Months Ended
                                                   May 28, 1998
          -----------------------------------------------------
          Operating revenues                       $  1,173,052
          Operating expenses                          1,029,981
          Operating income                              143,071
          Other income                                    7,385
          Interest charges                               30,495
          -----------------------------------------------------
          Income available for common stock       $     119,961
          -----------------------------------------------------
          Earnings per share                   $           2.35
          -----------------------------------------------------
  


                                     88


<PAGE>
Consolidated  earnings  for the  eight  months  ended May 28,  1998 were  $120.0
million, or $2.35 per share. Core utility operations  contributed $136.7 million
or $2.68  per  share.  THEC  contributed  $12.5  million  or $0.24  per share to
earnings,  while Energy Related  Investments had a loss of $6.2 million or $0.12
per share and Energy Related Services showed a loss of $6.5 million or $0.13 per
share,  reflecting  the effect of various costs  related to market  development.
Utility results  reflected the favorable  effect of gas heating sales during the
prime  heating  months of November  through April when total annual gas revenues
are  substantially  realized.  Losses are  incurred  for the period May  through
September  and have not been  reflected in these  results.  In  addition,  $16.5
million or $0.32 per share of primarily merger related expenses were recorded by
KSE's   administrative  and  service  area  and  were  not  allocated  to  KSE's
subsidiaries.  Cash provided by operating  activities for the eight months ended
May 28, 1998 was $253.6  million and cash provided by financing  activities  was
$5.5  million.  For the eight  months  ended May 28, 1998 cash used in investing
activities  was $130.9  million and at May 28,  1998 KSE had cash and  temporary
cash investments of $165.2 million.

NOTE 10. BUSINESS SEGMENTS

SFAS No. 131,  "Disclosures  about Segments of an Enterprise and Related Company
Information,"  requires  the  reporting  of  certain  financial  information  by
business segments.  The Company has six reportable  segments:  Gas Distribution,
Electric Services,  Gas Exploration and Production,  Energy Related Investments,
Energy  Related  Services and Other.  The Gas  Distribution  reportable  segment
consists of the two gas distribution companies serving customers in the New York
City boroughs of Brooklyn, Staten Island and Queens and the Long Island counties
of Nassau and Suffolk.  The Electric  Services  reportable  segment  consists of
subsidiaries  that own and  operate  oil and gas fired  generating  plants,  and
through  long term  contracts,  manage the  electric  T&D  system,  the fuel and
electric  purchases,  and the off-system sales for LIPA. The Gas Exploration and
Production  reportable  segment,  consisting  of THEC, is engaged in gas and oil
exploration  and  production,  and the  development  and acquisition of domestic
natural gas and oil  properties.  Subsidiaries  included  in the Energy  Related
Investments segment have investments in natural gas pipelines, midstream natural
gas processing and gathering  facilities and gas storage facilities.  The Energy
Related Services segment consists of subsidiaries that primarily provide gas and
electric  marketing and related energy systems  installation,  appliance service
contracts and  management  services to customers  primarily in the New York City
metropolitan  area.  The  Other  reportable   segment   represents   unallocated
administrative expenses of the Company.

                                       89

<PAGE>

The accounting  policies of the segments are the same as those  described in the
summary of significant  accounting  policies.  The Company's reportable segments
are  strategic  business  units  that are  managed  separately  because of their
different  operating  and  regulatory   environments.   The  reportable  segment
information is as follows:


<TABLE>
<CAPTION>

                                                                    Energy       Energy
                         Gas         Electric    Gas Exploration     Related      Related                Reconciling
                     Distribution    Services    and Production    Investments    Services    Other      Eliminations   Consolidated
                     ---------------------------------------------------------------------------------------------------------------
9 MONTHS ENDED                                                                                             (IN THOUSANDS OF DOLLARS)
DECEMBER 31, 1998

<S>                     <C>           <C>             <C>          <C>          <C>        <C>            <C>              <C>      
Revenues                  851,656       753,636        70,812         117        62,435       171,414        (188,218)     1,721,852

Depreciation and
amortization               57,351        45,900       177,114         216         1,117        13,166               -        294,864

Interest income                 -             -             -           -             -        49,200               -         49,200

Interest expense           60,678        69,953         3,870           -             -        58,682         (54,468)       138,715

Income (loss) before                                                                                                           
special charges             8,582        57,119         2,218      (4,186)       (3,708)        2,959               -        62,984*

Loss from equity method
subsidiaries                    -             -             -      (5,842)            -             -               -        (5,842)

Total assets            3,919,311     1,456,094       569,454     428,746       116,940    12,151,745     (11,747,188)     6,895,102

Investment in equity
method subsidiaries             -             -             -     341,346             -             -               -        341,346

Capital expenditures      128,405        54,090       182,729     231,791        28,421        51,127               -        676,563

</TABLE>

          *Excludes special charges of $258.5 million  after-tax.  See Note 11 -
          Costs Related to the LIPA  Transaction  ges. and Special Charges.

          Electric  Services  revenues from LIPA, its only  customer,  of $408.3
          million  for the  nine  months  ended  December  31,  1998  represents
          approximately  24% of the Company's  consolidated  revenue during that
          period.

          Reconciling  items  include  intercompany  revenues  and  intercompany
          interest  expense  and  the  elimination  of  intercompany   ownership
          interests within the affiliated entities.

                                       90

<PAGE>


<TABLE>
<CAPTION>
                                                                                  
                                                                  Energy       Energy                   
                         Gas        Electric   Gas Exploration    Related      Related                    Reconciling
                     Distribution   Services   and Production   Investments    Services       Other       Eliminations  Consolidated
                     ---------------------------------------------------------------------------------------------------------------
12 MONTHS ENDED                                                                                            (IN THOUSANDS OF DOLLARS)
MARCH 31, 1998

<S>                     <C>         <C>                     <C>         <C>           <C>           <C>             <C>   <C>       
Revenues                  645,659     2,478,435             -           -             -             -               -      3,124,094

Depreciation and
amortization               38,584       131,186             -           -             -             -               -        169,770

Interest expense           52,409       352,064             -           -             -             -               -        404,473

Net income                 33,815       276,612             -           -             -             -               -        310,427

Total assets            1,444,745    10,455,980             -           -             -             -               -     11,900,725

Capital expenditures       78,897       218,333             -           -             -             -               -        297,230
</TABLE>

<TABLE>
<CAPTION>
                                                                        Energy       Energy                                       
                         Gas        Electric       Gas Exploration     Related      Related               Reconciling   
                     Distribution   Services        and Production    Investments    Services    Other    Eliminations  Consolidated
                     ---------------------------------------------------------------------------------------------------------------
3 MONTHS ENDED                                                                                             (IN THOUSANDS OF DOLLARS)
MARCH 31, 1997                                                                                       

<S>                     <C>          <C>                    <C>         <C>           <C>           <C>             <C>   <C>
Revenues                  293,391       557,791             -           -             -             -               -        851,182

