SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

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


            For the period from January 1, 2001 to December 31, 2001

                         Commission File Number 1-14161

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

<TABLE>
<CAPTION>

                           NEW YORK                                              11-3431358
<S>                                                                 <C>
(State or other jurisdiction of incorporation or organization)      (I.R.S. employer identification no.)
           One MetroTech Center, Brooklyn, New York                                11201
        175 East Old Country Road, Hicksville, New York                            11801
           (Address of principal executive offices)                              (Zip code)
</TABLE>


                            (718) 403-1000 (Brooklyn)
                           (516) 755-6650 (Hicksville)
              (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 1, 2002, the aggregate market value of the common stock
held by non-affiliates (139,971,853 shares) of the registrant was
$4,571,480,718.98 based on the closing price, on such date, of $32.66 per
share.

         As of March 1, 2002, there were 158,837,654 shares of common stock,
$.01 par value, outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

        Proxy Statement dated on or about March 22, 2002 is incorporated by
reference into Part III hereof.



<PAGE>


<TABLE>
                                                KEYSPAN CORPORATION
                                                INDEX TO FORM 10-K
<CAPTION>

                                                                                                               Page
                                                                                                               ----

                                                      Part I
<S>                                                                                                              <C>
Item 1. Description of the Business................................................................................
Item 2. Properties.................................................................................................
Item 3. Legal Proceedings..........................................................................................
Item 4. Submission of Matters to a Vote of Security Holders........................................................

                                                      Part II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................
Item 6. Selected Financial Data....................................................................................
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A Quantitative and Qualitative Disclosures About Market Risk ................................................
Item 8. Financial Statements and Supplementary Data ...............................................................
Item 9. Changes in and Disagreements with Accountants on Accounting and
                           Financial Disclosure....................................................................

                                                     Part III

Item 10.  Directors and Executive Officers of the Registrant
Item 11.  Executive Compensation
Item 12.  Security Ownership of Certain Beneficial Owners and Management
Item 13.  Certain Relationships and Related Transactions
Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K
</TABLE>


                                                         2

<PAGE>




PART I

Item 1.  Description of the Business

                               Corporate Overview

KeySpan Corporation ("KeySpan"), a New York corporation, is a member of the
Standard and Poor's 500 Index and a registered holding company under the Public
Utility Holding Company Act of 1935, as amended ("PUHCA"). KeySpan was formed in
May 1998, as a result of the business combination of KeySpan Energy Corporation,
the parent of The Brooklyn Union Gas Company, and certain businesses of the Long
Island Lighting Company ("LILCO"). On November 8, 2000, we acquired Eastern
Enterprises ("Eastern"), a Massachusetts business trust, that primarily owns
three gas utilities operating in Massachusetts, Boston Gas Company ("Boston
Gas"), Colonial Gas Company ("Colonial Gas") and Essex Gas Company ("Essex
Gas"), as well as EnergyNorth Natural Gas, Inc. ("EnergyNorth"), a gas utility
operating principally in central New Hampshire. As used herein, "KeySpan," "we,"
"us" and "our" refers to KeySpan, its six principal gas distribution
subsidiaries, and its other regulated and unregulated subsidiaries, individually
and in the aggregate.

Under our holding  company  structure,  we have no  independent  operations  and
conduct  substantially  all of our  operations  through  our  subsidiaries.  Our
subsidiaries  operate in the following  businesses:  Gas Distribution,  Electric
Services, Energy Services and Energy Investments.

The Gas  Distribution  segment  consists of our six regulated  gas  distribution
subsidiaries,  which  operate in New York,  Massachusetts  and New Hampshire and
serve approximately 2.5 million customers.

The Electric Services segment consists of subsidiaries that operate the electric
transmission  and  distribution  ("T&D")  system  owned by the Long Island Power
Authority  ("LIPA");  provide  energy  conversion  services  for  LIPA  from our
generating  facilities located on Long Island; and manage fuel supplies for LIPA
to fuel our approximately 4,000 megawatts of Long Island generating  facilities.
The electric  services  segment also includes  subsidiaries  that own, lease and
operate  the  2,200  megawatt   Ravenswood  electric  generation  facility  (the
"Ravenswood facility"), located in Queens County in New York City.

The Energy Services segment primarily provides energy-related services to
customers primarily located within the New York, New Jersey, Massachusetts, New
Hampshire, Rhode Island and Pennsylvania through various subsidiaries that
operate under the following principal four lines of business: (i) home energy
services; (ii) business solutions; (iii) commodity procurement; and (iv) fiber
optic services.

We are also engaged in Energy Investments which includes: (i) gas exploration
and production activities; (ii) domestic pipelines and gas storage facilities;
(iii) midstream natural gas processing activities in Canada; and (iv) natural
gas distribution and pipeline activities in the United Kingdom.



<PAGE>



KeySpan's vision is to be the premier energy company in the Northeastern  United
States.  To help us achieve that goal, we acquired the operations of Eastern and
EnergyNorth  in  November  2000,   establishing   KeySpan  as  the  largest  gas
distribution  company  in the  Northeast  and the fifth  largest  in the  United
States.  The increased size and scope of the company should enable us to provide
enhanced  cost-effective  customer service;  offer our existing  customers other
services  and  products by  implementing  innovative  marketing  techniques  and
building upon our existing  relationships;  and capitalize on the  above-average
growth opportunities for natural gas expansion in the Northeast by expanding our
infrastructure primarily on Long Island and in New England.

The key element of our business  strategy is the  continued  focus and growth of
our Gas Distribution,  Electric Services and Energy Services businesses.  We are
also  exploring the sale of some or all of our assets in the Energy  Investments
segment.  KeySpan's financial  statements are prepared on the basis of reporting
its operations  under the following four business  segments:  Gas  Distribution,
Electric   Services,   Energy  Services  and  Energy   Investments.   Additional
information  about  KeySpan's  industry  segments is  contained in Note 2 to the
Consolidated  Financial  Statements,  "Business  Segments"  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 that are other than
statements of historical  facts,  are  "forward-looking  statements"  within the
meaning of Section  21E of the  Securities  Exchange  Act of 1934,  as  amended.
Without  limiting the  foregoing,  all  statements  under the captions  "Item 7.
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations" and "Item 7A. Quantitative and Qualitative  Disclosures About Market
Risk" relating to our future outlook,  anticipated capital expenditures,  future
cash flows and borrowings, pursuit of potential future acquisition opportunities
and sources of funding,  are forward-looking  statements.  Such  forward-looking
statements  reflect  numerous  assumptions  and  involve  a number  of risks and
uncertainties  and actual results may differ  materially from those discussed in
such statements.

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

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

-    our ability to successfully reduce our cost structure;

-    implementation of new accounting standards;

-    inflationary trends and interest rates;

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


-    available sources and cost of fuel;

-    federal  and  state  regulatory   initiatives  that  increase  competition,
     threaten cost and investment  recovery,  and impact the rate  structures of
     our regulated businesses;

                                                         4

<PAGE>



-    the  exercise by LIPA of its right to acquire  our Long  Island  generation
     operations  and  the  possible  deployment  of  the  proceeds  received  in
     connection therewith;

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

-    competition in general facing our unregulated  Energy Services  businesses,
     including but not limited to competition from other  mechanical,  HVAC, and
     engineering companies;

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

-    other risks detailed from time to time in other reports and other documents
     filed by KeySpan with the Securities and Exchange Commission ("SEC").

For any of these statements, KeySpan claims the protection of the safe harbor
for forward-looking information contained in the Private Securities Litigation
Reform Act of 1995, as amended. For additional discussion on these risks,
uncertainties and assumptions, see "Item 1. Business," "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Item 7A. Quantitative and Qualitative Disclosures About Market Risk" contained
herein.

KeySpan'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 (Investor Relations section).

                            Gas Distribution Overview

Our  gas  distribution  activities  are  conducted  by  our  six  regulated  gas
distribution subsidiaries,  which operate in three states in the Northeast - New
York, Massachusetts and New Hampshire. We are the fifth largest gas distribution
company  in  the  United  States  and  the  largest  in  the   Northeast,   with
approximately  2.5 million  customers  served  within an aggregate  service area
covering  4,273 square miles.  In New York, The Brooklyn Union Gas Company doing
business as KeySpan Energy Delivery New York ("KEDNY") provides gas distribution
services to  customers  in the New York City  Boroughs of  Brooklyn,  Queens and
Staten Island; and KeySpan Gas East Corporation doing business as KeySpan Energy
Delivery Long Island ("KEDLI")  provides gas distribution  services to customers
in the Long Island Counties of Nassau and Suffolk and the Rockaway  Peninsula of
Queens County. In Massachusetts,  Boston Gas distributes  natural gas in eastern
and central Massachusetts;  Colonial Gas distributes natural gas in Cape Cod and
eastern  Massachusetts;  and  Essex  Gas  distributes  natural  gas  in  eastern
Massachusetts.  In New  Hampshire,  EnergyNorth  distributes  gas  to  customers
principally located in central New Hampshire.  Our New England gas companies all
do business as KeySpan Energy Delivery New England ("KEDNE").

In New York there are two separate, but contiguous service territories served by
KEDNY and KEDLI,  comprising  approximately 1,417 square miles, and 1.66 million
customers. In

                                                         5

<PAGE>



Massachusetts,  Boston Gas,  Colonial  Gas and Essex Gas serve three  contiguous
service territories  consisting of 1,934 square miles and approximately  768,000
customers.  In New  Hampshire,  EnergyNorth  has a  service  territory  that  is
contiguous  to  Colonial's  and is within 30 to 85 miles of the  greater  Boston
area.  EnergyNorth  provides  service to  approximately  75,000 customers over a
service area of approximately 922 square miles.  Collectively,  KeySpan owns and
operates  gas  distribution,  transmission  and storage  systems that consist of
approximately 21,000 miles of gas mains and distribution pipelines and 576 miles
of transmission pipelines, as well as two major gas storage facilities.

Gas is offered  for sale to  residential  and small  commercial  customers  on a
"firm" basis, and to most large commercial and industrial  customers on a "firm"
or "interruptible"  basis. "Firm" service is offered to customers under tariffed
schedules or contracts that anticipate no interruptions, whereas "interruptible"
service is offered to customers under schedules or contracts that anticipate and
permit  interruption  on short  notice,  generally in  peak-load  seasons or for
system  reliability  reasons.  We have  restructured our gas supply and capacity
contracts to reduce fixed costs and to minimize the risk of stranded  costs.  We
maintain  sufficient  gas supply and capacity  contracts to serve our customers,
maintain system reliability and system operations, and to meet our obligation to
serve.  Over the long term, we intend to minimize our costs by purchasing gas at
points within or in close proximity to our market area,  which will only require
us  to  contract  for  firm  short-haul  rather  than  long-haul  transportation
capacity.

Gas is available at any time of the year on an interruptible basis, if supply is
sufficient  and the gas  delivery  system  is  operationally  adequate.  KeySpan
actively promotes a competitive  retail gas market by making capacity  available
to retail  marketers that are unable to obtain their own capacity.  KeySpan also
participates in interstate markets by releasing pipeline capacity or by bundling
gas supply  and  pipeline  capacity  for  "off-system"  sales.  An  "off-system"
customer consumes gas at facilities  located outside of our service  territories
by connecting to our facilities or another  transporter's  facilities at a point
of delivery agreed to by us and the customer.

KeySpan  purchases  natural  gas  for  sale to  customers  under  both  long-and
short-term supply contracts,  and on the spot market,  under firm transportation
contracts.  In  addition,  KeySpan  contracts  for firm  capacity in natural gas
underground storage facilities and for winter peaking supplies.

KeySpan  sells gas to firm gas customers at its cost for such gas, plus a charge
designed  to  recover  the costs of  distribution  (including  a return of and a
return on capital  invested in our distribution  facilities).  We share with our
firm gas customers net revenues  (operating  revenues less the cost of gas) from
off-system sales and capacity release  transactions.  Further, net revenues from
tariff gas balancing services and certain on-system sales are refunded,  for the
most part, to firm customers subject to certain sharing provisions.


Our gas operations 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

                                                         6

<PAGE>



fourth calendar quarters. KEDNY and KEDLI each operate under a tariff that
contains a weather normalization adjustment that provides for recovery from or
refund to firm customers of material shortfalls or excesses of firm net revenues
(revenues less applicable gas costs) during a heating season due to variations
from normal weather. However, the tariffs for our four KEDNE gas distribution
companies do not contain such a weather normalization adjustment and, therefore,
fluctuations in seasonal weather conditions between years may have a significant
effect on results of operations and cash flows for these four subsidiaries. For
additional discussion, see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Regulation and Rate Matters".

Gas sales and revenues for 2001 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 Heating                                             152,725                 1,944,414                 53.81
Residential Non-Heating                                          12,412                   255,623                  7.07
Temperature-Controlled heating                                   28,694                   191,504                  5.30
Commercial / Industrial                                          67,642                   733,560                 20.30
                                                   --------------------  ------------------------ ---------------------
Total Firm                                                      261,473                 3,125,101                 86.48
                                                   --------------------  ------------------------ ---------------------
Firm Transportation                                             101,000                    87,089                  2.41
Transportation - Electric Generation                             64,578                     7,496                   .21
                                                   --------------------  ------------------------ ---------------------
Total Firm Transportation                                       165,578                    94,585                  2.62
                                                   --------------------  ------------------------ ---------------------
   Total Firm Gas Sales and Transportation                      427,051                 3,219,686                 89.10
Interruptible                                                     7,235                    47,082                  1.30
Off-System Sales                                                 40,058                   138,415                  3.83
Transportation                                                   59,507                   154,905                  4.29
                                                   --------------------  ------------------------ ---------------------
   Total Gas Sales and Transportation                           533,851                 3,560,088                 98.52
Other Retail Services                                                 -                    53,463                  1.48
                                                   --------------------  ------------------------ ---------------------
   Total Sales and Revenues                                     533,851                 3,613,551                100.00
                                                   ====================  ======================== =====================
</TABLE>

Further information and statistics regarding our Gas Distribution segment see
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations, "Gas Distribution."

                                                         7

<PAGE>



New York Gas Distribution System - KEDNY and KEDLI

Supply and Storage

KEDNY and KEDLI have contracts for the purchase of firm long-term transportation
and  underground  storage  services.  Gas supplies are purchased  under long and
short-term  contracts,  as  well  as  on  the  spot  market.  Gas  supplies  are
transported by interstate  pipelines  from domestic and Canadian  supply basins.
Peaking  supplies  are  available  to meet  system  requirements  during  winter
periods.

Peak-Day Capability. The design criteria for the New York gas system assumes an
average temperature of 0(0)F for peak-day demand. Under such criteria, we
estimate that the requirements to supply our firm gas customers would amount to
approximately 1,993 MDTH of gas for a peak-day during the 2001/02 winter season
and that the gas available to us on such a peak-day amounts to approximately
2,036 MDTH. For the 2002/03 winter season, we estimate the peak-day requirements
will amount to 1,996 MDTH and that the gas supplies available on such a peak-day
amount to approximately 2,046 MDTH . The 2001/02 winter peak-day throughput to
our New York customers was 1,411 MDTH, which occurred on December 31, 2001 at an
average temperature of 26 F, representing 69% of our per day capability
at that time. We plan to have sufficient gas available to meet the requirements
of firm gas customers for both the 2001/02 and 2002/03 winter seasons. Our New
York firm gas peak-day capability is summarized in the following table:


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

Pipeline...........               752                       37
Underground Storage               779                       38
Peaking Supplies...               505                       25
                                  ---                       --
Total                            2,036                      100
--------------------- --- ==================== ---- ===================

Pipelines. Our New York based gas distribution utilities purchase natural gas
for sale to their New York gas customers under contracts with suppliers with
natural gas located in domestic and Canadian supply basins and arrange for its
transportation to our facilities under firm long-term contracts with interstate
pipeline companies. For the 2001/02 winter, approximately 76% of our New York
natural gas supply was available from domestic sources and 24% from Canadian
sources. We have available under firm contract 752 MDTH per day of year-round
and seasonal pipeline transportation capacity to our facilities in the New York
City metropolitan area. Major providers of interstate pipeline capacity and
related services to us include: Transcontinental Gas Pipe Line Corporation
("Transco"), Texas Eastern Transmission Corporation ("Tetco"), Iroquois Gas
Transmission System ("Iroquois"), Tennessee Gas Pipeline Company ("Tennessee"),
Dominion Transmission Incorporated ("Dominion"), and Texas Gas Transmission
Company.

Underground Storage. In order to meet higher winter demand in our New York
service territories, we also have long-term contracts with Transco, Tetco,
Tennessee, Dominion, Equitrans, Inc., and Honeoye Storage Corporation
("Honeoye"), for underground storage capacity of 59,058 MDTH for the winter
season and 779 MDTH per day of maximum deliverability.

                                                         8

<PAGE>



Peaking Supplies. In addition to the pipeline and underground storage supply, we
supplement our winter supply portfolio with peaking supplies that are available
on the coldest days of the year to economically meet the increased requirements
of our heating customers. Our peaking supplies include gas provided by: (i) two
liquefied natural gas ("LNG") plants; and (ii) peaking supply contracts with
four cogeneration facilities/independent power producers located in our
franchise areas, as well as with the New York Power Authority ("NYPA"). For the
2001/02 winter season, we had the capability to provide a maximum peak-day
supply of 505 MDTH on excessively cold days. The LNG plants have a storage
capacity of approximately 2,053 MDTH and peak-day throughput capacity of 394.5
MDTH, or 19% of peak-day supply. We also have contract rights with Trigen
Services Corporation, Brooklyn Navy Cogeneration Partners, LP, Nissequogue Cogen
Partners, TBG 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.

In April 1, 2000, through a subsidiary, we entered into a two-year agreement
with Coral Energy, LLC, ("Coral") in which Coral was contracted to assist with
the New York gas distribution energy supply management services and our
energy-management services undertaken on behalf of LIPA. The agreement was
scheduled to expire on March 31, 2002, and both parties have agreed to a one
year extension through March 31, 2003.

Gas Costs. Fluctuations in utility gas costs have little impact on the operating
results of KEDNY and KEDLI, since the current gas rate structure of each of
these companies includes a gas adjustment clause whereby variations between
actual gas costs and gas cost recoveries are deferred and subsequently refunded
to or collected from customers.

Deregulation. Regulatory actions, economic factors and changes in customers and
their preferences continue to reshape our gas operations. A number of
multi-family, commercial and industrial customers and residential customers
currently purchase their gas supplies from natural gas marketers and then
contract with us for local transportation, balancing and other unbundled
services. In addition, our New York gas distribution companies release firm
capacity on our interstate pipeline transportation contracts to natural gas
marketers to ensure the marketers' gas supply is delivered on a firm basis and
in a reliable manner to their customers. Since 1996, when New York State
regulators implemented policies designed to encourage customers to purchase
their gas from suppliers other than the traditional gas utilities, approximately
136,000 gas customers have opted to purchase their gas from marketers instead of
KEDNY or KEDLI. This trend has slowed somewhat in recent months as policies
towards additional deregulation are being reevaluated by utility regulators
nationwide.

New England Gas Distribution Systems

Supply and Storage

KEDNE has contracts for the purchase of firm long-term transportation and
underground storage services. Gas supplies are purchased under long and
short-term contracts, as well as on the spot market. Gas supplies are
transported by interstate pipelines from domestic and Canadian supply basins.
Peaking supplies are available to meet system requirements during winter
periods.

                                                         9

<PAGE>



Peak-Day Capability. The design criteria for our New England gas systems assumes
an average temperature of -6(0)F for peak-day demand. Under such criteria, KEDNE
estimates that the requirements to supply their firm gas customers would amount
to approximately 1,245 MDTH of gas for a peak-day during the 2001/2002 winter
season and that the gas available to KEDNE on such a peak-day would amount to
approximately 1,317 MDTH. For the 2002/2003 winter season, KEDNE estimates that
the peak-day requirements will amount to 1,294 MDTH and that the gas supplies
available on such a peak-day will amount to approximately 1,317 MDTH.

During 2001, the highest daily throughput to our New England customers was 947
MDTH, which occurred on February 11, 2001 at an average temperature of
17 F, representing 72% of KEDNE's capability at that time. KEDNE has
sufficient gas available to meet the requirements of their firm gas customers
for the 2001/2002 winter gas season and anticipate that they will have
sufficient quantities for the 2002/2003 winter season. The firm gas peak day
capability of KEDNE is summarized in the following table:


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

Pipeline...................                 436                      33
Underground Storage........                 270                      21
Peaking Supplies...........                 611                      46
                                            ---                      --
Total                                      1,317                    100
------------------------------ ---  =================== --- ====================


Pipelines. Our New England based gas distribution utilities purchase natural gas
for sale to their gas customers under contracts with suppliers with natural gas
located in domestic and Canadian supply basins and arrange for transportation to
their facilities under firm long-term contracts with interstate pipeline
companies. During the 2001/2002 winter season, approximately 77% of KEDNE's
natural gas supply was available from domestic sources and 23% from Canadian
sources.

Underground Storage. KEDNE has available under firm contract 706 MDTH per day of
year-round and seasonal transportation and underground storage capacity to their
facilities in New England. Major providers of interstate pipeline capacity and
related services to the KEDNE companies include: Tetco, Iroquois, Maritimes and
Northeast Pipeline, Tennessee, Algonquin Gas Transmission Company and Portland
Natural Gas Transmission System. Moreover, KEDNE has long-term contracts with
Tetco, Tennessee, Dominion, National Fuel Gas Supply Corporation and Honeoye for
underground storage capacity of 23,205 MDTH and 270 MDTH per day of maximum
deliverability.

Peaking Supplies. The KEDNE gas supply portfolio is supplemented with peaking
supplies that are available on the coldest days of the year in order to
economically meet the increased requirements of our heating customers. Peaking
supplies include gas provided by both LNG and propane air plants located within
the distribution system, as well as two leased facilities outside of our
distribution systems located in Providence, Rhode Island and Everett, MA. For
the 2001/2002 winter season, KEDNE had the capability to provide a peak-day
supply of 611 MDTH on excessively cold days or 46% of peak-day supply.


                                                        10

<PAGE>



Gas Supply Management. Since November 1, 1999, the Massachusetts based gas
distribution subsidiaries have been operating under a three-year portfolio
management contract with El Paso Energy Marketing, Inc. ("El Paso"). El Paso
provides the majority of the city gate supply requirements to the three
Massachusetts gas distribution companies (Boston, Colonial and Essex) at market
prices and manages upstream capacity, underground storage and term supply
contracts. The Massachusetts Department of Telecommunications and Energy ("DTE")
approved this contract in October 1999. The annual fee paid by El Paso to manage
the Massachusetts KEDNE companies' portfolio is, for the most part, returned to
firm customers.

Gas Costs. Fluctuations in utility gas costs have little impact on the operating
results of the KEDNE companies, since their 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. The KEDNE companies do not have a weather normalization adjustment
clause and as a result, fluctuations from normal weather may have a positive or
negative impact on their results.

For additional information concerning the gas distribution segment, see the
discussion in"Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Gas Distribution" contained herein.

                           Electric Services Overview

We are the largest  investor  owned  electric  generator in New York State.  Our
subsidiaries  own  and  operate  five  large  generating  plants  and 8  smaller
facilities  which are  comprised  of 53  generating  units in Nassau and Suffolk
Counties on Long Island and the Rockaway  Peninsula in Queens.  In addition,  we
own, lease and operate a major generating  facility in Queens County in New York
City,  the Ravenswood  facility  which is comprised of 3 large  steam-generating
units and 17 gas turbine generators.

As more fully described below: we (i) provide to LIPA all operation, maintenance
and  construction  services  relating  to the Long  Island  electric  T&D system
through a  management  services  agreement  (the  "MSA");  (ii) supply LIPA with
energy  conversion and ancillary  services through a power supply agreement (the
"PSA") to allow LIPA to provide electricity to its customers on Long Island; and
(iii)  manage all  aspects of the fuel  supply  for the Long  Island  generating
facilities,  as well as all aspects of the capacity and energy owned by or under
contract to LIPA through an energy management agreement (the "EMA"). Each of the
MSA, PSA and EMA became effective on May 28, 1998 and are collectively  referred
to herein as the "LIPA Agreements."

Generating Facility Operations

Ravenswood facility. On June 18, 1999, we acquired the 2,200 megawatt Ravenswood
facility located in New York City from Consolidated  Edison Company of New York,
Inc.  ("Consolidated Edison") for approximately $597 million. In order to reduce
our initial cash  requirements to finance this  acquisition,  we entered into an
arrangement with an unaffiliated  special purpose financing entity through which
we lease the Ravenswood  facility.  Under the  arrangement,  the special purpose
financing entity acquired a portion of the facility  directly from  Consolidated
Edison and leased it to our wholly  owned  subsidiary.  We have  guaranteed  all
payment and performance obligations of our subsidiary under the lease. The lease
relates to approximately $425 million of the acquisition cost

                                                        11

<PAGE>



of the  facility,  which is the amount of debt that would have been  recorded on
our Consolidated Balance Sheet had the special purpose financing entity not been
utilized and conventional debt financing been employed.  Further,  we would have
recorded an asset in the same amount.  Monthly  lease  payments are for interest
only. The lease qualifies as an operating lease for financial reporting purposes
while  preserving our ownership of the facility for federal and state income tax
purposes.  The balance of the funds  needed to acquire the  Ravenswood  facility
were  provided  from cash on hand.  We believe that the fair market value of the
Ravenswood facility,  including the leased facilities,  is well in excess of its
acquisition cost.

The Ravenswood  facility sells capacity,  energy and ancillary services into the
New York  Independent  System Operator  ("NYISO")  energy market at market-based
rates, subject to mitigation. The plant has the ability to provide approximately
25% of New York City's  capacity  and is a strategic  asset that is available to
serve  residents and  businesses in New York City. We are also in the process of
constructing  an expansion to our  Ravenswood  facility by adding a 250-megawatt
state-of-the-art  gas- fired  co-generation  unit at the site.  On  September 5,
2001, we received  approval for the expansion from New York State's Siting Board
on Electric Generation and the Environment  ("Siting Board") and construction is
underway. We anticipate that the new unit will be operational in late 2003/early
2004.

The pricing for both energy  sales and  ancillary  services to the NYISO  energy
market is still evolving and the Federal Energy Regulatory  Commission  ("FERC")
has adopted several price mitigation measures which are subject to rehearing and
possible judicial review. See "Item 7A. Quantitative and Qualitative Disclosures
About Market Risk" for a further discussion of these matters.

Long Island  Generation.  Forty of our 73 generating units can be powered either
by natural  gas or oil. In recent  years,  we have  reconfigured  several of our
facilities to enable them to burn either natural gas or oil, thus enabling us to
switch  periodically  between  fuel  alternatives  based upon cost and  seasonal
environmental  requirements.  Through other innovative technological approaches,
we increased  installed  capacity in our generating  facilities by 80 megawatts,
and we instituted a program to reduce nitrogen oxides for improved environmental
performance.  Reliability  improvement  investments at our  Ravenswood  facility
reduced the forced  outage rate for that facility from 35% in 1999 to just 5% in
2000 and 2001.  Decreasing the amount of time our  generating  units are offline
for repair allows us to increase sales.

The following table indicates the 2001 summer capacity of our steam generation
facilities and gas turbine ("GT") units as reported to the NYISO:


<TABLE>
<CAPTION>
    Location of Units               Description                  Fuel                  Units                  MW
--------------------------  ---------------------------  --------------------- ---------------------  ------------------
<S>                               <C>                           <C>                              <C>             <C>
Long Island City                   Steam Turbine                 Dual*                             3               1,755
Northport, L.I.                    Steam Turbine                 Dual*                             3               1,150
Northport, L.I.                    Steam Turbine                  Oil                              1                 370
Port Jefferson, L.I.               Steam Turbine                 Dual*                             2                 385
Glenwood, L.I.                     Steam Turbine                  Gas                              2                 229
Island Park, L.I.                  Steam Turbine                 Dual*                             2                 389
Far Rockaway, L.I.                 Steam Turbine                 Dual                              1                 110
Long Island City                     GT Units                    Dual*                            17                 455
Throughout L.I.                      GT Units                    Dual*                            12                 311
Throughout L.I.                      GT Units                     Oil                             30               1,093

Total                                                                                             73               6,247
==========================  ===========================  ===================== =====================  ==================
</TABLE>

*Dual - Oil or natural gas

In addition to the 250 MW expansion of the  Ravenswood  facility,  we have plans
for the development of three new generation  projects on Long Island,  New York.
We plan to  construct  another 250 MW combined  cycle  plant in  Melville,  Long
Island.  In January 2002, we filed an  application  for approval with the Siting
Board for this project.  This facility is expected to become operational in late
2004/early 2005. Additionally,  we are constructing two peaking facilities,  one
at Glenwood Landing and the other at Port Jefferson.  Each facility will produce
approximately  79 MW of  electricity  which is  enough  power to  supply  80,000
customers.  We have entered into a long term power purchase  agreement with LIPA
with respect to the Glenwood Landing facility and expect to enter into a similar
power  purchase  agreement  with  respect  to the Port  Jefferson  facility.  We
anticipate  that these units will be operational by this summer to meet the peak
electric load season.

LIPA Agreements P

ower  Supply  Agreement.  The PSA  provides  for the  sale to LIPA of all of the
capacity and, to the extent LIPA requests,  energy conversion  services from the
Long Island  generating  facilities.  Capacity refers to the ability to generate
energy and,  pursuant to NYISO  requirements,  must be  maintained  at specified
levels  (including  reserves)  regardless  of the  source  and  amount of energy
consumption.  By contrast,  energy conversion services refers to the electricity
actually  generated for  consumption  by  consumers.  Such sales of capacity and
energy conversion  services from the Long Island generating  facilities are made
at rates  regulated  by the 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 Long Island generating facilities; and (iii) reasonably incurred expenses
that are outside of our control.

The  PSA  provides  incentives  and  penalties  for us to  maintain  the  output
capability  of the Long  Island  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 2001, we earned  approximately  $3.8 million in incentives
under the PSA.

LIPA has no  obligation  to purchase  energy  conversion  services from the Long
Island  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 transmission and distribution  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 Long Island generating  facilities.  A variable maintenance charge
is  imposed  for each  unit of  energy  actually  generated  by the Long  Island
generating facilities. The PSA expires on May 28, 2013 and is renewable for an



                                                        13

<PAGE>



additional 15 years on similar terms.  However, the PSA provides LIPA the option
of electing  to reduce or  "ramp-down"  the  capacity  it  purchases  from us in
accordance with agreed-upon schedules. In years 7 through 10 of the PSA, if LIPA
elects to ramp-down,  we are entitled to receive payment for 100% 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,  KeySpan 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 we continue to operate the ramped-down capacity,
the PSA requires us to use reasonable  efforts to market the capacity and energy
from the  ramped-down  capacity and to share any profits with LIPA. The PSA will
be  terminated in the event that LIPA  exercises its right to purchase,  at fair
market  value,  all of the Long  Island  generating  facilities  pursuant to the
Generation Purchase Rights Agreement discussed in greater detail below.

We also have 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
Long  Island  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 revenues  attributable to the Long Island generating  facilities
is retained  by KeySpan  and the other 67% is credited to LIPA.  LIPA also has a
right of first refusal on any  potential  emission  allowance  sales of the Long
Island generating facilities.  Additionally,  KeySpan voluntarily entered into a
memorandum of understanding  with the New York State Department of Environmental
Conservation ("DEC"), which memorandum prohibits the sale of SO2 allowances into
certain  states and requires the purchaser to be bound by the same  restriction,
which may marginally affect the market value of the allowances.

Management  Services Agreement.  Under the MSA, we perform day-to-day  operation
and maintenance  services and capital  improvements for LIPA's  transmission and
distribution   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.  KeySpan furnishes such services as an
independent  contractor and does not have any ownership or leasehold interest in
the transmission and distribution system.

In exchange for providing these  services,  we are reimbursed our budgeted costs
and entitled to earn an annual  management  fee of $10 million and may also earn
certain  incentives,  or be responsible  for certain  penalties,  based upon our
performance.  The  incentives  provide  for us 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 and we are
required to absorb any total cost budget overruns up to a maximum of $15 million
in any contract year.

In addition to the foregoing cost-based incentives and penalties, we are
eligible for incentives for performance above certain threshold target levels
and subject to disincentives for performance below



                                                        14

<PAGE>



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.  In 2001, we earned $7.4 million in
non-cost performance incentives.

The MSA currently  has an eight year term and expires on May 28, 2006.  However,
we have  reached an agreement  in  principle  with LIPA to, among other  things,
extend the MSA for an additional  thirty months,  until November 28, 2008. For a
further  description  of the  agreement  in  principle,  see the  discussion  on
"Generation Purchase Rights Agreement" below.

Energy  Management  Agreement.  Pursuant to the EMA,  KeySpan (i)  procures  and
manages fuel  supplies for LIPA to fuel the Long Island  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 Long
Island  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  electricity  sales arranged by us. The term for the service provided
in (i) above is fifteen  years,  and the term for the services  provided in (ii)
and (iii) above is eight years.

In exchange for these services,  we earn 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. Fuel and  electricity  purchase prices are compared
to regional price indices and we receive  payment from LIPA, or are obligated to
make payment to LIPA, for fuel and/or purchased electricity costs that 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  (subject  to an overall cap  including  certain  non-cost  performance
incentives  under the MSA).  For the year ended  December 31, 2000, we earned an
aggregate of $5 million in incentives under the EMA.

Generation  Purchase  Rights  Agreement.  Under  a  Generation  Purchase  Rights
Agreement ("GPRA"), LIPA has the right to purchase, at fair market value, all of
our  currently  existing Long Island based  generating  assets during the twelve
month  period  ending on May 28,  2002.  On March 11,  2002,  we entered into an
agreement in  principle  with LIPA,  to among other  thing,  extend the GPRA for
three  years.  The  agreement  in  principle  establishes  a new  option  window
commencing November 2004 and closing May 2005. Under the agreement, LIPA retains
the right to exercise the option to purchase our Long Island  generation  assets
under the terms of the original  GPRA. In return for providing LIPA an extension
of the GPRA, we have been provided with a  corresponding  extension of 30 months
on the term of the MSA, as previously discussed.

The GPRA extension is the result of a new initiative established by LIPA to work
with KeySpan and others to review Long Island's  long-term energy needs. We will
work  with  LIPA  to  jointly  analyze  new  energy  supply  options   including
re-powering  existing  plants,   renewable  energy   technologies,   distributed
generation, conservation initiatives and retail competition.



                                                        15

<PAGE>



The  extension  allows  both  LIPA and us to  explore  alternatives  to the GPRA
including re-powering existing facilities,  the sale of some, but not all of our
currently existing Long Island generation plants to LIPA, or the sale of some of
these plants to other private operators.

Other Rights.  Pursuant to other agreements  between LIPA and us, 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  Long  Island  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,  KeySpan has the right to sell
or lease property on or adjoining the Long Island generating facilities to third
parties.  In  addition,  LIPA has  acquired  a parcel at the site of the  former
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.

We own the common plant (such as  administrative  office  buildings and computer
systems)  formerly  owned by LILCO and  recover  LIPA's  allocable  share of the
carrying  costs of such plant  through  the MSA.  KeySpan  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 transmission and  distribution  system.  We have
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 10-year period attributed to
the  May 28,  1998  transaction  which  resulted  in the  formation  of  KeySpan
(estimated to be approximately $1 billion),  which savings are incorporated into
the cost structure under the LIPA Agreements;  and (iii) not to commence any tax
certiorari case (until termination of the PSA) challenging  certain property tax
assessments relating to the Long Island generating facilities.

Guarantees and Indemnities. We have entered into agreements with LIPA to provide
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 LILCO assets transferred to KeySpan,  have been assumed by KeySpan; and
liabilities  associated  with the assets  acquired  by LIPA,  are borne by LIPA,
subject to certain specified exceptions. We have 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 Long
Island generating  facilities and all liabilities  traceable to the business and
operations  conducted  by  LIPA  after  completion  of  the  1998  KeySpan/LILCO
transaction.  An agreement also provides for an allocation of liabilities  which
relate to the assets that were common to the  operations  of LILCO and/or shared
services and are not  traceable  directly to either the  business or  operations
conducted by LIPA or KeySpan.

For additional  information  concerning the Electric services  segment,  see the
discussion  in  "Item 7.  Management's  Discussion  and  Analysis  of  Financial
Condition and Results of Operations - Electric Services" contained herein.




                                                        16

<PAGE>



                            Energy Services Overview

Our Energy Services segment  provides  services to customers  located  primarily
within the New York, New Jersey, Massachusetts,  New Hampshire, Rhode Island and
Pennsylvania through various subsidiaries which operate under the following four
principal  lines  of  business:   (i)  home  energy  services,   which  provides
residential  and small  commercial  customers  with service and  maintenance  of
energy  systems and  appliances,  as well as the  competitive  retail  supply of
natural  gas  and   electricity;   (ii)  business   solutions,   which  provides
engineering,  consulting  and  construction  services,  related  to the  design,
construction,  installation,  operation,  maintenance and management of heating,
cooling and power production equipment and systems for commercial and industrial
customers,  as  well  as the  competitive  retail  supply  of  natural  gas  and
electricity to large commercial, institutional and industrial customers. Certain
subsidiaries  within  this line of  business  also  engage or may  engage in the
financing and ownership of cogeneration, small power production, thermal energy,
chilled water and related equipment and facilities; (iii) commodity procurement,
which  provides  management  and  procurement   services  for  fuel  supply  and
management of energy sales,  primarily for and from the Ravenswood facility,  as
well as wholesale gas and electric  purchasing and management  services for home
energy  services,  retail gas and  electricity  business;  and (iv) fiber  optic
services in which we construct  fiber optic systems and  facilities  and own and
lease fiber optic cable to local, long distance, and trans-Atlantic carriers, as
well as internet service providers.

The Energy Services segment has more than 3,000  employees,  100,000 natural gas
and electric  commodity  customers,  200,000 service contracts and is the number
one oil to gas conversion contractor in New York.

KeySpan's Energy Services subsidiaries compete with local, regional and national
mechanical  contracting,  HVAC,  plumbing,  engineering,  wholesale fiber optics
carriers,  and independent 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 experience and customer service.
With  our  strong  market  presence  in  the  Northeast   centered  on  our  Gas
Distribution  and Electric  Services  operations and the long-term trend towards
further  deregulation,  we believe  that we are well  positioned  to provide our
customers  with an expanded  array of energy  products and services  through our
unregulated energy service companies.

During  2001,  we  undertook  a  complete  evaluation  of  our  Energy  Services
operations,   operating  controls  and  the  organizational   structure  of  our
subsidiaries,  as a result of  circumstances  surrounding  certain  charges  and
losses  incurred in 2001 relating to the general  contracting  activities of the
Roy Kay companies. We are currently engaged in litigation concerning the Roy Kay
companies.  For further information,  See Note 11 to the Consolidated  Financial
Statements,  "Roy  Kay  Operations"  and  Note 8  "Contractual  Obligations  and
Contingencies - Legal Matters for a further discussion.



                                                        17

<PAGE>



As a result of our evaluation of the Energy Services  business,  we decided that
our contracting  subsidiaries would no longer engage in new general  contracting
activities.  We also installed new senior management  personnel who, among other
things,  will be  reviewing  and  focusing  on our  overall  strategy  of  these
businesses.

In its order  approving the  acquisition by KeySpan of Eastern and  EnergyNorth,
the SEC  reserved  jurisdiction  on its  determination  of  whether  the  Energy
Services  companies are retainable under existing SEC precedent.  We are working
with the SEC in providing them with additional and  supplemental  information to
assist  them in their  evaluation  of these  subsidiaries  as to  whether  their
operations are functionally  related to our core utility  operations as required
by PUHCA.  We are  hopeful  that the SEC will  approve  of  KeySpan's  continued
operations  in the  Energy  Services  business,  as other  companies  that  have
registered as holding  companies under PUHCA have been permitted to retain their
energy-service operations.

For additional  information  concerning  the Energy  Services  segment,  see the
discussion  in  "Item 7.  Management's  Discussion  and  Analysis  of  Financial
Condition and Results of Operations - Energy Services" contained herein.

                           Energy Investments Overview

We are also engaged in Energy Investments which include: (i) gas exploration and
production activities; (ii) domestic pipelines and gas storage facilities; (iii)
midstream  natural  gas  processing  activities  in  Canada;  (iv)  natural  gas
distribution  and pipeline  activities  in the United  Kingdom;  and (v) certain
other  domestic  energy-related  investments,  such as providing  meter  reading
equipment and services to municipal  utilities,  the  transportation by truck of
liquid  natural gas, new fuel cell  technologies  and certain  internet  related
activities.

Gas Exploration & Production

KeySpan is engaged in the exploration and production of domestic natural gas and
oil through our 67% equity interest in The Houston Exploration Company ("Houston
Exploration") and through our wholly owned subsidiary,  KeySpan  Exploration and
Production,  LLC ("KeySpan  Exploration").  Houston Exploration was organized by
KEDNY  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
1, 2002, its aggregate  market  capitalization  was  approximately  $943,597,720
(based  upon the  closing  price on the New York Stock  Exchange on that date of
$30.95).  At March 1, 2002,  Houston  Exploration had  approximately  30,487,810
shares of common stock, $.01 par value, outstanding.

KeySpan  Exploration  is engaged in a joint venture with Houston  Exploration to
explore for natural gas and oil. Houston Exploration contributed all of its then
undeveloped  offshore leases to the joint venture for a 55% working interest and
KeySpan  Exploration,  acquired a 45% working  interest in all  prospects  to be
drilled by the joint venture. Effective 2001, the joint venture was modified to



                                                        18

<PAGE>



reflect that KeySpan  Exploration  would only  participate in the development of
wells that had previously been drilled and not participate in future  prospects.
KeySpan  Exploration  expended  approximately  $17.2  million  and has agreed to
commit  approximately  $15 million  for 2002 for the  continued  development  of
prospects successfully drilled by the joint venture.

Our gas exploration and production  subsidiaries focus their 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 these operations
enables  our  subsidiaries  to  manage a  comparatively  large  asset  base with
relatively  few  employees and to add and operate  production at relatively  low
incremental  costs.  Our gas  exploration  and production  subsidiaries  seek to
balance  their  offshore and onshore  activities so that the lower risk and more
stable production  typically  associated with onshore properties  complement the
high potential  exploratory projects in the Gulf of Mexico by balancing risk and
reducing  volatility.  Houston  Exploration'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 our offshore and onshore  properties and by making
selective opportune acquisitions.

Offshore Properties. We hold interests in 101 lease blocks, representing 496,995
gross (412,335 net) acres, in federal and state waters in the Gulf of Mexico, of
which 38 have  current  operations.  Houston  Exploration  operates  24 of these
blocks,  accounting for approximately 75% of our offshore  production.  Over the
past  five  years,  we have  drilled  29  successful  exploratory  wells  and 22
successful  development  wells in the Gulf of Mexico,  representing a historical
success  rate of 70%.  During  2001,  Houston  Exploration  drilled 7 successful
exploratory  wells  and 6  successful  development  wells on its Gulf of  Mexico
properties.  The joint venture  participated in 3 of the successful wells, all 2
exploratory wells and 1 of the development wells.

Onshore  Properties.  We  also  own  onshore  natural  gas  and  oil  properties
representing  interests  in 1,481 gross (1041 net) wells,  approximately  86% of
which Houston  Exploration is the operator of record, and 198,781 gross (126,448
net) acres.  Over the past five years,  we have drilled or  participated  in the
drilling of 191 successful  development wells and 7 successful exploratory wells
onshore,  representing a historical success rate of 84%, through our interest in
Houston  Exploration.  During  2001,  Houston  Exploration  participated  in the
drilling of 60 successful development wells and 1 successful exploratory well on
its onshore properties.  During the same period,  Houston Exploration drilled or
participated in the drilling of 4 development and 12 development wells that were
not successful.

On December 31, 2001, Houston  Exploration  acquired 159 producing wells located
in South Texas,  representing 85 BCF of total proved reserves from Conoco,  Inc.
for $69 million.

For  additional  information  concerning  the  gas  exploration  and  production
segment,  see the  discussion on "Gas  Exploration  and  Production" in "Item 7.
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations" and for information with respect to net proved reserves, production,
productive wells and acreage, undeveloped acreage, drilling activities, present



                                                        19

<PAGE>



activities and drilling  commitments see "Note 17 to the Consolidated  Financial
Statements, Supplemental Gas and Oil Disclosures," included herein.

Domestic Pipelines and Gas Storage Facilities

We also own an approximate 20% interest in Iroquois, the partnership that owns a
375-mile  pipeline  that  currently  transports  946 MDTH of Canadian gas supply
daily from the New  York-Canadian  border to markets in the Northeastern  United
States. KeySpan is also a shipper on Iroquois and currently transports up to 137
MDTH of gas per day on the pipeline.

We are also  participating  in the Islander East Pipeline Company LLC ("Islander
East"), an interstate pipeline joint venture with Duke Energy  Corporation.  The
joint venture plans to construct, own and operate a 50 mile natural gas pipeline
that will transport 260 MDTH of gas from Nova Scotia,  Canada to growing markets
in Connecticut,  New York City and Long Island, New York. The project received a
positive  preliminary  determination  from the FERC to construct  the  pipeline.
Increasing gas  transmission  capacity is necessary to meet the increased demand
for natural gas in the Northeast which coincides with the growth strategy of our
Gas Distribution business. Islander East is projected to be in service by 2003.

We also have equity  investments  in two gas storage  facilities in the State of
New York. Honeoye Storage  Corporation and Steuben Gas Storage Company. We own a
52% interest in Honeoye,  an underground gas storage  facility which provides up
to 4.8  billion  cubic  feet of  storage  service  to New York and New  England.
Additionally, we own 34% of a partnership that has a 50% interest in the Steuben
facility  storage which provides up to 6.2 billion cubic feet of storage service
to New Jersey and Massachusetts.

Our   investments  in  domestic   pipelines  and  gas  storage   facilities  are
complimentary to our Gas Distribution and Electric  Services  businesses in that
they provide energy infrastructure to support the growth of these businesses. To
the extent that opportunities  become available for expanding our investments in
these types of Energy  Investments,  KeySpan  will  continue  to  consider  such
investments as strategic.

Midstream Natural Gas Processing Activities in Canada

We also own 100% of KeySpan Canada, a company with natural gas processing plants
and  gathering  facilities  located  in Western  Canada.  In  October  2000,  we
purchased the remaining 50% interest in KeySpan Canada from our former  partner,
Gulf Canada  Resources  Limited.  The assets include  interests in 14 processing
plants and associated gathering systems that can process  approximately 1.5 BCFe
of  natural  gas  daily,  and  associated  natural  gas  liquids  fractionation.
Additionally,  KeySpan  owns an  approximate  75%  interest in the Paddle  River
processing plant in Western Canada and an interest in the Younger NGL Extraction
plant in British Columbia,  Canada. We also consider our Canadian  operations to
be  non-core  assets and are also  evaluating  strategies  to divest or monetize
these assets.





                                                        20

<PAGE>

Natural Gas Distribution and Pipeline Activities in the United Kingdom

We own a 50%  interest  in Premier  Transco  Pipeline  and a 24.5%  interest  in
Phoenix  Natural Gas Limited  both in  Northern  Ireland.  Premier is an 84-mile
pipeline  to  Northern   Ireland  from  southwest   Scotland  that  has  planned
transportation capacity of approximately 300 MDTH of gas supply daily to markets
in Northern  Ireland.  Phoenix is a gas distribution  system serving the City of
Belfast,  Northern  Ireland.  KeySpan  also  considers  these assets as non-core
assets and is currently evaluating the possible divestiture of these assets.

Marine Transportation Activities - Discontinued Operations

Our marine transportation subsidiary, Midland Enterprises, Inc. ("Midland") that
was  acquired  as part of the  Eastern  acquisition  is being  divested  and its
operations  are being  discontinued.  We were required by the SEC to divest this
subsidiary  by November 8, 2003, as its  operations  were  determined  not to be
functionally  related to our core utility  operations  as required by PUHCA.  On
January 24, 2002, we announced  that we had entered into a definitive  agreement
with Ingram Industries for the sale of Midland for  approximately  $230 million.
Ingram Industries will also assume debt of approximately $135 million.  The sale
is subject to certain  regulatory  approvals and is expected to close during the
second  quarter of 2002.  See Note 10  "Discontinued  Operations,"  for  further
information on the sale of our marine transportation business.

For additional  information  concerning the Energy Investments  segment, see the
discussion  on "Energy  Investments"  in "Item 7,  Management's  Discussion  and
Analysis of Financial Condition and Results of Operations" contained herein.

                         Environmental Matters Overview

KeySpan's  ordinary business  operations  subject it to regulation in accordance
with various federal,  state and local laws, rules and regulations  dealing with
the  environment,   including  air,  water,  and  hazardous  substances.   These
requirements  govern both our normal,  ongoing operations and the remediation of
impacted properties historically used in utility operations. Potential liability
associated  with our  historical  operations  may be imposed  without  regard to
fault, even if the activities were lawful at the time they occurred.

Except as set forth below, or in Note 8 to the Consolidated Financial Statements
"Contractual Obligations and Contingencies - Environmental Matters," no material
proceedings  relating to  environmental  matters have been  commenced or, to our
knowledge,  are  contemplated  by any  federal,  state or local  agency  against
KeySpan,  and we are not a defendant in any material  litigation with respect to
any matter  relating to the protection of the  environment.  We believe that our
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 us. We are also pursuing claims against  insurance  carriers
and  potentially   responsible  parties  which  seek  the  recovery  of  certain
environmental  costs  associated  with  the  investigation  and  remediation  of
contaminated properties.  We believe that all investigator and remediation costs
prudently incurred at facilities



                                                        21

<PAGE>



associated with utility  operations,  not recoverable  through insurance or some
other means, will be recoverable from our customers.

Air. The Federal Clean Air Act ("CAA")  provides for the regulation of a variety
of air  emissions  from new and existing  electric  generating  plants.  We have
submitted timely applications for permits in accordance with the requirements of
Title V of the 1990  amendments  to the CAA.  Final permits have been issued for
all of our electric generating facilities, except for the Far Rockaway facility.
The permits allow our electric  generating plants to continue to operate without
any additional significant expenditures, except as described below.

Our generating  facilities are located within a CAA severe ozone  non-attainment
area,  and are  subject  to  Phase  I, II and  III  NOx  reduction  requirements
established  under the Ozone  Transportation  Commission  ("OTC")  memorandum of
understanding. Our investments in boiler combustion modifications and the use of
natural  gas  firing  systems at our steam  electric  generating  stations  have
enabled us to achieve the emission  reductions  required under Phase I and II of
the OTC memorandum in a cost-effective  manner. With respect to Phase III of the
OTC  memorandum,  we  are  required  to be in  compliance  with  such  reduction
requirements  by May 1,  2003 and we  fully  expect  to  achieve  such  emission
reductions on time and in a cost-effective  manner.  Our expenditures to address
emission reduction requirements through the year 2003 are expected to be between
$10 million and $15 million.

Water.  The Federal  Clean Water Act provides for  effluent  limitations,  to be
implemented  by a permit  system,  to regulate the discharge of pollutants  into
United  States  waters.  We  possess  permits  for our  generating  units  which
authorize  discharges  from  cooling  water  circulating  systems  and  chemical
treatment  systems.  These permits are renewed from time to time, as required by
regulation.  Additional capital expenditures  associated with the renewal of the
surface water discharge permits for our power plants may be required by the DEC.
Until our monitoring  obligations are completed and changes to the Environmental
Protection  Agency  regulations  under  Section  316 of the Clean  Water Act are
promulgated,  the need for and the cost of equipment upgrades, if any, cannot be
determined.

Land.  The  Federal  Comprehensive  Environmental  Response,   Compensation  and
Liability Act of 1980 and certain similar state laws (collectively  "Superfund")
impose liability,  regardless of fault, upon generators of hazardous  substances
for costs associated with remediating  contaminated  property.  In the course of
our business operations, we generate materials which, after disposal, may become
subject  to  Superfund.  From  time to  time,  we have  received  notices  under
Superfund  concerning  possible  claims with  respect to sites  where  hazardous
substances  generated by KeySpan and other potentially  responsible parties were
allegedly disposed.  The cost of these claims is not presently determinable but,
if actually imposed on us, may be material to our financial  condition,  results
of operations or cash flows.

KeySpan has identified  certain  manufactured gas plant ("MGP") sites which were
historically   owned  or  operated  by  its   subsidiaries  (or  such  companies
predecessors).  Operations at these sites between the mid 1800s to mid 1900s may
have resulted in the release of hazardous substances. For a



                                                        22

<PAGE>



discussion  on our MGP sites and further  information  concerning  environmental
matters,  see  Note 8 to the  Consolidated  Financial  Statements,  "Contractual
Obligations and Contingencies - Environmental Matters."

Competition, Regulation and Rate Matters

Competition

Over  the last  several  years  the  natural  gas and  electric  sectors  of the
regulated  energy  industry have undergone  significant  change as market forces
moved  towards   replacing  or   supplementing   rate  regulation   through  the
introduction  of competition.  A significant  number of natural gas and electric
utilities  reacted to the changing  structure of the 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  operations.   We  engaged  in  two  such
combinations,  the  KeySpan/LILCO  transaction  in1998  and  our  November  2000
acquisition of Eastern and EnergyNorth.  For further  information  regarding the
gas and electric industry, see "Item 7A. Quantitative and Qualitative Disclosure
about Market Risk."

Additionally,  our  non-utility  subsidiaries  engaged  in the  Energy  Services
business compete with other mechanical,  HVAC, and engineering companies, and in
New Jersey are faced with  competition  from the  regulated  utilities  that are
still able to offer appliance repair and protection services.

Regulation

Public utility holding companies,  like KeySpan,  are regulated by the SEC under
PUHCA and to some extent by state utility  commissions through the regulation of
corporate,  financial and affiliate activities of public utilities.  Our utility
subsidiaries  are subject to  extensive  federal and state  regulation  by state
utility  commissions,  FERC and the SEC.  Our gas and  electric  public  utility
companies  are  subject  to either  or both  state and  federal  regulation.  In
general,  state public  utility  commissions,  such as the NYPSC,  DTE and NHPUC
regulate the provision of retail  services,  including the distribution and sale
of natural gas and  electricity  to  consumers.  The FERC  regulates  interstate
natural gas transportation and electric transmission,  and has jurisdiction over
certain wholesale natural gas sales and wholesale electric sales.

In  addition,  our  non-utility  subsidiaries  are subject to a wide  variety of
federal,  state and local  laws,  rules and  regulations  with  respect to their
business  activities,  including but not limit to those affecting  public sector
projects,   environmental  and  labor  laws  and  regulations,  state  licensing
requirements,  as well as state laws and regulations  concerning the competitive
retail commodity supply.

State Utility  Commissions  Our regulated  utility  subsidiaries  are subject to
regulation by the NYPSC, DTE and NHPUC. The NYPSC regulates KEDNY and KEDLI, and
indirectly KeySpan itself, through conditions,  which were included in the NYPSC
order authorizing the 1998 KeySpan/LILCO transaction. Those



                                                        23

<PAGE>



conditions address the manner in which KeySpan, its service company subsidiaries
and its unregulated  subsidiaries  may interact with KEDNY and KEDLI.  The NYPSC
also regulates the safety, reliability and certain financial transactions of our
Long Island generating facilities and our Ravenswood generating facility under a
lightened regulatory standard.  Our KEDNE subsidiaries are subject to regulation
by the DTE and  NHPUC.  Our Energy  Services  subsidiaries  which  engage in the
retail sale of gas and  electricity  are also subject to regulation by the NYPSC
and the New Jersey Board of Public Utilities.  For further information regarding
the state regulatory  commissions,  see the discussion in "Item 7.  Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations -
Regulation and Rate Matters."

Federal Energy Regulatory Commission

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.  The Long Island
generating facilities and the Ravenswood facility are subject to FERC regulation
based on their wholesale energy  transactions.  In 1998,  LIPA,  KeySpan and the
Staff of FERC stipulated to a five-year rate plan for the Long Island generating
facilities  with  agreed-upon  yearly  adjustments,  which have been approved by
FERC.  Our  Ravenswood  facility's  rates  are  based  on  a  market-based  rate
application  approved by FERC. The rates that our Ravenswood facility may charge
are subject to  mitigation  measures due to market power  concerns of FERC.  The
mitigation  measures are administered by the NYISO.  FERC retains the ability in
future  proceedings,  either on its own  motion or upon a  complaint  filed with
FERC,  to modify the  Ravenswood  facility's  rates,  as well as the  mitigation
measures, if FERC concludes that it is in the public interest to do so.

KeySpan currently bids and sells the energy capacity and ancillary services from
the Ravenswood  facility  through the energy market  operated by the NYISO.  For
information  concerning the NYISO,  see Item 7A.  Quantitative  and  Qualitative
Disclosures About Market Risk.

FERC also 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 KEDNY,  KEDLI, KEDNE and certain related
intrastate gas  transportation  functions are not subject to FERC  jurisdiction.
However,  to the extent  that  KEDNY,  KEDLI or KEDNE  purchase  or sell gas for
resale  in  interstate   commerce,   such   transactions  are  subject  to  FERC
jurisdiction  and have been  authorized by the FERC.  Our interests in Iroquois,
Honeoye and Steuben are also fully regulated by FERC as natural gas companies.

Securities and Exchange Commission

As a  result  of the  acquisition  of  Eastern  and  EnergyNorth,  we  became  a
registered holding company under PUHCA.  Therefore,  our corporate and financial
activities  and  those  of our  subsidiaries,  including  their  ability  to pay
dividends to us, are subject to regulation by the SEC. Under our holding company
structure,  we have no independent operations or source of income of our own and
conduct  substantially all of our operations  through our subsidiaries and, as a
result, we depend on



                                                        24

<PAGE>



the  earnings  and cash  flow of,  and  dividends  or  distributions  from,  our
subsidiaries  to provide the funds  necessary  to meet our debt and  contractual
obligations.  Furthermore,  a substantial  portion of our  consolidated  assets,
earnings and cash flow is derived from the  operations of our regulated  utility
subsidiaries, whose legal authority to pay dividends or make other distributions
to us is subject to regulation by state regulatory  authorities.  For additional
information  concerning  regulation  by the SEC under  PUHCA see the  discussion
under the heading "Securities and Exchange Commission  Regulation"  contained in
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations" contained herein.

Foreign Regulation

KeySpan's foreign 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.

KeySpan's  assets in Canada are subject to  regulation  by Canadian  federal and
provincial  authorities.  Such regulatory authorities license various aspects of
the facilities and pipeline systems as well as regulate safety,  operational and
environmental  matters and certain  changes in such  facilities'  and pipelines'
capacities and operations.

Employee Matters

As of December 31, 2001, KeySpan and its wholly owned subsidiaries had
approximately 13,000 employees. Of that total, approximately 5,922 employees in
our regulated companies are covered under collective bargaining agreements.
KeySpan 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 executive officers of KeySpan and certain of its
subsidiaries is set forth below:

Robert B. Catell

Mr.  Catell,  age 65, has been a Director of KeySpan  since its  creation in May
1998. He was elected  Chairman of the Board and Chief Executive  Officer in July
1998.  He served as its  President  and Chief  Operating  Officer  from May 1998
through  July 1998.  Mr.  Catell  joined  KEDNY in 1958 and became an officer in
1974. He was elected Vice President in 1977, Senior Vice President in 1981



                                                        25

<PAGE>



and Executive Vice President in 1984. He was elected Chief Operating  Officer in
1986 and President in 1990. Mr. Catell continued to serve as President and Chief
Executive  Officer of KEDNY from 1991 through 1996, when he was elected Chairman
and Chief Executive Officer. In 1997, Mr. Catell was elected Chairman, President
and Chief Executive Officer of KEDNY and its parent KeySpan Energy Corporation.

Robert J. Fani

Mr. Fani, age 48, was elected President of KeySpan Energy Services and Supply in
July 2001. Mr. Fani joined KEDNY in 1976, and held a variety of management
positions in distribution, engineering, planning, marketing, and business
development. He was elected as a KEDNY Vice President in 1992. In 1997, Mr. Fani
was promoted to Senior Vice President of Marketing and Sales. In 1998, he
assumed the position of Senior Vice President of Marketing and Sales for
KeySpan. In September 1999, he became SENIOR Vice President for Gas Operations
and in February 2000 was promoted to Executive Vice President of Strategic
Services until assuming his current position in July 2001.

Wallace P. Parker Jr.

Mr. Parker, age 52, was elected President of KeySpan Energy Delivery in July
2001. He joined KEDNY 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 and in August 1998 was
promoted to SENIOR Vice President of Human Resources of KeySpan. He also served
as Executive Vice President of Gas Operations from February 2000 until his
promotion in July 2001.

John A. Caroselli

Mr. Caroselli, age 47, was elected Executive Vice President of Strategic
Services in October 2001 and is responsible for Brand Management, Strategic
Marketing, Strategic Planning, Strategic Performance, and E-business. Mr.
Caroselli came to KeySpan in 2001 from AXA Financial where he was Executive Vice
President of Corporate Development. Prior to that, he held senior officer
positions with Chase Manhattan, Chemical Bank and Manufacturers Hanover Trust.
He has extensive experience in brand management, marketing, communications,
human resources, facilities management, e-business and change management.

Gerald Luterman

Mr.  Luterman,  age 58 was elected  Executive Vice President and Chief Financial
Officer in February  2002.  He  previously  served as SENIOR Vice  President and
Chief  Financial  Officer since joining KeySpan in July 1999. He formerly served
as Chief Financial Officer of  barnesandnoble.com  and SENIOR Vice President and
Chief Financial Officer of Arrow Electronics,  Inc., a distributor of electronic
components and computer products. Prior to that, from 1985 through 1996, he held



                                                        26

<PAGE>



executive  positions with American Express,  including  Executive Vice President
and Chief Financial  Officer of the Consumer Card Division from  1991-1996.  Mr.
Luterman serves on the Board of Directors of The Houston Exploration Company.

Chester R. Messer

Mr. Messer, age 60, was elected Executive Vice President of KeySpan and
President of KEDNE in November 2000, upon the acquisition of Eastern. He also
serves as President of each of our New England gas utilities, Boston Gas
Company, Colonial Gas Company, Essex Gas Company and EnergyNorth Natural Gas,
Inc. Mr. Messer joined Boston Gas Company in 1963 and rose through a succession
of positions until he was elected President in November 1988.

Anthony Nozzolillo

Mr. Nozzolillo, age 53, was elected Executive Vice President of Electric
Operations in February 2000. He previously served as SENIOR Vice President of
KeySpan's Electric Business Unit from December 1998 to January 2000. 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.

Lenore F. Puleo

Ms. Puleo, age 48, was elected Executive Vice President of Shared Services in
February 2000. She previously served as SENIOR Vice President of Customer
Relations for KEDNY from May 1994 to January 2000. She joined KEDNY in 1974 and
held various positions in KEDNY'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.

Steven L. Zelkowitz

Mr. Zelkowitz, age 52, was elected to Executive Vice President and General
Counsel in July 2001, with responsibility for legal services, human resources,
regulatory affairs, enterprise-wide risk management and administration of the
internal auditing area. He joined KeySpan as SENIOR Vice President and Deputy
General Counsel in October 1998, and was elected SENIOR Vice President and
General Counsel in February 2000. Before joining KeySpan, 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.

Joseph A. Bodanza

Mr. Bodanza, age 54, was elected SENIOR Vice President of Finance Operations and
Regulatory  Affairs  in July  2001.  He  continues  to serve as Chief  Financial
Officer of KEDNE, a position he was



                                                        27

<PAGE>



appointed to in November  2000,  upon the  acquisition  of Eastern.  Mr. Bodanza
previously served as SENIOR Vice President of Finance and Management Information
Systems and  Treasurer of Eastern's Gas  Distribution  Operations.  Mr.  Bodanza
joined  Boston Gas in 1972 and held a variety of positions in the  financial and
regulatory  areas  before  becoming  Treasurer  in  1984.  He was  elected  Vice
President and Treasurer in 1988.

David J. Manning

Mr. Manning, age 51, was elected SENIOR Vice President of KeySpan's Corporate
Affairs group in April 1999. Before joining KeySpan, Mr. Manning had been
President of the Canadian Association of Petroleum Producers since 1995. From
1993 to 1995, he was Deputy Minister of Energy for the Province of Alberta,
Canada. From 1988 to 1993, he was SENIOR International Trade Counsel for the
Government of Alberta, based in New York City. Previously he was in the private
practice of law in Canada.

H. Neil Nichols

Mr. Nichols, age 64, was elected President of KeySpan Energy Development
Corporation ("KEDC"), a position to which he was elected in March 1998. KEDC is
a wholly owned subsidiary of KeySpan responsible for our Energy Investments
segment. Since February 1999, Mr. Nichols also has responsibility for KeySpan
Energy Trading Services, LLC, which provides fuel-procurement management and
energy-trading services for KEDNY, KEDLI and LIPA. Mr. Nichols joined KeySpan in
1997 as a broad-based negotiator and business strategist with comprehensive
finance and treasury experience in domestic and international markets. Prior to
joining KeySpan, Mr. Nichols was an owner and president of Corrosion
Interventions, Ltd. in Toronto, Canada. He also served as Chief Financial
Officer and Executive Vice President with TransCanada PipeLines.

Cheryl T. Smith

Ms. Smith, age 50, joined KeySpan in November 1998. She serves as SENIOR Vice
President and Chief Information Officer of KeySpan's Information technology
division. She came to KeySpan from Verizon (Bell Atlantic) where she served as
Vice President of Strategic Systems and Corporate Systems from 1995 through
1998. Prior to Bell Atlantic, she worked at Honeywell Federated Systems Inc. as
the Director of Management Information Services for Honeywell Federal Systems,
Inc.

Colin P. Watson

Mr.  Watson,  age 50, was named SENIOR Vice  President  of  KeySpan's  Strategic
Marketing and E- Business division effective March 1, 2000. He previously served
as Vice  President of Strategic  Marketing  from May 1998 until his promotion to
SENIOR Vice  President.  Mr.  Watson  joined KEDNY in 1997 as Vice  President of
Strategic  Marketing.  From 1973 to 1997,  he held  several  positions at NYNEX,
including  Vice  President of General  Business  Sales and Managing  Director of
worldwide operations.



                                                        28

<PAGE>



Elaine Weinstein

Ms. Weinstein, age 55, was named SENIOR Vice President of KeySpan's Human
Resources division in November 2000. She previously served as Vice President of
Staffing and Organizational Development since September 1998. Prior to that
time, Ms. Weinstein was General Manager of Employee Development since joining
KeySpan in 1995. Prior to 1995, Ms. Weinstein was Vice President of Training and
Organizational Development at Merrill Lynch.

Lawrence S. Dryer

Mr. Dryer, age 42, was named SENIOR Vice President and Chief Financial Officer
of KeySpan Services, Inc. effective March 1, 2002. He had been Acting Chief
Financial Officer since August 2001. He also serves as our Internal Auditor, a
position he has held since he was elected Vice President, Internal Audit in
September 1998. Prior to such positions, Mr. Dryer had been with LILCO from 1992
to 1998 as Director of Internal Audit. Prior to joining LILCO, Mr. Dryer was an
Audit Manager with Coopers & Lybrand.

Ronald S. Jendras

Mr. Jendras, age 54, was named Vice President, Controller and Chief Accounting
Officer of KeySpan in August 1998. He joined KEDNY 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 KEDNY's Rate and
Regulatory Affairs area, and in 1997, was named general manager of the
Accounting Division. Mr. Jendras has been Treasurer of KeySpan Foundation since
1998 as well as a member of its Board of Directors.

Richard A. Rapp, Jr.

Mr. Rapp, age 43, was elected Vice President and Deputy General Counsel in
February 2000 and in June 2000, he assumed the additional responsibility of
corporate Secretary. He joined LILCO in 1984 and has held various positions in
the Legal Department including several Assistant General Counsel positions.

Michael J. Taunton

Mr. Taunton, age 46, has been KeySpan's Vice President and Treasurer since June
2000. Prior to that time, he served as Vice President of Investor Relations
since September 1998. He joined KEDNY in 1975 and held positions in Accounting,
Customer Service, Corporate Planning, Budgeting and Forecasting, Marketing and
Sales and Business Process Improvement.




                                                        29

<PAGE>




Item 2.  Properties

Information with respect to KeySpan'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 gas and oil properties, held under long-term mineral leases. In addition
to the information set forth therein with respect to properties utilized by each
business segment, KeySpan owns or leases a variety of office space used for its
administrative operations. In the case of leased office space, we anticipate no
significant difficulty in leasing alternative space at reasonable rates in the
event of the expiration, cancellation or termination of a lease.

Item 3.  Legal Proceedings

See Note 8 to the Consolidated Financial Statements, "Contractual Obligations
and Contingencies - Legal Matters."

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

No matters were submitted to a vote of the security holders during the last
quarter of the 12 months ended December 31, 2001.


                                     PART II

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

KeySpan'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 1, 2002, there
were approximately 82,321 registered record holders of KeySpan's common stock.
The following table sets forth, for the quarters indicated, the high and low
sales prices and dividends declared per share for the periods indicated:


2001                     High             Low             Dividends Per Share
-------------------- -----------------------------------------------------------
First Quarter           $41.94           $34.20                 $0.445
Second Quarter          $41.10           $35.75                 $0.445
Third Quarter           $37.20           $29.10                 $0.445
Fourth Quarter          $35.35           $31.53                 $0.445

<PAGE>



2000                     High              Low            Dividends Per Share
-------------------- -----------------------------------------------------------
First Quarter            $27.188          $20.188                    $0.445
Second Quarter           $32.688          $26.000                    $0.445
Third Quarter            $40.145          $30.938                    $0.445
Fourth Quarter           $43.625          $33.500                    $0.445


Item 6.  Selected Financial Data
<TABLE>
<CAPTION>

                                                                                 (In Thousands of Dollars, Except Per Share Amounts)
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                      Nine Months
                                          Year Ended          Year Ended           Year Ended            Ended           Year Ended
                                      December 31, 2001    December 31, 2000   December 31, 1999   December 31, 1998  March 31, 1998
------------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>                 <C>                  <C>                  <C>              <C>
Income Summary
Revenues
Gas Distribution                      $   3,613,551   $       2,555,785    $       1,753,132   $         856,172   $       645,659
Electric Services                         1,421,079           1,444,711              861,582             408,305                 -
Electric Distribution                             -                   -                    -             330,011         2,478,435
Gas Exploration and Production              400,031             274,209              150,581              70,812                 -
Energy Services and Other                 1,198,454             805,997              189,318              63,181                 -
------------------------------------------------------------------------------------------------------------------------------------
Total revenues                            6,633,115           5,080,702            2,954,613           1,728,481         3,124,094
Operating expenses
Purchased gas for resale                  2,171,113           1,408,680              744,432             331,690           299,469
Fuel and purchased power                    538,532             460,841               17,252              91,762           658,338
Operation and maintenance                 2,114,759           1,659,736            1,091,166             777,678           511,165
Depreciation, depletion and
  amortization                              559,138             330,922              253,440             254,859           183,129
Early retirement and
    severance charges                             -              65,175                    -              64,635                 -
Operating taxes                             448,924             421,936              366,154             257,124           466,326
------------------------------------------------------------------------------------------------------------------------------------
Operating income                            800,649             733,412              482,169             (49,267)        1,005,667
Other income (deductions)                     7,206             (12,086)              46,555             (36,727)           (6,301)
------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before interest
  charges and  income taxes                 807,855             721,326              528,724             (85,994)          999,366
Interest charges                            353,470             201,314              133,751             140,733           404,473
Income taxes (credits)                      210,693             217,262              136,362             (59,794)          232,653
------------------------------------------------------------------------------------------------------------------------------------
Net income (loss)                           243,692             302,750              258,611            (166,933)          362,240
Preferred stock dividends                     5,904              18,113               34,752              28,604            51,813
------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from
  Continuing Operations               $     237,788  $          284,637    $          223,859   $       (195,537)  $       310,427
----------------------------------------------------------------------------------------------------------------------------------
Discontinued Operations
    Income from Operations, net of tax       10,918              (1,943)                   -                   -                 -
    Loss on Disposal, net of tax            (30,356)                  -                    -                   -                 -
----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from
  Discontinued Operations                   (19,438)             (1,943)                   -                   -                 -
----------------------------------------------------------------------------------------------------------------------------------
Earnings for Common Stock             $     218,350  $          282,694    $          223,859   $        (195,537) $       310,427
----------------------------------------------------------------------------------------------------------------------------------
Financial Summary
Basic earnings (loss) per share ($)            1.58                2.10                 1.62              (1.34)              2.56
Cash dividends declared per share ($)          1.78                1.78                 1.78                1.19              1.78
Book value per share, year-end ($)            21.33               20.65                20.26               20.90             21.88
Market value per share, year-end ($)          34.65               42.38                23.19               31.00             31.50
Shareholders                                 82,300              86,900               90,500             103,239            78,314
Capital expenditures ($)                  1,059,759             925,257              725,670             676,563           297,230
Total assets ($)                         11,789,606          11,307,465            6,730,691           6,895,102        11,900,725
Common equity ($)                         2,890,602           2,815,816            2,712,325           3,022,908         2,662,447
Redeemable preferred stock ($)                    -                   -              363,000             363,000           562,600
Preferred stock ($)                          84,077              84,205               84,339             447,973                 -
Long term debt ($)                        4,697,649           4,116,441            1,682,702           1,619,067         4,381,949
Total capitalization ($)                  7,672,328           7,016,462            4,479,366           5,089,948         7,606,996
----------------------------------------------------------------------------------------------------------------------------------
Utility Operating Statistics
Firm gas and transportation
      sales (MDTH)                          427,051             306,509              275,771              87,179            58,304
Other sales (MDTH)                          106,800              91,406               54,661              38,088            21,025
Total active gas meters                   2,499,170           2,483,730            1,628,497           1,610,202           464,563
Gas heating customers                     1,267,000           1,260,000              677,000             665,000           295,000
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>




<PAGE>



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

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

Consolidated Summary of Results
-------------------------------

The following is a discussion of transactions affecting comparative earnings for
the years ended December 31, 2001, 2000 and 1999. As mentioned in Note 1 to the
Consolidated Financial Statements "Summary of Significant Accounting Policies",
on November 8, 2000 we acquired all of the common stock of Eastern Enterprises
("Eastern") and EnergyNorth Inc. ("ENI") in a transaction accounted for as a
purchase. As a result, consolidated comparisons in earnings, revenues and
expenses between reporting periods have been significantly affected by the
addition of these operations. Capitalized terms used in the following
discussion, but not otherwise defined, have the same meaning as when used in the
Notes to the Consolidated Financial Statements.

Consolidated earnings from continuing operations for 2001 were $237.8 million,
or $1.72 per share compared to $284.6 million, or $2.12 per share for 2000 and
$223.9 million, or $1.62 per share for 1999. Average common shares outstanding
for 2001 increased by 3% compared to 2000 reflecting the re-issuance of shares
held in treasury pursuant to dividend reinvestment and employee benefit plans.
This increase in average common shares outstanding reduced 2001 earnings per
share by $0.05 compared to 2000.

On January 24, 2002, we announced that we have entered into an agreement to sell
Midland Enterprises Inc. ("Midland"), our marine barge business. In anticipation
of this divestiture,  which we expect to close in the second quarter of 2002, we
have reported Midland's operations as discontinued for 2001 as well as for 2000.
For 2001,  we  reflected  a loss of $19.4  million,  or $0.14 per  share,  which
included both Midland's  2001  operating  results as well as an estimate for our
loss on



<PAGE>



the sale. At the time of our acquisition of Eastern, we were ordered by the
Securities and Exchange Commission ("SEC") to divest this subsidiary by November
8, 2003 since its operations are not functionally related to our core utility
operations. (See Note 10 to the Consolidated Financial Statements "Discontinued
Operations" for further information.) In 2000, Midland's results of operations
reflected a loss of $1.9 million, or $0.02 per share. There were no discontinued
operations in 1999, since we acquired Midland as part of the our acquisition of
Eastern on November 8, 2000.

Consolidated earnings available for common stock, which includes both results of
operations from continuing as well as discontinued operations, were $218.4
million or $1.58 per share in 2001, compared to $282.7 million or $2.10 per
share in 2000 and $223.9 million or $1.62 per share in 1999. Diluted earnings
per share were $1.56 in 2001 and $2.09 in 2000. Basic and diluted earnings per
share were the same in 1999.

During 2001, we recorded the effects of a number of events that significantly
affected results of operations as follows: (1) A non-cash impairment charge
recorded by our gas exploration and production subsidiaries to recognize the
effect of lower wellhead prices on their valuation of proved gas reserves. Our
share of this charge was $26.2 million after-tax ($40.7 million pre-tax) or
$0.19 per share. (See Note 1 to the Consolidated Financial Statements "Summary
of Significant Accounting Policies", Item F for further details.); (2) The
reversal of a previously recorded loss provision regarding certain pending rate
refund issues relating to the 1989 RICO class action settlement of $20.1 million
after-tax ($33.5 million pre-tax), or $0.15 per share. (See Note 12 to the
Consolidated Financial Statements "Class Action Settlement" for a further
discussion of this issue.); and (3) Losses incurred by the Roy Kay companies of
$95.0 million after-tax ($137.8 million pre- tax) or $0.69 per share reflecting
costs related to the discontinuance of the general contracting activities of
these companies, costs to complete work on certain loss construction projects,
and operating losses incurred. (See Note 11 to the Consolidated Financial
Statements, "Roy Kay Operations" and Note 8 "Contractual Obligations and
Contingencies " - legal matters, for a further discussion of these issues.)

In 2000, we recorded a $65.2 million pre-tax charge associated with early
retirement and severance programs that were implemented upon the acquisition of
Eastern and ENI. The after-tax effect of this charge on consolidated results
from continuing operations was $41.1 million, or $0.31 per share. There were no
significant items to note in 1999.

Interest expense increased by $152.2 million, or 75% in 2001,  reflecting higher
levels of debt outstanding, primarily related to: (i) $1.65 billion of long-term
debt and $308.6 million of commercial paper issued to finance the acquisition of
Eastern and ENI;  (ii) debt  assumed in the Eastern and ENI  acquisition;  (iii)
$625 million of notes  issued  during the year,  primarily  used to repay short-
term debt; (iv) debt incurred by our Canadian subsidiary;  as well as (v) higher
commercial paper borrowings  during the year to satisfy seasonal working capital
needs. As part of the RICO class settlement  adjustment noted above, we reversed
$11.5 million of previously  recorded  carrying charges during 2001; of which $9
million ($5.9 million after-tax) was recorded in 2000.