Depreciation and
Amortization                7,827        31,993             -           -             -             -               -         39,820

Interest Expense           13,708        92,170             -           -             -             -               -        105,878

Net Income                 46,925        27,803             -           -             -             -               -         74,728

Total Assets            1,267,600    10,582,400             -           -             -             -               -     11,850,000

Capital Expenditures       15,804        46,675             -           -             -             -               -         62,479
</TABLE>


<TABLE>
<CAPTION>
                                                                                                        
                                                                      Energy       Energy                   
                         Gas            Electric   Gas Exploration     Related      Related              Reconciling
                     Distribution       Services   and Production    Investments    Services    Other    Eliminations   Consolidated
                     ---------------------------------------------------------------------------------------------------------------
12 MONTHS ENDED                                                                                            (IN THOUSANDS OF DOLLARS)
DECEMBER 31, 1996                                                                       
                                                                                                     
<S>                    <C>          <C>                     <C>         <C>           <C>           <C>             <C>   <C>      
Revenues                  684,260     2,466,435             -           -             -             -               -      3,150,695

Depreciation and
amortization               43,147       128,534             -           -             -             -               -        171,681

Interest expense           54,811       392,818             -           -             -             -               -        447,629

Net income                 38,471       225,777             -           -             -             -               -        264,248

Total assets            1,460,600    10,749,400             -           -             -             -               -     12,210,000

Capital expenditures       76,938       214,680             -           -             -             -               -        291,618
</TABLE>

                                      91

<PAGE>


NOTE 11. COSTS RELATED TO THE LIPA TRANSACTION AND SPECIAL CHARGES

Special  charges for the nine months ended December 31, 1998 were $258.5 million
after-tax.  These charges reflected,  in part,  non-recurring charges associated
with the LIPA  Transaction  of $107.9 million  after-tax.  Costs relating to the
LIPA Transaction  principally reflected taxes associated with the sale of assets
(the  "Transferred  Assets") to the Company by LIPA;  the  write-off  of certain
regulatory assets that were no longer recoverable under various LIPA agreements;
and other transaction  costs incurred to consummate the LIPA Transaction.  These
charges were offset,  in part, by tax benefits  relating to the deferred federal
income taxes necessary to account for the difference between the carryover basis
of the Transferred Assets for financial reporting purposes and the new increased
tax  basis  of the  assets,  and  tax  benefits  recognized  on the  funding  of
post-employment benefits for employees of the successor company.


Further,  the Company  incurred  charges  related to the KeySpan  Acquisition of
$83.5  million  after-tax.  These charges  reflected a $42.0  million  after-tax
charge for an early retirement program initiated by the Company in December 1998
in which approximately 600 employees participated, and a $41.5 million after-tax
charge for the write-off of a customer  billing system that was in  development.
Also, in December 1998, the Company made a $20.0 million donation ($13.0 million
after-tax) to establish the KeySpan Foundation,  a not-for-profit  philanthropic
foundation that will make donations to local charitable community organizations.

Special charges also reflected an after-tax  impairment charge of $54.1 million,
which represented the Company's share of the impairment charge,  recorded by the
Company's gas and oil exploration and production  subsidiary to reduce the value
of its proved gas reserves in accordance with the asset ceiling test limitations
of the  Securities and Exchange  Commission  applicable to gas  exploration  and
development operations accounted for under the full cost method.

NOTE 12. SUPPLEMENTAL DISCLOSURE OF KSE AND SUBSIDIARIES (UNAUDITED)

For the twelve  months ended  December  31, 1998 net income of the  consolidated
entities  comprising  KSE was $12.5 million  compared to $126.3  million for the
1997 corresponding period. Net income in 1998 was affected by rate reductions to
gas utility  customers;  significantly  warmer than  normal  weather  during the
period; certain special charges associated with the KeySpan Acquisition of $23.5
million  after-tax,  including  charges  associated  with the  early  retirement
program; and an impairment charge of $54.1 million after-tax to reduce the value
of proved gas reserves. Energy Related Investment earnings for the twelve months
ended December 31, 1997 reflected the sale of certain subsidiary  properties for
$15.2 million  after-tax.  Consolidated  net income  together with the effect of
special charges, is set forth in the following table:

KSE AND SUBSIDIARIES

                                Twelve Months       Twelve Months
Results of Operations               Ended               Ended
(In Thousands of Dollars)      December 31, 1998  December 31, 1997
------------------------------ ---------------- -----------------
Gas Distribution                        $99,406           $93,205
Gas Exploration and Production            8,995            15,774
Energy Related Investments               (6,098)           21,669
Energy Related Services                  (9,119)           (3,896)
Other                                    (3,136)             (487)
Income before special charges            90,048           126,265
Special charges                         (77,591)                -
------------------------------ ---------------- -----------------
Consolidated net income                 $12,457          $126,265
============================== ================ =================

Earnings from Gas  Distribution  operations for the twelve months ended December
31,  1998 were  impacted by synergy  savings-related  rate  reductions  of $23.9
million effective May 29, 1998.  Brooklyn Union core customers have received the
benefits of these reductions before actual savings


                                       92

<PAGE>




could be achieved.  Moreover,  in 1998 results  were  affected by  significantly
warmer  than  normal  weather.  Weather  was 18% warmer  than  normal in 1998 as
compared to normal  weather  experienced  in 1997. The effects of weather on Gas
Distribution   revenues  is  largely  mitigated  by  the  weather  normalization
adjustment  included  in  Brooklyn  Union's  tariff;  nevertheless,  significant
fluctuations  in normal  weather  will affect  revenues  collected  from heating
customers. The effects of the rate reduction and the significantly warmer winter
heating season reduced net revenues,  revenues less gas costs,  by $24.2 million
for the twelve months ended  December 31, 1998 as compared to the  corresponding
period last year.

The  aforementioned  variations  in net  revenues  were  totally  offset by cost
reduction measures and re-engineering  processes employed by KSE during the past
few years.  Further,  operation and maintenance expense was lower in 1998 due to
the exceptionally warm weather experienced. Earnings from gas utility operations
provided an equity return, including discrete incentives,  of 13.6% for the rate
year  ending  September  30,  1998 as compared to 13.5% for the rate year ending
September 30, 1997.

Earnings  from  Gas  Exploration  and  Production  activities  in 1998  and 1997
reflected the continued expansion of operations, primarily in Texas and the Gulf
of Mexico, by THEC.  Earnings in 1998, however,  were significantly  affected by
low gas production  prices.  Included in special  charges above, is an after-tax
charge of $54.1 million representing the Company's share of an impairment charge
recorded by THEC to reduce the value of its investment in proved gas reserves in
accordance  with the  asset  ceiling  test  limitations  of the  Securities  and
Exchange Commission.