<PAGE>



Earnings before interest and taxes ("EBIT") from continuing  operations in 2001,
after adjusting for the matters noted above, were substanially  higher than such
earnings for 2000. Our gas distribution  operations benefitted from the addition
of the New  England  gas  utilities  for an entire  year as compared to only two
months in the prior year's results, as well as an increase in net margins due to
continued  gas  sales  growth,  and  cost  saving  synergies.  Further,  our gas
exploration  and production  activities  benefitted  from the combined effect of
higher  realized gas prices,  primarily  during the first  quarter of 2001,  and
improved  production  volumes  throughout the year.  These benefits to EBIT from
continuing operations were almost entirely offset by higher interest expense. In
addition,  during  2000  certain  charges  were  incurred by our  corporate  and
administrative  areas  that  were not  incurred  in 2001,  which  resulted  in a
significant  increase to comparative  earnings.  (See the  discussion  under the
heading "Review of Operating  Segments" for an analyses of comparative  EBIT for
each of our operating segments.)

The increase in earnings for 2000 over 1999, resulted from solid performance
across all of our business segments. Further, our average common shares
outstanding were approximately 3% lower for 2000 compared to 1999 due to a stock
repurchase program in 1999. The lower shares outstanding had a favorable affect
on earnings per share from continuing operations of $0.07. Our gas distribution
operations benefitted from gas sales growth, favorable gas prices compared to
oil prices for most of 2000 and earnings from the acquisition of the New England
gas distribution companies.

Earnings growth in 2000 was also due to the operation of our investment in the
Ravenswood electric generation facility, ("Ravenswood facility") located in
Queens, New York. The Ravenswood facility was acquired in June 1999 and
therefore, earnings for 2000 reflected a full year of operations, while 1999
reflected less than seven full months of operations. In addition, consolidated
earnings from continuing operations were further enhanced through improved
performance from our gas exploration and production operations which benefitted
from significantly higher realized gas prices and increased production volumes
in 2000. In addition, on March 31, 2000 we increased our ownership in Houston
Exploration from 64% to 70% at that time. Offsetting, to some extent, these
enhancements to earnings in 2000, were expenses incurred by our corporate and
administrative areas that were not allocated to our various business segments
and were not incurred in 1999, as well as an increase to interest expense
reflecting higher levels of debt outstanding due primarily to the acquisition of
Eastern and ENI as previously noted.

Income tax expense generally reflects the lower level of pre-tax income in 2001
compared to last year. For 2000, income tax expense reflects the higher level of
pre-tax income compared to 1999. Further, during the last quarter of 2000, the
basis for computing certain local income taxes was changed which increased
income tax expense in 2001 and 2000. (See Note 3 to the Consolidated Financial
Statements, "Income Taxes" for more information.) Preferred stock dividends have
decreased in all periods as a result of a redemption, at maturity, of 14.5
million shares of preferred stock in the second quarter of 2000.

Financial Outlook for 2002

Consistent with the guidance issued in December 2001, KeySpan's 2002 earnings
from core operations (defined for this purpose as all operations other than gas
exploration and production operations) are forecasted to be approximately $2.40
to $2.45 per share. KeySpan's 2002 earnings forecast for its gas exploration and
production operations is approximately $0.20-$0.30 per share, based on the most
recent guidance issued by Houston Exploration. Houston Exploration's earnings
forecasts may vary significantly during the year due to, among other things,
changing energy market conditions.

Pursuant to SEC rules for exploration and production companies which use the
"full cost" accounting method, such as Houston Exploration and KeySpan
Exploration and Production LLC, a quarterly "ceiling test" calculation is
required using commodity prices as of the end of the reporting period. As a
result, depending on prevailing commodity prices, our gas exploration and
production subsidiaries may be required to recognize a non-cash impairment
charge at the end of any future reporting period.


<PAGE>


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


Gas Distribution

KeySpan Energy Delivery New York ("KEDNY") provides gas distribution service to
customers in the New York City Boroughs of Brooklyn, Queens and Staten Island.
KeySpan Energy Delivery Long Island ("KEDLI") provides gas distribution service
to customers in the Long Island Counties of Nassau and Suffolk and the Rockaway
Peninsula of Queens County. Four natural gas distribution companies - Boston Gas
Company, Essex Gas Company, Colonial Gas Company and EnergyNorth Natural Gas,
Inc., each doing business under the name KeySpan Energy Delivery New England
("KEDNE"), provide gas distribution service to customers in Massachusetts and
New Hampshire. Since the New England entities were acquired on November 8, 2000,
results of operations for periods prior to such date do not reflect the
operating results of these entities.

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

                                                                                                           (In Thousands of Dollars)
                                                                                                           -------------------------

                                                                Year Ended                    Year Ended               Year Ended
                                                             December 31, 2001            December 31, 2000        December 31, 1999
-----------------------------------------------------  ---------------------------  ----------------------------  ------------------
<S>                                                             <C>                           <C>                       <C>
Revenues                                               $         3,613,551          $          2,555,785          $      1,753,132
Cost of gas                                                      2,017,782                     1,303,515                   702,044
Revenue taxes                                                      119,084                       117,811                   108,488
-----------------------------------------------------  ---------------------------  ----------------------------  ------------------
Net Revenues                                                     1,476,685                     1,134,459                   942,600
-----------------------------------------------------  ---------------------------  ----------------------------  ------------------
Operating expenses
  Operations and maintenance                                       593,341                       456,028                   415,888
  Early retirement and severance programs                                -                        41,790                         -
  Depreciation and amortization                                    253,523                       143,335                   102,997
  Operating taxes                                                  148,428                       131,854                   115,305
-----------------------------------------------------  ---------------------------  ----------------------------  ------------------
Total Operating Expenses                                           995,292                       773,007                   634,190
-----------------------------------------------------  ---------------------------  ----------------------------  ------------------
Operating Income                                                  481,393                       361,452                   308,410
Other Income and (Deductions), Net                                 10,969                         5,774                     9,835
-----------------------------------------------------  ---------------------------  ----------------------------  ------------------
Earnings Before Interest and Taxes                     $          492,362           $           367,226          $        318,245
-----------------------------------------------------  ---------------------------  ----------------------------  ------------------
Firm gas sales (MDTH)                                             261,473                       216,000                   172,019
Firm transportation (MDTH)                                        101,000                        40,655                    21,249
Transportation - Electric
      Generation   (MDTH)                                          64,578                        49,854                    82,503
Other sales (MDTH)                                                106,800                        91,406                    54,661
Warmer (Colder) than normal - New York                              10.0%                        (2.1)%                     10.0%
Warmer (Colder) than normal - New England                            4.6%                        (4.0)%                     N/A
-----------------------------------------------------  ---------------------------  ----------------------------  ------------------
</TABLE>
   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. One billion cubic feet (BCF) of gas
   equals approximately 1,000 MDTH.



<PAGE>



Net Revenues

Net gas revenues (revenues less the cost of gas and associated revenue taxes)
increased by $342.2 million or 30% in 2001 compared to 2000. The gas
distribution operations of KEDNE added $296.8 million to this increase, while
our New York based gas distribution operations accounted for the remaining $45.4
million increase. Net gas revenues increased by $191.9 million or 20% in 2000
compared to 1999. The gas distribution operations of KEDNE contributed $126.6
million to the increase in net gas revenues, while our New York based gas
distribution operations added the remaining $65.3 million to the increase.

Net revenues from our firm gas customers (residential, commercial and industrial
customers) increased by $343.1 million in 2001 compared to 2000. This increase
was largely driven by the addition of KEDNE's gas distribution operations which
accounted for $296.8 million of the increase. Our New York based gas
distribution operations added $9.2 million to firm net revenues in 2001 through
the addition of new gas customers and through our continuing efforts to convert
residential and commercial customers from oil-to-gas for space heating purposes,
primarily on Long Island. In addition, the comparative increase in firm net
revenues in 2001 was favorably affected by the recovery of previously deferred
property taxes, as well as regulatory incentives which added $13.3 million and
$23.7 million, respectively to firm net gas revenues in 2001. The property taxes
are being amortized through operating taxes and therefore do not benefit net
income.

Firm net gas revenues grew approximately $163.9 million in 2000 over 1999. The
gas distribution operations of Eastern and ENI added $126.6 million, while our
New York based gas distribution operations added $41.8 million through the
addition of new gas customers and oil-to-gas conversions, primarily in the Long
Island market, as well as from the benefits of colder weather. Partially
offsetting these benefits were regulatory customer refunds that reduced net
margins by $4.5 million.

In our large-volume heating markets and other interruptible (non-firm) markets,
which include large apartment houses, government buildings and schools, gas
service is provided under rates that are established to compete with prices of
alternative fuel, including No. 2 and No. 6 grade heating oil. Net revenues in
these markets in 2001 were slightly lower than sales to this market for 2000.
Sales in these markets increased by $28.0 million in 2000 compared to 1999,
through aggressive unit pricing and the addition of two large commercial and
industrial customers. The majority of interruptible profits earned by KEDNE and
KEDLI are returned to firm customers through the gas adjustment clause.

We believe that significant growth opportunities exist on Long Island and in our
New England service  territories.  We estimate that on Long Island approximately
35% of the residential and multi-family  markets,  and  approximately 55% of the
commercial  market  currently  use natural gas for space  heating.  Further,  we
estimate that in our New England service  territories  approximately  45% of the
residential and multi-family  markets,  and  approximately 30% of the commercial
market  currently use natural gas for space heating and other  purposes.  In all
our market segments we will continue to seek growth through the expansion of our
gas distribution  system, as well as through the conversion of residential homes
from oil-to-gas for space heating purposes.



<PAGE>



KEDNY and KEDLI each operate under a utility tariff that contains a weather
normalization adjustment that largely offsets shortfalls or excesses of firm net
revenues during a heating season due to variations from normal weather. The gas
distribution operations of our New England based subsidiaries do not have a
weather normalization adjustment and, as a result, fluctuations from normal
weather may have a significant positive or negative effect on the results of
these operations. To a small extent, we mitigated the effect of fluctuations in
normal weather patterns on our New England based subsidiaries' cash flows, by
employing a derivative hedging instrument in 2001 for a limited sales quantity.
(See Note 9 to the Consolidated Financial Statements "Hedging, Derivative
Financial Instruments and Fair Values" for further information.)

Sales, Transportation and Other Quantities

Firm gas sales and transportation quantities increased by 41% during 2001,
compared to last year. The gas distribution operations of KEDNE, accounted for
122.1 Mdth or 100% of the increase. Firm gas sales and transportation quantities
from our New York based gas distribution operations decreased by 8% compared to
last year as a result of warmer than normal weather. Weather was approximately
10% warmer than normal in 2001 and approximately 11% warmer than last year. Firm
gas sales and transportation quantities increased by 33% in 2000 compared to
1999 reflecting firm gas sales from KEDNE which accounted for 41.0 Mdth, or 65%
of the increase, as well as from the addition of new gas customers and the
benefits derived from colder weather.

Weather normalized sales quantities in 2001 in our New York service territories
were flat compared to 2000 due primarily to the effect on consumption of
extraordinarily high gas prices during the first quarter of 2001 when the
majority of our yearly gas distribution earnings are usually realized. Weather
normalized sales quantities increased by approximately 5% in 2000 compared to
1999 in our New York service territories.

Firm gas transportation quantities increased in all periods, due to our
continued natural gas unbundling initiatives and the addition of the New England
gas distribution operations. At December 31, 2001, approximately 141,000
residential, commercial and industrial customers throughout our service
territories purchased their gas supply from third party suppliers compared to
approximately 130,500 customers in 2000 and 46,000 customers in 1999. Net
revenues are not affected by customers opting to purchase their gas supply from
other sources, since delivery rates charged to transportation customers
generally are the same as delivery rates charged to full sales service
customers.

Transportation quantities related to electric generation reflect the
transportation of gas to our electric generating facilities located on Long
Island. Net revenues from these services are deducted from the cost of gas
charged to firm customers.



<PAGE>



Other sales quantities include on-system interruptible quantities, off-system
sales quantities (sales made to customers outside of our service territories)
and related transportation. Effective April 1, 2000, we entered into an
agreement with Coral Resources, L.P. ("Coral"), a subsidiary of Shell Oil
Company. Coral assists in the origination, structuring, valuation and execution
of energy-related transactions on behalf of KEDNY and KEDLI. Effective November
1, 1999, our Massachussetts based gas distribution subsidiaries entered into a
three-year portfolio management contract with El Paso Energy Marketing, Inc. El
Paso provides all of the city gate supply requirements at market prices and
manages certain upstream capacity, underground storage and term supply
contracts.

Operating Expenses

Operating expenses increased by $222.3 million, or 29%, in 2001 compared to last
year, due to the addition of the New England gas distribution operations, which
added $289.1 million to operating expenses in 2001. This amount includes
operations and maintenance costs of $170.6 million, depreciation and
amortization charges of $91.0 million and general taxes of $27.5 million.
Operating expenses related to our New York based gas distribution operations
decreased in 2001 compared to last year, as a result of cost savings synergies
realized this year and lower general and administrative costs being allocated to
our New York operations as a result of a change in our allocation methodology
pursuant to the SEC's requirements under PUHCA. Further, in 2000 we recorded a
charge of $41.8 million associated with early retirement and severance programs
implemented upon the acquisition of Eastern and ENI.

Depreciation and amortization expense for this segment reflects the amortization
of goodwill ($35.6 million in 2001), that was assigned to gas distribution
operations, as well as continued property additions, and the amortization of
certain costs previously deferred and now being recovered through rates. During
2001, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard ("SFAS") 142 "Goodwill and Other Intangible
Assets". As required by SFAS 142, goodwill will no longer be subject to
amortization, but rather, will be tested for impairment at least annually. SFAS
142 is effective January 1, 2002. (See Note 1 "Summary of Significant Accounting
Policies" - item G for further information.)

Operating expenses increased by $138.8 million, or 22%, in 2000 compared to 1999
primarily due to the addition of the KEDNE gas distribution operations. KEDNE
added $69.8 million to operating expenses in 2000. This amount includes
operations and maintenance costs of $42.0 million, depreciation and amortization
charges of $21.9 million and general taxes of $5.9 million. Further, operating
expenses in 2000 include $41.8 million of early retirement and severance program
charges. Included in the depreciation and amortization charge, is an expense of
$6.2 million primarily representing two months amortization of goodwill that was
assigned to gas distribution operations. The remaining increase in depreciation
and amortization expense reflects continued property additions, and the
amortization of certain costs previously deferred and now being recovered
through revenue recovery mechanisms. Further, operating taxes, which include
state and local taxes on property have increased as the applicable property base
and tax rates generally have increased.



<PAGE>



Other Matters

As previously mentioned, there remain significant growth opportunities in our
Long Island and New England gas distribution service areas. The Northeast region
represents a significant portion of the country's population and energy
consumption. As our gas distribution operations evolve within the new
deregulated gas environment, gas sales growth will remain a critical core
strategy. Customer additions are and will remain critical to our earnings in the
future. The beneficial effect of these initiatives, however, may not be fully
realized in the short-term since we will make incremental investments in our gas
distribution network and expand our promotional campaigns to optimize the
long-term growth opportunities in our territories.

To take advantage of the anticipated gas sales growth opportunities in the New
York City metropolitan area, in 2000 we announced the formation of Islander East
Pipeline, LLC, a limited liability company in which a KeySpan subsidiary and a
subsidiary of Duke Energy Corporation each own a 50% equity interest. Islander
East Pipeline, LLC has received a positive preliminary determination from the
Federal Energy Regulatory Commission ("FERC") to construct, own and operate a
natural gas pipeline facility consisting of approximately 50 miles of interstate
natural gas pipeline extending from Algonquin Gas Transmission Company's
facilities in Connecticut, across the Long Island Sound and connect with KEDLI's
facilities on Long Island. A companion proposal filed by Algonquin Gas
Transmission Company also received preliminary approval for increasing
throughput on more than 13 miles of existing pipeline and constructing a new
compressor station in Connecticut. The Islander East Pipeline which is expected
to begin operating in 2003, will transport 260,000 dth daily to the Long Island
and New York City energy markets, enough fuel to cool and heat 600,000 homes, as
well as allow us to further diversify the geographic sources of our gas supply.
We are currently evaluating various options for the financing of this pipeline.





















<PAGE>



Electric Services

The Electric Services segment primarily consists of subsidiaries that own and
operate oil and gas fired electric generating plants in Queens and Long Island,
and through long-term contracts of varying lengths, manage the electric
transmission and distribution ("T&D") system, the fuel and electric purchases,
and the off-system electric sales for LIPA.

Selected financial data for the Electric Services segment is set forth in the
table below for the periods indicated.
<TABLE>
<CAPTION>
                                                                                                        (In Thousands of Dollars)
                                                                                                        -------------------------

                                                        Year Ended                    Year Ended                  Year Ended
                                                    December 31, 2001             December 31, 2000          December 31, 1999
--------------------------------------------  ----------------------------  -----------------------------  -------------------------
<S>                                                 <C>                           <C>                           <C>
 Revenues                                     $       1,421,079             $       1,444,711              $       861,582
 Purchased fuel                                         281,398                       315,139                       17,252
--------------------------------------------  ----------------------------  -----------------------------  -------------------------
Net Revenues                                          1,139,681                     1,129,572                      844,330
--------------------------------------------  ----------------------------  -----------------------------  -------------------------
Operating expenses
  Operations and maintenance                            699,169                       675,393                      527,729
  Depreciation                                           52,247                        49,278                       44,334
  Operating taxes                                       155,697                       158,886                      132,327
--------------------------------------------  ----------------------------  -----------------------------  -------------------------
Total Operating Expenses                                907,113                       883,557                      704,390
--------------------------------------------  ----------------------------  -----------------------------  -------------------------
Operating Income                                        232,568                       246,015                      139,940
Other Income and (Deductions), Net                       13,523                         4,673                        1,257
--------------------------------------------  ----------------------------  -----------------------------  -------------------------
Earnings Before Interest and Taxes            $         246,091             $         250,688              $       141,197
--------------------------------------------  ----------------------------  -----------------------------  -------------------------
Electric sales (MWH)*                                 4,930,129                     4,893,451                    2,995,970
Capacity (MW)*                                            2,200                         2,200                        2,168
Cooling degree days                                       1,381                         1,075                        1,312
--------------------------------------------  ----------------------------  -----------------------------  -------------------------
</TABLE>
    *Reflects the operations of the Ravenswood facility only.

Net Revenues

Total electric net revenues increased slightly in 2001 compared to last year.
Net revenues from the Ravenswood facility decreased by $12.6 million, or 3%,
reflecting lower realized energy prices and lower ancillary service revenues
offset, in part, by effective hedging strategies. (Ancillary services include
primarily spinning reserves and non-spinning reserves available to replace
energy that is unable to be delivered due to the unexpected loss of a major
energy source.) Further, capacity and energy sales quantities, as well as
realized energy prices were impacted by an increase in available capacity in New
York City during 2001.

The pricing for both energy sales and the sale of certain ancillary services to
the New York Independent System Operator ("NYISO") energy markets is still
evolving and the FERC has adopted several price mitigation measures which are
subject to rehearing and possible judicial review. The final resolution of these
issues and their effect on our financial position, results of operations and




<PAGE>



cash flows can not be determined at this time.  (See Item 7A.  Quantitative  and
Qualitative  Disclosures  About  Market Risk for a further  discussion  of these
matters.)

Revenues from the service agreements with LIPA increased by $22.7 million, or 3%
in 2001 compared to last year. Included in revenues in 2001, are billings to
LIPA for certain third party construction costs that were significantly higher
than such billings last year. These revenues have minimal impact on net income
since the costs associated with these construction projects are included in
operating expenses and we share any cost under-runs with LIPA. Further,
reflected in 2000, are revenues earned from the construction of an underground
transmission line to reinforce the electric system capacity on the southfork of
Long Island. These revenues also have minimal impact on net income. Excluding
both the third party construction billings and revenues associated with the
construction of the underground transmission line, revenues in 2001 associated
with the LIPA service agreements were comparable to such revenues earned last
year. In addition, in 2001 we earned $16.2 million associated with non-cost
performance incentives provided for under these agreements, compared to $15.4
million earned last year. (For a description of the LIPA service agreements, see
"LIPA Agreements.")

Net revenues increased by $285.2 million, or 34%, in 2000 compared to 1999 due
primarily to a full year of operations of the Ravenswood facility. Revenues from
the Ravenswood facility benefitted both from the sale of energy, capacity and
ancillary services to the NYISO at competitive market prices, as well as from
effective hedging strategies. Prior to the start of operations of the NYISO on
November 19, 1999, all of the energy and capacity from the Ravenswood facility
was sold to the Consolidated Edison Company of New York, Inc. ("Consolidated
Edison") on a cost recovery and fixed fee basis. Further, there were no sales of
ancillary services in 1999.

Revenues from our service agreements with LIPA were $50.2 million higher in 2000
compared to 1999. The increase is largely due to the construction of the
underground transmission line described previously. Further, revenues in 2000
include $16.5 million related to our share of off-system sales from the Long
Island electric generation units. Under the terms of the energy management
agreement, we are entitled to one-third of the profit from any off-system
electricity sales arranged by us on LIPA's behalf. In addition, in 2000 we
earned $15.4 million associated with non-cost performance incentives provided
for under these agreements, compared to $15.8 million earned in 1999.

Operating Expenses

Operating expenses increased by $23.6 million, or 3% in 2001, compared to 2000,
primarily as a result of the increase in third party construction costs
previously noted and higher allocated charges for corporate and administrative
costs due to changes in our allocation methodology as prescribed under PUHCA.

Operating expenses in 2000 increased by $179.2 million or 25% compared to 1999,
primarily reflecting the operations of the Ravenswood facility for a full year.
Operating expenses associated


<PAGE>



with the Ravenswood facility increased by $143.7 million in 2000 compared to
1999. Included in operating expenses for the Ravenswood facility are charges of
$63.9 million for fuel management services provided by one of our subsidiaries
within the Energy Services segment. There were no comparable charges in 1999.
Operating expenses incurred under LIPA service agreements increased by $35.5
million in 2000 compared to 1999 due primarily to costs incurred to install the
new electric transmission line discussed earlier.

Other Matters

On September 5, 2001, the New York State Board on Electric Generation Siting and
the Environment ("Siting Board") approved our application to build a new 250 MW
generation facility at the Ravenswood facility site. The new facility is
expected to commence operations in late 2003 or early 2004. The capacity and
energy produced from this plant is anticipated to be sold into the NYISO energy
markets. We have also filed an application with the Siting Board for approval of
our proposal to build a similar 250 MW combined cycle electric generating
facility on Long Island. This facility is anticipated to commence operation in
late 2004 or early 2005. We anticipate that 50% of the plant's capacity will be
under a long-term contract to LIPA. Further, we are in the process of
constructing two 79 MW electric generating facilities on Long Island that will
serve LIPA in the summer of 2002. We are currently evaluating various options
for the financing of these facilities.

Under a Generation Purchase Rights Agreement ("GPRA"), LIPA had the right to
purchase, at fair market value, all existing Long Island based generating assets
during the twelve month period beginning on May 28, 2001. On March 11, 2002,
LIPA and KeySpan announced that they had reached an agreement in principle to,
among other things, extend the GPRA for three years. See the discussion under
the heading "Electric Services - Revenue Mechanisms, Generation Purchase Rights
Agreement" for further details.

Energy Services

The Energy Services segment primarily includes companies that provide services
through four lines of business to clients located within the New York City
metropolitan area, Rhode Island, Pennsylvania, Massachusetts and New Hampshire.
The lines of business are: Home Energy Services; Business Solutions; Energy
Commodity Procurement; and Fiber Optic Services.

The table below highlights selected financial information for the Energy
Services segment.
<TABLE>
                                                                                                          (In Thousands of Dollars)
                                                                                                          -------------------------
<CAPTION>

                                                                  Year Ended                 Year Ended               Year Ended
                                                                December 31, 2001          December 31, 2000      December 31, 1999
---------------------------------------------------------  ------------------------  -------------------------  --------------------
<S>                                                            <C>                          <C>                      <C>
Unaffiliated revenues                                      $     1,100,167           $        770,110           $       186,529
Intersegment revenues                                               46,718                     63,296                        -
Less: cost of gas and fuel                                         407,734                    248,275                   42,388
---------------------------------------------------------  ------------------------  -------------------------  --------------------
Net revenues                                                       739,151                    585,131                  144,141
Other operating expenses                                           849,483                    507,639                  148,784
---------------------------------------------------------  ------------------------  -------------------------  --------------------
Operating Income (Loss)                                           (110,332)                    77,492                   (4,643)
Other Income and (Deductions), Net                                   4,282                     (2,727)                     708
---------------------------------------------------------  ------------------------  -------------------------  --------------------
Earnings (Loss) Before Interest and Taxes                  $      (106,050)          $         74,765           $       (3,935)
---------------------------------------------------------  ------------------------  -------------------------  --------------------
</TABLE>

<PAGE>


The decrease in EBIT in 2001 is primarily the result of the operations of the
former Roy Kay companies, which incurred EBIT losses of $137.8 million in 2001.
We have decided to discontinue the general contracting activities of these
companies based upon our view that the general contracting business is not a
core competency of these companies. Certain remaining activities engaged in by
the former Roy Kay companies will be integrated with those of other KeySpan
energy-related businesses. (See Note 11 to the Consolidated Financial Statements
"Roy Kay Operations" for further information.) EBIT associated with these
companies in 2000 was $1.3 million.

Excluding the operations of the Roy Kay companies, EBIT for this segment was
$31.7 million in 2001 compared to $73.4 million in 2000. EBIT also includes
earnings from fuel-management services provided to the Ravenswood facility. A
subsidiary within this segment, KeySpan Energy Supply Inc., provides the
Ravenswood facility with energy procurement advisory services and acts as an
energy broker for the sale of energy and ancillary services. For these services,
KeySpan Energy Supply Inc. receives a management fee and shares in the operating
profit generated by the Ravenswood facility on the sale of energy and ancillary
services. Inter-company EBIT associated with these services in 2001 was $37.4
million compared to $60.1 million in 2000. The remaining companies in this
segment reflected a decrease in EBIT of $19.0 million in 2001 compared to 2000.
The comparative decrease in EBIT is attributed to costs incurred to complete
certain loss construction contracts and higher corporate allocated costs as
result of PUHCA requirements.

The increase in earnings of the Energy Services segment in 2000 compared to
1999, reflects primarily fuel-management services provided to the Ravenswood
facility, which for 2000, resulted in inter-company EBIT of $60.1 million. There
were no energy procurement and fuel-management advisory services between KeySpan
Energy Supply and the Ravenswood facility in 1999. This segment also realized
significantly greater gross profit margins in 2000, compared to 1999, for each
of its other lines of business. These gross profit margin enhancements resulted
from acquisitions of companies providing energy-related services and through
customer additions related to energy sales. These benefits to gross profit
margins were partially offset by increases in general and administrative
expenses associated primarily with the operations of the acquired companies.

At December 31, 2001, affiliates in this segment had net customer accounts
receivable of $332.7 million, which is consistent with the prior year balance.
This balance reflects, for the most part, receivables associated with the
design, building, and installation of large heating, ventilation and air-
conditioning ("HVAC") systems. Revenues, as well as receivables, are generally
recognized by the percentage of completion method. A number of these
construction projects are for the installation of HVAC systems for governmental
agencies and hospitals. Traditionally, the collection cycle for outstanding
accounts receivables associated with these customers is generally longer than
with other customers. It has been our experience that, for the most part, these
accounts receivable are fully collectible. In addition, included in the net
customer accounts receivable balance are receivables associated with our gas and
electric marketing activities, which balances are also consistent with prior
years.




<PAGE>


Energy Investments

The Energy Investment segment consists of our gas exploration and production
operations, certain other domestic and international energy-related investments,
as well as certain technology related investments. Our gas exploration and
production subsidiaries are engaged in gas and oil exploration and production,
and the development and acquisition of domestic natural gas and oil properties.
These investments consist of our 67% equity interest in the Houston Exploration
Company ("Houston Exploration"), as well as our wholly-owned subsidiary, KeySpan
Exploration and Production, LLC.

This segment also consists of KeySpan Canada; our 20% interest in the Iroquois
Gas Transmission System LP ("Iroquois"); and our 50% interest in the Premier
Transmission Pipeline and 24.5% interest in Phoenix Natural Gas, both located in
Northern Ireland.

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

<TABLE>

                                                                                                           (In Thousands of Dollars)
                                                                                                           -------------------------
<CAPTION>

                                                                 Year Ended                  Year Ended               Year Ended
                                                             December 31, 2001            December 31, 2000         December 31,1999
----------------------------------------------------  ----------------------------  -------------------------  ---------------------
<S>                                                             <C>                        <C>                        <C>
Revenues                                              $          400,031            $        274,209           $      150,581
Depletion and amortization expense                               142,728                      95,364                   74,051
Full cost ceiling test write-down                                 41,989                           -                        -
Other operating expenses                                          55,653                      44,435                   28,000
----------------------------------------------------  ----------------------------  -------------------------  ---------------------
Operating Income                                                 159,661                     134,410                   48,530
Other Income and (Deductions), Net*                              (39,728)                    (22,738)                  (7,695)
----------------------------------------------------  ----------------------------  -------------------------  ---------------------
Earnings Before Interest and Taxes*                   $          119,933            $        111,672           $       40,835
----------------------------------------------------  ----------------------------  -------------------------  ---------------------
Natural gas and oil production (Mmcf)                             93,968                      80,415                   71,227
Natural gas (per Mcf) realized                        $             4.24            $           3.38           $         2.10
Natural gas (per Mcf) unhedged                        $             4.09            $           3.97           $         2.14
Proved reserves at year-end (BCFe)                                   647                         593                      553
----------------------------------------------------  ----------------------------  -------------------------  ---------------------
</TABLE>
            *Operating income above represents 100% of our gas exploration and
            production subsidiaries' results for the periods indicated. Earnings
            before interest and taxes, however, is adjusted to reflect minority
            interest. Gas reserves and production are stated in BCFe and Mmcfe,
            which includes equivalent oil reserves.

Earnings Before Interest and Taxes

The increase in EBIT for 2001 compared to 2000 reflects a significant increase
in gas exploration and production revenues, partially offset by increases in
operating expenses associated with higher production volumes. Revenues for 2001
benefitted from the combined effect of a 17% increase in production volumes and
a 25% increase in average realized gas prices (average wellhead price received
for production including hedging gains and losses). The average realized gas
price in 2001 was 103% of the average unhedged natural gas price.

In the fourth quarter of 2001, our gas exploration  and production  subsidiaries
recorded a non-cash



<PAGE>



impairment charge of $42.0 million to recognize the effect of lower wellhead
prices on their valuation of proved gas reserves. Our share of this charge,
which includes our joint venture ownership interest and minority interest, was
$26.2 million after-tax. (See Note 1 to the Consolidated Financial Statements
"Summary of Significant Accounting Policies", Item F for more information on
this charge.)

Houston Exploration entered into derivative financial positions in 2001 to hedge
a substantial portion of its anticipated 2002 production. These derivative
instruments are designed to provide Houston Exploration with a more predicable
cash flow, as well as to reduce its exposure to adverse price fluctuations in
natural gas. (See Note 9 to the Consolidated Financial Statements, "Hedging,
Derivative Financial Instruments and Fair Values" for further information.)

At December 31, 2001, our gas exploration and production subsidiaries had 647
BCFe of net proved reserves of natural gas, of which approximately 72% were
classified as proved developed.

EBIT increased by $70.8 million in 2000 compared to 1999, reflecting a
significant increase in revenues, partially offset by increases in operating
expenses. Revenues benefitted from the combined effect of a 13% increase in
production volumes and a 61% increase in average realized gas prices. The
average realized gas price in 2000 was 85% of the average unhedged natural gas
price. Further, on March 31, 2000, we increased our ownership in Houston
Exploration from 64% to 70% at that time. The increase in operating expenses
reflects the significant increase in production volumes.

Natural gas prices continue to be volatile and the risk that we may be required
to write-down our full cost pool again in the future increases when natural gas
prices are depressed or if we have significant downward revisions in our
estimated proved reserves.

Selected financial data for our other energy-related investments are set forth
in the following table for the periods indicated.
<TABLE>
                                                                                                           (In Thousands of Dollars)
                                                                                                           -------------------------
<CAPTION>
                                                        Year Ended                     Year Ended                   Year Ended
                                                    December 31, 2001              December 31, 2000           December 31, 1999
--------------------------------------------  ------------------------------  ---------------------------  -------------------------
<S>                                                      <C>                          <C>                              <C>
Revenues                                      $            98,287           $          35,258           $               2,789
Operation and maintenance expense                          71,411                      31,551                           8,257
Other operating expenses                                   20,883                       9,988                           1,316
--------------------------------------------  ------------------------------  ---------------------------  -------------------------
Operating Income (Loss)                                     5,993                      (6,281)                         (6,784)
Other Income and (Deductions), Net                         15,551                      26,295                          20,557
--------------------------------------------  ------------------------------  ---------------------------  -------------------------
Earnings Before Interest and Taxes            $            21,544           $          20,014           $              13,773
--------------------------------------------  ------------------------------  ---------------------------  -------------------------
</TABLE>

Overall,  EBIT from these operations and investments in 2001 remained relatively
constant  compared to 2000.  EBIT growth from our investments in KeySpan Canada,
Northern Ireland and certain operations  purchased as part of our acquisition of
Eastern were offset, in part, by losses incurred from certain technology-related
investments.  Further,  in the fourth quarter of 2000, we acquired the remaining
50% interest in KeySpan Canada,  making us the sole owner. Results of operations
associated with KeySpan Canada are now fully consolidated, whereas prior to this
transaction,  KeySpan  Canada's  results were reported as equity income in Other
Income and (Deductions).


<PAGE>



EBIT from this segment increased by $6.2 million in 2000, compared to 1999,
reflecting earnings growth from our Canadian investments. Results of operations
from Canadian gas and oil operations were enhanced through the acquisition, in
the fourth quarter of 1999, of the Paddle River Gas Plant and certain oil
producing properties in Alberta, Canada, more efficient operations of KeySpan
Canada and the additional ownership interest in that company. Further, in the
fourth quarter of 2000, we sold our interest in the oil producing properties in
Alberta, Canada and recognized an after-tax gain of approximately $1.3 million
from the sale. In addition, Iroquois realized higher transportation sales
quantities and revenues from its interruptible customers in 2000 compared to
1999. Earnings from our investments in Northern Ireland in 2000 were essentially
the same as earnings for 1999. For much of 2000 and 1999, the subsidiaries in
this segment were primarily accounted for under the equity method since our
ownership interests were 50% or less. Accordingly, income from these investments
was reflected primarily in Other Income and (Deductions) in the Consolidated
Statement of Income.

We do not consider the businesses contained in the Energy Investments segment to
be part of our core asset group. We have stated in the past that we may sell or
otherwise dispose of all or a portion of our non-core assets. Except for the
sale of Midland Enterprises as previously discussed, we can not predict when, or
if, any such sale or disposition may take place, or the effect that any such
sale or disposition may have on our financial position, results of operations or
cash flows.

Allocated Costs

As  previously  mentioned,  due to the  acquisition  of Eastern  and ENI, we are
subject to the  jurisdiction  of the SEC under PUHCA.  As part of the regulatory
provisions of PUHCA,  the SEC regulates  various  transactions  among affiliates
within a holding company system. In accordance with the regulations of PUHCA and
New York State  Public  Service  Commission  requirements,  we have  established
service  companies that provide:  (i) traditional  corporate and  administrative
services;  (ii) gas and electric transmission and distribution systems planning,
marketing,  and gas supply planning and procurement;  and (iii)  engineering and
surveying services to subsidiaries.  Revised allocation methodologies,  approved
by the  SEC,  have  been  used in 2001 to  allocate  service  company  costs  to
affiliates.  During  2000,  certain  costs were  incurred by our  corporate  and
administrative subsidiaries that were not allocated to other operating segments,
and were not incurred in 2001. These unallocated costs had a significant  effect
on comparative EBIT results and are as follows:(i) a charge of $10.0 million for
a contribution  to the KeySpan  Foundation;  (ii) an impairment  charge of $23.2
million  associated  with our equity  investment  in certain  technology-related
activities;  (iii) branding  expenses and other costs related to the integration
of the Eastern and ENI companies of $24.6 million; and (iv) early retirement and
severance  charges of $23.1 million.  Item (i) is reflected in "Other Income and
Deductions"  and all other items are reflected in  "Operations  and  Maintenance
expense" in the Consolidated Statement of Income for 2000. Further,  during 2001
we: (i) recorded  the benefit  associated  with the  favorable  appellate  court
decision  regarding the class action settlement at our corporate holding company
level  which  increased  EBIT  by  $22.0  million;   and  (ii)  settled  certain
outstanding issues associated with LIPA and reallocated  certain  administrative
costs  which  combined  added  $15.8  million  to EBIT.  The net  result  of the
preceding  items  contributed  to the increase in EBIT of $137.0 million in 2001
associated with our non-operating subsidiaries. The 2000 charges described above
are also the major  contributing  factor to the $121.6 million  decrease in EBIT
from these operations in 2000 compared to 1999.



<PAGE>



Liquidity

Cash flow from operations continues to reflect strong results from our core
operations - gas distribution operations and electric operations, as well as
significant contributions from our gas exploration and production activities.
Further, the decrease in natural gas prices in the second half of 2001 also had
a positive impact on cash flow from operations. As a result of the seasonal
nature of our gas distribution operations, we incur significant cash
expenditures during the summer and early fall to purchase and inject gas into
our storage facilities. We recover these costs in subsequent periods as the gas
is removed from storage and delivered to our customers, primarily during the
winter, for space heating purposes. Significant cash flows are generated during
the first two quarters of the subsequent fiscal year as we receive payment from
customers for such heating season use. Due to the significant increase in gas
costs during the summer and early fall of 2000, gas cost recoveries for the
first two quarters of 2001 were greater than such recoveries for the same period
in 2000. Further, gas prices during the third and fourth quarters of 2001 were
lower than this time last year, resulting in lower cash expenditures required to
maintain natural gas inventory in storage. Also, as stated earlier, our gas
exploration and production activities benefitted from higher gas prices during
the first two quarters of 2001 compared to 2000. These enhancements to cash flow
were partially offset by an increase in interest payments due to higher levels
of outstanding debt.

The decrease in cash flow from operations in 2000 compared to 1999 reflects
working capital requirements primarily as a result of the rising price of
natural gas in the latter part of 2000, as previously mentioned. Cash flow from
operations also reflects a decrease in interest income, and an increase in
interest payments due to increased levels of outstanding debt. Further, in 1999
cash flow from operations reflects the cash utilization of a $57.4 million net
operating loss carryforward on income tax payments in 1999.

At December 31,  2001,  we had cash and  temporary  cash  investments  of $159.3
million.  During the year, we replaced two existing  revolving credit facilities
of $700  million  each,  with one new credit  facility  which will  continue  to
support our $1.4 billion  commercial  paper program.  Under this  facility,  our
consolidated indebtedness may not exceed 68% of our consolidated  capitalization
at the end of any fiscal  quarter.  As of December  31, 2001,  our  consolidated
indebtedness  was  66% of our  consolidated  capitalization.  Violation  of this
covenant could result in the termination of the credit  facilities.  At December
31, 2001, $1.0 billion of commercial paper was outstanding at a weighted average
annualized  interest  rate of 2.23%  compared  to $1.3  billion  outstanding  at
December 31, 2000.  We had the ability to borrow up to an  additional  of $351.6
million at December 31, 2001 under the terms of our credit facility.

Houston Exploration has an unsecured line of credit with a commercial bank that
provides for a maximum commitment of $250 million, subject to a borrowing base
limitation of $250 million. During 2001, Houston Exploration borrowed $172
million under this facility and repaid $173 million; at December 31, 2001, $144
million remained outstanding at a weighted average annualized interest rate of
6.22%. At December 31, 2001, Houston Exploration had available borrowings of
$106 million.



<PAGE>



Also, KeySpan Canada has two revolving loan agreements with financial
institutions in Canada. Borrowings under these agreements totaled $13.6 million
and repayments totaled $9.4 million in 2001. At December 31, 2001, approximately
$175 million was outstanding at a weighted average annualized interest rate of
5.03%. KeySpan Canada currently has available borrowings of approximately $29
million.

KeySpan has fully and unconditionally guaranteed $525 million of medium- term
notes issued by KEDLI under KEDLI's current shelf registration, as well as a
$125 million revolving credit agreement associated with its Canadian
subsidiaries. Both the medium- term notes and credit agreement are reflected on
the Consolidated Balance Sheet.

Further, KeySpan has: (i) guaranteed $191.0 million of surety bonds associated
with certain construction projects currently being performed by subsidiaries
within the Energy Services segment; (ii) guaranteed certain supply contracts,
hedging margin accounts and purchase orders for certain subsidiaries in the
aggregate amount of $83.2 million; and (iii) guaranteed the $425 million Master
Lease Agreement associated with the lease of the Ravenswood facility. These
guarantees are not on the Consolidated Balance Sheet. The guarantee on the
medium- term notes expires in 2010, while the other guarantees have terms that
do not extend beyond 2005; however the Master Lease Agreement can be extended to
2009. At this point in time, we have no reason to believe that our subsidiaries
will default on their current obligations. However, we can not predict when or
if any defaults may take place or the impact such defaults may have on our
consolidated results of operations, financial condition or cash flows. See Note
7 to the Consolidated Financial Statements "Long-Term Debt" for an explanation
of KEDLI's medium- term notes and the Canadian revolving credit facility. Also,
see the discussion of the Ravenswood lease under the heading "Financing".

We satisfy our seasonal working capital requirements primarily through
internally generated funds and the issuance of commercial paper. In addition, we
anticipate realizing approximately $165 million in proceeds from the sale of
Midland in 2002. We believe that these sources of funds are sufficient to meet
our seasonal working capital needs. Further, we use treasury stock to satisfy
the requirements of our employee common stock, dividend reinvestment and benefit
plans.

Capital Expenditures and Financing
Construction Expenditures

The table below sets forth our construction expenditures by operating segment
for the periods indicated:
<TABLE>
                                                                                   (In Thousands of Dollars)
                                                                                   -------------------------
<CAPTION>

                                                         Year Ended                      Year Ended
                                                     December 31, 2001               December 31, 2000
---------------------------------------------  ------------------------------  ------------------------------
<S>                                                     <C>                              <C>
Gas Distribution                               $           384,323              $          274,941
Electric Services                                          211,658                          69,921
Energy Investments                                         437,976                         270,187
Energy Services                                             17,292                          17,362
Corporate Unallocated                                        8,510                             624
---------------------------------------------  ------------------------------  ------------------------------
                                               $         1,059,759              $          633,035
---------------------------------------------  ------------------------------  ------------------------------
</TABLE>

<PAGE>


Construction expenditures related to the Gas Distribution segment are primarily
for the renewal and replacement of mains and services and for the expansion of
the gas distribution system on Long Island and in New England. Construction
expenditures for the Electric Services segment reflect primarily costs to
maintain our electric generating facilities as well as costs to expand the
Ravenswood facility and construct the new electric generating facilities as
previously noted. Construction expenditures related to the Energy Investments
segment primarily reflect costs associated with our gas exploration and
production activities. These costs are related to the development of properties
in Southern Louisiana and in the Gulf of Mexico. Expenditures also include
development costs associated with our joint venture with Houston Exploration, as
well as costs related to Canadian affiliates.

Construction expenditures for 2002 are estimated to be $1.2 billion, including
estimated expenditures for the construction of the new electric generating
facilities. The amount of future construction expenditures is reviewed on an
ongoing basis and can be affected by timing, scope and changes in investment
opportunities.

Financing

During 2001, we issued $500 million 6.15% Notes due June 1, 2006 under an
existing shelf registration statement, leaving $500 million available for
issuance at December 31, 2001. The proceeds from the issuance of these notes was
used to repay a portion of outstanding commercial paper. In February 2002, we
updated our shelf registration for the issuance of up to $1.2 billion of
additional securities, thereby giving us the ability to issue up to $1.7 billion
of debt, equity or various forms of preferred stock. Currently, we have the
authority under PUHCA to issue up to $1.0 billion of this amount. We have filed
an application with the SEC for additional authorization.

KEDLI also has an effective shelf registration statement on file with the SEC
for the issuance of up to $600 million of debt securities. During 2001, KEDLI
issued $125 million of medium term notes at 6.9% due January 15, 2008 and at
December 31, 2001 has $525 million outstanding under this shelf registration
statement, with $75 million available for issuance. The medium term notes issued
by KEDLI are fully and unconditionally guaranteed by KeySpan.

We will continue to evaluate our capital structure and financing strategy for
2002 and beyond. In order to take advantage of low cost debt opportunities
currently available and to finance the construction of our new electric power
plants and the Islander East pipeline, we are analyzing the feasibility of
engaging in various forms of financing transactions during 2002. Depending upon,
among other things, market conditions and the timing of our receipt of the
proceeds from the sale of Midland, our strategy may include the issuance of
traditional and/or alternative forms of debt or equity securities during 2002.
In any event, we believe that our current sources of funding (i.e., internally
generated funds and the availability of commercial paper), together with the
cash proceeds from the sale of Midland, are sufficient to meet our anticipated
working capital needs for the foreseeable future.

As part of our strategy to increase the level of floating rate debt, in 2001 we
entered into several interest rate swap agreements on $1.3 billion of existing
fixed rate medium-term and long-term debt and effectively converted it to
floating rate debt. These swap agreements qualify for hedge accounting and were
completed with several major financial institutions to reduce credit risk.
Additionally, we entered



<PAGE>



into a swap agreement that effectively converts $270 million of outstanding
commercial paper with fixed rate debt and also qualifies for hedge accounting.
(See Note 9 to the Consolidated Financial Statements "Hedging, Derivative
Financial Instruments, and Fair Values" for additional information on these swap
agreements.)

At December 31, 2001 our debt, including commercial paper, to total
capitalization was approximately 66%. As a registered holding company, we are
subject to certain financing restrictions. See the discussion under the heading
"Securities and Exchange Commission Regulation" for additional information on
these restrictions.

We also have an arrangement with a special purpose financing entity through
which we lease the Ravenswood facility. We acquired the Ravenswood facility from
Consolidated Edison on June 18, 1999 for approximately $597 million. In order to
reduce our initial cash requirements, we entered into a lease agreement with a
special purpose, unaffiliated financing entity that acquired a portion of the
facility directly from Consolidated Edison and leased it to our subsidiary. We
have guaranteed all payment and performance obligations of our subsidiary under
the lease. The lease relates to approximately $425 million of the acquisition
cost of the facility, which is the amount of debt that would have been recorded
on our Consolidated Balance Sheet had the special purpose financing entity not
been utilized and conventional debt financing been employed. Further, we would
have recorded an asset in the same amount. Monthly lease payments are for
interest only. The lease qualifies as an operating lease for financial reporting
purposes while preserving our ownership of the facility for federal and state
income tax purposes.

The initial term of the lease expires on June 20, 2004 and may be extended until
June 20, 2009. In June 2004 , we have the right to either purchase the facility
or terminate the lease and dispose of the facility for an amount generally equal
to the original acquisition cost, $425 million, plus the present value of the
lease payments that would have otherwise been paid through June 20, 2009. In
June 2009, when the lease terminates, we may purchase the facility in an amount
generally equal to the original acquisition cost or surrender the facility to
the lessor. At this time, we believe that the fair market value of the leased
assets is well in excess of the original acquisition cost.

The Financial Accounting Standards Board (the "Board") is currently reviewing
issues related to special purpose entities. We anticipate that in April 2002,
the Board will issue for public comment interpretive guidance regarding
accounting for and disclosure of special purpose entities. We expect the final
guidance to be issued in the summer of 2002, and be effective January 1, 2003.
At this time, we are unable to determine the impact the final interpretive
guidance will have on our results of operations and financial position. (See
Note 8 to the Consolidated Financial Statements "Contractual Obligations and
Contingencies" for further details.)

The ratings on our long-term debt have remained unchanged from last year.
Moody's Investor Services rated: (i) KeySpan's long-term debt at A3; and (ii)
KEDNY's, KEDLI's, Boston Gas Company's and Colonial Gas Company's long-term debt
at A2. Standard and Poor's rating agency rated: (i) the long- term debt of
KeySpan, KeySpan Generation, Boston Gas Company and Colonial Gas Company at A;
and (ii) KEDNY's and KEDLI's long-term debt at A+.



<PAGE>




The table below reflects the maturity schedules for our contractual obligations:
<TABLE>
                                                                                                           (In Thousands of Dollars)
                                                                                                           -------------------------

<CAPTION>
Contractual                                           Less than 1
Obligations                        Total                 Year              1-3 Years            4-5 Years          After 5 Years
---------------------------  ---------------------  -----------------  -------------------  ------------------  --------------------
<S>                              <C>                   <C>                  <C>                 <C>                   <C>
Long-Term Debt               $     4,811,347       $        339        $      10,810        $    1,227,333      $      3,572,865
Capital Lease
  Obligations                         15,192                654                2,382                 2,176                 9,980
Operating Leases                     633,313                  -              261,953               165,441               205,919
---------------------------  ---------------------  -----------------  -------------------  ------------------- --------------------
Total Contractual
  Cash Obligations           $     5,459,852       $        993         $    275,145        $    1,394,950      $      3,788,764
---------------------------  ---------------------  -----------------  -------------------  ------------------  --------------------
Commercial Paper (1)         $     1,048,450            Revolving                  -                     -                     -
---------------------------  ---------------------  -----------------  -------------------  ------------------  --------------------
</TABLE>

(1) We have a $1.4 billion revolving credit facility that supports our
commercial paper program. This facility will expire in September 2002.
Traditionally we replace expired credit facilities with new facilities of
similar terms.

Discussions of Critical Accounting Policies and Assumptions

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

Percentage of Completion
Significant reliance is placed upon estimates of future job costs in computing
revenue and subsequent net income under the percentage of completion method of
revenue recognition for the design, building and installation of heating,
ventilation and air-conditioning systems by subsidiaries in our Energy Services
segment. This method measures the percentage of costs incurred and accrued to
date for each contract to the estimated total costs for each contract at
completion. These estimates are made on available information at the time of
review, and changes in estimates resulting in additional future costs to
complete projects can result in reduced margins or loss contracts. Provisions
for estimated losses on uncompleted contracts are made in the period such losses
are determined. These changes in job performance, job conditions and estimated
profitability are recognized in the period the revisions are determined.

Valuation of Goodwill
We record goodwill on purchase transactions, representing the excess of
acquisition cost over the fair value of net assets acquired. In accordance with
the provisions of SFAS 121 "Accounting for the



<PAGE>



Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
the carrying value of goodwill is to be reviewed if the facts and circumstances,
such as significant declines in sales, earnings or cash flows, or material
adverse changes in the business climate suggest that such goodwill might be
impaired. If this review indicates that goodwill is not recoverable, as
determined based upon the estimated undiscounted cash flows of the entity
acquired, impairment would be measured by comparing the carrying value of the
investment in such entity to its fair value. Fair value would be determined
based on quoted market values, appraisals, or discounted cash flows. For the
year ended December 31, 2001, we reviewed the facts and circumstances for the
entities carrying goodwill and as a result of the above procedures, wrote off
$12.4 million associated with the Roy Kay Companies upon determination that the
asset was not recoverable. (See Note 11 to the Consolidated Financial Statements
"Roy Kay Operations" for more information.)

On January 1, 2002, we adopted SFAS 141, "Business Combinations", and SFAS 142
"Goodwill and Other Intangible Assets". The key concepts from the two
interrelated Statements include mandatory use of the purchase method when
accounting for business combinations, discontinuance of goodwill amortization, a
revised framework for testing goodwill impairment at a "reporting unit" level,
and new criteria for the identification and potential amortization of other
intangible assets. Other changes to existing accounting standards involve a
requirement to test goodwill for impairment at least annually. The annual
impairment test is to be performed within six months of adopting SFAS 142 with
any resulting impairment reflected as either a change in accounting principle,
or a charge to operations in the financial statements, as appropriate.

In testing for goodwill impairment under both SFAS 121 and SFAS 142, significant
reliance is placed upon estimated future cash flows. Cash flow estimates are
determined based upon our projected market conditions and demand for our
products and services. We are currently in the process of testing goodwill under
the revised discounted cash flow methodology prescribed by SFAS 142. A change in
the fair value measurement of our investments could cause a significant change
in the carrying value of goodwill. The results of this analysis is not complete
at this time, and we are unable to determine the impact this analysis may have
on our results of operations or financial condition.

Valuation of Derivative Instruments
From time to time, we employ derivative instruments to hedge a portion of our
exposure to commodity price risk and interest rate risk, as well as to fix the
selling price on a portion of our electric energy sales from the Ravenswood
facility. A number of our derivative instruments are exchange traded and,
accordingly, fair value measurements are generally based on standard New York
Mercantile Exchange ("NYMEX") quotes. However, the oil derivative instruments we
employ to hedge the purchase price on a portion of the oil used to fuel the
Ravenswood facility are not exchange traded. We use industry published oil
indices for No. 6 grade fuel oil to value these oil swap contracts. We have also
engaged in the use of derivative swap instruments to fix the selling price on a
portion of our electric energy sales from the Ravenswood facility. Further, we
have tolling arrangements under which we have "locked-in" a profit margin on a
portion of electric sales. These arrangements are also non-exchange traded and
we use NYISO-location zone published indices to value these outstanding
derivatives. For collar transactions relating to natural gas sales associated
with our gas exploration and production subsidiaries, we use standard NYMEX
quotes, as well as Black- Scholes valuations to calculate the fair



<PAGE>



value of these instruments. Finally, we also have interest rate swap agreements
in which approximately $1.4 billion of fixed rate debt have been effectively
converted to floating rate debt. The fair values of these derivative instruments
are provided to us by third party appraisers and represent the present value of
future cash-flows based on a forward interest rate curve for the life of the
derivative instrument. All fair value measurements, whether calculated using
standard NYMEX quotes or other valuation techniques, are subjective and subject
to fluctuations in commodity prices, interest rates and overall economic market
conditions and, as a result, our fair value measurements can fluctuate
significantly from period to period. Except for derivative instruments related
to firm gas sales to our regulated gas sales customers and derivative
instruments associated with gas sales to certain large-volume gas sales
customers, our current derivative instruments qualify for hedge accounting under
SFAS 133 "Accounting for Derivative Instruments and Hedging Activities". (See
Note 9 to the Consolidated Financial Statements "Hedging, Derivative Financial
Instruments and Fair Values" for a further description of the instruments.)

Dividends

We are currently paying a dividend at an annual rate of $1.78 per common share.
Our 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. However, based on currently foreseeable
market conditions it is our intent to maintain the dividend at the $1.78 level.

Pursuant to New York Public Service Commission's ("NYPSC") orders, the ability
of KEDNY and KEDLI 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 is incurred under the customer service performance
program. At the end of KEDNY's and KEDLI's rate years (September 30, 2001 and
November 30, 2001, respectively), the ratio of debt to total utility
capitalization was 44% and 54%, respectively. Our corporate and financial
activities and those of each of our subsidiaries (including their ability to pay
dividends to us) are also subject to regulation by the SEC. For additional
information, see the discussion under the heading "Securities and Exchange
Commission Regulation" .

Regulation and Rate Matters

Gas Distribution

By orders dated February 5, 1998 and April 14, 1998 the NYPSC approved the
KeySpan / LILCO merger and established gas rates for both KEDNY and KEDLI.
Pursuant to the orders, $1 billion of efficiency savings, excluding gas costs,
attributable to operating synergies that are expected to be realized over the
ten-year period following the combination, were allocated to customers net of
transaction costs.





<PAGE>



Effective May 29, 1998, KEDNY's base rates to core customers were reduced by
$23.9 million annually. In addition, KEDNY is 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 13.50%
and 13.25% for the rate years ended September 30, 2001 and 2002, respectively.
KEDNY slightly exceeded the threshold return on equity for the rate year ended
September 30, 2001. On September 30, 2002, KEDNY's rate agreement with the NYPSC
will expire. Under the terms of the agreement, the then current gas distribution
rates and all other provisions, including the earnings sharing provision, will
remain in effect until changed by the NYPSC.

The orders also required KEDLI 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. KEDLI 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%. KEDLI did not earn above its threshold return level in its rate year
ended November 30, 2001. On November 30, 2000, KEDLI's rate agreement with the
NYPSC expired. Under the terms of the agreement, the gas distribution rates and
all other provisions, including the earnings sharing provision, will remain in
effect until changed by the NYPSC. We expect current gas distribution rates for
our New York and Long Island based gas distribution utilities to remain in
effect through 2002.

Boston Gas Company, Colonial Gas Company, and Essex Gas Company operations are
subject to Massachusetts's statutes applicable to gas utilities. Rates for gas
sales and transportation service, distribution safety practices, issuance of
securities and affiliate transactions are regulated by the Massachusetts
Department of Telecommunications and Energy ("DTE"). Rates for transportation
service and gas sales are subject to approval by and are on file with the DTE.

Boston Gas Company's gas rates for local distribution service are governed by a
five-year performance- based rate plan approved by the DTE in 1996 (the "Plan").
Under the Plan, Boston Gas Company's rates for local distribution are
recalculated annually to reflect inflation for the previous 12 months, and
reduced by a productivity factor of 1%. The productivity factor has been the
subject of a remand proceeding at the DTE as discussed below. The Plan also
calls for penalties if Boston Gas Company fails to meet specified service
quality measures, with a maximum potential expense of $1 million, which has also
been a subject in the DTE's remand proceeding. There is a margin sharing
mechanism, whereby 25% of earnings in excess of a 15% return on equity are
passed back to customers. Similarly, ratepayers absorb 25% of any shortfall
below a 7% return on equity. Gas rates under the Plan are set to expire on
October 31, 2002. We have represented to the DTE that by April 1, 2002 we will
propose a new rate plan or an extension of the existing Plan.

With respect to the appeal by Boston Gas Company of the Plan, the Massachusetts
Supreme Judicial Court issued an order vacating: (i) the "accumulated
inefficiencies" component of the productivity factor, thereby reducing the
productivity factor from 1.50% to .50%; and (ii) the expansion of the service
quality penalty beyond $1 million, and remanded these matters to the DTE for
further proceedings, which actions were requested by the DTE in its motion for
discharge of report and



<PAGE>



remand. On January 16, 2001, the DTE issued an order in the remand proceeding.
The order imposes a 0.5% accumulated inefficiencies factor, thereby increasing
the productivity factor from 0.5% to 1% and sets the maximum service quality
adjustment at $1 million. The order requires the accumulated inefficiencies
factor be implemented retroactively as of November 1, 1999. On January 30, 2001,
Boston Gas Company filed a Petition for Appeal and Motion for a Stay with the
Massachusetts Supreme Judicial Court, and on February 16, 2001, the court
granted the stay pending the appeal. On March 7, 2002, the Supreme Judicial
Court ruled in favor of Boston Gas Company and eliminated the accumulated
inefficiencies factor of 0.5%. During, the first quarter of 2002, we will
reverse a previously recorded loss provision of approximately $4.0 million
because of this favorable ruling.

In connection with Eastern Enterprises' acquisition of Colonial Gas Company in
1999, the DTE approved a merger and rate plan that resulted in a 2.2% reduction
in firm gas sales rates to Colonial Gas Company's firm customers for the first
full year following the merger. Also a ten-year freeze of base rates was also
ordered at that time. The base rate freeze is subject only to certain exogenous
factors, such as changes in tax laws, accounting changes, or regulatory,
judicial, or legislative changes. The Office of the Attorney General appealed
the DTE's order to the Supreme Judicial Court, which appeal is still pending.
Due to the length of the base rate freeze, Colonial Gas Company discontinued its
application of SFAS 71 "Accounting for the Effects of Certain Types of
Regulation".

Essex Gas Company is also under a ten-year base rate freeze and has also
discontinued its application of SFAS 71.

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

The SEC's order issued on November 8, 2000, in connection with our acquisition
of Eastern and ENI, provides us with, among other things, authorization to do
the following through December 31, 2003 (the "Authorization Period"): (a)
subject to an aggregate amount of $5.1 billion, (i) maintain existing financing
agreements, (ii) issue and sell up to $1.5 billion of additional securities in
compliance with certain defined parameters, (iii) issue additional guarantees
and other forms of credit support in an aggregate amount of $2.0 billion at any
time in addition to any such securities, guarantees and credit support
outstanding or existing as of November 8, 2000, and (iv) amend, review, extend,
supplement or replace any of the foregoing; (b) issue shares of common stock or
reissue shares of common stock held in treasury under dividend reinvestment and
stock-based management incentive and employee benefit plans; (c) maintain
existing and enter into additional hedging transactions with respect to
outstanding indebtedness in order to manage and minimize interest rate costs;
(d) invest up to 250% of our consolidated retained earnings in exempt wholesale
generators and foreign utility companies;



<PAGE>



and (e) pay dividends out of capital and unearned surplus as well as
paid-in-capital with respect to certain subsidiaries, subject to certain
limitations.

In addition, we have committed that during the Authorization Period, our common
equity will be at least 30% of our consolidated capitalization and each of our
utility subsidiaries' common equity will be at least 30% of such entity's
capitalization. At December 31, 2001 our consolidated common equity was 34% of
our consolidated capitalization, including commercial paper.

Electric Services - Revenue Mechanisms

LIPA Agreements

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

Management Services Agreement ("MSA")
A KeySpan subsidiary manages the day-to-day operations, maintenance and capital
improvements of the T&D system. LIPA exercises control over the performance of
the T&D system through specific standards for performance and incentives. In
exchange for providing the services, we earn a $10 million annual management fee
and are operating under an eight-year contract which provides certain incentives
and imposes certain penalties based upon performance. We have reached an
agreement in principle with LIPA to extended the MSA for 30 months, as discussed
under the heading "Generation Purchase Right Agreement" below. Annual service
incentives or penalties exist under the MSA if certain targets are achieved or
not achieved. In addition, we 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 us 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, we 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, we have performed our obligations under the MSA within the agreed upon
budget guidelines and we are 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 KeySpan subsidiary sells to LIPA all of the capacity and, to the extent
requested, energy from our existing Long Island based oil and gas-fired
generating plants. Sales of capacity and energy are made under rates approved by
the 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 our control.
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 number of
megawatt hours dispatched. LIPA has no obligation to purchase energy from us 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. We must,
therefore, operate our generating facilities in a manner such that we can remain
competitive with other producers of energy. To date, we have dispatched to LIPA




<PAGE>



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.

Energy Management Agreement ("EMA")
The EMA provides for a KeySpan 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 we earn an annual fee of $1.5 million. In
addition, we 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 eight years for off-system management services.

Under the agreements, we are required to obtain a letter of credit in the
aggregate amount of $60 million supporting our obligations to provide the
various services if our long-term debt is not rated "A" by a nationally
recognized rating agency.

Generation Purchase Right Agreement ("GPRA")
Under the GPRA, LIPA had the right for a one-year period, beginning on May 28,
2001, to acquire all of our Long Island based generating assets at fair market
value at the time of the exercise of such right. On March 11, 2002, LIPA and
KeySpan announced that they had reached an agreement in principle to extend
LIPA's option under the GPRA for three years.

The agreement in principle establishes a new option window commencing November
2004 and closing May 2005. Under the agreement, LIPA retains the right to
exercise the option to purchase KeySpan's on-island generation assets under the
terms of the original GPRA. In return for providing LIPA an extension of the
GPRA, KeySpan has been provided with a corresponding extension of 30 months for
the MSA.

The extension is the result of a new initiative established by LIPA to work with
KeySpan and others to review Long Island's long-term energy needs. LIPA and
KeySpan will jointly analyze new energy supply options including re-powering
existing plants, renewable energy technologies, distributed generation,
conservation initiatives and retail competition.

The extension allows both LIPA and KeySpan to explore alternatives to the GPRA
including re- powering existing facilities, the sale of some, but not all of
KeySpan's plants to LIPA, or the sale of some plants to other private operators.




<PAGE>



Ravenswood Facility

At the time of our purchase of the Ravenswood facility, KeySpan and Consolidated
Edison  entered  into  transition  energy  and  capacity  contracts.  The energy
contract  provided  Consolidated  Edison with 100% of the energy produced by the
Ravenswood facility and covered a period of time from the date of closing,  June
18,  1999,  through  November  18,  1999.  With the  start-up of the NYISO,  the
electricity  market in New York City began a transition to a competitive  market
for capacity,  energy and ancillary services.  Starting on November 18, 1999, we
began selling the energy  produced by the Ravenswood  facility  through  bidding
into the NYISO  energy  markets on a day ahead or real time basis.  We also have
the option to enter into bilateral  transactions to sell all or a portion of the
energy  produced by the Ravenswood  facility to Load Serving  Entities  ("LSE"),
i.e. entities that sell to end-users or to brokers and marketers.  At this point
in time,  we have sold  energy  exclusively  through  the  NYISO.  The  capacity
contract, which provided Consolidated Edison with 100% of the available capacity
of the  Ravenswood  facility  expired on April 30,  2000.  Since that date,  the
available  capacity  of the  Ravenswood  facility  has been bid into the auction
process conducted by the NYISO.

Environmental Matters

KeySpan is subject to various federal, state and local laws and regulatory
programs related to the environment. Ongoing environmental compliance
activities, which have not been material, are charged to operation and
maintenance activities. We estimate that the remaining cost of our manufactured
gas plant ("MGP") related environmental cleanup activities, including costs
associated with the Ravenswood facility will be approximately $215.1 million and
we have recorded a related liability for such amount. We have also recorded an
additional $42.5 million liability representing the estimated environmental
cleanup costs related to a coal tar processing facility formerly owned by
Eastern. As of December 31, 2001, we have expended a total of $44.5 million
associated with environmental clean-up activities. During 2001, we performed an
analysis of our potential environmental liabilities and accordingly adjusted our
liabilities for the remaining cost on a number of our environmental sites. The
adjustments associated with our New York based gas distribution operations were
deferred, pursuant to current NYPSC orders, while the increases associated with
our New England operations were either recorded as an adjustment to goodwill or
were deferred as appropriate for each company. (See Note 8 to the Consolidated
Financial Statements, "Contractual Obligations and Contingencies" for a further
explanation of these matters.)

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are subject to various risk exposures and uncertainties associated with our
operations. The most significant contingency involves the evolution of the gas
distribution and electric industries towards more competitive and deregulated
environments. In addition, we are exposed to commodity price risk, interest rate
risk and, to less of a degree, foreign currency risk. Set forth below is a
description of these exposures and an explanation as to how we have managed and,
to the extent possible, sought to reduce these risks.




<PAGE>

Regulatory Issues and the Competitive Environment

The Gas Industry

Long Island and New York

The NYPSC's December 26, 2000 Order Establishing Interim Rate Plan (the "Interim
Agreement") provided, among other things, that marketers receive an incentive
payment equal to 8% of the delivery charges they incurred to serve firm
customers to encourage marketers to provide gas commodity sales to customers.
The Interim Agreement and incentive payment expired on June 30, 2001. The
Interim Agreement also provided that the parties resume negotiations on issues
that were not resolved, including daily balancing, a migration program for
cooking-only customers, a low income customer aggregation program, and a back
out credit to be applied to rates charged to customers who migrate to a
non-utility energy supplier. We continue to discuss these remaining issues with
a number of interested parties.

The NYPSC also continues to conduct collaborative proceedings on ways to develop
the competitive energy market in New York. On July 13, 2001, the presiding
officers in the case issued their recommended decision ("RD"). The RD recommends
that the NYPSC adopt an end state vision that includes removing the utilities
from the provision of the energy (gas and electric) commodity. The RD also
recommends that utilities exit the commodity function only where there is a
workably competitive market. The RD states that the only market that is
currently workably competitive is the commodity market for non-residential
large- use gas customers. Parties filed briefs on and opposing exceptions to the
RD. An order in this proceeding is pending.

In a separate phase of this case, the parties have discussed preparation of
embedded cost of service studies by all gas and electric utilities in New York.
The NYPSC has ordered the utilities to prepare abbreviated embedded cost of
service studies and to file unbundled rates reflecting the results of those
studies. KEDNY's and KEDLI's studies must be filed by May 15, 2002. Tariffs
implementing unbundled rates must be filed by June 1, 2002 to be effective
August 30, 2002.

We are unable, at this time, to predict the outcome of these proceedings or what
effect, if any, they will have on our financial condition, results of operations
or cash flows. Moreover, as a result of circumstances in 2001, including the
California energy crisis and the bankruptcy of Enron Corp., state regulators
around the country are reassessing the pace of movement toward deregulation. We
are unable to predict the outcome or pace of this trend or its ultimate effect
on our results of operation, financial condition or cash flows.

New England

In July 1997, the DTE directed Massachusetts gas distribution companies to
undertake a collaborative process with other stakeholders to develop common
principles under which comprehensive gas service unbundling might proceed. A
settlement agreement by the Local Distribution Company's ("LDC's") and the
marketer group regarding model terms and conditions for unbundled transportation
service was approved by the DTE in November 1998. In February 1999, the DTE
issued its order on how unbundling of natural gas service will proceed. For a
five year transition period, the DTE determined that LDC contractual commitments
to upstream capacity will be assigned on a mandatory, pro rata basis



<PAGE>



to marketers selling gas supply to the LDC's customers. The approved mandatory
assignment method eliminates the possibility that the costs of upstream capacity
purchased by the LDCs to serve firm customers will be absorbed by the LDC or
other customers through the transition period. The DTE also found that, through
the transition period, LDCs will retain primary responsibility for upstream
capacity planning and procurement to assure that adequate capacity is available
to support customer requirements and growth. The DTE approved the LDCs Terms and
Conditions of Distribution Service that conform to the settled upon model terms
and conditions. Since November 1, 2000, all Massachusetts gas customers have the
option to purchase their gas supplies from third party sources other than the
LDCs. Further, the New Hampshire Public Utility Commission required gas
utilities to offer transportation services to all commercial and residential
customers starting November 1, 2001.

We believe that the actions described above strike a balance among competing
stakeholder interests in order to most effectively make available the benefits
of the unbundled gas supply market to all customers.

The Electric Industry - Long Island and New York City

As previously mentioned, our electric operations on Long Island are generally
governed by service agreements with LIPA. The agreements have varying terms and
generally provide for recovery of virtually all costs of production, operation
and maintenance. Although additional generating capacity and transmission
interconnections for Long Island are in various stages of development, at this
time, we face minimal competitive pressures associated with our electric
operations on Long Island.

With our investment in the Ravenswood facility, we also have electric operations
in New York City. We currently sell the energy produced by the Ravenswood
facility, as well as its capacity and ancillary services, through bidding into
the NYISO energy markets. New York City local reliability rules currently
require that 80% of the electric capacity needs of New York City be provided by
"in-city" generators. We expect that the current local reliability rules will
remain in effect at least through October 31, 2002. A total of over 500 MW of
additional generating capacity was either placed in service or attained through
improved generating facility operations over the past year. The majority of this
additional capacity was placed in service by the New York Power Authority. At
this time, we anticipate that we can continue to sell a significant portion of
the capacity of the Ravenswood facility. However, should new, more efficient
electric power plants be built in New York City, the requirement that 80% of
in-city load be served by in-city generators be modified, and/or the
availability of the Ravenswood facility deteriorate, then capacity and energy
sales volumes could be adversely affected. We cannot predict, however, when or
if new power plants will be built or the nature of future New York City
requirements.

Regional Transmission Organizations and Market Design

During 2001, FERC issued several orders and began several proceedings related to
the  development  of the  Regional  Transmission  Organizations  ("RTO") and the
design of the  wholesale  energy  markets.  The  details  of how the RTO will be
formed and how the markets would  develop are not yet known.  We do not know how
these  proposed  changes will impact the  operations  of the NYISO or its market
rules.  Furthermore,  we are unable to determine to what  extent,  if any,  this
process will impact the Ravenswood  facility's financial  condition,  results of
operations or cash flows.



<PAGE>



New York Independent System Operator Matters

The Ravenswood facility currently sells its capacity, energy and ancillary
services through bidding into the NYISO energy markets at FERC approved market
based rates. Capacity is the capability to generate electrical power and is
measured in megawatts (MW). Energy is a quantity of electricity that is produced
over a period of time and is measured in megawatt hours (MWh). Ancillary
services include 10-minute spinning and non-spinning reserves available to
replace energy that is unable to be delivered due to the unexpected loss of a
major energy source.

As a condition of FERC's approval of the Ravenswood facility's market based rate
authority, it is subject to certain mitigation measures associated with the sale
of its capacity, energy and ancillary services. There have been various filings
at FERC concerning the various market mitigation measures.

One of the most significant mitigation measures has been with regard to in-city
local mitigation measures that impose a bid and price cap on the Ravenswood
facility's capacity sales and the day ahead energy bid cap. FERC has ordered the
NYISO to make a comprehensive filing proposing a coordinated set of mitigation
measures to be effective May 1, 2002. The NYISO is in the process of developing
mitigation measures to be applied to the real-time market, as well as the day
ahead market. Mitigation measures are also being developed to apply to all
existing and planned New York City generation.

Based on availability data for a 12-month period, the bid and price cap for
in-city unforced capacity was set at $112.95 per kW-year. Ravenswood and other
in-city generation owners requested rehearing of FERC's order claiming that the
translation of the bid and price cap based solely on a brief 12-month time
period was inaccurate. The rehearing request was denied on February 13, 2002.

There have also been proceedings regarding mitigation measures concerning
ancillary services. On November 8, 2001, FERC denied various rehearing requests
related to the sale of 10 minute non-spinning reserves during the months from
January through March 2000 and held that refunds related to these reserves would
not be required during this period. On December 10, 2001, the NYISO filed a
rehearing request with FERC related to its November 8th decision, claiming that:
(i) FERC's decision was based on new grounds that were not included in FERC's
May 31, 2000 Order on Tariff Filing and Complaints; and (ii) that FERC had
erroneously concluded that the NYISO had raised a new issue when it proposed a
means for determining just and reasonable rates.

Additionally, the NYISO, Consolidated Edison, Rochester Gas and Electric
Corporation ("RGEC") and Niagara Mohawk Power Corporation ("NMPC") each appealed
the November 8th FERC order to the United States Court of Appeals for the
District of Columbia. Consolidated Edison, RGEC and the NMPC appeals were
consolidated. We requested that the NYISO appeals and the consolidated appeal be
dismissed, or in the alternative, that the appeals be held in abeyance until
FERC acts upon the NYISO's December 10th request for rehearing. A decision on
these matters is still pending.



<PAGE>



It is not known to what extent these proceedings may impact the Ravenswood
facility's financial condition, results of operations or cash flows.


Derivative Financial Instruments

Commodity Contracts and Electric Derivative Instruments: From time to time we
utilize derivative financial instruments, such as futures, options and swaps,
for the purpose of hedging exposure to commodity price risk and to fix the
selling price on a portion of our peak electric energy sales.

Houston Exploration utilizes collars, as well as, over- the- counter ("OTC")
swaps to hedge future sales prices on a portion of its natural gas production to
achieve a more predictable cash flow and reduce its exposure to adverse price
fluctuations of natural gas. For any particular collar transaction, the counter
party is required to make a payment to Houston Exploration if the settlement
price for any settlement period is below the floor price for such transaction,
and Houston Exploration 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. In the swap instruments, Houston Exploration will pay the amount by
which the floating variable price (settlement price) exceeds the fixed price and
receive the amount by which the settlement price is below the fixed price. As of
December 31, 2001, Houston Exploration has hedged approximately 59% of its
estimated 2002 yearly production and 14% of its estimated 2003 yearly
production. Houston Exploration uses standard New York Mercantile Exchange
("NYMEX") futures prices and published volatility in its Black-Scholes
calculation to value its outstanding derivatives. Houston Exploration recorded a
benefit of $12.9 million in Revenues for derivative instruments that settled
during 2001.

We also employ standard NYMEX gas futures contracts, as well as oil swap
derivative contracts to fix the purchase price for a portion of the fuel used at
the Ravenswood facility. For these instruments, we will pay the amount by which
the floating variable price (settlement price) is below the fixed price and
receive the amount by which the settlement price exceeds the fixed price. We use
standard NYMEX futures prices to value the gas futures contracts and industry
published oil indices for number 6 grade fuel oil to value the oil swap
contracts. These contracts extend through 2003. During 2001, we realized a gain
of $5.9 million on the settlement of derivative instruments and recorded this
gain as a decrease to Fuel and Purchased Power expense.

Our gas and electric marketing subsidiary has fixed rate gas sales contracts and
utilizes standard NYMEX futures contracts to lock-in a price for future natural
gas purchases. For these contracts, we pay the amount by which the floating
variable price (settlement price) is below the fixed price and receive the
amount by which the settlement price exceeds the fixed price. This subsidiary
uses standard NYMEX futures prices to value its outstanding contracts. During
2001, we realized a gain of $10.2 million on derivatives that settled during
2001 and recorded this gain as a reduction to Purchased Gas for Resale.

We have also engaged in the use of derivative swap instruments to fix the
selling price on a portion of our estimated 2002 summer and winter peak electric
energy sales from the Ravenswood facility to protect against a potential
degradation in market prices. Under these swap agreements, we will receive



<PAGE>



from a counter party a fixed price per megawatt hour of electricity sold during
certain peak hours and pay the counter party the then current floating market
price for peak electric supply. We will receive the then current floating market
price of peak electric energy when the Ravenswood facility sells electric energy
to the NYISO. We also have tolling arrangements with two counter parties under
which we have "locked-in" a profit margin on a portion of 2002 summer and winter
season sales. Under these arrangements, we will receive from counter parties a
fixed margin and will then pay the counter party, on a monthly basis, a variable
profit margin from the sale of electric energy. As a result of these hedging
arrangements, we have hedged approximately 13% of our estimated 2002 yearly
electric sales. We have a stated hedging policy that we will not hedge more than
50% of our daily peak sales. We use NYISO-location zone published indices and
standard NYMEX prices to value these outstanding derivatives. During 2001, we
realized a gain of $13.6 million on the settlement of certain swap derivative
instruments and recorded this gain in Revenues.

We adopted SFAS 133 "Accounting for Derivative Instruments and Hedging
Activities" on January 1, 2001. All of our commodity contracts and electric
derivative instruments detailed above are cash- flow hedges and qualify for
hedge accounting. Periodic changes in market value of derivatives which meet the
definition of a cash-flow hedge are recorded as comprehensive income, subject to
effectiveness, and then included in net income to match the underlying hedged
transactions. The adoption of SFAS 133, and the associated effectiveness
testing, did not have a significant effect on the results of operations for
2001.