Revenues from gas production activities increased in 1998 as compared to 1997 by
approximately  9% due  primarily  to the  continued  development  of  additional
natural  gas  properties  acquired  by THEC  during  the past three  years.  The
benefits  derived from  increased  production  levels,  however,  were partially
offset,  by decreases in average realized prices.  In 1998,  production was 62.8
billion cubic feet (BCFe), or 11.5 BCFe above the level of production last year.
In 1998,  wellhead  prices averaged $1.96 per MCF compared with $2.45 per MCF in
1997.  The  effective  price  realized  (average  wellhead  price  received  for
production  including  recognized hedging gains and losses) was $2.02 per MCF in
1998  compared  with  $2.25  per  MCF  in  1997.  Further,  operating  expenses,
including,  depreciation,  depletion  and  amortization  expense,  increased  by
approximately 30% for the year ended December 31, 1998 as compared with the year
ended December 31, 1997 due primarily to increased production activity.

Earnings from the Energy Related  Investments  segment  consists of results from
the  Company's  20%  interest  in the  Iroquois  Gas  Transmission  System  LP ,
investments in The Premier Transco  Pipeline and Phoenix Natural Gas in Northern
Ireland and investments in midstream  natural gas assets in Western Canada owned
jointly with Gulf Canada Resources Limited. Results from these investments,  for
the year  ended  December  31,  1998,  reflected  the  start-up  nature of their
operations,  while  results  relating  to the  investment  in the  Iroquois  Gas
Transmission  System  for  1998  and  1997  were  consistent  with  management's
expectations  and  reflected  after-tax  earnings of $6.5  million.  The Company
completed its acquisition of midstream natural gas assets in Western Canada in



                                       93
<PAGE>




December  1998, and therefore,  earnings from this  investment  will begin to be
realized in fiscal year 1999.  Results also  reflected  costs to settle  certain
contracts  associated  with  the  sale of the  Company's  domestic  cogeneration
investments and fuel management  operations,  which took place in 1997. Earnings
in 1997 primarily reflected the sale of certain Canadian properties and the sale
of domestic cogeneration investments and fuel management operations.

Subsidiaries  comprising the Energy Related Services segment incurred losses for
the past two years reflecting the start-up nature of their operations.  Included
in this business  segment are operations  which market gas and  electricity  and
arrange  transportation  and  related  services,  largely  to retail  customers,
including  those  served by the  Company's  gas  distribution  subsidiaries.  In
addition,  these  subsidiaries  provide a variety of technical  and  maintenance
services to customers  that operate  commercial  and  industrial  facilities and
provide  appliance repair service to residential  customers,  all located within
the New York City metropolitan  area. During the past two years, the Company has
acquired  an  engineering   firm,  and  major  heating,   ventilation   and  air
conditioning contractors and has integrated these operations into its strategies
for future growth.

Results from the Other segment reflected certain costs associated with corporate
and  administrative  functions  that  were not  allocated  to  various  business
segments.

                                       94

<PAGE>




NOTE 13.  DISAGGREGATED CONDENSED BALANCE SHEET (UNAUDITED)

Set forth below is LILCO's  condensed  balanced sheet at May 28, 1998, which has
been  disaggregated to reflect the effects of the LIPA Transaction.  The assets,
capitalization and liabilities  attributable to KeySpan  subsidiaries  represent
LILCO's transfer of its gas and generation business to KeySpan subsidiaries. The
assets,  capitalization  and  liabilities  attributable  to LIPA represent those
items that have been  acquired  or assumed by LIPA  through its  acquisition  of
LILCO's  common  stock.  All such amounts  exclude the proceeds from the sale of
common stock to LIPA. For a further discussion of the LIPA Transaction, see Note
2, "Sale of LILCO Assets, Acquisition of KeySpan Energy Corporation and Transfer
of Assets and Liabilities to the Company."

<TABLE>
<CAPTION>

                                                            (In Millions of Dollars)
------------------------------------------------------------------------------------
                                                    Allocation of Assets/Liabilities
                                                    --------------------------------
                                                         KeySpan
                                         LILCO        Subsidiaries       LIPA
------------------------------------------------------------------------------------
ASSETS
<S>                                     <C>            <C>              <C>        
Total net utility plant                 $   3,853.6    $     1,798.0    $   2,055.6
------------------------------------------------------------------------------------
Regulatory assets
  Shoreham related                           4,692.4             -          4,692.4
  Regulatory tax asset                       1,660.9             -          1,660.9
  Other                                        681.4           445.9          235.5
------------------------------------------------------------------------------------
Total regulatory assets                      7,034.7           445.9        6,588.8
Nonutility property and other investments       52.1            33.1           19.0
Current assets                               1,083.1           397.0          686.1
Deferred charges                                87.2            33.2           54.0
------------------------------------------------------------------------------------
Total assets                            $   12,110.7   $     2,707.     $   9,403.5
====================================================================================

CAPITALIZATION AND LIABILITIES
Capitalization                                                                    
  Long-term debt, including current
       maturities                       $    4,383.1   $        24.4    $    4,358.7
  Promissory notes                               -           1,047.9       (1,047.9)
  Preferred stock, including current           659.6           438.0          221.6
       maturities
  Common shareholders' equity           $    2,682.6           181.8        2,500.8
------------------------------------------------------------------------------------
Total capitalization                         7,725.3         1,692.1        6,033.2
Regulatory liabilities                         380.7            68.4          312.3
Current liabilities                          1,103.8           752.3          351.5
Deferred credits                             2,708.7             1.5        2,707.2
Operating reserves                             192.2           192.9          ( 0.7)
------------------------------------------------------------------------------------
Total capitalization and liabilities    $   12,110.7   $     2,707.2    $   9,403.5
====================================================================================
</TABLE>

                                       95

<PAGE>

Note 14.  Supplemental Gas and Oil Disclosures (Unaudited)

This  information  includes amounts  attributable to a 36% minority  interest in
THEC at December 31, 1998 and a 34% minority  interest in 1997 and 1996. Gas and
oil operations, and reserves, were predominantly located in the United States in
all years.
<TABLE>
<CAPTION>


CAPITALIZED COSTS RELATING TO GAS AND OIL PRODUCING ACTIVITIES    
-----------------------------------------------------------------------------------------------------------
At December 31,                                                                    1998                1997
-----------------------------------------------------------------------------------------------------------
                                                                      (In Thousands of Dollars)
<S>                                                                            <C>                 <C>     
Unproved properties not being amortized                                        $145,317            $104,075
Properties being amortized - productive and nonproductive                       828,168             566,868
-----------------------------------------------------------------------------------------------------------
Total capitalized costs                                                         973,485             670,943
Accumulated depletion                                                          (438,974)           (229,776)
-----------------------------------------------------------------------------------------------------------
  Net capitalized costs                                                        $534,511            $441,167
-----------------------------------------------------------------------------------------------------------
</TABLE>

The  following is a break-out of the costs (in  thousands of dollars)  which are
excluded from the  amortization  calculation as of December 31, 1998, by year of
acquisition: 1998 - $68,931 1997 - $34,259 and prior years $42,127 . The Company
cannot accurately  predict when these costs will be included in the amortization
base, but it is expected that these costs will be evaluated within the next five
years.
<TABLE>
<CAPTION>