The following tables set forth selected financial data associated with these
derivative financial instruments noted above that were outstanding at December
31, 2001.

<TABLE>
<CAPTION>
                                 Year of       Volumes                                   Fixed             Current       Fair Value
          Type of Contract      Maturity        mmcf       Floor $     Ceiling $         Price $           Price $          ($000)
---------------------------  -------------  -----------  -----------  ------------  ----------------  ----------------  ------------
<S>                              <C>          <C>          <C>           <C>          <C>               <C>                <C>
                Gas

Collars                           2002         51,100       3.64          5.36              -            2.56 - 3.22       50,731
Swaps -Short Natural Gas          2002         10,950         -            -               3.01          2.56 - 3.22        2,926
                                  2003         14,600         -            -               3.19              3.18             113
Swaps - Long Natural Gas          2002          8,880         -            -           2.96 - 3.93       2.56 - 3.22       (5,733)
                                  2003          1,570         -            -           3.36 - 3.64       3.12 - 3.41         (350)
---------------------------  -------------  -----------  -----------  ------------  ----------------  ----------------  ------------
                                               87,100                                                                      47,687
---------------------------  -------------  -----------  -----------  ------------  ----------------  ----------------  ------------
</TABLE>









<PAGE>



<TABLE>
<CAPTION>

                                   Year of           Volumes                                                           Fair Value
         Type of Contract         Maturity           Barrels          Fixed Price $          Current Price $            ($000)
-----------------------------  ---------------  -----------------  -------------------  ------------------------  ------------------
<S>                               <C>                <C>             <C>                    <C>                        <C>
                Oil

Swaps - Long Fuel Oil               2002              384,043         20.09 - 29.38           21.22 - 22.72               (776)
                                    2003              225,686         21.01 - 26.72           21.32 -21.81                (274)
-----------------------------  ---------------  -----------------  -------------------  ------------------------  ------------------
                                                      609,729                                                           (1,050)
-----------------------------  ---------------  -----------------  -------------------  ------------------------  ------------------
</TABLE>


<TABLE>
<CAPTION>
                             Year of                                                   Current        Estimated          Fair Value
      Type of Contract       Maturity           MWh        Fixed Margin /Price $       Price $         Margin $            ($000)
-----------------------  ----------------  -------------  ------------------------  -------------  ----------------  ---------------
<S>                           <C>            <C>           <C>                         <C>          <C>                    <C>
         Electricity

Tolling Arrangements           2002           576,000        10.00 - 26.00                -          3.94 - 10.13           7,640
Swaps                          2002            67,200            54.50                  42.35             -                   820
-----------------------  ----------------  -------------  ------------------------  -------------  ----------------  ---------------
                                              643,200                                                                       8,460
-----------------------  ----------------  -------------  ------------------------  -------------  ----------------  ---------------
</TABLE>




Non-firm Gas Sales Derivative Instruments: 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. We use gas swap contracts, with offsetting positions in oil swap
contracts of equivalent energy value, with third parties to fix profit margins
on specified portions of gas sales to our large-volume market. These derivatives
instruments, at this time, do not meet the "effectiveness standards" as
prescribed by SFAS 133 and accordingly do not qualify for hedge accounting.
Therefore, changes in the market value of these derivatives are included in
income currently. During 2001, we realized gains of $3.0 million on the
settlement of certain contracts, as well as, $1.9 million in mark-to-market
gains, and recorded these gains as a reduction to Purchased Gas for Resale. We
use standard NYMEX futures prices to value both the gas and No. 2 grade heating
oil swap contracts.

The following table sets forth selected financial data associated with these
derivative financial instruments that were outstanding at December 31, 2001.

<TABLE>
<CAPTION>
                                  Year of        Volumes         Volumes                                                 Fair Value
         Type of Contract         Maturity         mmcf          Barrels        Fixed Price $     Current Price $          ($000)
------------------------------  ------------  --------------  --------------  ----------------  -------------------  ---------------
<S>                                <C>            <C>          <C>            <C>               <C>                        <C>
Swaps - Short Natural Gas           2002           770                -         3.11 - 3.81        2.56 - 2.57             (1,535)
Swaps - Short  Heating Oil          2002             -          448,000        29.42 - 33.15      23.18 - 23.24             3,505
------------------------------  ------------  --------------  --------------  ----------------  -------------------  ---------------
                                                   770          448,000                                                     1,970
------------------------------  ------------  --------------  --------------  ----------------  -------------------  ---------------
</TABLE>


Firm Gas Sales Derivative Instruments - Regulated Utilities: We utilize
derivative financial instruments to "lock-in" the purchase price for a portion
of our future natural gas purchases. Our strategy is to minimize fluctuations in
firm gas sales prices to our regulated firm gas sales customers in our New York
service territory. During 2001, we entered into a number of derivative
instruments such as, collars, purchased calls, transformer calls and variable
premium contracts. Since these derivative



<PAGE>



instruments have not been designed as hedges and are being employed to support
our gas sales prices to regulated firm gas sales customers, the accounting for
these derivative instruments is subject to SFAS 71. Therefore, changes in the
market value of these derivatives are recorded as a Regulatory Asset or
Regulatory Liability on the Consolidated Balance Sheet. Gains or losses on the
settlement of these contracts are initially deferred and then refunded to or
collected from our firm gas sales customers during the appropriate winter
heating season consistent with regulatory requirements. We use standard NYMEX
futures prices to value these instruments.

The following table sets forth selected financial data associated with these
derivative financial instruments that were outstanding at December 31, 2001.

<TABLE>
<CAPTION>
                             Year of      Volumes                                                                         Fair Value
      Type of Contract      Maturity       mmcf         Floor $       Ceiling $      Fixed Price $     Current Price $     ($000)
-----------------------  -------------  -----------  -------------  --------------  ----------------  -----------------  -----------
<S>                          <C>          <C>        <C>           <C>               <C>                <C>               <C>
             Gas
Collars                       2002         1,800      4.55 - 5.43    5.70 - 6.20           -             2.56 - 2.57        (4,370)
Call Options                  2002         3,900           -              -           4.00 - 5.60        2.56 - 2.57        (3,878)
Variable Premiums             2002         2,400           -              -           3.90 - 6.00        2.56 - 2.57        (2,604)
-----------------------  -------------  -----------  -------------  --------------  ----------------  -----------------  -----------
                                           8,100                                                                           (10,852)
-----------------------  -------------  -----------  -------------  --------------  ----------------  -----------------  -----------
</TABLE>

Interest Rate Swaps: We also have interest rate swap agreements in which
approximately $1.4 billion of fixed rate debt have effectively been changed to
floating rate debt. These swaps extend through 2023, but can be terminated
earlier based on certain market and contract conditions. We have entered into
these derivative instruments with a number of major financial institutions to
reduce credit risk. For the term of the agreements, we will receive the fixed
coupon rate associated with these bonds and pay the counter parties a variable
interest rate that is reset on a weekly and/or quarterly basis as appropriate.
These bonds are fair- value hedges and qualify for hedge accounting. The swap
agreements associated with the Medium Term Notes, as displayed in the table
below, qualify for "short-cut" hedge accounting treatment under SFAS 133. Under
this method, changes in the fair values of the swap instruments are recorded
directly against the hedged bonds and have no impact on earnings. These swaps
were entered into in October 2001. The fair-value hedge associated with a Gas
Facilities Revenue Bond, which was entered into in 1999, does not qualify for
"short-cut" accounting treatment. As a result, the fair values of both the bond
and swap instrument are measured at least quarterly and the net change in the
fair values from period to period are recorded in income. Through the
utilization of our interest rate swap agreements, we reduced recorded interest
expense by $9.5 million in 2001. Further, we recorded, a benefit of $0.5 million
as a result of the fair value measurements. The fair values of these derivative
instruments are provided to us by third party appraisers and represent the
present value of future cash- flows based on a forward interest rate curve for
the life of the derivative instrument. The fair values at December 31, 2001, as
indicated in the table below, reflects an assumption of higher interest rates in
the future.









<PAGE>



The table below summarizes selected financial data associated with these
derivative financial instruments that were outstanding at December 31, 2001.

<TABLE>
<CAPTION>
                                                                                                 Average
                                  Maturity Date of     Notional Amount       Fixed Rate       Variable Rate         Fair Value
                    Bond               Swaps               ($000)             Received             Paid               ($000)
-------------------------------  ------------------  -------------------  ----------------  ------------------  -------------------
<S>                                   <C>               <C>                   <C>               <C>                 <C>    <C>
Gas Facilities Revenue Bonds           2024                90,000              5.540%             2.650%                 136
Medium Term Notes                      2010               500,000              7.625%             4.600%             (21,921)
Medium Term Notes                      2006               500,000              6.150%             3.900%             (11,567)
Medium Term Notes                      2023               270,000              8.200%             4.020%             (13,794)
-------------------------------  ------------------  -------------------  ----------------  ------------------  -------------------
                                                        1,360,000                                                    (47,146)
-------------------------------  ------------------  -------------------  ----------------  ------------------  -------------------
</TABLE>

Additionally, in November 2001, we entered into a swap agreement that
effectively converted $270 million of outstanding commercial paper with
fixed-rate debt. This swap is a cash-flow hedge and qualifies for hedge
accounting under SFAS 133. Periodic changes in the market value of this swap are
recorded as comprehensive income, subject to effectiveness, and then included in
net income to match the underlying hedged transactions. We recorded additional
interest expense associated with this swap of $0.3 million during 2001 and there
was no impact on earnings from ineffectiveness. At December 31, 2001, the fair
value of this swap, which was reflected as a liability, was $0.4 million.

Weather Derivative: The utility tariffs associated with our New England gas
distribution operations do not contain a weather normalization adjustment. As a
result, fluctuations from normal weather may have a significant positive or
negative effect on the results of these operations. To mitigate the effect of
fluctuations from normal weather on our financial position and cash flows, we
entered into a weather swap in October 2001. This derivative hedged
approximately 15% of our weather related risk for the November 2001 - March 2002
winter season. Since weather in New England was warmer than normal in the fourth
quarter of 2001, we recorded a gain of $1.4 million in Other Income in 2001.
Although weather derivatives are outside the scope of SFAS 133, these
derivatives are essentially marked to market, at least quarterly, with changes
in fair valve included in earnings currently. In January 2002, we settled all
our remaining weather derivatives and recorded a gain of $0.3 million in Other
Income.

We 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 hedged against. We believe that the credit risk related to the
above noted 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.


Foreign Currency Fluctuations

We  follow  the  principles  of SFAS  52,  "Foreign  Currency  Translation"  for
recording our investments in foreign affiliates. Due to our purchases of certain
Canadian  interests  and our  continued  activities  in  Northern  Ireland,  our
investment in foreign affiliates has been growing. At December 31, 2001, the net
assets of these affiliates was approximately  $360.0 million and at December 31,
2001,  the  accumulated  after-tax  foreign  currency  translation  included  in
Accumulated Other Comprehensive Income was a debit of $9.6 million.  (See Note 1
to the Consolidated  Financial  Statements,  "Summary of Significant  Accounting
Policies.")


<PAGE>


<TABLE>
<CAPTION>
                                                CONSOLIDATED BALANCE SHEET
                                                 (In Thousands of Dollars)



                                                                             December 31, 2001                    December 31, 2000
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>                                <C>

ASSETS

Current Assets
    Cash and temporary cash investments                       $                         159,252      $                      83,329
    Customer accounts receivable                                                      1,344,898                          1,759,628
    Allowance for uncollectible accounts                                                (72,299)                           (48,314)
    Gas in storage, at average cost                                                     334,999                            282,654
    Materials and supplies, at average cost                                             105,693                            114,663
    Other                                                                               125,944                            139,185
                                                                     --------------------------         --------------------------
                                                                                      1,998,487                          2,331,145
                                                                     --------------------------         --------------------------


Investment Held for Disposal                                                            191,055                            184,036
Equity Investments and Other                                                            223,249                            199,196

Property
    Gas                                                                               5,704,857                          5,346,799
    Electric                                                                          1,629,768                          1,412,839
    Other                                                                               400,643                            402,600
    Accumulated depreciation                                                         (2,533,466)                        (2,297,842)
    Gas exploration, production and refining                                          2,200,851                          1,781,379
    Accumulated depletion                                                              (796,722)                          (615,799)
                                                                     --------------------------         --------------------------
                                                                                      6,605,931                          6,029,976
                                                                     --------------------------         --------------------------

Deferred Charges
    Regulatory assets                                                                   458,191                            385,116
    Goodwill, net of amortization                                                     1,782,826                          1,829,070
    Other                                                                               529,867                            348,926
                                                                     --------------------------         --------------------------
                                                                                      2,770,884                          2,563,112
                                                                     --------------------------         --------------------------

                                                                     --------------------------         --------------------------
Total Assets                                                  $                      11,789,606      $                  11,307,465
                                                                     ==========================         ==========================
</TABLE>







                See accompanying Notes to the Consolidated Financial Statements.




<PAGE>


<TABLE>
<CAPTION>
                                                    CONSOLIDATED BALANCE SHEET
                                                     (In Thousands of Dollars)


                                                                            December 31, 2001                      December 31, 2000
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>                            <C>
LIABILITIES AND CAPITALIZATION

Current Liabilities
     Current redemption of long-term debt                       $                            993        $                  1,500
    Accounts payable and accrued expenses                                              1,091,430                       1,464,684
    Commercial paper                                                                   1,048,450                       1,300,237
    Dividends payable                                                                     63,442                          62,218
    Taxes accrued                                                                         50,281                          73,199
    Customer deposits                                                                     36,151                          32,855
    Interest accrued                                                                      93,962                          69,402
                                                                    ----------------------------        ------------------------
                                                                                       2,384,709                       3,004,095
                                                                    ----------------------------        ------------------------

Deferred Credits and Other Liabilities
    Regulatory liabilities                                                                39,442                          40,041
    Deferred income tax                                                                  598,072                         374,580
    Postretirement benefits and other reserves                                           694,680                         602,954
    Other                                                                                207,992                         127,393
                                                                    ----------------------------        ------------------------
                                                                                       1,540,186                       1,144,968
                                                                    ----------------------------        ------------------------

Capitalization
    Common stock                                                                       2,995,797                       2,985,022
    Retained earnings                                                                    452,206                         480,639
    Accumulated other comprehensive income                                                 4,483                             825
    Treasury stock purchased                                                            (561,884)                       (650,670)
                                                                    ----------------------------        ------------------------
       Total common shareholders' equity                                               2,890,602                       2,815,816
    Preferred stock                                                                       84,077                          84,205
    Long-term debt                                                                     4,697,649                       4,116,441
                                                                    ----------------------------        ------------------------
Total Capitalization                                                                   7,672,328                       7,016,462
                                                                    ----------------------------        ------------------------

Minority Interest in Subsidiary Companies                                                192,383                         141,940
                                                                    ----------------------------        ------------------------
Total Liabilities and Capitalization                            $                     11,789,606        $             11,307,465
                                                                    ============================        ========================
</TABLE>

                See accompanying Notes to the Consolidated Financial Statements.





<PAGE>
<TABLE>
<CAPTION>
                                                                CONSOLIDATED STATEMENT OF INCOME
                                                       (In Thousands of Dollars, Except Per Share Amounts)
                                                       ---------------------------------------------------

                                                                  Year Ended               Year Ended                Year Ended
                                                               December 31, 2001        December 31, 2000        December 31, 1999
---------------------------------------------------------------------------------  ------------------------  -----------------------
<S>                                                               <C>                      <C>                       <C>
Revenues
Gas Distribution                                       $           3,613,551       $         2,555,785        $       1,753,132
Electric Services                                                  1,421,079                 1,444,711                  861,582
Energy Services                                                    1,100,167                   770,110                  186,529
Gas Exploration and Production                                       400,031                   274,209                  150,581
Energy Investments                                                    98,287                    35,887                    2,789
                                                          ------------------        ------------------        -----------------
Total Revenues                                                     6,633,115                 5,080,702                2,954,613
                                                          ------------------        ------------------        -----------------
Operating Expenses
Purchased gas for resale                                           2,171,113                 1,408,680                  744,432
Fuel and purchased power                                             538,532                   460,841                   17,252
Operations and maintenance                                         2,114,759                 1,659,736                1,091,166
Early retirement and severance charges                                     -                    65,175                        -
Depreciation, depletion and amortization                             559,138                   330,922                  253,440
Operating taxes                                                      448,924                   421,936                  366,154
                                                          ------------------        ------------------        -----------------
Total Operating Expenses                                           5,832,466                 4,347,290                2,472,444
                                                          ------------------        ------------------        -----------------
Operating Income                                                     800,649                   733,412                  482,169
                                                          ------------------        ------------------        -----------------

Other Income and (Deductions)
Income from equity investments                                        13,129                    20,010                   15,347
Interest income                                                        8,326                    12,327                   26,993
Minority interest                                                    (40,847)                  (26,342)                 (11,141)
Other                                                                 26,598                   (18,081)                  15,356
                                                          ------------------        ------------------        -----------------
Total Other Income and (Deductions)                                    7,206                  (12,086)                   46,555
                                                          ------------------        ------------------        -----------------
Income  Before Interest Charges
  and Income Taxes                                                   807,855                   721,326                  528,724
                                                          ------------------        ------------------        -----------------

Interest Charges                                                     353,470                   201,314                  133,751
                                                          ------------------        ------------------        -----------------

Income Taxes
    Current                                                          101,738                   170,809                   26,618
    Deferred                                                         108,955                    46,453                  109,744
                                                          ------------------        ------------------        -----------------
Total Income Taxes                                                   210,693                   217,262                  136,362
                                                          ------------------        ------------------        -----------------

Net Income                                                           243,692                   302,750                  258,611
Preferred Stock Dividend Requirements                                  5,904                    18,113                   34,752
                                                          ------------------        ------------------        -----------------
Earnings from Continuing Operations                                  237,788                   284,637                  223,859
                                                          ------------------        ------------------        -----------------


Discontinued Operations
    Income from operations, net of tax                                10,918                   (1,943)                        -
    Loss on disposal, net of tax                                     (30,356)                       -                         -
                                                          ------------------        ------------------        -----------------
Loss  from Discontinued Operations                                   (19,438)                   (1,943)                       -
                                                          ------------------        ------------------        -----------------

Earnings for Common Stock                              $             218,350     $             282,694     $            223,859
                                                          ==================        ==================        =================
Basic Earnings Per Share from Continuing Operations                     1.72                      2.12                     1.62

Basic Loss  Per Share from Discontinued Operations                     (0.14)                    (0.02)                       -
                                                          ------------------        ------------------        -----------------
Basic Earnings Per Share                               $                1.58     $                2.10     $               1.62
                                                          ==================        ==================        =================
Diluted Earnings Per Share                             $                1.56     $                2.09     $               1.62
                                                          ==================        ==================        =================
Average Common Shares Outstanding (000)                              138,214                   134,357                  138,526
Average Common Shares Outstanding - Diluted (000)                    139,221                   135,165                  138,552
</TABLE>
          See accompanying Notes to the Consolidated Financial Statements.



<PAGE>

<TABLE>
<CAPTION>
                                                              CONSOLIDATED STATEMENT OF CASH FLOWS
                                                                    (In Thousands of Dollars)
                                                                    -------------------------

                                                                      Year Ended                Year Ended            Year Ended
                                                                   December 31, 2001         December 31, 2000     December 31, 1999

------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>                 <C>                   <C>
Operating Activities
Net income from continuing operations                                $        243,692    $          302,750  $           258,611
Adjustments to reconcile net income to net
            cash provided by (used in) operating activities
      Depreciation, depletion and amortization                                559,138               330,922              253,440
      Early retirement and severance accruals                                       -                65,175                    -
      Deferred income tax                                                     108,955                46,453              109,744
      Income from equity investments                                          (13,129)              (20,010)             (15,347)
      Dividends from equity investments                                         7,570                21,507                9,368
      Gain from class action settlement                                       (33,510)                    -                    -
      Provision for losses on contracting business                             63,682                     -                    -
Changes in assets and liabilities
      Accounts receivable                                                     401,976              (800,033)            (132,114)
      Materials and supplies, fuel oil and  gas in storage                    (43,856)              (36,952)              (9,789)
      Accounts payable and accrued expenses                                  (425,196)              452,076               83,493
      Interest accrued                                                         24,560                32,659                8,128
      Other                                                                    (3,701)               44,179               23,471
                                                                    -----------------     -----------------   ------------------
Net Cash Provided by Operating Activities                                     890,181               438,726              589,005
                                                                    -----------------     -----------------   ------------------

Investing Activities
Construction expenditures                                                  (1,059,759)             (633,035)            (671,845)
Other investments                                                                   -              (292,222)             (53,825)
Acquisition of Eastern Enterprise and EnergyNorth, Inc.                             -            (1,762,007)                   -
Investment held for disposal                                                        -              (184,036)                   -
Proceeds from sale of assets                                                   18,458                     -                    -
Other                                                                              (6)                 (510)              30,006
                                                                    ------------------     ----------------   ------------------
Net Cash (Used in) by Investing Activities                                 (1,041,307)           (2,871,810)            (695,664)
                                                                    -----------------     -----------------   ------------------

Financing Activities
Treasury stock issued  (purchased)                                             88,786                72,289             (299,243)
Issuance of long-term debt                                                    812,116             2,166,955              102,648
Payment of long-term debt                                                    (183,410)              (68,365)            (442,475)
Issuance (payment) of commercial paper                                       (251,787)              935,372              208,300
Payment of preferred stock                                                          -              (363,000)                   -
Preferred stock dividends paid                                                 (5,904)              (20,261)             (34,760)
Common stock dividends paid                                                  (245,598)             (239,740)            (249,567)
Settlement on interest rate lock                                                    -               (59,490)                   -
Other                                                                          12,846               (35,949)               7,582
                                                                    -----------------     -----------------   ------------------
Net Cash Provided by (Used in) Financing Activities                           227,049             2,387,811             (707,515)
                                                                    -----------------     -----------------   ------------------
Net Increase or (Decrease) in Cash and Cash Equivalents              $         75,923       $       (45,273)    $       (814,174)
                                                                    =================     =================   ==================
Cash and Cash Equivalents at Beginning of Period                     $         83,329       $       128,602     $        942,776
Net Increase or (Decrease) in Cash and Cash Equivalents                        75,923               (45,273)            (814,174)
                                                                    ------------------    -----------------   ------------------
Cash and Cash Equivalents at End of Period                           $        159,252       $        83,329     $        128,602
                                                                    =================     =================   ==================
Interest paid                                                        $        328,910       $       165,020     $        109,614
Income tax paid                                                      $        128,558       $       187,219     $         38,700

</TABLE>

                See accompanying Notes to the Consolidated Financial Statements.



<PAGE>


<TABLE>
<CAPTION>

                                                CONSOLIDATED STATEMENT OF RETAINED EARNINGS
                                                         (In Thousands of Dollars)
                                                         -------------------------

                                                        Year Ended                   Year Ended                  Year Ended
                                                     December 31, 2001            December 31, 2000           December 31, 1999
------------------------------------------------  --------------------------  -------------------------  ---------------------------
<S>                                                      <C>                            <C>                            <C>
Balance at Beginning of Period                    $        480,639            $          456,882         $              474,188
Net Income  for period                                     224,254                       300,807                        258,611
------------------------------------------------  --------------------------  -------------------------  ---------------------------
                                                           704,893                       757,689                        732,799
Deductions:
Cash dividends declared on common stock                    246,783                       239,740                        246,251
Cash dividends declared on preferred stock                   5,904                        20,298                         34,752
Other, primarily write-off of
       capital stock expense                                     -                        17,012                         (5,086)
------------------------------------------------  --------------------------  -------------------------  ---------------------------
Balance at End of Period                          $        452,206            $          480,639         $              456,882
------------------------------------------------  --------------------------  -------------------------  ---------------------------
</TABLE>




<TABLE>
<CAPTION>
                                                         CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
                                                                    (In Thousands of Dollars)
                                                                    -------------------------

                                                                      Year Ended                Year Ended                Year Ended
                                                                  December 31, 2001        December 31, 2000       December 31, 1999
----------------------------------------------------------  -------------------------  ---------------------  ---------------------
<S>                                                                          <C>                    <C>                    <C>
Net Income                                                  $                 224,254  $             300,807  $             258,611
----------------------------------------------------------  -------------------------  ---------------------  ---------------------
Other comprehensive income (loss), net of tax
    Net gains on derivative instruments                                       (27,690)                     -                      -
    Reclassification adjustment for other gains
        reclassified to net income                                             (3,242)                     -                      -
    Foreign currency translation adjustments                                   (9,627)                (7,320)                 5,633
    Unrealized gains (losses) on marketable securities                         (5,464)                 3,131                      -
    Accrued unfunded pension obligation                                       (13,262)                     -                      -
    Unrealized gains on derivative
        financial instruments                                                  62,943                      -                      -
----------------------------------------------------------  -------------------------  ---------------------  ---------------------
Other comprehensive income (loss)                                               3,658                 (4,189)                 5,633
----------------------------------------------------------  -------------------------  ---------------------  ---------------------
Comprehensive income                                        $                 227,912  $             296,618  $             264,244
----------------------------------------------------------  -------------------------  ---------------------  ---------------------
Related tax (benefit) expense
    Net gains on derivative instruments                     $                 (14,910) $                   -  $                   -
    Reclassification adjustment for other gains
        reclassified to net income                                             (1,746)                     -                      -
    Foreign currency translation adjustments                                   (5,184)                (3,941)                 3,033
    Unrealized gains (losses) on marketable securities                         (2,942)                 1,686                      -
    Accrued unfunded pension obligation                                        (7,140)                     -                      -
    Unrealized gains on derivative financial instruments                       33,892                      -                      -
----------------------------------------------------------  -------------------------  ---------------------  ---------------------
Total tax expense (benefit)                                 $                   1,970  $              (2,255) $               3,033
----------------------------------------------------------  -------------------------  ---------------------  ---------------------
</TABLE>





                See accompanying Notes to the Consolidated Financial Statements.





<PAGE>


<TABLE>
<CAPTION>
                                                            CONSOLIDATED STATEMENT OF CAPITALIZATION


-----------------------------------------------------------------------------------------------------------------------------------
                                                                 Shares Issued                           (In Thousands of Dollars)
------------------------------------------------ -----------------------------------------------------------------------------------
                                                    December 31,           December 31,          December 31,         December 31,
                                                        2001                   2000                  2001                 2000
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>                 <C>                     <C>                   <C>

Common Shareholders' Equity
Common stock, $0.01 par value                        158,837,654          158,837,654     $           1,588     $           1,588
Premium on capital stock                                                                          2,994,209             2,983,434
Retained earnings                                                                                   452,206               480,639
Other comprehensive income                                                                            4,483                   825
Treasury stock                                        19,407,905           22,474,628              (561,884)             (650,670)
-----------------------------------------------------------------------------------------------------------------------------------
Total Common Shareholders' Equity                    139,429,749          136,363,026             2,890,602             2,815,816
-----------------------------------------------------------------------------------------------------------------------------------

Preferred Stock - No Redemption Required
Par Value $100 per share
7.07% Series B-private placement                         553,000              553,000                55,300                55,300
7.17% Series C-private placement                         197,000              197,000                19,700                19,700
6.00% Series A-private placement                          90,770               92,050                 9,077                 9,205
-----------------------------------------------------------------------------------------------------------------------------------
Total Preferred Stock - No Redemption Required                                                       84,077                84,205
-----------------------------------------------------------------------------------------------------------------------------------

Long - Term Debt                                   Interest Rate             Maturity
-----------------------------------------------------------------------------------------------------------------------------------

Notes
Medium term notes                                  6.15% - 9.75%             2005-2030            2,885,000             2,260,000
Senior subordinated notes                              8.625%                  2008                 100,000               100,000
-----------------------------------------------------------------------------------------------------------------------------------
Total Notes                                                                                       2,985,000             2,360,000
-----------------------------------------------------------------------------------------------------------------------------------

Gas Facilities Revenue Bonds                          Variable                 2020                 125,000               125,000
                                                   5.50% - 6.95%             2020-2026              523,500               523,500
-----------------------------------------------------------------------------------------------------------------------------------
Total Gas Facilities Revenue Bonds                                                                  648,500               648,500
-----------------------------------------------------------------------------------------------------------------------------------

Promissory Notes to LIPA
Debentures                                             8.20%                   2023                 270,000               270,000
Pollution control revenue bonds                        5.15%                   2016                 108,022               108,022
Electric facilities revenue bonds                  5.30% - 7.15%             2019-2025              224,405               224,405
-----------------------------------------------------------------------------------------------------------------------------------
Total Promissory Notes to LIPA                                                                      602,427               602,427
-----------------------------------------------------------------------------------------------------------------------------------

First Mortgage Bonds                               5.50% - 10.10%            2002-2028              179,122               179,872
Authority Financing Notes                             Variable               2027-2028               66,005                66,005
Other Subsidiary Debt                                                                               330,293               328,227
Capital Leases                                                               2004-2020               15,192                16,001
-----------------------------------------------------------------------------------------------------------------------------------
Subtotal                                                                                          4,826,539             4,201,032
Unamortized interest rate hedge and debt discount                                                   (80,173)              (83,091)
Derivative impact on debt                                                                           (47,724)                    -
Less current maturities                                                                                 993                 1,500
-----------------------------------------------------------------------------------------------------------------------------------
Total Long Term Debt                                                                              4,697,649             4,116,441
-----------------------------------------------------------------------------------------------------------------------------------
Total Capitalization                                                                      $       7,672,328     $       7,016,462
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>




              See accompanying Notes to the Consolidated Financial Statements.



<PAGE>



Notes to the Consolidated Financial Statements

Note 1.  Summary of Significant Accounting Policies

A.  Organization of the Company

KeySpan Corporation, a New York corporation, was formed in May 1998, as a result
of the business combination of KeySpan Energy Corporation, the parent of The
Brooklyn Union Gas Company, and certain businesses of the Long Island Lighting
Company ("LILCO"). On November 8, 2000, we acquired Eastern Enterprises
("Eastern"), a Massachusetts business trust, and the parent of several gas
utilities operating in Massachusetts. Also on November 8, 2000, Eastern acquired
EnergyNorth, Inc. ("ENI"), the parent of a gas utility operating in central New
Hampshire. KeySpan Corporation will be referred to in these notes to the
Consolidated Financial Statements as "KeySpan", "we", "us" and "our."

Our core business is gas distribution, conducted by our six regulated gas
utility subsidiaries: The Brooklyn Union Gas Company d/b/a KeySpan Energy
Delivery New York ("KEDNY") and KeySpan Gas East Corporation d/b/a KeySpan
Energy Delivery Long Island ("KEDLI") distribute gas to customers in the
boroughs of Brooklyn, Queens and Staten Island in New York City, and the
counties of Nassau and Suffolk on Long Island and the Rockaway Peninsula in
Queens, respectively; Boston Gas Company, Colonial Gas Company and Essex Gas
Company, each doing business as KeySpan Energy Delivery New England ("KEDNE"),
distribute gas to customers in southern and central Massachusetts; and
EnergyNorth Natural Gas, Inc., d/b/a KeySpan Energy Delivery New England
distributes gas to customers in central New Hampshire. Together, these companies
distribute gas to approximately 2.5 million customers throughout the Northeast.

We also own, lease and operate generating plants on Long Island and in New York
City. Under contractual arrangements, we provide power, electric transmission
and distribution services, billing and other customer services for approximately
one million electric customers of the Long Island Power Authority ("LIPA").

Our other subsidiaries are involved in gas and oil exploration and production;
gas storage; wholesale and retail gas and electric marketing; appliance service;
heating, ventilation and air conditioning installation and services; large
energy-system ownership, installation and management; and fiber optic services.
We also invest in, and participate in the development of, pipelines and other
energy-related projects, domestically and internationally. (See Note 2,
"Business Segments" for additional information on each operating segment.)

We are a registered holding company under the Public Utility Holding Company Act
of 1935 ("PUHCA"), as amended. Therefore, our corporate and financial activities
and those of our subsidiaries, including their ability to pay dividends to us,
are subject to regulation by the Securities and Exchange Commission ("SEC").
Under our holding company structure, we have no independent operations or source
of income of our own and conduct all of our operations through our subsidiaries
and, as a result, we depend on the earnings and cash flow of, and dividends or




<PAGE>



distributions  from, our subsidiaries to provide the funds necessary to meet our
debt and  contractual  obligations.  Furthermore,  a substantial  portion of our
consolidated  assets,  earnings and cash flow is derived from the  operations of
our regulated  utility  subsidiaries,  whose legal authority to pay dividends or
make other  distributions  to us is subject to  regulation  by state  regulatory
authorities.

B.  Basis of Presentation

The Consolidated Financial Statements presented herein reflect the accounts of
KeySpan and its subsidiaries. Most of our subsidiaries are fully consolidated in
the financial information presented, except for certain subsidiary investments
in the Energy Investment segment which are accounted for on the equity method as
we do not have a controlling voting interest or otherwise have control over the
management of such 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.

As noted, on November 8, 2000, we completed the acquisitions of Eastern
Enterprises and EnergyNorth Inc. The transactions have been accounted for using
the purchase method of accounting for business combinations and accordingly the
accompanying consolidated financial statements include the results of Eastern
and ENI for the period November 8, 2000 through December 31, 2001.

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.

C.  Accounting for the Effects of Rate Regulation

The accounting records for our six regulated gas utilities are maintained in
accordance with the Uniform System of Accounts prescribed by the Public Service
Commission of the State of New York ("NYPSC"), the New Hampshire Public Utility
Commission, and the Massachusetts Department of Telecommunications and Energy
("DTE"). Our electric generation subsidiaries are not subject to state rate
regulation, but they are subject to Federal Energy Regulatory Commission
("FERC") regulation. Our financial statements reflect the ratemaking policies
and actions of these regulators in conformity with generally accepted accounting
principles for rate-regulated enterprises.

Four of our six regulated gas utilities (KEDNY, KEDLI, Boston Gas Company and
EnergyNorth Natural Gas, Inc.) and our Long Island based electric generation
subsidiaries are subject to the provisions of Statement of Financial Accounting
Standards ("SFAS") 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, we record these future economic benefits
and obligations as regulatory assets and regulatory liabilities, respectively.



<PAGE>





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

The following table presents our net regulatory assets at December 31, 2001 and
December 31, 2000.
<TABLE>
<CAPTION>
                                                                                                          (In Thousands of Dollars)
                                                                                                          -------------------------

                                                                    December 31, 2001                December 31, 2000
-----------------------------------------------------------  -------------------------------  --------------------------------
<S>                                                                           <C>                              <C>
Regulatory Assets
   Regulatory tax asset                                      $                  64,536        $                   61,071
   Property taxes                                                               54,617                            51,948
   Environmental costs                                                         183,716                           116,609
   Postretirement benefits other than pensions                                  84,238                            89,188
   Costs associated with the KeySpan / LILCO merger                             55,204                            66,300
   Derivative assets                                                            15,880*                                -
-----------------------------------------------------------  -------------------------------  --------------------------------
Total Regulatory Assets                                      $                 458,191        $                  385,116
Regulatory Liabilities                                                          39,442                            40,041
-----------------------------------------------------------  -------------------------------  --------------------------------
Net Regulatory Assets                                        $                 418,749        $                  345,075
===========================================================  ===============================  ================================
</TABLE>

* Includes derivative instruments that settled in December 2001 for $5.0 million
associated with January 2002 gas purchases.

The regulatory assets above are not included in our rate base. However, we
record carrying charges on the property tax and costs associated with the
KeySpan / LILCO merger deferrals. We also record carrying charges on our
regulatory liabilities. The remaining regulatory assets represent, primarily,
costs for which expenditures have not yet been made, and therefore, carrying
charges are not recorded. We anticipate recovering these costs in our gas rates
concurrently with future cash expenditures. If recovery is not concurrent with
the cash expenditures, we will record the appropriate level of carrying charges.
Deferred gas costs of $5.6 million and $189.8 million at December 31, 2001 and
December 31, 2000, respectively are reflected in Accounts Receivable on the
Consolidated Balance Sheet.

We estimate that full recovery of our regulatory assets will not exceed 15
years, except for the regulatory tax asset which will be recovered over the
estimated lives of certain utility property.

Rate regulation is undergoing significant change as regulators and customers
seek lower prices for utility service and greater competition among energy
service providers. In the event that regulation significantly changes the
opportunity for us to recover costs in the future, all or a portion of our
regulated operations may no longer meet the criteria for the application of SFAS
71. In that event, a write-down of all or a portion of our existing regulatory
assets and liabilities could result. If we were unable to continue to apply the
provisions of SFAS 71 for any of our rate regulated subsidiaries, we would have
applied the provisions of SFAS 101 "Regulated Enterprises - Accounting for the
Discontinuation of Application of FASB Statement No. 71." We estimate that the
write-off of all our net regulatory assets at December 31, 2001 could result in




<PAGE>



a charge to net  income of $272.2  million or $1.97 per  share,  which  would be
classified as an  extraordinary  item. In  management's  opinion,  our regulated
subsidiaries  that  are  currently  subject  to the  provisions  of SFAS 71 will
continue to be subject to SFAS 71 for the foreseeable future.

D.  Revenues

Utility gas customers are billed monthly or 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 used is recovered when billed to firm customers through the
operation of gas adjustment clauses ("GAC") included in utility tariffs. The GAC
provision requires a periodic reconciliation of recoverable gas costs and GAC
revenues. Any difference is deferred pending recovery from or refund to firm
customers. Further, net revenues from tariff gas balancing services, off-system
sales and certain on-system interruptible sales are refunded, for the most part,
to firm customers subject to certain sharing provisions.

The New York and Long Island gas utility tariffs contain weather normalization
adjustments that largely offset shortfalls or excesses of firm net revenues
(revenues less gas costs and revenue taxes) during a heating season due to
variations from normal weather. The New England gas utility rate structures
contain no weather normalization feature, therefore their net revenues are
subject to weather related demand fluctuations.

Electric revenues are derived from billings to the Long Island Power Authority
("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 us 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.
Under a Management Service Agreement ("MSA") costs in excess of budgeted levels
are assumed by us 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 billed to LIPA on a
monthly basis include fixed and variable components. Billings related to
transmission, distribution and delivery services are based, in part, on
negotiated estimated levels.

In addition, electric revenues are derived from our investment in the 2,200
megawatt Ravenswood electric generation facility ("Ravenswood facility"), which
we acquired in June 1999. (See Note 8 "Contractual Obligations and
Contingencies" for a description of the Ravenswood transaction.)

We realize revenues from our investment in the Ravenswood facility through the
wholesale sale of energy, capacity, and ancillary services to the New York
Independent System Operator ("NYISO"). Energy and ancillary services are sold
through a bidding process into the NYISO energy markets on



<PAGE>



a day ahead or real time basis. Prior to the start of the NYISO on November 19,
1999, however, KeySpan and the Consolidated Edison Company of New York, Inc.
("Consolidated Edison") entered into transition energy and capacity contracts.
The energy contract provided Consolidated Edison with 100% of the energy
produced by the Ravenswood facility on a cost recovery basis. This contract
expired on November 19, 1999. The capacity contract provided Consolidated Edison
with 100% of the available capacity of the Ravenswood facility on a monthly
fixed-fee basis. That contract expired on April 30, 2000.

Revenues earned by our Energy Services segment for the design, building and
installation of heating, ventilation and air-conditioning systems are generally
recognized by the percentage of completion method. This method measures the
percentage of costs incurred and accrued to date for each contract to the
estimated total costs for each contract at completion. Provisions for estimated
losses on uncompleted contracts are made in the period such losses are
determined. Changes in job performance, job conditions and estimated
profitability may result in revisions to cost and income, which are recognized
in the period the revisions are determined. Service and maintenance revenues are
recognized as earned or over the life of the service contract, as appropriate.
Energy sales are recorded upon delivery of the related commodity and
telecommunications revenue is recognized upon delivery of service access.

E.  Utility Property - Depreciation and Maintenance

Utility gas property is stated at original cost of construction, which includes
allocations of overheads, including taxes, and an allowance for funds used
during construction. Electric depreciation consists of depreciation of our
electric generating facilities, including the Ravenswood facility from June 19,
1999.

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:
<TABLE>
<CAPTION>

                        Period                                Electric                 Gas
                        ------                                --------                 ---
           <S>                                                <C>                     <C>
            Year Ended December 31, 2001                       3.78%                   3.40%
            Year Ended December 31, 2000                       3.68%                   3.51%
            Year Ended December 31, 1999                       3.56%                   2.85%
</TABLE>



F.  Gas Exploration and Production Property - Depletion

The full cost method of accounting is used for our investments in natural gas
and oil properties. These investments consist of our 67% equity interest in The
Houston Exploration Company ("Houston Exploration"), an independent natural gas
and oil exploration company, as well as KeySpan Exploration and Production, LLC,
our wholly-owned subsidiary engaged in a joint venture with Houston Exploration.
Under the full cost 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



<PAGE>



pool are depleted and charged to operations using the unit-of-production method
based on production and proved reserve quantities. To the extent that such
capitalized costs (net of accumulated depletion) 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. Once incurred, such impairment of gas properties
is not reversible at a later date even if gas prices increase.

The ceiling test is calculated using natural gas and oil prices in effect as of
the balance sheet date, held flat over the life of the reserves. We use
derivative financial instruments that qualify for hedge accounting under SFAS
133 "Accounting for Derivative Instruments and Hedging Activities", to hedge
against the volatility of natural gas prices. In accordance with current
Securities and Exchange Commission guidelines, we have included estimated future
cash flows from our hedging program in the ceiling test calculation. In
calculating the ceiling test at December 31, 2001, we estimated, using a
wellhead price of $2.38 per mcf, that our capitalized costs exceeded the ceiling
limitation. As a result, in the fourth quarter of 2001, we recorded a $42.0
million impairment charge to write-down our gas exploration and production
assets, and recorded this charge in Depreciation, Depletion and Amortization on
the Consolidated Statement of Income. Our share of the impairment charge was
$26.2 million after-tax, or $0.19 per share. Natural gas prices continue to be
volatile and the risk that we will be required to write-down our full cost pool
increases when, among other things, natural gas prices are depressed, we have
significant downward revisions in our estimated proved reserves or we have
unsuccessful drilling results.

G.  Goodwill

At December 31, 2001, we had recorded goodwill in the amount of $1.8 billion,
representing the excess of acquisition cost over the fair value of net assets
acquired. Our recorded goodwill, net of accumulated amortization, consists of
$1.5 billion related to the Eastern and ENI acquisitions, $156 million related
to the KeySpan / LILCO merger, and $169 million related to the acquisitions of
energy- related services companies and to certain ownership interests of 50% or
less in energy-related investments in Northern Ireland which are accounted for
under the equity method. For the year ended December 31, 2001, goodwill
amortization was $62 million.

As prescribed by SFAS 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of", the carrying value of goodwill is
reviewed if the facts and circumstances, such as significant declines in sales,
earnings or cash flows, or material adverse changes in the business climate
suggest it might be impaired. If this review indicates that goodwill is not
recoverable, as determined based upon the estimated undiscounted cash flows of
the entity acquired, impairment would be measured by comparing the carrying
value of the investment in such entity to its fair value. Fair value would be
determined based on quoted market values, appraisals, or discounted cash flows.
For the year ended December 31, 2001, we reviewed the facts and circumstances
for the entities carrying goodwill and as a result of the above procedures,
wrote off $12.4 million associated with the Roy Kay Companies upon determination
that the asset was not recoverable. (See note 11, "Roy Kay Operations" for
additional information.)




<PAGE>



On January 1, 2002, we adopted SFAS 141, "Business Combinations", and SFAS 142
"Goodwill and Other Intangible Assets". The key concepts from the two
interrelated Statements include mandatory use of the purchase method when
accounting for business combinations, discontinuance of goodwill amortization, a
revised framework for testing goodwill impairment at a "reporting unit" level,
and new criteria for the identification and potential amortization of other
intangible assets. Other changes to existing accounting standards involve the
amount of goodwill to be used in determining the gain or loss on the disposal of
assets, and a requirement to test goodwill for impairment at least annually. The
annual impairment test is to be performed within six months of adopting SFAS 142
with any resulting impairment reflected as either a change in accounting
principle, or a charge to operations in the financial statements. The results of
this analysis is not complete at this time, and we are unable to determine the
impact this analysis may have on our results of operations or financial
condition. However, a change in the measurement of the fair value of our
investments could result in a significant change in the carrying value of
goodwill.

H.  Hedging and Derivative Financial Instruments

From time to time we employ derivative instruments to hedge a portion of our
exposure to commodity price risk and interest rate risk, as well as to fix the
selling price on a portion of our peak electric energy sales. Whenever hedge
positions are in effect, we 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. We believe 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. We have a stated policy that we enter into
derivative contracts only with major investment grade financial institutions,
and we believe that reduction of the exposure to price risk lowers our overall
business risk.

Commodity Contracts and Electric Derivatives: We employ derivative financial
instruments, such as futures, options and swaps, for the purpose of hedging
exposure to commodity price risk and to fix the selling price on a portion of
our peak electric energy sales. We also utilize derivative instruments to
"lock-in" profit margin on a number of fixed- rate gas sales contracts. These
derivative instruments are cash-flow hedges and qualify for hedge accounting
under SFAS 133. Under SFAS 133, periodic changes in market value of cash-flow
hedges are recorded as comprehensive income, subject to effectiveness, and
subsequently included in net income to match the underlying transactions.

Non-firm Gas Sales Derivatives: Further, we employ derivative instruments to fix
profit margins on specific portions of gas sales to our large-volume gas sales
market. These derivative instruments do not qualify for hedge accounting at this
time, since they do not meet the "effectiveness standards" prescribed by SFAS
133. Accordingly, changes in market value of these derivatives are included in
income currently.

Firm Gas Sales Derivatives: We utilize derivative financial instruments to
"lock-in" the purchase price for a portion of our future natural gas purchases.
Our strategy is to minimize fluctuations in firm gas sales prices to our
regulated firm gas sales customers in our New York service territory. Since
these derivative instruments are being employed to support our gas sales prices




<PAGE>



to regulated  firm gas sales  customers,  the  accounting  for these  derivative
instruments  is subject to SFAS 71.  Therefore,  changes in the market  value of
these derivatives are recorded as a Regulatory Asset or Regulatory  Liability on
our  Consolidated  Balance  Sheet.  Gains or losses on the  settlement  of these
contracts are initially deferred and then refunded to or collected from our firm
gas sales customers during the appropriate winter heating season.

Weather Derivatives: The utility tariffs associated with our New England gas
distribution operations do not contain a weather normalization adjustment. As a
result, fluctuations from normal weather may have a significant positive or
negative effect on the results of these operations. To mitigate the effect of
fluctuations from normal weather on our financial position and cash flows, we
may enter into weather swaps from time to time. Although weather derivatives are
outside the scope of SFAS 133, such instruments are essentially marked to market
currently.

Interest Rate Derivatives: We continually assess the cost relationship between
fixed and variable rate debt. In line with our objective to minimize capital
costs, we periodically enter into hedging transactions that effectively convert
the terms of underlying debt obligations from fixed to variable or variable to
fixed. Payments made or received on these derivative contracts are recognized as
an adjustment to interest expense as incurred. Hedging transactions that
effectively convert the terms of underlying debt obligations from fixed to
variable are considered fair-value hedges. Hedging transactions that effectively
convert the terms of underlying debt obligations from variable to fixed are
considered cash-flow hedges.

I.  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.

J.  Income Tax

In accordance with SFAS 109, "Accounting for Income Taxes" and applicable rate
regulation, certain of our regulated subsidiaries record a regulatory asset for
the net cumulative effect of providing deferred income taxes on all differences
between the financial statement carrying amounts of existing assets and
liabilities, and their respective tax basis. Investment tax credits, which were
available prior to the Tax Reform Act of 1986, were deferred and are generally
amortized as a reduction of income tax over the estimated lives of the related
property.

K.  Subsidiary Common Stock Issuances to Third Parties

We follow an accounting policy of income statement recognition for parent
company gains or losses from issuances of common stock by subsidiaries to
unaffiliated third parties.

L.  Foreign Currency Translation

We follow the principles of SFAS 52, "Foreign Currency Translation," for
recording our investments in foreign affiliates. Under this statement, all
elements of the financial statements are translated by



<PAGE>



using a current exchange rate. Translation adjustments result from changes in
exchange rates from one reporting period to another. At December 31, 2001, the
foreign currency translation adjustment was included in Accumulated Other
Comprehensive Income as a separate component of Shareholders' Equity. The
functional currency for our foreign affiliates is their local currency.

M.  Earnings Per Share

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

We have approximately 2.2 million options outstanding at December 31, 2001 that
were not used in the calculation of diluted EPS since the exercise price
associated with these options was greater than the average per share market
price of our common stock. (See Note 6 "Stock Options", for further information
on outstanding options.) Further, we have 84,077 shares of convertible preferred
stock outstanding that can be converted into 244,104 shares of common stock.
These shares were also not included in the calculation of diluted EPS since to
do so would have been anti-dilutive.

Under the requirements of SFAS 128, "Earnings Per Share" our basic and diluted
EPS are as follows:
<TABLE>
<CAPTION>
                                                                            (In Thousands of Dollars, Except Per Share)
                                                                            -------------------------------------------

                                                                          Year Ended          Year Ended              Year Ended
                                                                         December 31,        December 31,            December 31,
                                                                             2001                2000                    1999
-------------------------------------------------------------------  -----------------  -----------------  -----------------------
<S>                                                                          <C>                <C>                      <C>
Earnings for common stock                                            $         218,350  $         282,694  $               223,859
Houston Exploration dilution (options)                                          (1,116)              (725)                    (135)
-------------------------------------------------------------------  -----------------  -----------------  -----------------------
Earnings for common stock - adjusted                                 $         217,234  $         281,969  $               223,724
-------------------------------------------------------------------  -----------------  -----------------  -----------------------

Weighted average shares outstanding (000)                                      138,214            134,357                  138,526
Add dilutive securities:
   Options                                                                       1,007                808                       26
-------------------------------------------------------------------  -----------------  -----------------  -----------------------
Total weighted average shares outstanding - assuming dilution                  139,221            135,165                  138,552
-------------------------------------------------------------------  -----------------  -----------------  -----------------------

Basic Earnings Per Share                                             $            1.58  $            2.10  $                  1.62
-------------------------------------------------------------------  -----------------  -----------------  -----------------------
Diluted Earnings Per Share                                           $            1.56  $            2.09  $                  1.62
-------------------------------------------------------------------  -----------------  -----------------  -----------------------
</TABLE>



N.  Recent Accounting Pronouncements

In June of 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
143, "Accounting for Asset Retirement Obligations". The Standard requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. When the liability is
initially recorded, the entity will capitalize a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is accreted to
its then present value, and the capitalized cost is



<PAGE>



depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. The standard is effective for fiscal
years beginning after June 15, 2002, with earlier application encouraged. We are
currently evaluating the impact, if any, that the Statement may have on our
results of operations and financial condition.

SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," is
effective January 1, 2002, and addresses accounting and reporting for the
impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets
to Be Disposed Of" and APB Opinion No. 30, "Reporting the Results of Operations-
Reporting the Effects of Disposal of a Segment of a Business." SFAS 144 retains
the fundamental provisions of SFAS 121 and expands the reporting of discontinued
operations to include all components of an entity with operations that can be
distinguished from the rest of the entity and that will be eliminated from the
ongoing operations of the entity in a disposal transaction. We currently do not
anticipate that implementation of this Statement will have a significant effect
on our results of operations and financial condition.

Note 2. Business Segments

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

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

The Electric Services segment consists of subsidiaries that: operate the
electric transmission and distribution system owned by LIPA; own and provide
capacity to and produce energy for LIPA from our generating facilities located
on Long Island; and manage fuel supplies for LIPA to fuel our Long Island
generating facilities. These services are provided in accordance with long-term
service contracts having remaining terms that range from four to eleven years.
The Electric Services segment also includes subsidiaries that own, lease and
operate the 2,200 megawatt Ravenswood electric generation facility, located in
Queens, New York. Currently, our primary electric generation customers are LIPA
and the NYISO energy markets.

The Energy Services segment includes companies that provide energy-related
services to customers located within the New York City metropolitan area, as
well as, Rhode Island, Pennsylvania, Massachusetts and New Hampshire, through
the following four lines of business: (i) Home Energy Services, which provides
residential customers with service and maintenance of energy systems and
appliances, as well as the retail marketing of natural gas and electricity to




<PAGE>



residential  and small  commercial  customers;  (ii) Business  Solutions,  which
provides  professional  engineering-consulting  and design of energy systems for
commercial  and  industrial  customers,   including  installation  of  plumbing,
heating,   ventilation   and   air-conditioning   equipment;   (iii)   Commodity
Procurement,  which provides management and procurement services for fuel supply
and management of energy sales,  primarily for and from the Ravenswood facility;
and (iv) Fiber Optic Services,  which provides  various  services to carriers of
voice and data transmission on Long Island and in New York City.

The Energy Investments segment consists of our gas exploration and production
investments, as well as certain other domestic and international energy-related
investments. Our gas exploration and production subsidiaries are engaged in gas
and oil exploration and production, and the development and acquisition of
domestic natural gas and oil properties. These investments consist of our 67%
equity interest in Houston Exploration, an independent natural gas and oil
exploration company, as well as KeySpan Exploration and Production, LLC, our
wholly owned subsidiary engaged in a joint venture with Houston Exploration.
Subsidiaries in this segment also hold a 20% equity interest in the Iroquois Gas
Transmission System LP, a pipeline that transports Canadian gas supply to
markets in the Northeastern United States; a 50% interest in the Premier
Transmission Pipeline and a 24.5% interest in Phoenix Natural Gas, both in
Northern Ireland; and investments in certain midstream natural gas assets in
Western Canada through KeySpan Canada. With the exception of our gas exploration
and production subsidiaries and KeySpan Canada, which are consolidated in our
financial statements, these subsidiaries are accounted for under the equity
method. Accordingly, equity income from these investments is reflected in Other
Income and (Deductions) in the Consolidated Statement of Income.

The accounting policies of the segments are the same as those used for the
preparation of the Consolidated Financial Statements. Our segments are strategic
business units that are managed separately because of their different operating
and regulatory environments. Operating results of our segments are evaluated by
management on a earnings before interest and taxes ("EBIT") basis. Due to the
anticipated sale of Midland Enterprises in 2002, this subsidiary is reported as
discontinued operations in 2001 and 2000. For more information on this
transaction, refer to Note 10, "Discontinued Operations".



















<PAGE>




The reportable segment information below is shown excluding the operations of
Midland:

<TABLE>
<CAPTION>
                                                                                                         (In Thousands of Dollars)
                                                                                                         -------------------------

                                                                                     Energy Investments
                                                                            ------------------------------------
                                       Gas       Electric       Energy   Gas Exploration     Other
                                  Distribution   Services      Services   and Production    Investments  Eliminations   Consolidated
-------------------------------- ---------------------------------------------------------------------------------------------------
<S>                              <C>            <C>          <C>          <C>              <C>          <C>              <C>
Year Ended December 31, 2001
Unaffiliated revenue               3,613,551     1,421,079    1,100,167     400,031          98,287             -         6,633,115
Intersegment revenue                       -             -       46,718           -               -       (46,718)                -
Depreciation, depletion and
  amortization                       253,523        52,247       33,673     184,717          15,737        19,241           559,138
Income from equity
  method subsidiaries                      -             -            -           -          13,129             -            13,129
Interest income                        3,879           147        3,471           -             334           495             8,326
Earnings before interest and
income taxes                         492,362       246,091     (106,050)    119,933          21,544        33,975           807,855
Interest charges                     219,307        47,124       20,824       2,993           9,772        53,450           353,470
Total assets                       6,994,140     1,641,189      585,162     951,135         797,294       820,686        11,789,606
Investment in equity
  method subsidiaries                      -             -            -           -         107,069             -           107,069
Construction expenditures            384,323       211,658       17,292     385,463          52,513         8,510         1,059,759
-------------------------------- ---------------------------------------------------------------------------------------------------
</TABLE>


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

Electric Services revenues from LIPA and the NYISO of $1.4 billion for the year
ended December 31, 2001 represents approximately 21% of our consolidated
revenues during that period.



























<PAGE>


<TABLE>
<CAPTION>
                                                                                                           (In Thousands of Dollars)
                                                                                                           -------------------------

                                                                          Energy Investments
                                                                          ---------------------------------
                                    Gas           Electric     Energy     Gas Exploration    Other
                                Distribution      Services     Services    and Production   Investments  Eliminations   Consolidated
------------------------------------------------------------------------------------------------------------------------------------
<S>                             <C>             <C>            <C>          <C>          <C>           <C>               <C>
Year Ended December 31, 2000
Unaffiliated revenue              2,555,785       1,444,711     770,110      274,209        35,258           629          5,080,702
Intersegment revenue                      -               -      63,296            -             -       (63,296)                 -
Depreciation, depletion and
  amortization                      143,335          49,278      10,347       95,364         6,586        26,012            330,922
Income from equity
  method subsidiaries                     -               -           -            -        20,010             -             20,010
Interest income                       3,951           1,214         966            -         6,134            62             12,327
Earnings before interest and
  income taxes                      367,226         250,688      74,765      111,672        20,014      (103,039)           721,326
Interest charges                    111,176          24,254         125       11,360         7,636        46,763            201,314
Total assets                      7,286,138       1,856,981     768,016      830,170       683,399      (117,239)        11,307,465
Investment in equity
  method subsidiaries                     -               -           -            -       109,751         3,387            113,138
Construction expenditures           274,941          69,921      17,362      243,799        26,388           624            633,035
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


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

Electric Services revenues from LIPA, Consolidated Edison and the NYISO of $1.4
billion for the year ended December 31, 2000 represents approximately 28% of our
consolidated revenues during that period.

































<PAGE>


<TABLE>
<CAPTION>
                                                                                                           (In Thousands of Dollars)
                                                                                                           -------------------------

                                                                             Energy Investments
                                                                      --------------------------------------
                                    Gas        Electric    Energy     Gas Exploration      Other
                                Distribution   Services   Services    and Production    Investments   Eliminations   Consolidated
------------------------------------------------------------------------------------------------------------------------------------
<S>                             <C>           <C>          <C>           <C>           <C>          <C>            <C>
Year Ended December 31, 1999
Unaffiliated revenue              1,753,132      861,582    186,529       150,581         2,789             -       2,954,613
Intersegment revenue                      -            -          -             -             -             -               -
Depreciation, depletion and
  amortization                      102,997       44,334      3,548        74,051         1,308        27,202         253,440
Income from equity
  method subsidiaries                     -            -          -             -        15,347             -          15,347
Interest income                       3,942            -          -             -         5,016        18,035          26,993
Earnings before interest and
income taxes                        318,245      141,197    (3,935)        40,835        13,773        18,609         528,724
Interest charges                     88,370       22,380          -        13,307         3,726         5,968         133,751
Total assets                      3,774,563    1,267,931    202,124       646,657       503,549       335,867       6,730,691
Investment in equity
  method subsidiaries                     -            -          -             -       341,874         4,016         345,890
Construction expenditures           213,845      245,177      6,179       183,322        10,028        13,294         671,845
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


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

Electric Services revenues from LIPA, and Consolidated Edison of $859 million
for the year ended December 31, 1999 represents approximately 29% of our
consolidated revenues during that period.


Note 3. Income Tax

We file consolidated federal and state income tax returns. A tax sharing
agreement between our holding company and its subsidiaries provides for the
allocation of a realized tax liability or benefit based upon separate return
contributions of each subsidiary to the consolidated taxable income or loss in
the consolidated income tax returns.

Income tax expense in 1999 reflects an adjustment to deferred tax expense and
current tax expense for the utilization of previously deferred net operating
loss carryforwards recorded in 1998. In 1998, we recorded a deferred tax benefit
of $71.1 million for net operating loss carryforwards. We estimated that $57.4
million of the benefit from the net operating loss carryforwards from 1998 would
be realized in our consolidated 1999 federal and state income tax returns and,
accordingly, we applied the net operating loss benefit in our 1999 federal and
state tax provisions.






<PAGE>




Income tax expense is reflected as follows in the Consolidated Statement of
Income:
<TABLE>
<CAPTION>
                                                                                                           (In Thousands of Dollars)
                                                                                                           -------------------------

                                                             Year Ended                    Year Ended                  Year Ended
                                                         December 31, 2001             December 31, 2000           December 31, 1999
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>                           <C>                           <C>
Current  income tax                                $              101,738       $              170,809       $                26,618
Deferred  income tax                                              108,955                       46,453                       109,744
------------------------------------------------------------------------------------------------------------------------------------
Total income tax                                   $              210,693       $              217,262       $               136,362
------------------------------------------------------------------------------------------------------------------------------------
</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, 2001                 December 31, 2000
--------------------------------------------  --------------------------------  --------------------------------
<S>                                                                  <C>                               <C>
Reserves not currently deductible             $                         55,372  $                         63,635
Benefits of tax loss carryforwards                                       6,346                            26,276
Property related differences                                          (498,726)                         (403,224)
Regulatory tax asset                                                   (22,588)                          (21,375)
Property taxes                                                         (61,126)                          (54,794)
Discontinued operations                                                (74,936)                                -
Other items - net                                                       (2,414)                           14,902
--------------------------------------------  --------------------------------  --------------------------------
Net deferred tax liability                    $                       (598,072) $                       (374,580)
--------------------------------------------  --------------------------------  --------------------------------
</TABLE>

The following is a reconciliation between the effective tax rate and the federal
income tax rate of 35%:
<TABLE>
<CAPTION>
                                                                                                         (In Thousands of Dollars)
                                                                                                         -------------------------

                                                                   Year Ended                  Year Ended              Year Ended
                                                                  December 31,                December 31,            December 31,
                                                                      2001                        2000                    1999
--------------------------------------------------------------------------------  ---------------------  -------------------------
<S>                                                                     <C>                    <C>                      <C>
Computed at the statutory rate                             $             159,035  $             182,004  $                138,241
Adjustments related to:
       Tax credits                                                        (1,100)                (1,181)                   (2,154)
       Goodwill amortization                                              21,126                  4,123                     1,468
       Minority interest in Houston Exploration                           13,862                  8,768                     3,105
       State income tax                                                   26,418                 30,384                     4,635
       Other items - net                                                  (8,648)                (6,836)                   (8,933)
--------------------------------------------------------------------------------  ---------------------  -------------------------
$           Total income tax                               $             210,693  $             217,262  $                 136,362
--------------------------------------------------------------------------------  ---------------------  -------------------------
            Effective income tax rate (1)                                    46%                    42%                       35%
--------------------------------------------------------------------------------  ---------------------  ------------------------
</TABLE>
(1) Reflects both federal as well as state income taxes.









<PAGE>



Note 4.  Postretirement Benefits

Pension Plans: The following information represents the consolidated results for
our noncontributory defined benefit pension plans which cover substantially all
employees. Benefits are based on years of service and compensation. Funding for
pensions is in accordance with requirements of federal law and regulations. We
are currently integrating our plans and allocations to individual business
segments. KEDLI is subject to certain deferral accounting requirements mandated
by the NYPSC for pension costs and other postretirement benefit costs.
Information pertaining to discontinued operations has been excluded from this
presentation.

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


                                                                                                           (In Thousands of Dollars)
                                                                                                           -------------------------
                                                     Year Ended                      Year Ended                      Year Ended
                                                  December 31, 2001               December 31, 2000                December 31, 1999
---------------------------------------------  --------------------------------  ----------------------------  ---------------------
<S>                                                 <C>                            <C>                                <C>
Service cost, benefits earned
    during the period                          $        41,162                   $    35,541                    $        38,372
Interest cost on projected
     benefit  obligation                               128,481                       109,231                            106,888
Expected return on plan assets                        (180,757)                     (166,744)                          (138,436)
Special termination charge (1)                               -                        45,838                                  -
Settlement Gain (2)                                          -                       (20,196)                                 -
Net amortization and deferral                          (39,772)                      (54,881)                            (8,869)
---------------------------------------------  --------------------------------  ----------------------------  ---------------------
Total pension benefit                             $    (50,886)                  $   (51,211)                   $        (2,045)
---------------------------------------------  --------------------------------  ----------------------------  ---------------------
</TABLE>

(1) See discussion of early retirement program at end of note.
(2) See discussion of pension plan settlement.

Pension cost includes expense and income for KEDNE for the period November 8,
2000 through December 31, 2001.





<PAGE>



The following table sets forth the pension plans' funded status at December 31,
2001 and December 31, 2000. Plan assets are principally common stock and fixed
income securities.
<TABLE>
<CAPTION>

                                                                                                       (In Thousands of Dollars)
                                                                                                       -------------------------

                                                                 December 31, 2001                          December 31, 2000
--------------------------------------------------------  ------------------------------  -----------------------------------
<S>                                                                     <C>                                  <C>
Change in benefit obligation:
   Benefit obligation at beginning of period              $               (1,914,885)      $                   (1,529,815)
   Benefit obligation of acquisitions                                              -                             (255,510)
   Service cost                                                              (41,162)                             (35,541)
   Interest cost                                                            (128,481)                            (109,231)
   Amendments                                                                 (8,679)                             (34,400)
   Actuarial gain (loss)                                                      61,718                             (112,137)
   Special termination benefits                                                    -                              (45,838)
    Settlements                                                                    -                              110,000
   Benefits paid                                                             116,335                               97,587
--------------------------------------------------------  ------------------------------  -----------------------------------
Benefit obligation at end of period                                       (1,915,154)                          (1,914,885)
--------------------------------------------------------  ------------------------------  -----------------------------------
Change in plan assets:
   Fair value of plan assets at beginning of period                        2,170,093                            2,048,325
   Fair value of acquired plan assets                                              -                              240,665
   Actual return on plan assets                                             (197,632)                              70,798
   Employer contribution                                                      43,130                               18,302
   Settlements                                                                     -                             (110,410)
   Benefits paid                                                            (116,335)                             (97,587)
--------------------------------------------------------  ------------------------------  -----------------------------------
Fair value of plan assets at end of period                                 1,899,256                            2,170,093
--------------------------------------------------------  ------------------------------  -----------------------------------
   Funded status                                                             (15,898)                             255,208
   Unrecognized net loss (gain) from past experience
      different from that assumed and from
      changes in assumptions                                                   8,207                             (342,730)
   Unrecognized prior service cost                                            84,036                               79,914
   Unrecognized transition obligation                                          1,212                                2,187
--------------------------------------------------------  ------------------------------  -----------------------------------
Net prepaid (accrued) pension cost reflected
   on consolidated balance sheet                          $                   77,557        $                      (5,421)
--------------------------------------------------------  ------------------------------  -----------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                           Year Ended                     Year Ended                   Year Ended
                                                        December 31, 2001              December 31, 2000           December 31, 1999
------------------------------------------------  -----------------------------  -----------------------------  --------------------
<S>                                                          <C>                           <C>                            <C>
Assumptions:
   Obligation discount                                        7.00%                          7.00%                         7.50%
   Asset return                                               8.50%                          8.50%                         8.50%
   Average annual increase in compensation                    4.00%                          5.00%                         5.00%
------------------------------------------------  -----------------------------  -----------------------------  --------------------
</TABLE>





<PAGE>

Pension Plan Settlement

In 2000, we settled certain participating contracts covering retiree pension
plans with MetLife. As required under SFAS 88 "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits", a gain of $20.2 million was recognized as part of our
pension cost for the year ended December 31, 2000.

Unfunded Pension Obligation

At December 31, 2001 accumulated benefit obligations were in excess of pension
assets. As prescribed by SFAS 87 "Employers' Accounting for Pensions", we were
required to record an additional $68.9 million minimum liability for this
unfunded pension obligation. As allowed for under current accounting guidelines,
this accrual can be offset by a corresponding debit to a long-term asset up to
the amount of accumulated unrecognized prior service costs. Any remaining amount
is to be recorded as a direct charge to equity. Therefore, at year-end, we also
recorded a $48.5 million debit in Deferred Charges Other and a $20.4 million
debit in Accumulated Other Comprehensive Income. At December 31, 2001 the
projected benefit obligation, accumulated benefit obligation and value of assets
for plans with accumulated benefit obligations in excess of plan assets were
$1.1 billion, $1.0 billion and $929 million, respectively. In December 2002, we
will re- measure the accumulated benefit obligations and pension assets, and
adjust the accrual and deferrals as appropriate.

Other Postretirement Benefits: The following information represents the
consolidated results for our noncontributory defined benefit plans covering
certain health care and life insurance benefits for retired employees. We have
been funding a portion of future benefits over employees' active service lives
through Voluntary Employee Beneficiary Association ("VEBA") trusts.
Contributions to VEBA trusts are tax deductible, subject to limitations
contained in the Internal Revenue Code. We are currently integrating our plans
and allocations to individual business segments.

Net periodic other postretirement benefit cost included the following
components:
<TABLE>
<CAPTION>
                                                                                                           (In Thousands of Dollars)

                                                   Year Ended                      Year Ended                          Year Ended
                                               December 31, 2001                December 31, 2000                  December 31, 1999
------------------------------------------  ------------------------------  -----------------------------  -------------------------
<S>                                                 <C>                            <C>                                  <C>
Service cost, benefits earned
     during the period                      $         20,339                $        14,771                $              16,747
Interest cost on accumulated post-
     retirement benefit obligation                    64,649                         47,412                               42,616
Expected return on plan assets                       (42,822)                       (42,890)                             (36,842)
Special termination charge (1)                             -                          5,590                                    -
Net amortization and deferral                         11,664                         (9,290)                               3,429
------------------------------------------  ------------------------------  -----------------------------  -------------------------
Other postretirement benefit cost           $         53,830                $        15,593                $              25,950
------------------------------------------  ------------------------------  -----------------------------  -------------------------
</TABLE>

(1)   See discussion of early retirement program at end of note.
Other post-retirement benefit costs include expense and income for KEDNE for
November 8, 2000 through December 31, 2001.



<PAGE>



The following table sets forth the plan's funded status at December 31, 2001 and
December 31, 2000. Plan assets are principally common stock and fixed income
securities.
<TABLE>
<CAPTION>
                                                                                            (In Thousands of Dollars)
                                                                                            -------------------------

                                                                  December 31, 2001                December 31, 2000
----------------------------------------------------------  ------------------------------  -------------------------------
<S>                                                                             <C>                              <C>
Change in benefit obligation:
   Benefit obligation at beginning of period                $                     (873,421) $                      (602,053)
   Benefit obligation of acquisitions                                                    -                         (103,630)
   Service cost                                                                    (20,339)                         (14,771)
   Interest cost                                                                   (64,649)                         (47,412)
   Plan participants' contributions                                                 (1,439)                            (678)
   Amendments                                                                           52                                -
   Actuarial (loss)                                                                (57,670)                        (137,756)
   Special termination benefits                                                          -                           (5,590)
   Benefits paid                                                                    47,774                           38,469
----------------------------------------------------------  ------------------------------  -------------------------------
Benefit obligation at end of period                                               (969,692)                        (873,421)
----------------------------------------------------------  ------------------------------  -------------------------------
Change in plan assets:
   Fair value of plan assets at beginning of period                                554,866                          548,850
   Fair value of acquired plan assets                                                    -                           39,263
   Actual return on plan assets                                                    (39,703)                             816
   Employer contribution                                                             7,318                            3,728
   Plan participants' contribution                                                   1,439                              678
   Benefits paid                                                                   (47,774)                         (38,469)
----------------------------------------------------------  ------------------------------  -------------------------------
Fair value of plan assets at end of period                                         476,146                          554,866
----------------------------------------------------------  ------------------------------  -------------------------------
   Funded status                                                                  (493,546)                        (318,555)
   Unrecognized net loss from past  experience
      different from that assumed and from changes in
      assumptions                                                                  251,198                          123,251
   Unrecognized prior service cost                                                  (8,392)                          (8,924)
----------------------------------------------------------  ------------------------------  -------------------------------
Accrued benefit cost reflected on
   consolidated balance sheet                               $                     (250,740) $                      (204,228)
----------------------------------------------------------  ------------------------------  -------------------------------
</TABLE>


<TABLE>
<CAPTION>
                                                     Year Ended                     Year Ended                        Year Ended
                                                  December 31, 2001              December 31, 2000                 December 31, 1999
------------------------------------------- ----------------------------- ------------------------------- --------------------------
<S>                                                   <C>                             <C>                               <C>
Assumptions:
 Obligation discount                                    7.00%                          7.00%                             7.50%
 Asset return                                           8.50%                          8.50%                             8.50%
 Average annual increase in  compensation               4.00%                          5.00%                             5.00%
------------------------------------------- ----------------------------- ------------------------------- --------------------------
</TABLE>




<PAGE>



The measurement of plan liabilities also assumes a health care cost trend rate
of 10% grading down to 5% in 2009 and thereafter. 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, 2001 by $110.8 million and
the net periodic health care expense by $12.9 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, 2001 by $97.3 million and
the net periodic health care expense by $10.8 million.

In 1993, LILCO adopted the provisions of SFAS 106, "Employer's Accounting for
Postretirement Benefits Other Than Pensions," and recorded an accumulated
postretirement benefit obligation and a corresponding regulatory asset of $376
million. LIPA has been reimbursing us for costs related to the postretirement
benefits of the electric business unit employees, therefore, we have
reclassified the regulatory asset for postretirement benefits associated with
electric business unit employees to Deferred Charges Other on the Consolidated
Balance Sheet.

Early Retirement Program

In December 2000, we completed an early retirement program for certain
management and union employees. The additional obligations for pensions and
other postretirement benefits are reflected at December 31, 2000. Included in
the pension and other postretirement benefits expense for the year ended
December 31, 2000 are charges of $45.8 million and $5.6 million, respectively
related to the early retirement program.

Note 5. Capital Stock

Common Stock: Currently we have 450,000,000 shares of authorized common stock.
In 1998, we initiated a program to repurchase a portion of our outstanding
common stock on the open market. At December 31, 2001 we had 19.4 million
shares, or approximately $562 million of Treasury Stock outstanding. We
completed this repurchase plan in 1999 and now utilize Treasury Stock to satisfy
our common stock plans. During 2001, we issued 3.1 million shares out of
treasury for the dividend reinvestment feature of our Investor Program, the
Employee Stock Discount Purchase Plan for Employees, and the Employee Savings
Plan.

Preferred Stock: We have 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, 2001 we had 553,000 shares outstanding of 7.07% Preferred Stock
Series B par value $100; 197,000 shares outstanding of 7.17% Preferred Stock
Series C par value $100; and 90,770 shares outstanding of 6% Preferred Stock
Series A par value $100, in the aggregate totaling $84.1 million.

Boston Gas Company has 622,700 shares of 6.421% non-voting preferred stock par
value $25 per share outstanding at December 31, 2001. This issue of preferred
stock has a 5% annual sinking fund requirement. We have the option of increasing
the sinking fund payment up to 10% per year. This issue is callable beginning in
2003 and is reflected in Minority Interest on the Consolidated Balance Sheet.



<PAGE>



Note 6.  Stock Options

We issue stock options to all KeySpan officers and certain other management
employees as approved by our Board of Directors. These options generally vest
over a three year period and have a ten-year exercise period. Approximately 19.3
million shares have been authorized to grant for options and approximately 9.0
million of these shares were remaining at December 31, 2001. Moreover, under a
separate plan, Houston Exploration has issued approximately 2.2 million stock
options to key Houston Exploration employees. KeySpan and Houston Exploration
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," our net income and earnings
per share would have been decreased to the proforma amounts indicated below:
<TABLE>
<CAPTION>

                                                                   Year Ended                 Year Ended               Year Ended
                                                               December 31, 2001           December 31,2000        December 31, 1999
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>                      <C>                        <C>                      <C>
Income available for common stock (000):
                                            As reported              $218,350                   $282,694                  $223,859
                                            Proforma                 $210,493                   $276,167                  $215,416
Earnings per share:                         As reported               $1.58                       $2.10                    $1.62
                                            Proforma                  $1.52                       $2.06                    $1.56
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

All grants are estimated on the date of the grant using the Black-Scholes
option-pricing model. The following table presents the weighted average fair
value, exercise price and assumptions used for the periods indicated:
<TABLE>
<CAPTION>
                                            Year Ended                       Year Ended                        Year Ended
                                        December 31, 2001                 December 31, 2000                December 31, 1999
-------------------------------  --------------------------------  -------------------------------  --------------------------------
<S>                                         <C>                               <C>                              <C>
Fair value of grants issued                   $5.29                             $2.87                            $3.65
Dividend yield                                 4.91%                             8.22%                            6.58%
Expected volatility                           29.04%                            24.00%                           23.43%
Risk free rate                                 5.13%                             6.54%                            5.72%
Expected lives                               10 years                          6 years                          6 years
Exercise price                               $36.25                            $22.69                           $27.58
-------------------------------  --------------------------------  -------------------------------  --------------------------------
</TABLE>






<PAGE>



A summary of the status of our fixed stock option plans and changes is presented
below for the periods indicated:

<TABLE>
<CAPTION>
                                             Year Ended                   Year Ended                          Year Ended
                                        December 31, 2001             December 31, 2000                  December 31, 1999
----------------------------------- ------------------------------ --------------------------------- -------------------------------
                                                     Weighted                           Weighted                        Weighted
                                                      Average                            Average                         Average
Fixed Options:                          Shares     Exercise Price     Shares         Exercise Price     Shares       Exercise Price
----------------------------------- ---------- ------------------- --------------------------------- -------------- ----------------
<S>                                 <C>              <C>               <C>              <C>         <C>                 <C>
Outstanding at beginning of period   6,456,627        $25.61             4,968,398       $28.18         921,066          $30.80
Granted during the year              2,285,350        $39.50             3,165,822       $22.69       4,149,000          $27.58
Exercised                             (809,983)       $25.15            (1,577,259)      $27.82          (2,666)         $27.75
Forfeited                             (135,832)       $29.19              (100,334)      $26.04         (99,002)         $27.22
----------------------------------- ---------- ------------------- --------------------------------- -------------- ----------------
Outstanding at end of period         7,796,162        $29.67             6,456,627       $25.61       4,968,398          $28.18
----------------------------------- ---------- ------------------- --------------------------------- -------------- ----------------
Exercisable at end of period         2,996,771        $24.86             2,759,599       $29.57       3,638,448          $28.53
----------------------------------- ---------- ------------------- --------------------------------- -------------- ----------------
</TABLE>




<TABLE>
<CAPTION>
 Options Outstanding      Remaining      Weighted Average      Range of      Options Exercisable   Weighted Average     Range of
at December 31, 2001  Contractual Life    Exercise Price    Exercise Price  at December 31, 2001    Exercise Price   Exercise Price
--------------------- ----------------- ------------------ --------------- --------------------- ----------------- -----------------
     <S>                <C>                  <C>           <C>                  <C>                   <C>          <C>
       61,400              4 years            $27.00            $27.00             61,400              $27.00           $27.00
      236,086              5 years            $30.43        $20.57 - 30.50         236,086             $30.43       $20.57 - 30.50
      304,410              6 years            $32.56        $19.15 - 32.63         304,410             $32.56       $19.15 - 32.63
    1,501,009              7 years            $30.14        $24.73 - 30.63       1,501,009             $30.14       $24.73 - 30.63
      919,649              8 years            $26.82        $21.99 - 27.01         390,772             $26.86       $21.99 - 27.01
    2,531,258              9 years            $22.68        $13.76 - 32.76         503,094             $22.54       $13.76 - 32.76
    2,242,350             10 years            $39.50            $39.50                   -                -                -
--------------------- ----------------- ------------------ --------------- --------------------- ----------------- -----------------
    7,796,162                                                                    2,996,771
--------------------- ----------------- ------------------ --------------- --------------------- ----------------- -----------------
</TABLE>




<PAGE>

Note 7. Long-Term Debt

Gas Facilities Revenue Bonds: KEDNY 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 our Gas Facilities Revenue Bonds. At December 31,
2001, KEDNY 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 1.30% to 4.40% through December 31, 2001, at which time the rate
was 1.42%.