COSTS INCURRED IN PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT ACTIVITIES
---------------------------------------------------------------------------------------------------
Year Ended December 31,                              1998                 1997                1996
---------------------------------------------------------------------------------------------------
                                     (In Thousands of Dollars)
<S>                                              <C>                 <C>                  <C>
Acquisition of properties-
  Unproved properties                             $33,803              $16,613             $23,317
  Proved properties                               162,083               24,007              94,774
Exploration                                        55,611               44,119              27,398
Development                                        51,046               59,244              31,243
---------------------------------------------------------------------------------------------------
Total costs incurred                             $302,543             $143,983            $176,732
---------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>

RESULTS OF OPERATIONS FROM GAS AND OIL PRODUCING ACTIVITIES
-----------------------------------------------------------------------------------------------------------
Year Ended December 31,                                      1998                 1997                1996
-----------------------------------------------------------------------------------------------------------
                                             (In Thousands of Dollars)
<S>                                                      <C>                  <C>                  <C>    
Revenues from gas and oil
  producing activities-
Sales to unaffiliated parties                            $127,124             $116,349             $64,864
----------------------------------------------------------------------------------------------------------
Revenues                                                  127,124              116,349              64,864
----------------------------------------------------------------------------------------------------------
Production and lifting costs                               21,166               18,379              12,201
Depletion                                                 209,838               59,081              33,732
----------------------------------------------------------------------------------------------------------
Total expenses                                            231,004               77,460              45,933
----------------------------------------------------------------------------------------------------------
Income before taxes                                      (103,880)              38,889              18,931
Income taxes                                              (37,410)              12,397               5,192
----------------------------------------------------------------------------------------------------------
Results of gas and oil producing
  activities (excluding corporate
  overhead and interest costs)                           ($66,470)             $26,492             $13,739
----------------------------------------------------------------------------------------------------------
</TABLE>


                                       96

<PAGE>


NOTE 14.  SUPPLEMENTAL GAS AND OIL DISCLOSURES (CONTINUED)


The gas and oil reserves  information  is based on estimates of proved  reserves
attributable  to  THEC's  interest  as of  December  31 for  each  of the  years
presented.  These estimates  principally were prepared by independent  petroleum
consultants.  Proved reserves are estimated  quantities of natural gas and crude
oil which geological and engineering data demonstrate with reasonable  certainty
to be recoverable in future years from known reservoirs under existing  economic
and operating conditions.


The  standardized  measure of  discounted  future net cash flows was prepared by
applying year-end prices of gas and oil to the proved reserves, except for those
reserves devoted to future  production that is hedged.  Such reserves are priced
at their respective hedged amounts.  The standardized  measure does not purport,
nor should it be  interpreted,  to present  the fair value of THEC's gas and oil
reserves.  An estimate of fair value would also take into  account,  among other
things, the recovery of reserves not presently classified as proved, anticipated
future changes in prices and costs and a discount factor more  representative of
the time value of money and the risks inherent in reserve estimates.


<TABLE>
<CAPTION>

Reserve Quantity Information
Natural Gas (MMcf)
At December 31,                                                       1998                1997                   1996
---------------                                                       ----                ----                   ----
<S>                                                                <C>                 <C>                    <C>
Proved reserves-
  Beginning of year                                                330,601             320,474                195,946
  Revisions of previous estimates                                   (4,656)            (18,743)                (8,665)
  Extensions and discoveries                                        67,272              75,651                 21,445
  Production                                                       (61,479)            (50,310)               (31,215)
  Purchases of reserves in place                                   139,994               3,778                143,688
  Sales of reserves in place                                        (1,285)               (249)                  (725)
Proved reserves-
  End of year                                                      470,447             330,601                320,474
Proved developed reserves-
  Beginning of year                                                256,632             236,544                162,784
  End of year                                                      369,931             256,632                236,544

</TABLE>
<TABLE>
<CAPTION>

Crude Oil, Condensate and Natural Gas Liquids (MBbls)
At December 31,                                                       1998                1997                   1996
---------------                                                       ----                ----                   ----
<S>                                                                  <C>                 <C>                    <C>
Proved reserves-
  beginning of year                                                  1,077               1,131                    889
  Revisions of previous estimates                                     (105)                (62)                  (157)
  Extensions and discoveries                                           249                 184                    198
  Production                                                          (225)               (171)                  (118)
  Purchases of reserves in place                                       665                   1                    361
  Sales of reserves in place                                           (11)                 (6)                   (42)
Proved reserves-
  end of year                                                        1,650               1,077                  1,131
Proved developed reserves-
  Beginning of year                                                    914               1,013                    774
  End of year                                                        1,498                 914                  1,013
</TABLE>



                                       97

<PAGE>



Note 14.  Supplemental Gas and Oil Disclosures (continued)
<TABLE>
<CAPTION>

Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Gas and Oil Reserves
At December 31,                                                       1998                1997
---------------                                                       ----                ----
                                                                      (In Thousands of Dollars)
<S>                                                               <C>                 <C>     
Future cash flows                                                 $878,448            $781,336
Future costs-                                          
  Production                                                      (153,567)           (135,437)
  Development                                                     (103,915)            (84,658)
Future net inflows
  before income tax                                                620,966             561,241
Future income taxes                                                (89,032)           (124,510)
Future net cash flows                                              531,934             436,731
10% discount factor                                               (135,874)           (121,351)
Standardized measure of
  discounted future net
  cash flows                                                      $396,060            $315,380
</TABLE>
<TABLE>
<CAPTION>




Changes in Standardized Measure of Discounted Future Net Cash Flows from
Proved Reserve Quantities
Year Ended December 31,                                               1998                1997                   1996
-----------------------                                               ----                ----                   ----
                                                                      (In Thousands of Dollars)
<S>                                                               <C>                 <C>                    <C>
Standardized measure -
  beginning of year                                               $315,380            $452,582               $171,459
Sales and transfers, net of
  production costs                                                (105,958)            (97,968)               (52,663)
Net change in sales and
  transfer prices, net of
  production costs                                                (104,137)           (223,169)               145,385
Extensions and discoveries and
  improved recovery, net of
  related costs                                                     72,333             114,893                 46,616
Changes in estimated future
  development costs                                                 (6,656)            (20,499)               (14,068)
Development costs incurred
  during the period that reduced
  future development costs                                          15,891              16,154                 19,594
Revisions of quantity estimates                                     (4,982)            (23,156)               (19,132)
Accretion of discount                                               37,706              57,700                 20,652
Net change in income taxes                                          44,812              62,733                (89,353)
Net purchases of reserves in place                                 155,259               1,855                250,990
Changes in production rates
  (timing) and other                                               (23,588)            (25,745)               (26,898)
Standardized measure -
  end of year                                                     $396,060            $315,380               $452,582
</TABLE>


                                       98

<PAGE>

Note 14.  Supplemental Gas and Oil Disclosures (continued)


<TABLE>
<CAPTION>


AVERAGE SALES PRICES AND PRODUCTION COSTS PER UNIT
------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,                                                          1998                1997              1996
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>                 <C>               <C>    
    Natural gas ($/MCF)                                                          1.96                2.45              2.35

    Oil, condensate and natural gas liquid ($/Bbl)                              12.18               18.33             21.53

    Production cost per equivalent MCF ($)                                       0.26                0.28              0.34
------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>

ACREAGE
------------------------------------------------------------------------------------------------------------------------------
At December 31, 1998                                                                                Gross               Net
------------------------------------------------------------------------------------------------------------------------------
    <S>                                                                                           <C>               <C>    
    Producing                                                                                     297,360           197,902
    Undeveloped                                                                                   317,049           282,822
------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>

NUMBER OF PRODUCING WELLS
------------------------------------------------------------------------------------------------------------------------------
At December 31, 1998                                                                                Gross               Net
------------------------------------------------------------------------------------------------------------------------------
    <S>                                                                                             <C>                 <C>
    Gas wells                                                                                       1,239               803
    Oil wells                                                                                           8                 3
------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>

DRILLING ACTIVITY (Net)
------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,                             1998                         1997                         1996
------------------------------------------------------------------------------------------------------------------------------
                                       Producing     Dry   Total   Producing      Dry   Total   Producing      Dry    Total
------------------------------------------------------------------------------------------------------------------------------
    <S>                                     <C>      <C>    <C>         <C>       <C>    <C>          <C>      <C>      <C>
    Net developmental wells                 19.2     4.6    23.8        29.3      8.5    37.8         7.0      1.0      8.0
    Net exploratory wells                    1.6     4.2     5.8         3.8      2.9     6.7         4.3      4.4      8.7
------------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>


WELLS IN PROCESS
------------------------------------------------------------------------------------------------------------------------------
At December 31, 1998                                                                                Gross               Net
------------------------------------------------------------------------------------------------------------------------------
    <S>                                                                                               <C>               <C>
    Exploratory                                                                                       2.0               0.7
    Developmental                                                                                     3.0               0.6
------------------------------------------------------------------------------------------------------------------------------
</TABLE>

          *Represents  the cash price  received which excludes the effect of any
          hedging transactions.

                                       99


<PAGE>


Supplementary Information (Unaudited)

Summary of Quarterly Information

The  following  is a table of financial  data for each quarter of the  Company's
nine month period ended December 31, 1998.
<TABLE>
<CAPTION>

                                (In Thousands of Dollars, Except Per Share Data)

                                   Quarter End    Quarter End    Quarter Ended
                                     6/30/98         9/30/98        12/31/98
--------------------------------------------------------------------------------
<S>                                  <C>             <C>            <C>    
Operating revenues (a)               568,986         426,258         726,608

Operating income (loss)              184,236          (8,530)       (162,467)

Net income (loss)                     37,250         (17,656)       (186,527)(b)

Earnings (loss) for common stock      26,034         (26,350)       (195,221)

Basic and diluted earnings (loss)
     per common share   (c)             0.19           (0.17)          (1.34)

Dividends declared                      0.300  (d)      0.445          0.445
--------------------------------------------------------------------------------
</TABLE>


(a)Includes revenues from various LIPA service agreements for the period May 29,
   1998 through  December 31, 1998 and  electric  distribution  revenues for the
   period April 1, 1998 through May 28, 1998.

(b)Reflects the following  after-tax charges:  LIPA Transaction charges of $97.6
   million;  KeySpan  Acquisition charges of $83.5 million; an impairment charge
   of $54.1 million to write-down the value of proved gas reserves; and a charge
   of $13.0  million to establish  the KeySpan  Foundation.  (See Note 11 to the
   Consolidated Financial  Statements,"Costs Related to the LIPA Transaction and
   Special Charges.")
(
c)Quarterly  earnings  per  share  are  based on the  average  number of shares
   outstanding  during the  quarter.  Because of the  changing  number of common
   shares  outstanding in each quarter,  the sum of quarterly earnings per share
   does not equal earnings per share for the year.

(d)  Prorated  portion for  approximately  two months of a dividend of $1.78 per
share annually.

<TABLE>
<CAPTION>

Summarized quarterly financial data of LILCO for 1998 and 1997

                                                        (In Thousands of Dollars, Except Per Share Data)
--------------------------------------------------------------------------------------------------------
                               3 Months Ended                       Fiscal Year Ended March 31, 1998
                               --------------                       --------------------------------
                                 3/31/97                    6/30/97     9/30/97    12/31/97      3/31/98
                                 -------                    -------     -------    --------      -------
<S>                              <C>                        <C>         <C>         <C>          <C>    
Operating revenues               851,182                    664,488     852,408     779,622      827,576
Operating income                 190,001                    144,079     242,611     171,969      209,637
Net income                        87,697                     45,161     144,384      56,756      115,939
Earnings for common stock         74,728                    32,193      131,435      43,807      102,992
Basic and diluted earnings per       .62                       .26         1.09         .36          .85
   common share
========================================================================================================
</TABLE>

                                      100

<PAGE>


REPORT OF ARTHUR ANDERSEN LLP, INDEPENDENT PUBLIC ACCOUNTANTS

To the  Shareholders  and Board of Directors  of  MarketSpan  Corporation  d/b/a
   KeySpan Energy:

We have audited the  accompanying  Consolidated  Balance Sheet and  Consolidated
Statement of Capitalization  of MarketSpan  Corporation (a New York corporation)
and subsidiaries as of December 31, 1998 and the related Consolidated Statements
of Income,  Retained  Earnings and Cash Flows for the nine months ended December
31, 1998.  These financial  statements are the  responsibility  of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards  require that we plan and perform the audit to obtain reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial position and capitalization of MarketSpan
Corporation  and  subsidiaries  as of December 31, 1998 and the results of their
operations  and their cash flows for the nine months ended December 31, 1998, in
conformity with generally accepted accounting principles.

Our  audits  were  made for the  purpose  of  forming  an  opinion  on the basic
consolidated  financial statements taken as a whole. The schedule listed in Item
14 is the  responsibility  of the Company's  management and is presented for the
purpose of complying with the Securities and Exchange  Commission's rules and is
not part of the basic consolidated financial statements.  This schedule has been
subjected  to the  auditing  procedures  applied  in  the  audits  of the  basic
consolidated  financial  statements  and, in our opinion,  fairly  states in all
material  respects  the  financial  data  required  to be set forth  therein  in
relation to the basic consolidated financial statements taken as a whole.