We have an interest rate swap agreement in which $90 million of our Gas Facility
Revenue Bonds, 6.75% Series A and B, were effectively converted to floating rate
debt. (See Note 9, "Hedging, Derivative Financial Instruments and Fair Values.")

Authority Financing Notes: Our electric generation subsidiary can also issue
tax-exempt bonds through the New York State Energy Research and Development
Authority. At December 31, 2001, $41.1 million of Authority Financing Notes 1999
Series A Pollution Control Revenue Bonds due October 1, 2028 were outstanding.
The interest rate on these notes is reset based on an auction procedure. The
interest rate during the year ranged from 1.20% to 4.45%, through December 31,
2001 at which time the rate was 1.40%.

We also have outstanding $24.9 million variable rate 1997 Series A Electric
Facilities Revenue Bonds due December 1, 2027. The interest rate on these bonds
is reset weekly and ranged from 1.00% to 4.85% through December 31, 2001 at
which time the rate was 1.65%.

Promissory Notes: At the time of the business combination between KeySpan and
LILCO, LIPA assumed all of the outstanding long-term debt of LILCO at May 28,
1998 except for the 1997 Series A Electric Facilities Revenue Bonds due December
1, 2027 which were assigned to us. In accordance with the LIPA agreement, we
issued promissory notes to LIPA which represented an amount equivalent to the
sum of: (i) the principal amount of 7.30% Series Debentures due July 15, 1999
and 8.20% 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. During 1999, we extinguished our obligation in the amount of $442.5
million under certain promissory notes to LIPA.

Notes Payable: In January 2001 KEDLI issued $125 million of Medium-Term Notes at
6.9% due January 15, 2008. Additionally, KEDLI has outstanding $400 million of
7.875 % Medium-Term Notes due February 1, 2010.

In May 2001, we issued $500 million 6.15% Notes due June 1, 2006 under an
effective shelf registration, leaving $500 million available for issuance at
December 31, 2001. In February 2002, we updated our shelf registration for
issuance of up to $1.2 billion in additional securities, thereby providing us
with the ability to issue up to $1.7 billion of debt, equity or various forms of
preferred stock.



<PAGE>



During the year ended December 31, 2000, we issued $1.65 billion of Medium-Term
Notes, associated with the acquisition of Eastern and ENI. The notes were issued
in three series as follows: $700 million, 7.25% Notes due 2005; $700 million,
7.625% Notes due 2010 and $250 million, 8.00% Notes due 2030. Additionally,
Boston Gas Company has outstanding $210 million of Medium-Term Notes. These
notes, which are not callable until maturity, have interest rates ranging from
6.80% - 9.75% and mature in 2005- 2025.

As part of our strategy to increase our level of floating rate debt, in 2001 we
entered into several interest rate swap agreements on $1.3 billion of existing
fixed rate medium and long-term debt and effectively converted it to floating
rate debt. These swap agreements qualify for hedge accounting and were completed
with several counter parties to reduce credit risk. (See Note 9 "Hedging,
Derivative Financial Instruments, and Fair Values" for additional information on
these swap agreements.)

At December 31, 2001, Houston Exploration had outstanding $100 million of 8.625%
Senior Subordinated Notes due 2008. These notes were issued in a private
placement in March 1998 and are subordinate to borrowings under Houston
Exploration's line of credit. These notes are redeemable at the option of
Houston Exploration after January 1, 2003.

First Mortgage Bonds: Eastern and ENI and their respective subsidiaries, have
issued and outstanding approximately $179 million of first mortgage bonds. These
bonds are secured by KEDNE gas utility property. The first mortgage bond
indentures include, among other provisions, limitations on: (i) the issuance of
long- term debt; (ii) engaging in additional lease obligations; and (iii) the
payment of dividends from retained earnings.

Commercial Paper and Revolving Credit Agreements: During 2001, we replaced two
existing revolving credit facilities of $700 million each, with one new credit
facility which will support our $1.4 billion commercial paper program. This
agreement is in place until September 2002.

Pricing under the facility is subject to a ratings-based grid with an annual fee
of .075% per annum on the balance of funds available. Borrowings will bear
interest at LIBOR plus 50 basis points. Borrowings in excess of more than 33% of
the total commitment will bear interest at LIBOR plus 62.5 basis points. At
December 31, 2001, $1.0 billion of commercial paper was outstanding at a
weighted average annualized interest rate of 2.23%; $351.6 million of commercial
paper was available for issuance.

In 2001 we entered into a swap agreement that effectively converted $270 million
of outstanding commercial paper with fixed rate debt that qualifies for hedge
accounting. (See Note 9 "Hedging, Derivative Financial Instruments, and Fair
Values" for additional information on these swap agreements.)

Houston Exploration has an unsecured available line of credit with a commercial
bank that provides for a maximum commitment of $250 million subject to borrowing
base limitations. This credit facility supports borrowings under a revolving
loan agreement, and at December 31, 2001, the borrowing base was $250 million.
Up to $2 million of this line is available for the issuance of letters of credit
to support performance guarantees. This credit facility matures on March 1, 2003
and is unsecured.



<PAGE>



Houston  Exploration  borrowed $172 million under this facility  during 2001 and
repaid $173 million,  and at December 31, 2001,  borrowings of $144 million were
outstanding  and $0.4 million was committed under  outstanding  letter of credit
obligations. Borrowings under this facility bear interest, at rates indexed at a
premium to the Federal Funds rate or LIBOR, or based on the prime rate depending
on amounts outstanding under the credit facility.  The weighted average interest
rate on this debt was 6.22% at December 31, 2001.

KeySpan Canada has two revolving loan agreements with Canadian banks. Under its
agreement with the Bank of Canada, KeySpan Canada repaid $9.4 million US dollars
in 2001. At December 31, 2001, total borrowings under this facility were $124.7
million US dollars. The weighted average interest rate on these borrowings at
December 31, 2001 was 4.97%. This credit facility has been fully utilized. The
second facility is with the Bank of Montreal. During the year, KeySpan Canada
borrowed $13.6 million US dollars. At December 31, 2001, total borrowings under
this facility were $50.6 million US dollars at a weighted average interest rate
of 5.20%. KeySpan Canada has $29 million US dollars available for future
borrowing under this facility.

Capital Leases: Our subsidiaries lease certain facilities and equipment under
long-term leases which expire on various dates through 2020. The weighted
average interest rate on these obligations was 6.69%.

Debt Maturity: Debt repayment requirements, including capitalized leases and
related maturities, are $1.0 million, $11.7 million, $1.5 million, $716.5
million, and $513.0 million for the years 2002 through 2006, respectively and
cumulatively $3.6 billion thereafter.

Note 8. Contractual Obligations and Contingencies

Lease Obligations: Lease costs included in operation expense were $89.8 million
in 2001 reflecting, primarily, the Ravenswood lease of $30.4 million and the
lease of our Brooklyn headquarters of $13.1 million. Lease costs also include
leases for other buildings, office equipment, vehicles and power operated
equipment. Lease costs for the year ended December 31, 2000 were $69.3 million.
Lease costs for the year ended December 31, 1999 were $47.1 million. The future
minimum lease payments under various leases, all of which are operating leases,
are $85.5 million per year over the next five years and $205.9 million, in the
aggregate, for all years thereafter, including future minimum lease payments for
the Ravenswood lease of $30.8 million per year over the next five years and
$92.5 million for all years thereafter.

We acquired the 2,200 megawatt Ravenswood facility located in Long Island City,
Queens, New York, from Consolidated Edison on June 18, 1999 for approximately
$597 million. In order to reduce our initial cash requirements, we entered into
a lease agreement with a special purpose, unaffiliated financing entity that
acquired a portion of the facility directly from Consolidated Edison and leased
it to our subsidiary. We have guaranteed all payment and performance obligations
of our subsidiary under the lease. Another subsidiary provides all operating,
maintenance and construction services for the facility. The lease relates to
approximately $425 million of the acquisition cost of the facility, which is the
amount of debt that would have been recorded on our Consolidated Balance Sheet
had the special purpose financing entity not been utilized and conventional debt
financing employed. Further, we would have recorded an asset in the same amount.



<PAGE>



The lease qualifies as an operating lease for financial reporting purposes while
preserving  our  ownership  of the  facility  for federal  and state  income tax
purposes.  The balance of the funds needed to acquire the facility were provided
from cash on hand.  The initial  term of the lease  expires on June 20, 2004 and
may be extended until June 20, 2009.

Fixed Charges Under Firm Contracts: Our utility subsidiaries have entered into
various contracts for gas delivery, storage and supply services. The contracts
have remaining terms that cover from one to thirteen years. Certain of these
contracts require payment of annual demand charges in the aggregate amount of
approximately $500.9 million. We are liable for these payments regardless of the
level of service we require from third parties. Such charges are currently
recovered from utility customers through the gas adjustment clause.

Legal Matters: From time to time we are subject to various legal proceedings
arising out of the ordinary course of our business. Except as described below,
we do not consider any of such proceedings to be material to our business or
likely to result in a material adverse effect on our results of operations,
financial condition and cash flows.

KeySpan, through its subsidiary, formerly known as Roy Kay, Inc., has terminated
the employment of the former owners of the Roy Kay companies and commenced a
proceeding in the Chancery Division of the Superior Court, Monmouth County, New
Jersey (Docket No. Mon. C. 95-01) as a result of the alleged fraudulent acts of
the former owners, both before and after the acquisition of the Roy Kay
companies in January 2000. KeySpan believes the former owners misstated the
financial statements of the Roy Kay companies and certain underlying
work-in-progress schedules. KeySpan is seeking damages in excess of $76 million
as well as a judicial determination that KeySpan is not required to pay the
former owners any further amounts under the terms of the stock purchase
agreement entered into in connection with the acquisition of the Roy Kay
companies. The causes of action include breach of contract and fiduciary duty,
fraud, and violation of the New Jersey Securities Laws. The former owners have
filed counterclaims against KeySpan and certain of its subsidiaries, as well as
certain of their respective officers, to recover damages they claim to have
incurred as a result of, among other things, their alleged improper termination
and the alleged fraud on the part of KeySpan in failing to disclose the
limitations imposed upon the Roy Kay companies, with respect to the performance
of certain services, under the PUHCA . The fraud claims asserted by the former
owners include claims under the New Jersey Uniform Securities Law and RICO
statutes. We are unable to predict the outcome of these proceedings or what
effect, if any, such outcome will have on our financial condition, results of
operations or cash flows.

KeySpan has been cooperating in preliminary inquiries regarding trading in
KeySpan Corporation stock by individual officers of KeySpan prior to the July
17, 2001 announcement that KeySpan was taking a special charge in its Energy
Services business and otherwise reducing its 2001 earnings forecast. These
inquiries are being conducted by the U.S. Attorney's Office, Southern District
of New York, and the U.S. Securities and Exchange Commission. In addition,
KeySpan and certain of its officers and directors are defendants in a number of
class action lawsuits filed in the United States District Court for the Eastern
District of New York after the July 17th announcement. These lawsuits allege,
among other things, violations of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, as amended ("Exchange Act"), in connection with
disclosures relating to or following the acquisition of the Roy Kay companies



<PAGE>



by KeySpan Services, Inc., a KeySpan subsidiary. Finally, in October 2001, a
shareholder's derivative action was commenced in the same court against certain
officers and directors of KeySpan, alleging, among other things, breaches of
fiduciary duty, violations of the New York Business Corporation Law and
violations of Section 20(a) of the Exchange Act. Each of the proceedings seeks
monetary damages in an unspecified amount. We are unable to determine the
outcome of these proceedings and what effect, if any, such outcome will have on
our financial condition, results of operations or cash flows.

In October 1998, the County of Suffolk and the Towns of Huntington and Babylon
commenced an action against LIPA, KeySpan, 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, and again in June 1999, the plaintiffs amended
their complaint. The amended complaint contains allegations relating to certain
payments LILCO had determined were payable in connection with the KeySpan /
LILCO merger to LILCO's Chairman and certain former officers and adds the
recipients of the payments as defendants. In June 1999, KeySpan was served with
the second amended complaint. On June 16, 2000, KeySpan filed a motion to
dismiss the second amended complaint. On August 14, 2000, the Court granted
KeySpan's motion and dismissed the plaintiffs' second amended complaint in its
entirety. The plaintiffs appealed that decision and on June 1, 2001 the United
States Court of Appeals in the Second Circuit denied plaintiff's appeal.

Environmental Matters

Air. With respect to NOx emissions reduction requirements for our existing power
plants, we are required to be in compliance with the Phase III reduction
requirements of the Ozone Transportation Commission memorandum by May 1, 2003
and we fully expect to achieve such emission reductions on time and in a
cost-effective manner. Our expenditures to address emission reduction
requirements through the year 2003 are expected to be between $10 million and
$15 million.

Water. Additional capital expenditures associated with the renewal of the
surface water discharge permits for our power plants may be required by the
Department of Environmental Conservation ("DEC"). Until our monitoring
obligations are completed and changes to the Environmental Protection Agency
regulations under Section 316 of the Clean Water Act are promulgated, the need
for and the cost of equipment upgrades cannot be determined.

Land.  Manufactured Gas Plants and Related Facilities

New York Sites. Within the State of New York we have identified 28 manufactured
gas plant ("MGP") sites and related facilities which were historically owned or
operated by KeySpan subsidiaries or such companies' predecessors. These former
sites, some of which are no longer owned by us, have been identified to both the
DEC for inclusion on appropriate site inventories and listing with the NYPSC.



<PAGE>



We have identified 18 sites associated with the historic operations of KEDNY.
Administrative Orders on Consent ("ACO") have been executed with the DEC to
address the investigation and remediation activities associated with two of
these sites. In 2001, KEDNY filed a complaint for the recovery of its
remediation costs in the New York State Supreme Court against the various
insurance companies that issued general comprehensive liability policies to
KEDNY. The outcome of this proceeding cannot yet be determined. We presently
estimate the remaining environmental cleanup activities of these sites will be
$88.6 million, which amount has been accrued by us. Expenditures incurred to
date by us with respect to MGP-related activities total $19.3 million.

We have identified nine sites associated with the historic operations of KEDLI,
six of which are the subject of two separate ACOs which we executed with the DEC
in 1999. Field investigations and, in some cases, interim remedial measures, are
underway or scheduled to occur at each of these sites under the supervision of
the DEC and the New York State Department of Health. Pursuant to a separate ACO
also entered into in 1999, we are performing preliminary site assessments at
five other sites which were formerly owned by KEDLI.

In January 1998, KEDLI filed a complaint for the recovery of its remediation
costs in the New York State Supreme Court against the various insurance
companies that issued general comprehensive liability policies to KEDLI. The
outcome of this proceeding cannot yet be determined. We presently estimate the
remaining environmental cleanup activities of these sites will be $68.3 million,
which amount has been accrued by us. Expenditures incurred to date by us with
respect to KEDLI MGP-related activities total $15.1 million.

We presently estimate the remaining cost of our New York/Long Island MGP-related
environmental cleanup activities will be $156.9 million, which amount has been
accrued by us as a reasonable estimate of probable cost for known sites.
Expenditures incurred to date by us with respect to these MGP-related activities
total $34.4 million.

With respect to remediation costs, the KEDNY 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 KEDNY will retain or absorb up to 10% of the variation. The
KEDLI rate plan also provides for the recovery of investigation and remediation
costs but with no consideration of the difference between estimated and actual
costs. Under prior rate orders, KEDNY has offset certain monies due to
ratepayers against its estimated environmental cleanup costs for MGP sites. At
December 31, 2001, we have reflected a regulatory asset of $124.1 million for
our New York/Long Island MGP sites.

We are also responsible for environmental obligations associated with the
Ravenswood electric generating facility, purchased from Consolidated Edison in
1999, including remediation activities associated with its historic operations
and those of the MGP facilities that formerly operated at the site. The extent
of our liability does not include liabilities arising from disposal of waste at
off-site locations prior to the acquisition closing and any monetary fines
arising from Consolidated Edison's pre-closing conduct.



<PAGE>



Based on information currently available for environmental contingencies related
to the Ravenswood facility acquisition, we have accrued a $5 million liability.

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

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

In March 1999, Boston Gas Company and a subsidiary of National Grid filed a
complaint for the recovery of remediation costs in the Massachusetts Superior
Court against various insurance companies that issued comprehensive general
liability policies to National Grid and its predecessors with respect to, among
other things, the 11 sites for which Boston Gas Company has agreed to make a
limited contribution. The outcome of this proceeding cannot be determined at
this time.

We presently estimate the remaining cost of these KEDNE MGP-related
environmental cleanup activities will be $36.1 million, which amount has been
accrued by us as a reasonable estimate of probable cost for known sites.
Expenditures incurred since November 8, 2000 with respect to these MGP-related
activities total $7.2 million.

We may have or share responsibility under applicable environmental laws for the
remediation of 10 MGP sites and related facilities associated with the historic
operations of EnergyNorth. EnergyNorth has received notice of its potential
responsibility for contamination at two former MGP sites and, together with
other potentially responsible parties, has received notice of potential
responsibility for contamination associated with four other sites.

With respect to the Laconia and Nashua sites, EnergyNorth has entered into
separate cost sharing agreements with Public Service of New Hampshire ("PSNH")
for the Laconia and Nashua sites. Under the agreements PSNH is obligated to
indemnify EnergyNorth for future remediation costs, with limited exceptions, at
the Laconia site and PSNH will pay EnergyNorth up to $4.8 million toward the
costs of the investigation and remediation at the Nashua site. EnergyNorth also
has entered into an agreement with the United States Environmental Protection
Agency ("EPA") for the contamination from the Nashua site that was allegedly
commingled with asbestos at the so-called Nashua River Asbestos Site, adjacent
to the Nashua MGP site.



<PAGE>



EnergyNorth has filed suit in both the New Hampshire Superior Court and the
United States District Court for the District of New Hampshire for recovery of
its remediation costs against the various insurance companies that issued
comprehensive general liability and excess liability insurance policies to
EnergyNorth and its predecessors. Settlements have been reached with some of the
carriers and one carrier was dismissed from a Superior Court action on summary
judgment. The outcome of the remaining proceedings cannot yet be determined.
EnergyNorth has also filed a contribution action in the United States District
Court for the District of New Hampshire against an entity it alleges shares
liability for the Manchester MGP study and remediation costs.

We presently estimate the remaining cost of EnergyNorth MGP-related
environmental cleanup activities will be $17.1 million, which amount has been
accrued by us as a reasonable estimate of probable cost for known sites.
Expenditures incurred since November 8, 2000 with respect to these MGP-related
activities total $2.9 million.

By a rate order issued in May 1990, the Massachusetts Department of
Telecommunications and Energy and the New Hampshire Public Utilities Commission
provide for the recovery of site investigation and remediation costs, and
accordingly, at December 31, 2001, we have reflected a regulatory asset of $59.6
million for the KEDNE MGP sites. As previously mentioned, Colonial Gas Company
and Essex Gas Company are not subject to the provisions of SFAS 71 and therefore
have recorded no regulatory assets. However, rate plans currently in effect for
these subsidiaries provide for the recovery of investigation and remediation
costs.

Eastern Enterprises Sites. We are aware of three non-utility sites located in
Pennsylvania, Connecticut and Massachusetts associated with former operations of
Eastern Enterprises, for which we may have or share environmental remediation
responsibility or ongoing maintenance, the principal of which is the former coal
tar processing facility in Everett, Massachusetts (the "Facility"). The Facility
was formerly owned by Eastern Enterprises and was operated by a predecessor of
Honeywell International, Inc. from the early 1900s until 1937 and then by a
predecessor of Beazer East, Inc. from 1937 until 1960 when it was shut down. The
Facility processed coal tar purchased from Eastern's adjacent by-product coke
plant, also shut down in 1960. Eastern, Beazer and Honeywell have entered into
an ACO with the Massachusetts Department of Environmental Protection ("DEP") for
the investigation and development of a remedial response plan for the Facility.
In addition, the Coast Guard has been working with the DEP since July 1998 to
bring about a remedial solution that would abate the continuing sheening problem
in the adjacent river. Eastern, Beazer and Honeywell have proposed a remedial
solution, a major element of which is the utilization of a containment structure
with limited dredging. As of yet, however, no agreement has been reached with
the regulators as to the appropriate remedial solution.

KeySpan, Honeywell and Beazer East have entered into a cost-sharing agreement
under which each company has agreed to pay one-third of the costs of compliance
with the consent order, while preserving any claims it may have against the
other companies. The companies have completed preliminary remedial measures,
including abatement of seepage of materials into the adjacent tidal river.
KeySpan also is recovering certain legal defense costs and may be entitled to
recover remediation costs from our insurers. We presently estimate the remaining
cost of our environmental cleanup activities for the three non-utility sites
will be approximately $42.5 million, which amount has been accrued by us a




<PAGE>



reasonable  estimate  of  probable  costs for known  sites;  however  the actual
remediation cost for these sites may be substantially higher.

We believe that in the aggregate, the accrued liability for investigation and
remediation of the New York and New England MGP sites and related facilities
identified above are reasonable estimates of likely cost within a range of
reasonable, foreseeable costs. We presently estimate the remaining cost of these
MGP- related environmental cleanup activities will be $257.6 million which
amount has been accrued by us as a reasonable estimate of probable cost for
known sites based upon available data, historical remediation costs of similarly
situated companies and management's experience in such matters. We may be
required to investigate and, if necessary, remediate each of these, or other
currently unknown, former MGP and related facility sites, the cost of which is
not presently determinable but may be material to our financial position,
results of operations or liquidity. As previously indicated, MGP-related costs
may be materially higher, depending upon remediation experience, selected end
use for each site, and actual environmental conditions encountered.

Note 9.  Hedging, Derivative Financial Instruments, and Fair Values

Commodity Contracts and Electric Derivative Instruments: From time to time we
utilize derivative financial instruments, such as futures, options and swaps,
for the purpose of hedging exposure to commodity price risk and to fix the
selling price on a portion of our peak electric energy sales.

Houston Exploration utilizes collars, as well as, over- the- counter ("OTC")
swaps to hedge future sales prices on a portion of its natural gas production to
achieve a more predictable cash flow and reduce its exposure to adverse price
fluctuations of natural gas. For any particular collar transaction, the counter
party is required to make a payment to Houston Exploration if the settlement
price for any settlement period is below the floor price for such transaction,
and Houston Exploration 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. In the swap instruments, Houston Exploration will pay the amount by
which the floating variable price (settlement price) exceeds the fixed price and
receive the amount by which the settlement price is below the fixed price. As of
December 31, 2001, Houston Exploration has hedged approximately 59% of its
estimated 2002 yearly production and 14% of its estimated 2003 yearly
production. Houston Exploration uses standard New York Mercantile Exchange
("NYMEX") futures prices and published volatility in its Black-Scholes
calculation to value its outstanding derivatives. Houston Exploration recorded a
benefit of $12.9 million in Revenues for derivative instruments that settled
during 2001.

We also employ standard NYMEX gas futures contracts, as well as oil swap
derivative contracts to fix the purchase price for a portion of the fuel used at
the Ravenswood facility. For these instruments, we will pay the amount by which
the floating variable price (settlement price) is below the fixed price and
receive the amount by which the settlement price exceeds the fixed price. We use
standard NYMEX futures prices to value the gas futures contracts and industry
published oil indices for number 6 grade fuel oil to value the oil swap
contracts. These contracts extend through 2003. During 2001, we realized a gain
of $5.9 million on the settlement of derivative instruments and recorded this
gain as a decrease to Fuel and Purchased Power expense.



<PAGE>



Our gas and electric marketing subsidiary has fixed rate gas sales contracts and
utilizes standard NYMEX futures contracts to lock-in a price for future natural
gas purchases. For these contracts, we pay the amount by which the floating
variable price (settlement price) is below the fixed price and receive the
amount by which the settlement price exceeds the fixed price. This subsidiary
uses standard NYMEX futures prices to value its outstanding contracts. During
2001, we realized a gain of $10.2 million on derivatives that settled during
2001 and recorded this gain as a reduction to Purchased Gas for Resale.

We have also engaged in the use of derivative swap instruments to fix the
selling price on a portion of our estimated 2002 summer and winter peak electric
energy sales from the Ravenswood facility to protect against a potential
degradation in market prices. Under these swap agreements, we will receive from
a counter party a fixed price per megawatt hour of electricity sold during
certain peak hours and pay the counter party the then current floating market
price for peak electric supply. We will receive the then current floating market
price of peak electric energy when the Ravenswood facility sells electric energy
to the NYISO. We also have tolling arrangements with two counter parties under
which we have "locked- in" a profit margin on a portion of 2002 summer and
winter season sales. Under these arrangements, we will receive from counter
parties a fixed margin and will then pay the counter party, on a monthly basis,
a variable profit margin from the sale of electric energy. As a result of these
hedging arrangements, we have hedged approximately 13% of our estimated 2002
yearly electric sales. We have a stated hedging policy that we will not hedge
more than 50% of our daily peak sales. We use NYISO-location zone published
indices and standard NYMEX prices to value these outstanding derivatives. During
2001, we realized a gain of $13.6 million on the settlement of certain swap
derivative instruments and recorded this gain in Revenues.

We adopted SFAS 133 "Accounting for Derivative Instruments and Hedging
Activities" on January 1, 2001. All of our commodity contracts and electric
derivative instruments detailed above are cash-flow hedges and qualify for hedge
accounting. Periodic changes in market value of derivatives which meet the
definition of a cash-flow hedge are recorded as comprehensive income, subject to
effectiveness, and then included in net income to match the underlying hedged
transactions. The adoption of SFAS 133, and the associated effectiveness
testing, did not have a significant effect on the results of operations for
2001.
















<PAGE>



The following tables set forth selected financial data associated with these
derivative financial instruments noted above that were outstanding at December
31, 2001.

<TABLE>
<CAPTION>
                                  Year of     Volumes                                 Fixed         Current        Fair Value
          Type of Contract       Maturity      mmcf       Floor $    Ceiling $      Price $        Price $           ($000)
----------------------------  ------------  -----------  ---------  -----------  -------------  -------------  ------------------
<S>                               <C>        <C>          <C>          <C>       <C>            <C>                 <C>
                Gas

Collars                            2002       51,100       3.64         5.36           -         2.56 - 3.22         50,731
Swaps -Short Natural Gas           2002       10,950         -           -            3.01       2.56 - 3.22          2,926
                                   2003       14,600         -           -            3.19           3.18               113
Swaps - Long Natural Gas           2002        8,880         -           -        2.96 - 3.93    2.56 - 3.22         (5,733)
                                   2003        1,570         -           -        3.36 - 3.64    3.12 - 3.41           (350)
----------------------------  ------------  -----------  ---------  -----------  -------------  -------------  ------------------
                                              87,100                                                                 47,687
----------------------------  ------------  -----------  ---------  -----------  -------------  -------------  ------------------
</TABLE>


<TABLE>
<CAPTION>
                                Year of     Volumes                                                 Fair Value
         Type of Contract      Maturity     Barrels      Fixed Price $        Current Price $         ($000)
----------------------------  -----------  ---------  -------------------  --------------------  -----------------
<S>                             <C>        <C>         <C>                    <C>                  <C>
                Oil

Swaps - Long Fuel Oil            2002       384,043     20.09 - 29.38          21.22 - 22.72          (776)
                                 2003       225,686     21.01 - 26.72          21.32 -21.81           (274)
----------------------------  -----------  ---------  -------------------  --------------------  -----------------
                                            609,729                                                  (1,050)
----------------------------  -----------  ---------  -------------------  --------------------  -----------------
</TABLE>



<TABLE>
<CAPTION>
                              Year of                                                  Current      Estimated          Fair Value
      Type of Contract        Maturity           MWh          Fixed Margin /Price $    Price $       Margin $            ($000)
------------------------  ----------------  ---------------  -----------------------  ----------  ---------------  -----------------
<S>                            <C>              <C>             <C>                   <C>         <C>                     <C>
         Electricity

Tolling Arrangements            2002             576,000         10.00 - 26.00            -        3.94 - 10.13            7,640
Swaps                           2002              67,200             54.50              42.35           -                    820
------------------------  ----------------  ---------------  -----------------------  ----------  ---------------  -----------------
                                                 643,200                                                                   8,460
------------------------  ----------------  ---------------  -----------------------  ----------  ---------------  -----------------
</TABLE>


Non-firm Gas Sales Derivative Instruments: 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



<PAGE>



prevailing alternate fuel oil prices. We use gas swap contracts, with offsetting
positions in oil swap contracts of equivalent energy value, with third parties
to fix profit margins on specified portions of gas sales to our large-volume
market. These derivatives instruments, at this time, do not meet the
"effectiveness standards" as prescribed by SFAS 133 and accordingly do not
qualify for hedge accounting. Therefore, changes in the market value of these
derivatives are included in income currently. During 2001, we realized gains of
$3.0 million on the settlement of certain contracts, as well as, $1.9 million in
mark-to-market gains, and recorded these gains as a reduction to Purchased Gas
for Resale. We use standard NYMEX futures prices to value both the gas and No. 2
grade heating oil swap contracts.

The following table sets forth selected financial data associated with these
derivative financial instruments that were outstanding at December 31, 2001.

<TABLE>
<CAPTION>
                                 Year of         Volumes        Volumes                                                 Fair Value
         Type of Contract        Maturity          mmcf         Barrels      Fixed Price $     Current Price $            ($000)
---------------------------  ----------------  ------------  -------------  ---------------  ------------------  -------------------
<S>                               <C>               <C>         <C>         <C>                <C>                       <C>
Swaps - Short Natural Gas          2002              770               -      3.11 - 3.81        2.56 - 2.57              (1,535)
Swaps - Short  Heating Oil         2002                -         448,000     29.42 - 33.15      23.18 - 23.24              3,505
---------------------------  ----------------  ------------  -------------  ---------------  ------------------  -------------------
                                                     770         448,000                                                   1,970
---------------------------  ----------------  ------------  -------------  ---------------  ------------------  -------------------
</TABLE>

Firm Gas Sales Derivative Instruments - Regulated Utilities: We utilize
derivative financial instruments to "lock-in" the purchase price for a portion
of our future natural gas purchases. Our strategy is to minimize fluctuations in
firm gas sales prices to our regulated firm gas sales customers in our New York
service territory. During 2001, we entered into a number of derivative
instruments such as, collars, purchased calls, transformer calls and variable
premium contracts. Since these derivative instruments have not been designed as
hedges and are being employed to support our gas sales prices to regulated firm
gas sales customers, the accounting for these derivative instruments is subject
to SFAS 71. Therefore, changes in the market value of these derivatives are
recorded as a Regulatory Asset or Regulatory Liability on the Consolidated
Balance Sheet. Gains or losses on the settlement of these contracts are
initially deferred and then refunded to or collected from our firm gas sales
customers during the appropriate winter heating season consistent with
regulatory requirements. We use standard NYMEX futures prices to value these
instruments.













<PAGE>



The following table sets forth selected financial data associated with these
derivative financial instruments that were outstanding at December 31, 2001.

<TABLE>
<CAPTION>
                           Year of     Volumes                                                                          Fair Value
      Type of Contract    Maturity      mmcf       Floor $       Ceiling $      Fixed Price $     Current Price $         ($000)
-----------------------  -----------  --------- -------------  --------------  ----------------  -----------------  ----------------
<S>                        <C>         <C>      <C>            <C>              <C>               <C>                  <C>
             Gas
Collars                     2002        1,800    4.55 - 5.43    5.70 - 6.20           -             2.56 - 2.57          (4,370)
Call Options                2002        3,900         -              -           4.00 - 5.60        2.56 - 2.57          (3,878)
Variable Premiums           2002        2,400         -              -           3.90 - 6.00        2.56 - 2.57          (2,604)
-----------------------  -----------  --------- -------------  --------------  ----------------  -----------------  ----------------
                                        8,100                                                                           (10,852)
-----------------------  -----------  --------- -------------  --------------  ----------------  -----------------  ----------------
</TABLE>


Interest Rate Swaps: We also have interest rate swap agreements in which
approximately $1.4 billion of fixed rate debt have effectively been changed to
floating rate debt. These swaps extend through 2023, but can be terminated
earlier based on certain market and contract conditions. We have entered into
these derivative instruments with a number of major financial institutions to
reduce credit risk. For the term of the agreements, we will receive the fixed
coupon rate associated with these bonds and pay the counter parties a variable
interest rate that is reset on a weekly and/or quarterly basis as appropriate.
These bonds are fair- value hedges and qualify for hedge accounting. The swap
agreements associated with the Medium Term Notes, as displayed in the table
below, qualify for "short-cut" hedge accounting treatment under SFAS 133. Under
this method, changes in the fair values of the swap instruments are recorded
directly against the hedged bonds and have no impact on earnings. These swaps
were entered into in October 2001. The fair-value hedge associated with a Gas
Facilities Revenue Bond, which was entered into in 1999, does not qualify for
"short-cut" accounting treatment. As a result, the fair values of both the bond
and swap instrument are measured at least quarterly and the net change in the
fair values from period to period are recorded in income. Through the
utilization of our interest rate swap agreements, we reduced recorded interest
expense by $9.5 million in 2001. Further, we recorded, a benefit of $0.5 million
as a result of the fair value measurements. The fair values of these derivative
instruments are provided to us by third party appraisers and represent the
present value of future cash-flows based on a forward interest rate curve for
the life of the derivative instrument. The fair values at December 31, 2001, as
indicated in the table below, reflects an assumption of higher interest rates in
the future.












<PAGE>

The table below summarizes selected financial data associated with these
derivative financial instruments that were outstanding at December 31, 2001.
<TABLE>
<CAPTION>

                                                                                                    Average
                                  Maturity Date of       Notional Amount        Fixed Rate       Variable Rate        Fair Value
                     Bond              Swaps                  ($000)             Received             Paid              ($000)
-------------------------------  -------------------  ---------------------  ----------------  -----------------  ------------------
<S>                                  <C>                <C>                       <C>                <C>              <C>
Gas Facilities Revenue Bonds          2024                   90,000                5.540%             2.650%               136
Medium Term Notes                     2010                  500,000                7.625%             4.600%           (21,921)
Medium Term Notes                     2006                  500,000                6.150%             3.900%           (11,567)
Medium Term Notes                     2023                  270,000                8.200%             4.020%           (13,794)
-------------------------------  -------------------  ---------------------  ----------------  -----------------  ------------------
                                                          1,360,000                                                    (47,146)
-------------------------------  -------------------  ---------------------  ----------------  -----------------  ------------------
</TABLE>


Additionally, in November 2001, we entered into a swap agreement that
effectively converted $270 million of outstanding commercial paper with
fixed-rate debt. This swap is a cash-flow hedge and qualifies for hedge
accounting under SFAS 133. Periodic changes in the market value of this swap are
recorded as comprehensive income, subject to effectiveness, and then included in
net income to match the underlying hedged transactions. We recorded additional
interest expense associated with this swap of $0.3 million during 2001 and there
was no impact on earnings from ineffectiveness. At December 31, 2001, the fair
value of this swap, which was reflected as a liability, was $0.4 million.

Weather Derivative: The utility tariffs associated with our New England gas
distribution operations do not contain a weather normalization adjustment. As a
result, fluctuations from normal weather may have a significant positive or
negative effect on the results of these operations. To mitigate the effect of
fluctuations from normal weather on our financial position and cash flows, we
entered into a weather swap in October 2001. This derivative hedged
approximately 15% of our weather related risk for the November 2001 - March 2002
winter season. Since weather in New England was warmer than normal in the fourth
quarter of 2001, we recorded a gain of $1.4 million in Other Income in 2001.
Although weather derivatives are outside the scope of SFAS 133, these
derivatives are essentially marked to market, at least quarterly, with changes
in fair valve included in earnings currently. In January 2002, we settled all
our remaining weather derivatives and recorded a gain of $0.3 million in Other
Income.

We 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 hedged against. We believe that the credit risk related to the
above noted 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.









<PAGE>

Fair Values of Long-Term Debt

<TABLE>
<CAPTION>
                        Fair Value                                                          (In Thousands of Dollars)

                                                                 2001                          2000
----------------------------------------------------  ---------------------------   -------------------------
<S>                                                                   <C>                          <C>
First Mortgage Bonds                                  $                   182,666   $                 185,418
Notes                                                                   3,076,455                   2,482,436
Gas Facilities Revenue Bonds                                              630,845                     672,815
Authority Financing Notes                                                  66,005                      66,005
Promissory Notes                                                          617,933                     598,769
----------------------------------------------------  ---------------------------   -------------------------
                                                      $                 4,573,904   $               4,005,443
----------------------------------------------------  ---------------------------   -------------------------

                        Carrying Amount                                                     (In Thousands of Dollars)

                                                                 2001                         2000
----------------------------------------------------  ---------------------------   -------------------------
First Mortgage Bonds                                  $                   179,122   $                 179,872
Notes                                                                   2,985,000                   2,360,000
Gas Facilities Revenue Bonds                                              648,500                     648,500
Authority Financing Notes                                                  66,005                      66,005
Promissory Notes                                                          602,427                     602,427
----------------------------------------------------  ---------------------------   -------------------------
                                                      $                 4,481,054   $               3,856,804
----------------------------------------------------  ---------------------------   -------------------------
</TABLE>



Our subsidiary debt is carried at an amount approximately 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.

Note 10.  Discontinued Operations

On November 8, 2000, we acquired Midland Enterprises ("Midland"), a marine
transportation subsidiary, as part of the Eastern transaction. We were ordered
by the SEC to sell this subsidiary by November 8, 2003 because its operations
are not functionally related to our core utility operations. On January 24,
2002, we announced an agreement to sell Midland to Ingram Industries Inc., which
is expected to close by the second quarter of 2002, subject to receipt of
applicable regulatory approvals. The sale of Midland represents the disposal of
a business segment pursuant to Accounting Principles Board ("APB") Opinion No.
30. Accordingly, the results of Midland have been classified as discontinued
operations, and prior periods have also been reclassified.