ARTHUR ANDERSEN LLP




February 12, 1999
New York, New York


                                       101

<PAGE>



REPORT OF ERNST & YOUNG LLP, INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and Board of Directors of Long Island Lighting Company:

We have audited the  accompanying  Balance Sheet of Long Island Lighting Company
and the related Statement of Capitalization as of March 31, 1998 and the related
Statements  of Income,  Retained  Earnings and Cash Flows for the twelve  months
ended March 31,  1998,  the three months ended March 31, 1997 and the year ended
December 31, 1996.  Our audits also  included the financial  statement  schedule
listed in the index at Item 14(a).  These financial  statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of Long Island Lighting Company at
March 31,  1998 and the  results  of its  operations  and its cash flows for the
twelve  months ended March 31,  1998,  the three months ended March 31, 1997 and
the year  ended  December  31,  1996,  in  conformity  with  generally  accepted
accounting  principles.  Also, in our opinion,  the related financial  statement
schedule, when considered in relation to the basic financial statements taken as
a whole,  presents  fairly in all material  respects the  information  set forth
therein.

During  the year  ended  March  31,  1998 the  Company  changed  its  method  of
accounting for revenues provided for under the Rate Moderation Component.


ERNST & YOUNG LLP




May 22, 1998
Melville, New York

                                       102

<PAGE>

ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE

           None.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

           A definitive  proxy statement is expected to be filed with the SEC on
or about April 7, 1999 (the "Proxy Statement"). The information required by this
item is set forth under the caption "Executive  Officers of the Company" in Part
I hereof and under the captions  "Election  of  Directors"  and  "Section  16(a)
Beneficial  Ownership  Reporting  Compliance"  contained in the Proxy Statement,
which information is incorporated herein by
reference thereto.

ITEM 11.  EXECUTIVE COMPENSATION

           The information  required by this item is set forth under the caption
"Executive   Compensation"  in  the  Proxy  Statement,   which   information  is
incorporated herein by reference thereto.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

           The information required by this item is set forth under the captions
"Security Ownership of Management" and "Security Ownership of Certain Beneficial
Owners" in the Proxy  Statement,  which  information is  incorporated  herein by
reference thereto.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

           The information  required by this item is set forth under the caption
"Transactions  with  Management  and  Others"  in  the  Proxy  Statement,  which
information is incorporated herein by reference thereto.

                                       103
<PAGE>


ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

1.    FINANCIAL STATEMENTS

           The following  consolidated  financial  statements of the Company and
its subsidiaries and report of independent accountants are filed as part of this
Report:

           Report of Independent Public Accountants
           Consolidated  Statement of Income for the nine months ended  December
                31, 1998, twelve months ended March 31, 1998, three months ended
                March 31, 1997 and year ended December 31, 1996
           Consolidated Statement of Retained Earnings for the nine months ended
                December 31,  1998,  twelve  months ended March 31, 1998,  three
                months ended March 31, 1997 and year ended December 31, 1996
           Consolidated  Balance  Sheet at December  31, 1998 and March 31, 1998
           Consolidated Statement of Capitalization at December 31, 1998 and
                March 31, 1998
           Consolidated  Statement  of Cash  Flows  for the  nine  months  ended
                December 31,  1998,  twelve  months ended March 31, 1998,  three
                months ended March 31, 1997 and year ended December 31, 1996
           Notes to Consolidated Financial Statements

2.    FINANCIAL STATEMENTS SCHEDULES

           Consolidated  Schedule of Valuation and  Qualifying  Accounts for the
                nine months ended  December 31,  1998,  the twelve  months ended
                March 31,  1998,  three months ended March 31, 1997 and the year
                ended December 31, 1996

           All other  schedules are omitted  because they are not  applicable or
the required information is shown in the financial statements or notes thereto.


                                      104

<PAGE>
3.    EXHIBITS

             Exhibits  listed  below which have been filed with the SEC pursuant
      to the Securities Act of 1933, as amended,  or the Securities Exchange Act
      of 1934,  as  amended,  and which  were filed as noted  below,  are hereby
      incorporated  by  reference  and made a part of this  report with the same
      effect as if filed herewith.

      3.1      Certificate of Incorporation  of the Company  effective April 16,
               1998,  Amendment to Certificate of  Incorporation  of the Company
               effective  May  26,  1998,   and  Amendment  to   Certificate  of
               Incorporation  of the  Company  effective  June 1, 1998 (filed as
               Exhibit 3 to the  Company's  Form 10-Q for the  quarterly  period
               ended June 30, 1998)

      3.2     ByLaws of the Company In Effect on September  10, 1998, as amended
              (filed as Exhibit 3.1 to the Company's  Form 8-K/A,  Amendment No.
              2, on September 29, 1998)

      4.1     Participation  Agreements  dated as of February  1, 1989,  between
              NYSERDA  and  The  Brooklyn  Union  Gas  Company  relating  to the
              Adjustable  Rate Gas  Facilities  Revenue Bonds  ("GFRBs")  Series
              1989A and Series 1989B  (filed as Exhibit 4 to The Brooklyn  Union
              Gas Company Form 10-K for the year ended September 30, 1989)

              Indenture of Trust,  dated February 1, 1989,  between  NYSERDA and
              Manufacturers  Hanover Trust Company, as Trustee,  relating to the
              Adjustable  Rate GFRBs  Series 1989A and 1989B (filed as Exhibit 4
              to the  Brooklyn  Union Gas  Company  Form 10-K for the year ended
              September 30, 1989)

      4.2     Participation Agreement, dated as of July 1, 1991, between NYSERDA
              and The  Brooklyn  Union Gas Company  relating to the GFRBs Series
              1991A and  1991B  (filed as  Exhibit 4 to The  Brooklyn  Union Gas
              Company Form 10-K for the year ended September 30, 1991)

              Indenture of Trust,  dated as of July 1, 1991, between NYSERDA and
              Manufacturers  Hanover Trust Company, as Trustee,  relating to the
              GFRBs  Series  1991A and 1991B (filed as Exhibit 4 to The Brooklyn
              Union Gas Company Form 10-K for the year ended September 30, 1991)

          4.3  First  Supplemental  Participation  Agreement  dated as of May 1,
               1992 to  Participation  Agreement  dated February 1, 1989 between
               NYSERDA and The Brooklyn Union Gas Company relating to Adjustable
               Rate GFRBs,  Series 1989A & B (filed as Exhibit 4 to The Brooklyn
               Union Gas  Company  Form 10-K for the year  ended  September  30,
               1992)

              First  Supplemental  Trust  Indenture  dated as of May 1,  1992 to
              Trust  Indenture  dated  February  1,  1989  between  NYSERDA  and
              Manufacturers  Hanover  Trust  Company,  as  Trustee,  relating to
              Adjustable Rate GFRBs, Series 1989A & B (filed as Exhibit 4 to The
              Brooklyn Union Gas Company Form 10-K for the year ended  September
              30, 1992)

      4.4     Participation Agreement, dated as of July 1, 1992, between NYSERDA
              and The  Brooklyn  Union Gas Company  relating to the GFRBs Series
              1993A and  1993B  (filed as  Exhibit 4 to The  Brooklyn  Union Gas
              Company Form 10-K for the year ended September 30, 1992)

              Indenture of Trust,  dated as of July 1, 1992, between NYSERDA and
              Chemical Bank, as Trustee,  relating to the GFRBs Series 1993A and
              1993B (filed as Exhibit 4 to The  Brooklyn  Union Gas Company Form
              10-K for the year ended September 30, 1992)

          4.5  First  Supplemental  Participation  Agreement dated as of July 1,
               1993 to Participation Agreement dated as of June 1, 1990, between
               NYSERDA  and The  Brooklyn  Union Gas  Company  relating to GFRBs
               Series C (filed as Exhibit 4 to The  Brooklyn  Union Gas  Company
               Form 10-K for the year ended September 30, 1993)

              First  Supplemental  Trust  Indenture  dated as of July 1, 1993 to
              Trust  Indenture  dated as of June 1,  1990  between  NYSERDA  and
              Chemical  Bank,  as Trustee,  relating to GFRBs Series C (filed as
              Exhibit 4 to The Brooklyn Union Gas Company Form 10-K for the year
              ended September 30, 1993)

                                      105
<PAGE>


          4.6  Participation Agreement, dated July 15, 1993, between NYSERDA and
               Chemical  Bank as Trustee,  relating to the GFRBs Series D-1 1993
               and Series D-2 1993 (filed as Exhibit 4 to The Brooklyn Union Gas
               Company Form S-8 Registration Statement No. 33-66182)

              Indenture  of Trust,  dated July 15,  1993,  between  NYSERDA  and
              Chemical  Bank as Trustee,  relating to the GFRBs  Series D-1 1993
              and D-2 1993 (filed as Exhibit 4 to The Brooklyn Union Gas Company
              Form S-8 Registration Statement No. 33-66182)

      4.7     Participation  Agreement,  dated January 1, 1996,  between NYSERDA
              and The Brooklyn  Union Gas Company  relating to GFRBs Series 1996
              (filed as Exhibit 4 to The  Brooklyn  Union Gas Company  Form 10-K
              for the year ended September 30, 1996)

              Indenture of Trust,  dated  January 1, 1996,  between  NYSERDA and
              Chemical Bank, as Trustee, relating to GFRBs Series 1996 (filed as
              Exhibit 4 to The Brooklyn Union Gas Company Form 10-K for the year
              ended September 30, 1996)

      4.8     Participation  Agreement,  dated as of January  1,  1997,  between
              NYSERDA and The Brooklyn Union Gas Company  relating to GFRBs 1997
              Series A (filed as Exhibit 4 to KeySpan  Energy  Corporation  Form
              10-K for the year ended September 30, 1997)

              Indenture of Trust,  dated  January 1, 1997,  between  NYSERDA and
              Chase Manhattan Bank, as Trustee,  relating to GFRBs 1997 Series A
              (filed as Exhibit 4 to KeySpan  Energy  Corporation  Form 10-K for
              the year ended September 30, 1997)

      4.9     Indenture of Trust dated as of December 1, 1997 by and between New
              York State Energy Research and Development Authority (NYSERDA) and
              The  Chase  Manhattan  Bank,  as  Trustee,  relating  to the  1997
              Electric  Facilities  Revenue  Bonds  (EFRBs),  Series A (filed as
              Exhibit 10(a) to the Company's Form 10-Q for the quarterly  period
              ended September 30, 1998)

              Participation  Agreement  dated  as of  December  1,  1997  by and
              between NYSERDA and Long Island Lighting  Company  relating to the
              1997 EFRBs, Series A (filed as Exhibit 10(a) to the Company's Form
              10-Q for the quarterly period ended September 30, 1998)


      10.1    Agreeement of Lease between Forest City Jay Street  Associates and
              The Brooklyn Union Gas Company dated  September 15, 1988 (filed as
              an exhibit to The  Brooklyn  Union Gas  Company  Form 10-K for the
              year ended September 30, 1996)

      10.2    Stipulation  of Settlement  of federal  Racketeer  Influenced  and
              Corrupt  Organizations  Act Class Action and False  Claims  Action
              dated as of February 27, 1989 among the  attorneys for Long Island
              Lighting  Company,  the  ratepayer  class,  the  United  States of
              America and the individual  defendants  named therein (filed as an
              exhibit to Long Island  Lighting  Company's Form 10-K for the year
              ended December 31, 1988)

                                      106
<PAGE>

      10.3    Credit  Agreement  dated  as of July 2,  1996  among  The  Houston
              Exploration Company and Texas Commerce Bank National  Association,
              as Agent, and the other Banks signatory  thereto (filed as Exhibit
              10.16 to The Houston Exploration Company's  Registration Statement
              on Form S-1 (Registration No. 333-4437))

      10.4    First  Amendment,  dated August 30, 1996, to the Credit  Agreement
              among The  Houston  Exploration  Company and Texas  Commerce  Bank
              National  Association,  as Agent,  and the other  Banks  signatory
              thereto  (filed  as  Exhibit  10.11  to  The  Houston  Exploration
              Company's  Annual Report on Form 10-K for the year ended  December
              31, 1997 (001-11899))


      *10.5    Employment  Agreement  effective  as of  January  1,  1997 by and
               between The Brooklyn Union Gas Company and David L. Phillips

      10.6    Agreement  and Plan of  Merger  dated  as of June 26,  1997 by and
              among BL Holding Corp., Long Island Lighting Company,  Long Island
              Power Authority and LIPA  Acquisition  Corp.  (filed as Annex D to
              Registration  Statement  on Form S-4,  No.  333-30353  on June 30,
              1997)

      10.7    Management  Services Agreement between Long Island Power Authority
              and Long Island Lighting  Company dated as of June 26, 1997 (filed
              as Annex D to Registration  Statement on Form S-4, No.  333-30353,
              on June 30, 1997)

      10.8    Power Supply  Agreement  between Long Island Lighting  Company and
              Long Island  Power  Authority  dated as of June 26, 1997 (filed as
              Annex D to Registration  Statement on Form S-4, No. 333-30353,  on
              June 30, 1997)

      10.9    Energy  Management  Agreement between Long Island Lighting Company
              and Long Island Power  Authority  dated as of June 26, 1997 (filed
              as Annex D to Registration  Statement on Form S-4, No.  333-30353,
              on June 30, 1997)

      10.10   Amended and  Restated  Agreement  and Plan of Exchange  and Merger
              dated June 26,  1997  between The  Brooklyn  Union Gas Company and
              Long Island  Lighting  Company dated as of June 26, 1997 (filed as
              Annex A to Registration  Statement on Form S-4, No. 333-30353,  on
              June 30, 1997)

      10.11   Second  Amendment,  dated August 4, 1997, to the Credit  Agreement
              among The  Houston  Exploration  Company and Texas  Commerce  Bank
              National  Association,  as Agent,  and the other  Banks  signatory
              thereto  (filed  as  Exhibit  10.1  to  The  Houston   Exploration
              Company's  Quarterly  Report on Form 10-Q for the quarterly period
              ended September 30, 1997 (File No. 001-11899)

      10.12   Amendment,   Assignment  and  Assumption  Agreement  dated  as  of
              September  29, 1997 by and among The  Brooklyn  Union Gas Company,
              Long Island Lighting Company and KeySpan Energy Corporation (filed
              as Exhibit 2.5 to Schedule 13D by Long Island Lighting  Company on
              October 24, 1997)

     *10.13 Employment  Agreement  dated as of December 5, 1997 between  KeySpan
             Energy Development Corporation and H. Neil Nichols

                                      107
<PAGE>


      10.14   Third Amendment to Credit Agreement among The Houston  Exploration
              Company  and  Chase  Bank of  Texas  National  Association,  dated
              February   12,  1998  (filed  as  Exhibit   10.1  to  The  Houston
              Exploration  Company's  Quarterly  Report  on  Form  10-Q  for the
              quarter ended March 31, 1998 (File No. 001-11899))

      10.15   Indenture,  dated  as  of  March  2,  1998,  between  The  Houston
              Exploration  Company and The Bank of New York,  as  Trustee,  with
              respect  to  the  8  5/8%  Senior   Subordinated  Notes  Due  2008
              (including  form of 8 5/8%  Senior  Subordinated  Note  Due  2008)
              (filed  as  Exhibit  4.1  to  The  Houston  Exploration  Company's
              Registration Statement on Form S-4 (No. 333-50235))

      *10.16  Directors'  Deferred  Compensation Plan of MarketSpan  Corporation
              d/b/a KeySpan Energy effective July 1, 1998


      10.17   Retirement   Agreement   between   the   Company  and  William  J.
              Catacosinos  dated  July 31,  1998  (filed  as  Exhibit  10 to the
              Company's Form 10-Q for the quarterly period ended June 30, 1998)

      *10.18   Corporate  Annual Incentive  Compensation  Plan effective as of
              September 10, 1998

      10.19   Employment Agreement dated September 10, 1998, between the Company
              and Robert B. Catell (filed as Exhibit 10(b) to the Company's Form
              10-Q for the quarterly period ended September 30, 1998)

      *10.20  Senior Executive Change of Control  Severance Plan effective as
              of October 30, 1998

      *10.21   Amendment to Employment  Agreement  effective as of October 30,
               1998 by and  between  The  Brooklyn  Union Gas  Company,  KeySpan
               Energy Corporation, MarketSpan Corporation and David L. Phillips

      10.22   Subordination  Agreement  dated  November 25, 1998 entered into by
              and among MarketSpan Corporation d/b/a KeySpan Energy, The Houston
              Exploration Company and Chase Bank of Texas,  National Association
              (filed as Exhibit 10.30 to The Houston Exploration  Company's Form
              10-K for the year ended December 31, 1998))

      10.23   Subordinated Loan Agreement dated November 30, 1998 by and between
              The Houston Exploration  Company and MarketSpan  Corporation d/b/a
              KeySpan Energy (filed as Exhibit 10.31 to The Houston  Exploration
              Company's Form 10-K for the year ended December 31, 1998))



                                      108
<PAGE>

      *21     Subsidiaries of the registrant

      *23.1   Consent of Arthur Andersen LLP, Independent Auditors

      *23.2   Consent of Ernst and Young LLP, Independent Auditors

     *24.1 Powers of Attorney executed by Directors and Officers of the Company

     *24.2    Certified  copy of Resolution  of Board of Directors  authorizing
              signature pursuant to power of attorney

     *27  Financial  Data  Schedule  on  Schedule  U-T for the fiscal year ended
          December 31, 1998

4.    REPORTS ON FORM 8-K

           None.

--------
*Filed herewith.

                                      109
<PAGE>


<TABLE>
<CAPTION>

                  SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS

                                                                                                  (In Thousands of Dollars)
---------------------------------------------------------------------------------------------------------------------------
         Column A                           Column B                Column C                     Column D          Column E
---------------------------------------------------------------------------------------------------------------------------
                                                                   Additions
                                                            --------------------------
                                                                           Adjustment
                                           Balance at       Charged to   for the KeySpan                          Balance at
                                           beginning        costs and   Acquisition and                             end of
Description                                of period        expenses    LIPA Transaction      Deductions (1)        period
----------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>           <C>             <C>                  <C>                 <C>    
Nine months ended December 31, 1998 
Deducted from asset accounts:
Allowance for doubtful accounts             $23,483       $11,064         $3,777               $18,298             $20,026

Twelve months ended March 31, 1998 
Deducted from asset accounts:
Allowance for doubtful accounts             $23,675       $23,239           -                  $23,431             $23,483

Three months ended March 31, 1997
Deducted from asset accounts:
Allowance for doubtful accounts             $25,000        $4,821           -                   $6,146             $23,675
     
Year ended December 31, 1996 
Deducted from asset accounts:
Allowance for doubtful accounts             $24,676       $23,119           -                  $22,795             $25,000
</TABLE>

(1)  Uncollectible accounts written off, net of recoveries


                                      110


<PAGE>

                                   SIGNATURES

           Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended,  the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

                                   MARKETSPAN CORPORATION
                                   d/b/a KeySpan Energy



March 29, 1999                     By:  /s/ Craig G. Matthews               
                                  ------------------------------------------
                                      Craig G. Matthews
                                      President and Chief Operating Officer

           Pursuant to the requirements of the Securities  Exchange Act of 1934,
as amended, this report has been signed below by the following persons on behalf
of the registrant and in the capacities indicated on March 29, 1999.

                  *                    Chairman of the Board and Chief Executive
      ________________________         Officer (Principal executive officer)
          Robert B. Catell

                  *                    President and Chief Operating Officerpal
         /s/ Craig G. Matthews         (Principal financial officer)
         ----------------------
          Craig G. Matthews

                                       Vice President, Controller and
                                       Chief Accounting Officer
         /s/ Ronald S. Jendras         (Principal accounting officer)
         ----------------------
          Ronald S. Jendras

                  *                    Director
      ------------------------
         Lilyan H. Affinito

                  *                    Director
      ------------------------
         George Bugliarello

                  *                    Director
      ------------------------
           Howard R. Curd

                  *                    Director
      ------------------------
          Richard N. Daniel

                  *                    Director
      ------------------------
          Donald H. Elliott

                  *                    Director
      ------------------------
           Alan H. Fishman

                  *                    Director
      ------------------------
           James R. Jones

                  *                    Director
      ------------------------
         Stephen W. McKessy

                  *                    Director
      ------------------------
          Edward D. Miller

                  *                    Director
      ------------------------
          Basil A. Paterson

                  *                    Director
      ------------------------
          James Q. Riordan

                  *                    Director
      ------------------------
         Frederic V. Salerno

                  *                    Director
      ------------------------
            Vincent Tese



      By: /s/ Craig G. Mathews
      ------------------------
          Craig G. Matthews
          ATTORNEY-IN-FACT

*Such  signature  has been affixed  pursuant to a Power of Attorney  filed as an
exhibit hereto and incorporated herein by reference thereto.