Discontinued operations for the year ended December 31, 2001 includes an
anticipated $30.4 million after-tax loss on the sale of Midland based on the
expected proceeds and estimated income for the first two quarters of 2002.
Proceeds from the transaction are subject to purchase price and post closing
adjustments, and may be used to pay-down a portion of outstanding debt.






<PAGE>

The following is selected financial information for Midland Enterprises for the
year ended December 31, 2001 and for the period November 8, 2000 through
December 31, 2000 :

<TABLE>
<CAPTION>
                                                                                                           (In Thousands of Dollars)
                                                                                                           -------------------------

                                                                               2001                              2000
------------------------------------------------------------------  ----------------------        -------------------------
<S>                                                                              <C>                                <C>
Revenues                                                            $              266,792        $                  40,788
Pretax income (loss)                                                                18,489                           (2,970)
Income tax (expense) benefit                                                        (7,571)                           1,027
------------------------------------------------------------------  ----------------------        -------------------------
Income (loss) from discontinued operations                                          10,918                           (1,943)
------------------------------------------------------------------  ----------------------        -------------------------
Estimated book gain on disposal                                                     44,580                                -
Tax expense associated with disposal                                               (74,936)                               -
------------------------------------------------------------------  ----------------------        -------------------------
Estimated loss on disposal                                                         (30,356)                               -
------------------------------------------------------------------  ----------------------        -------------------------
Loss from discontinued operations                                   $              (19,438)       $                  (1,943)
------------------------------------------------------------------  ----------------------        -------------------------
</TABLE>


Assets and liabilities of the discontinued operations are as follows:
<TABLE>
<CAPTION>
                                                                                                      (In Thousands of Dollars)
                                                                                                      -------------------------

                                                                    2001                                2000
-------------------------------------------------------  ---------------------------   ---------------------------
<S>                                                                   <C>                           <C>
Current assets                                           $              139,522   $                   117,199
Property, plant and equipment, net                                      316,626                       328,321
Long-term assets                                                         35,233                        34,516
Current liabilities                                                     (58,835)                      (54,084)
Long-term liabilities                                                  (241,491)                     (241,916)
-------------------------------------------------------  ---------------------------   ---------------------------
Net assets of discontinued operations                    $              191,055   $                   184,036
-------------------------------------------------------  ---------------------------   ---------------------------
</TABLE>

Note 11.  Roy Kay Operations

During  2001 we  undertook  a complete  evaluation  of the  strategy,  operating
controls  and  organizational  structure  of the Roy Kay  companies  - plumbing,
mechanical,  electrical  and  general  contracting  companies  acquired by us in
January  2000.  We decided  to  discontinue  the  general  contracting  business
conducted by these  companies  based upon our view that the general  contracting
business  is  not a  core  competency  of  these  companies.  Certain  remaining
activities  engaged in by the Roy Kay companies will be integrated with those of
other  KeySpan  energy-related  businesses.  We will  complete the  construction
projects  entered into by the former Roy Kay companies  and, as a result,  their
operations  will  continue  to be  consolidated  in our  Consolidated  Financial
Statements until such time as those contracts have been completed.  We currently
estimate  that these  contracts  will be completed  in 2002.  For the year ended
December 31, 2001,  the Roy Kay  companies  incurred an after-tax  loss of $95.0
million ($137.8 million pre-tax) reflecting: (i) unanticipated costs to complete
work on certain  construction  projects;  (ii) the impact of inaccuracies in the
books of these  companies  relating to their overall  financial and  operational
performance, (iii) discontinuance costs of the general contracting activities of
those companies,  including the write-off of goodwill,  and certain accounts and
retainage  receivables;  and (iv) operating losses.  For the year ended December
31, 2001 and December 31, 2000, the Roy Kay companies recorded a pre-tax loss of
$137.8 million and pre-tax earnings of $1.3 million,  respectively.  KeySpan and
the former Roy Kay companies are currently engaged in litigation relating to the
termination  of the former  owners,  as well as other  matters  relating  to the
acquisition of the Roy Kay companies.  (See Note 8 "Contractual  Obligations and
Contingencies" - legal matters.)



<PAGE>





Note 12. Class Action Settlement

During 2001, we reversed a previously recorded loss provision regarding certain
pending rate refund issues relating to the 1989 RICO class action settlement.
This adjustment resulted from a favorable United States Court of Appeals ruling
received on September 28, 2001, overturning a lower court decision, and resulted
in a positive pre-tax adjustment to earnings of $33.5 million, or $20.1 million
after-tax. This adjustment has been reflected as a $22.0 million reduction to
Operation and Maintenance expense and a reduction of $11.5 million to Interest
Expense on the Consolidated Statement of Income.

Note 13. KeySpan Gas East Corporation Summary Financial Data

KEDLI is a wholly owned subsidiary of KeySpan. KEDLI was formed on May 7, 1998
and on May 28, 1998 acquired substantially all of the assets related to the gas
distribution business of LILCO. KEDLI provides gas distribution services to
customers in the Long Island counties of Nassau and Suffolk and the Rockaway
peninsula of Queens county. KEDLI established a program for the issuance, from
time to time, of up to $600 million aggregate principal amount of Medium-Term
Notes, which will be fully and unconditionally guaranteed by us. On February 1,
2000, KEDLI issued $400 million of 7.875% Medium- Term Notes due 2010. In
January 2001, KEDLI issued an additional $125 million of Medium- Term Notes at
6.9% due January 15, 2008. These notes are also guaranteed by us. The following
condensed financial statements are required to be disclosed by SEC regulations
and represent those of KEDLI and KeySpan as guarantor of the Medium- Term Notes.





















<PAGE>
<TABLE>
Statement of Income
<CAPTION>
                                                                                                           (In Thousands of Dollars)
------------------------------------------------------------------------------------------------------------------------------------
                       Year Ended December 31, 2001                                   Year Ended December 31, 2000
---------------------  -------------------------------------------------------------------------------------------------------------
                         Guarantor    KEDLI     Eliminations    Consolidated   Guarantor      KEDLI    Eliminations     Consolidated
------------------------------------------------------------------------------------------------------------------------------------
<S>                    <C>          <C>         <C>            <C>            <C>           <C>         <C>              <C>
Revenues               $5,743,422  $ 889,693   $           -  $ 6,633,115  $   4,285,737  $  794,965 $            -  $    5,080,702
                       ----------  ---------  --------------  -----------  -------------  ---------- --------------  --------------
Operating Expenses
Purchased gas           1,706,333    464,780               -    2,171,113      1,000,593     408,087              -       1,408,680
Fuel and purchased
  power                   538,532          -               -      538,532        460,841           -              -         460,841
Operations and
      maintenance       2,069,653     45,106               -    2,114,759      1,597,131     127,780              -       1,724,911
Intercompany expense      (87,738)    87,738               -            -        (10,718)     10,718              -               -
Depreciation and
      amortization        502,864     56,274               -      559,138        284,905      46,017              -         330,922
Operating taxes           357,720     91,204               -      448,924        329,252      92,684              -         421,936
                       ----------  ---------  --------------  -----------  -------------  ---------- --------------  --------------
Total Operating
Expenses                5,087,364    745,102               -    5,832,466      3,662,004     685,286              -       4,347,290
                       ----------  ---------  --------------  -----------  -------------  ---------- --------------  --------------
Operating Income          656,058    144,591               -      800,649        623,733     109,679              -         733,412
Other Income and
     (Deductions)          22,566      9,721    (25,081)            7,206         13,388        (707)      (24,767)         (12,086)
                       ----------  ---------  --------------  -----------  -------------  ---------- --------------  --------------
Income (Loss) before
  interest charges and
  income taxes            678,624    154,312    (25,081)          807,855        637,121     108,972       (24,767)         721,326
Interest Expense          313,345     65,206    (25,081)          353,470        172,425      53,656       (24,767)         201,314
Income Taxes              182,374     28,319        -             210,693        198,900      18,362              -         217,262
                       ----------  ---------  --------------  -----------  -------------  ---------- --------------  --------------
Earnings from
Continuing Operations    $182,905    $60,787   $           -     $243,692       $265,796     $36,954 $            -        $302,750

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

                                                                                       (In Thousands of Dollars)
----------------------------------------------------------------------------------------------------------------
                                                          Year Ended December 31, 1999
------------------------------  --------------------------------------------------------------------------------
                                    Guarantor             KEDLI            Eliminations         Consolidated
------------------------------  ------------------  ------------------  ------------------  --------------------
<S>                                     <C>                  <C>                <C>                  <C>
Revenues                        $        2,317,525  $          637,088        $          -  $          2,954,613
                                ------------------  ------------------  ------------------  --------------------
Operating Expenses
Purchased gas                              459,508             284,924                   -               744,432
Fuel and purchased power                    17,252                   -                   -                17,252
Operations and
   maintenance                             981,331             109,835                   -             1,091,166
Intercompany expense                       (10,793)             10,793                   -                     -
Depreciation and
    amortization                           220,639              32,801                   -               253,440
Operating taxes                            282,521              83,633                   -               366,154
                                ------------------  ------------------  ------------------  --------------------
Total Operating Expenses                 1,950,458             521,986                   -             2,472,444
                                ------------------  ------------------  ------------------  --------------------
Operating Income                           367,067             115,102                   -               482,169
Other Income and
(Deductions)                                96,884                 159             (50,488)               46,555
                                ------------------  ------------------  ------------------  --------------------
Income (Loss) before
  interest charges and
  income taxes                             463,951             115,261             (50,488)              528,724
Interest Expense                           133,751              50,488             (50,488)              133,751
Income Taxes                               113,106              23,256                   -               136,362
                                ------------------  ------------------  ------------------  --------------------
Earnings From
Continuing Operations           $          217,094  $           41,517                   -  $            258,611

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

<PAGE>
<TABLE>
<CAPTION>

Balance Sheet                                                                                       (In Thousands of dollars)
                              December 31, 2001                                      December 31, 2000
-----------------------------------------------------------------------------------------------------------------------------------


                              Guarantor      KEDLI      Eliminations  Consolidated   Guarantor    KEDLI   Eliminations  Consolidated
------------------------------------------------------------------------------------------------------------------------------------
<S>                          <C>          <C>          <C>         <C>           <C>           <C>          <C>          <C>
ASSETS
Current Assets
  Cash and temporary cash
    investments            $   159,252  $         -  $          -  $   159,252   $    83,329  $        -  $          -  $    83,329
  Accounts receivable, net   1,540,082      233,013     (500,496)    1,272,599     1,991,904     277,632     (558,222)    1,711,314
  Other current assets         454,319      112,317             -      566,636       442,660      93,842             -      536,502
                           -----------  -----------  ------------  -----------   -----------  ----------  ------------  -----------
                             2,153,653      345,330     (500,496)    1,998,487     2,517,893     371,474     (558,222)    2,331,145
                           -----------  -----------  ------------  -----------   -----------  ----------  ------------  -----------

Investment Held for
  Disposal                     191,055            -             -      191,055       184,036           -             -      184,036
Equity Investments             756,111            -     (532,862)      223,249       732,058           -      (532,862)     199,196
                           -----------  -----------  ------------  -----------   -----------  ----------  ------------  -----------
Property
  Gas                        4,074,894    1,629,963             -    5,704,857     3,845,803   1,500,996             -    5,346,799
  Other                      4,231,262            -             -    4,231,262     3,596,818           -             -    3,596,818
  Accumulated depreciation
    and depletion           (3,035,788)    (294,400)                (3,330,188)   (2,645,381)   (268,260)                (2,913,641)
                           -----------  -----------  ------------  -----------   -----------  ----------  ------------  -----------
                             5,270,368    1,335,563             -    6,605,931     4,797,240   1,232,736             -    6,029,976
                           -----------  -----------  ------------  -----------   -----------  ----------  ------------  -----------

Deferred Charges             2,571,029      199,855             -    2,770,884     2,355,985     207,127             -    2,563,112
                           -----------  -----------  ------------  -----------   -----------  ----------  ------------  -----------

                           -----------  -----------  ------------  -----------   -----------  ----------  ------------  -----------
Total Assets               $10,942,216  $ 1,880,748  $(1,033,358)  $11,789,606   $10,587,212  $1,811,337  $(1,091,084)  $11,307,465
                           ===========  ===========  ============  ===========   ===========  ==========  ============  ===========

LIABILITIES AND
CAPITALIZATION
Current Liabilities

  Accounts payable and
    accrued expenses      $    975,873  $   115,557  $          -  $ 1,091,430    $ 1,268,147  $  196,537  $          -  $ 1,464,684
  Notes payable              1,048,450            -             -    1,048,450      1,300,237           -             -    1,300,237
  Other current
    liabilities                220,985       23,844             -      244,829        218,767      20,407             -      239,174
                          ------------  -----------  ------------  -----------    -----------  ----------  ------------  -----------
                             2,245,308      139,401             -    2,384,709      2,787,151     216,944             -    3,004,095
                          ------------  -----------  ------------  -----------    -----------  ----------  ------------  -----------
Intercompany Accounts
  Payable                            -      324,592     (324,592)            -              -     382,318     (382,318)            -
                          ------------  -----------  ------------  -----------    -----------  ----------  ------------  -----------

Deferred Credits and Other
    Liabilities
  Deferred income tax          593,300        4,772             -      598,072        400,674    (26,094)             -      374,580
  Other deferred credits
    and liabilities            841,662      100,452             -      942,114        658,149     112,239             -      770,388
                          ------------  -----------  ------------  -----------    -----------  ----------  ------------  -----------
                             1,434,962      105,224             -    1,540,186      1,058,823      86,145             -    1,144,968
                          ------------  -----------  ------------  -----------    -----------  ----------  ------------  -----------
Capitalization
  Common shareholders'
    equity                   2,812,837      610,627     (532,862)    2,890,602      2,798,652     550,026     (532,862)    2,815,816
  Preferred stock               84,077            -             -       84,077         84,205           -             -       84,205
  Long-term debt             4,172,649      700,904     (175,904)    4,697,649      3,716,441     575,904     (175,904)    4,116,441
                          ------------  -----------  ------------  -----------    -----------  ----------  ------------  -----------
Total Capitalization         7,069,563    1,311,531     (708,766)    7,672,328      6,599,298   1,125,930     (708,766)    7,016,462
                          ------------  -----------  ------------  -----------    -----------  ----------  ------------  -----------

Minority Interest in
  Subsidiary Companies         192,383            -             -      192,383        141,940           -             -      141,940
                          ------------  -----------  ------------  -----------    -----------  ----------  ------------  -----------
Total Liabilities and
  Capitalization          $ 10,942,216  $ 1,880,748  $(1,033,358)  $11,789,606    $10,587,212  $1,811,337  $(1,091,084)  $11,307,465
                          ============  ===========  ============  ===========    ===========  ==========  ============  ===========
</TABLE>

<PAGE>

<TABLE>
<CAPTION>

Statement of Cash Flows
                                                                                                          (In Thousands of dollars)
------------------------------------------  ----------------------------------------------  ----------------------------------------
                                                  Year Ended December 31, 2001                   Year Ended December 31, 2000
                                            ----------------------------------------------------------------------------------------
                                              Guarantor       KEDLI        Consolidated      Guarantor       KEDLI      Consolidated
                                            ----------------------------------------------------------------------------------------
<S>                                            <C>          <C>           <C>              <C>            <C>           <C>
Operating Activities
Net Cash Provided by Operating Activities   $   825,887  $     64,294  $      890,181  $       325,988  $   112,738  $      438,726
                                            ----------------------------------------------------------------------------------------
Investing Activities
   Capital expenditures                        (928,191)     (131,568)     (1,059,759)        (518,058)    (114,977)       (633,035)
   Other                                         18,452             -          18,452       (2,238,775)           -      (2,238,775)
                                            ----------------------------------------------------------------------------------------
Net Cash (Used in) Investing Activities        (909,739)     (131,568)     (1,041,307)      (2,756,833)    (114,977)     (2,871,810)
                                            ----------------------------------------------------------------------------------------
Financing Activities
   Treasury stock issued (purchased)             88,786             -          88,786           72,289            -          72,289
   Receipt/payment of dividends                       -             -               -          125,000     (125,000)              -
   Redemption of preferred stock                      -             -               -         (363,000)           -        (363,000)
   Issuance (payment) of debt, net              251,919       125,000         376,919        2,633,962      400,000       3,033,962
   Debt received (paid)                               -             -               -          397,000     (397,000)              -
   Common and preferred stock dividends paid   (251,502)            -        (251,502)        (260,001)           -        (260,001)
   Settlement of interest  rate lock and other   12,846             -          12,846          (95,439)           -         (95,439)
   Net intercompany accounts payable             57,726       (57,726)              -         (124,239)     124,239               -
                                            ----------------------------------------------------------------------------------------
Net Cash Provided by
   (Used in) Financing Activities               159,775        67,274         227,049        2,385,572        2,239       2,387,811
                                            ----------------------------------------------------------------------------------------
Net (Decrease) Increase
   in Cash and Cash Equivalents             $    75,923   $         -  $       75,923  $       (45,273)  $        -  $      (45,273)
                                            ========================================================================================
Cash and Cash Equivalents
    at Beginning of Period                  $    83,329   $         -  $       83,329  $       128,602   $        -  $      128,602
Net (Decrease) Increase
    in Cash and Cash Equivalents            $    75,923   $         -  $       75,923  $       (45,273)  $        -  $      (45,273)
                                            ----------------------------------------------------------------------------------------
Cash and Cash Equivalents
    at End of Period                        $   159,252   $         -  $      159,252  $        83,329   $        -  $       83,329
                                            ========================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                                                (In Thousands of dollars)
                                                    --------------------------------------
                                                      Year Ended December 31, 1999
                                                    --------------------------------------
                                                     Guarantor       KEDLI    Consolidated
                                                    --------------------------------------
<S>                                                  <C>           <C>           <C>
Operating Activities
Net Cash Provided by Operating Activities           $  564,109  $    24,896  $     589,005
                                                    ---------------------------------------
Investing Activities
   Capital expenditures                               (569,838)    (102,007)      (671,845)
   Other                                               (23,819)           -        (23,819)
                                                    ---------------------------------------
Net Cash (Used in) Investing Activities               (593,657)    (102,007)      (695,664)
                                                    ---------------------------------------
Financing Activities
   Treasury stock issued (purchased)                  (299,243)           -       (299,243)
   Receipt/payment of dividends                              -            -              -
   Redemption of preferred stock                             -            -              -
   Issuance (payment) of debt, net                    (131,527)           -       (131,527)
   Debt received (paid)                                      -            -              -
   Common and preferred stock dividends paid          (284,327)           -       (284,327)
   Settlement of interest  rate lock and other           7,582            -          7,582
   Net intercompany accounts payable                   (77,111)      77,111              -
                                                    ---------------------------------------
Net Cash Provided by
   (Used in) Financing Activities                     (784,626)      77,111       (707,515)
                                                    ---------------------------------------
Net (Decrease) Increase
   in Cash and Cash Equivalents                     $ (814,174) $         -  $    (814,174)
                                                    =======================================
Cash and Cash Equivalents
    at Beginning of Period                          $  942,776  $         -  $     942,776
Net (Decrease) Increase
    in Cash and Cash Equivalents                    $ (814,174  $         -  $    (814,174)
                                                    ---------------------------------------
Cash and Cash Equivalents
    at End of Period                                $  128,602 $          -  $     128,602
                                                    =======================================
</TABLE>

<PAGE>


Note 14. Eastern/EnergyNorth Acquisition

On November 8, 2000,  we purchased all of the  outstanding  stock of Eastern for
$64.56  per  share in cash and all of the  outstanding  common  stock of ENI for
$61.46 per share in cash.  The  increased  size of KeySpan  should  enable us to
provide  enhanced  cost-effective  customer  service  and to  capitalize  on the
above-average  growth opportunities for natural gas in the Northeast and provide
additional resources to our unregulated businesses.

The transactions have been accounted for using the purchase method of accounting
for business combinations. Accordingly, the accompanying Consolidated Statement
of Income includes Eastern and ENI results commencing November 8, 2000. The
purchase price was allocated to the net assets acquired based upon their fair
value. The historical cost basis of Eastern's and ENI's assets and liabilities,
with minor exceptions, was determined to represent the fair value due to the
existence of regulatory-approved rate plans based upon the recovery of
historical costs and a fair return thereon. The excess of the purchase price
over the fair value of the net assets acquired was approximately $1.5 billion
and was recorded as goodwill.

The following is the comparative unaudited proforma condensed financial
information for the years ended December 31, 2000 and 1999. The proforma
disclosures reflect the results of the operations of Eastern and ENI as if our
acquisitions were consummated on the first day of the reporting periods.


                         Year Ended                          Year Ended
                     December 31, 2000                  December 31, 1999
-------------------------------------------------------------------------
                      (In Thousands of Dollars, Except Per Share Amounts)

Revenues                 6,130,158                              4,058,178
Operating Income           671,081                                568,754
Net Income                 114,393                                174,923
-------------------------------------------------------------------------
Earnings Per Share           $0.71                                  $1.01
-------------------------------------------------------------------------

Included in the 2000 proforma earnings, are merger related costs of $76.0
million, after-tax, recorded by Eastern and ENI in connection with our
acquisition of these companies. Excluding these costs, proforma earnings per
share for the year ended December 31, 2000 were $1.27. These proforma results
may not be indicative of future results. Further, the consolidated proforma
results for 2000 and 1999 do not take into account: (i) continued gas sales
growth throughout our service territories, especially on Long Island and in New
England; (ii) earnings enhancement from our gas exploration and production
operations; and (iii) the continued successful integration of acquired companies
providing energy-related services within our Energy Services segment.

Note 15.   Workforce Reduction Programs

As a result of the Eastern acquisition, we implemented early retirement and
severance programs in an effort to reduce our workforce. In 2000, we recorded a
$22.7 million liability associated with these programs. During the year ended
December 31, 2001 we reduced this liability by $4.1 million as a result of lower
than anticipated costs per employee and recorded a corresponding reduction to



<PAGE>



Goodwill. This severance program is targeted to reduce the workforce by 500
employees and will continue through 2002. At December 31, 2001 we paid $10.1
million for these programs and had a remaining liability of $8.5 million.

Note 16.  Shareholder Rights Plan

On March 30, 1999 our Board of Directors adopted a Shareholder Rights Plan (the
"Plan") designed to protect shareholders in the event of a proposed takeover.
The Plan creates a mechanism that would dilute the ownership interest of a
potential unauthorized acquirer. The Plan establishes one preferred stock
purchase "right" for each outstanding share of common stock to shareholders of
record on April 14, 1999. Each right, when exercisable, entitles the holder to
purchase 1/100th of a share of Series D Preferred Stock, at a price of $95.00.
The rights generally become exercisable following the acquisition of more than
20 percent of our common stock without the consent of the Board of Directors.
Prior to becoming exercisable, the rights are redeemable by the Board of
Directors for $0.01 per right. If not so redeemed, the rights will expire on
March 30, 2009.

Note 17. Supplemental Gas and Oil Disclosures (Unaudited)

This information includes amounts attributable to 100% of Houston Exploration
and KeySpan Exploration and Production, LLC at December 31, 2001. Shareholders
other than KeySpan had a minority interest of approximately 33% in Houston
Exploration at December 31, 2001 and a 30% minority interest in 2000. Gas and
oil operations, and reserves, were located in the United States in all years.
<TABLE>
<CAPTION>

Capitalized Costs Relating To Gas and Oil Producing Activities
-----------------------------------------------------------------------  ----------------------------  ---------------------------
At December 31,                                                                      2001                         2000
-----------------------------------------------------------------------  ----------------------------  ---------------------------
                                                                                         (In Thousands of Dollars)
<S>                                                                                       <C>                          <C>
Unproved properties not being amortized                                  $                    195,478  $                   166,478
Properties being amortized - productive and nonproductive                                   1,575,131                    1,235,438
-----------------------------------------------------------------------  ----------------------------  ---------------------------
Total capitalized costs                                                                     1,770,609                    1,401,916
Accumulated depletion                                                                        (796,722)                    (577,240)
-----------------------------------------------------------------------  ----------------------------  ---------------------------
Net capitalized costs                                                    $                    973,887  $                   824,676
-----------------------------------------------------------------------  ----------------------------  ---------------------------
</TABLE>

The following is a break-out of the costs which are excluded from the
amortization calculation as of December 31, 2001, by year of acquisition: 2001-
$75.5 million , 2000 - $33.2 million and prior years $86.7 million. We 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.








<PAGE>

Costs Incurred in Property Acquisition, Exploration and Development Activities

<TABLE>
<CAPTION>
Year Ended December 31,                            2001                       2000                        1999
--------------------------------------  --------------------------  -------------------------  --------------------------
                                                                    (In Thousands of Dollars)
<S>                                                      <C>                         <C>                        <C>
Acquisition of properties-
     Unproved properties                $                   31,718  $                   7,992  $                   13,107
     Proved properties                                      85,435                     40,960                      42,573
Exploration                                                 74,497                     70,511                      39,649
Development                                                191,927                    111,078                      87,965
--------------------------------------  --------------------------  -------------------------  --------------------------
Total costs incurred                    $                  383,577  $                 230,541  $                  183,294
--------------------------------------  --------------------------  -------------------------  --------------------------
</TABLE>

<TABLE>
<CAPTION>
Results of Operations from Gas and Oil Producing Activities*
------------------------------------------------------------

Year Ended December 31,                                        2001                   2000                   1999
--------------------------------------------------------  ----------------  ----------------------  ---------------------
                                                                           (In Thousands of Dollars)
<S>                                                              <C>                      <C>                    <C>
Revenues                                              $            398,089  $              274,209  $             150,581
--------------------------------------------------------  ----------------  ----------------------  ---------------------
Production and lifting costs                                        26,179                  36,929                 23,851
Depletion                                                          174,249                  95,364                 74,051
--------------------------------------------------------  ----------------  ----------------------  ---------------------
Total expenses                                                     200,428                 132,293                 97,902
--------------------------------------------------------  ----------------  ----------------------  ---------------------
Income before taxes                                                197,661                 141,916                 52,679
Income taxes                                                        68,081                  48,790                 17,477
--------------------------------------------------------  ----------------  ----------------------  ---------------------
Results of operations                                 $            129,580  $               93,126  $              35,202
--------------------------------------------------------  ----------------  ----------------------  ---------------------
</TABLE>

     *(excluding corporate overhead and interest costs)

The gas and oil reserves information is based on estimates of proved reserves
attributable to the interest of Houston Exploration and KeySpan Exploration and
Production, LLC 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.















<PAGE>


<TABLE>
<CAPTION>
Reserve Quantity Information Natural Gas (MMcf)
-----------------------------------------------

At December 31,                                      2001                        2000                       1999
----------------------------------------------  ------------------  --------------------------  -------------------------
<S>                                                      <C>                         <C>                        <C>
Proved reserves
     Beginning of year                                     545,858                     534,306                    470,447
     Revisions of previous estimates                       (39,994)                      4,479                     45,510
     Extensions and discoveries                             86,401                      77,645                     70,741
     Production                                            (90,754)                    (78,493)                   (69,679)
     Purchases of reserves in place                         84,148                       7,921                     20,779
     Sales of reserves in place                                  -                           -                     (3,492)
----------------------------------------------  ------------------  --------------------------  -------------------------
Proved reserves-
     End of year (1)                                       585,659                     545,858                    534,306
----------------------------------------------  ------------------  --------------------------  -------------------------
Proved developed reserves-
     Beginning of year                                     431,536                     399,482                    369,931
----------------------------------------------  ------------------  --------------------------  -------------------------
     End of year (2)                                       448,921                     431,536                    399,482
----------------------------------------------  ------------------  --------------------------  -------------------------
</TABLE>

(1) Includes minority interest of 188,077; 167,730 and 189,427; in 2001, 2000,
and 1999, respectively. (2) Includes minority interest of 148,593; 133,271; and
143,043; in 2001, 2000, and 1999, respectively.

<TABLE>
<CAPTION>

Crude Oil, Condensate and Natural Gas Liquids (MBbls)
-----------------------------------------------------

At December 31,                                         2001                        2000                        1999
-------------------------------------------  ---------------------------  -------------------------  --------------------------
<S>                                                             <C>                         <C>                         <C>
Proved reserves
     Beginning of year                                             7,912                      3,136                       1,650
     Revisions of previous estimates                                (289)                       108                         237
     Extensions and discoveries                                    3,061                      4,326                       1,574
     Production                                                     (536)                      (320)                       (258)
     Purchases of reserves in place                                  115                        662                           2
     Sales of reserves in place                                      (29)                         -                         (69)
-------------------------------------------  ---------------------------  -------------------------  --------------------------
Proved reserves-
     End of year (1)                                              10,234                      7,912                       3,136
-------------------------------------------  ---------------------------  -------------------------  --------------------------
Proved developed reserves-
     Beginning of year                                             2,126                      2,059                       1,498
-------------------------------------------  ---------------------------  -------------------------  --------------------------
     End of year (2)                                               2,479                      2,126                       2,059
-------------------------------------------  ---------------------------  -------------------------  --------------------------
</TABLE>

(1) Includes minority interest of 2,186; 1,695; and 890; in 2001,2000, and 1999,
respectively. (2) Includes minority interest of 821; 573; and 647 in 2001,2000,
and 1999, respectively.

The standardized measure of discounted future net cash flows was prepared by
applying year-end prices of gas and oil to the proved reserves. The standardized
measure does not purport, nor should it be interpreted, to present the fair
value of gas and oil reserves of Houston Exploration or KeySpan Exploration and
Production LLC. An estimate of fair value would also take into account, among
other things, the recovery of reserves not presently classified as proved,



<PAGE>



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>

Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Gas and Oil Reserves
------------------------------------------------------------------------------------------------
At December 31,                                                                    2001                         2000
---------------------------------------------------------------------  -----------------------------  -------------------------
                                                                                        (In Thousands of Dollars)
<S>                                                                                      <C>                        <C>
Future cash flows                                                      $                   1,580,077  $               5,415,587
Future costs -
     Production                                                                             (316,421)                  (558,384)
     Development                                                                            (227,158)                  (182,242)
---------------------------------------------------------------------  -----------------------------  -------------------------
Future net inflows before income tax                                                       1,036,498                  4,674,961
Future income taxes                                                                         (221,324)                (1,299,965)
---------------------------------------------------------------------  -----------------------------  -------------------------
Future net cash flows                                                                        815,174                  3,374,996
10% discount factor                                                                         (228,988)                (1,209,237)
---------------------------------------------------------------------  -----------------------------  -------------------------
Standardized measure of discounted future net cash flows (1)           $                     586,186  $               2,165,759
---------------------------------------------------------------------  -----------------------------  -------------------------
</TABLE>

(1)  Includes  minority  interest  of  182,555  and  653,046  in 2001 and  2000,
respectively.

<TABLE>

Changes in Standardized Measure of Discounted Future Net Cash Flows from Proved Reserve Quantities
--------------------------------------------------------------------------------------------------
Year Ended December 31,                                            2001                     2000                       1999
-------------------------------------------------------  -----------------------  -----------------------  -------------------------
                                                                                  (In Thousands of Dollars)
<S>                                                               <C>                       <C>                          <C>
Standardized measure -
     beginning of year                                   $           2,165,759  $               480,632  $                  396,060
Sales and transfers, net of production costs                          (359,163)                (240,702)                   (126,730)
Net change in sales and transfer prices,
     net of production costs                                        (2,250,252)               2,142,932                      47,330
Extensions and discoveries and improved
     recovery, net of related costs                                    117,326                  472,658                     106,076
Changes in estimated future development costs                          (23,395)                 (38,839)                    (25,730)
Development costs incurred during the period
     that reduced future development costs                              75,652                   77,197                      40,563
Revisions of quantity estimates                                        (52,928)                  24,650                      51,375
Accretion of discount                                                  293,581                   54,460                      41,293
Net change in income taxes                                             666,373                 (706,074)                    (47,097)
Net purchases of reserves in place                                      51,674                   23,118                      19,018
Sales of reserves in place                                                (133)                       -                           -
Changes in production rates (timing) and other                         (98,308)                (124,273)                    (21,526)
------------------------------------------------------   ---------------------  -----------------------  --------------------------
Standardized measure -
     end of year                                         $             586,186  $             2,165,759  $                  480,632
------------------------------------------------------   ---------------------  -----------------------  --------------------------
</TABLE>






<PAGE>


<TABLE>
<CAPTION>
Average Sales Prices and Production Costs Per Unit
--------------------------------------------------

Year Ended December 31,                                                    2001                    2000                 1999
---------------------------------------------------------------  ------------------------  --------------------  -------------------
<S>                                                                           <C>                   <C>                  <C>
Average sales price*
  Natural gas ($/MCF)                                                            4.09                  3.97                 2.14
  Oil, condensate and natural gas liquid ($/Bbl)                                23.09                 27.29                16.41
  Production cost per equivalent MCF ($)                                         0.28                  0.55                 0.26
---------------------------------------------------------------  ------------------------  --------------------  -------------------
</TABLE>
*Represents  the cash price  received  which  excludes the
effect of any hedging transactions.


Acreage
-------
At December 31, 2001                          Gross                  Net
--------------------------------------  ------------------  -------------------
Producing                                   392,419               264,072
Undeveloped                                 303,357               274,711
--------------------------------------  ------------------  -------------------


Number of Producing Wells
-------------------------

At December 31, 2001             Gross                   Net
-----------------------  ----------------------  -----------------------
Gas Wells                        1,550                 1,086.6
Oil Wells                          6                     4.9
-----------------------  ----------------------  -----------------------


<TABLE>
<CAPTION>
Drilling Activity (Net)
-----------------------

Year Ended December 31,                 2001                                2000                                  1999
-------------------------  -------------------------------  ---------------------------------  -------------------------------------
                            Producing    Dry     Total          Producing   Dry     Total          Producing      Dry     Total
                            ---------    ---     -----          ---------   ---     -----          ---------      ---     -----
<S>                           <C>      <C>       <C>              <C>      <C>     <C>               <C>         <C>      <C>
Net developmental wells        51.9     10.2      62.1             40.4     4.4     44.8              29.7        3.1      32.8
Net exploratory wells          5.3       4.3      9.6              5.1      1.7      6.8              2.9         1.0      3.9
</TABLE>


Wells in Process
----------------

At December 31, 2001              Gross                       Net
------------------------  ---------------------  -----------------------------
Exploratory                         -                          -
Developmental                       6                         4.3
------------------------  ---------------------  -----------------------------













<PAGE>



Note 18.  Summary of Quarterly Information (Unaudited)

The following is a table of financial data for each quarter of KeySpan's year
ended December 31, 2001.
<TABLE>
<CAPTION>
                                                                     (In Thousands of Dollars, Except Per Share Amounts)

                                                   Quarter Ended         Quarter Ended           Quarter Ended         Quarter Ended
                                                      3/31/01             6/30/01 (a)             9/30/01 (b)           12/31/01 (c)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>                    <C>                    <C>                     <C>
Operating revenues                                  2,575,088              1,339,302              1,102,439               1,616,286
Earnings before interest and taxes                    462,104                 85,224                 49,792                 210,735
Earnings (loss) from continuing operations            222,638                (11,893)               (38,900)                 65,943
Earnings (loss) from discontinued operations              661                  3,892                  2,253                 (26,244)
Earnings (loss) for common stock                      223,299                 (8,001)               (36,647)                 39,699
Basic earnings per common stock from
   continuing operations  (d)                           1.63                  (0.09)                 (0.28)                   0.48
Basic earnings per common stock from
  discontinued operations  (d)                              -                  0.03                   0.02                   (0.19)
Basic earnings per common stock (d)                     1.63                  (0.06)                 (0.26)                   0.29
Diluted earnings per common stock (d)                   1.61                  (0.06)                 (0.26)                   0.28
------------------------------------------------------------------------------------------------------------------------------------
Dividends declared                                      0.445                  0.445                  0.445                   0.445
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>



(a) Reflects costs to complete work on certain  construction  projects,  as well
as, operating losses of the Roy Kay Companies of $35.6 million after-tax.

(b)  Reflects the reversal of a previously  recorded  loss  provision  regarding
certain  pending rate refund  issues of $20.1 million  after-tax.  Also includes
losses incurred by the Roy Kay Companies of $56.6 million  after-tax  related to
the discontinuance of the general contracting activities of these companies.

(c)Reflects  an  after-tax  non-cash  impairment  charge  of  $26.2  million  to
recognize  the effect of lower  wellhead  prices on the  valuation of proved gas
reserves,  as well as,  after-tax  operating  losses of the Roy Kay Companies of
$2.8 million.

(d)  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.














<PAGE>


The following is a table of financial data for each quarter of KeySpan's year
ended December 31, 2000.
<TABLE>
<CAPTION>
                                                                              (In Thousands of Dollars, Except Per Share Amounts)

                                                 Quarter Ended         Quarter Ended          Quarter Ended         Quarter Ended
                                                    3/31/00               6/30/00                9/30/00             12/31/00 (a)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>                      <C>                   <C>                 <C>
Operating revenues                                 1,316,613               947,588                947,137             1,869,364
Earnings before interest and taxes                   308,441               136,221                 90,272               186,392
Earnings (loss) from continuing operations           163,553                47,080                 13,154                60,850
Earnings (loss) from discontinued operations               -                     -                      -                (1,943)
Earnings for common stock                            163,553                47,080                 13,154                58,907
Basic earnings per common stock from
  continuing operations  (b)                           1.22                  0.35                   0.10                  0.46
Basic earnings per common stock from
  discontinued operations  (b)                             -                     -                      -                 (0.02)
Basic earnings per common stock (b)                    1.22                  0.35                   0.10                  0.44
Diluted earnings per common stock (b)                  1.22                  0.35                   0.10                  0.43
------------------------------------------------------------------------------------------------------------------------------------
Dividends declared                                     0.445                 0.445                  0.445                 0.445
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>



(a) Reflects an after-tax charge of $41.1 million relating to an early
retirement and severance program.

(b) 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.





<PAGE>



REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

We have audited the  accompanying  Consolidated  Balance Sheet and  Consolidated
Statement of Capitalization of KeySpan  Corporation (a New York corporation) and
subsidiaries  as of  December  31,  2001 and  December  31, 2000 and the related
Consolidated Statements of Income,  Retained Earnings,  Comprehensive Income and
Cash Flows for each of the three years in the period  ended  December  31, 2001.
These financial  statements are the responsibility of the KeySpan  Corporation's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 and capitalization of KeySpan
Corporation and subsidiaries as of December 31, 2001 and December 31, 2000 and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14 is the
responsibility of the KeySpan Corporation'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 financial statements. This schedule has been subjected to
the auditing procedures applied in the audits of the basic 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 financial statements
taken as a whole.

ARTHUR ANDERSEN LLP

February 4, 2002
New York, New York





<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 will be filed with the SEC on or about March 22,
2002 (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 "PROPOSAL 1. 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 captions "Director
Compensation" and "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 "AGREEMENTS
WITH EXECUTIVES" and "Involvement in Certain Proceedings" in the Proxy
Statement, which information is incorporated herein by reference thereto.

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

(a) Required Documents

1. Financial Statements

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

     Report of Independent Accountants

     Consolidated  Statement of Income for the year ended December 31, 2001, the
     year ended December 31, 2000 and the year ended December 31,1999.

     Consolidated Statement of Retained Earnings for the year ended December 31,
     2001,  the year ended  December  31, 2000 and the year ended  December  31,
     1999.

     Consolidated Balance Sheet at December 31, 2001 and December 31, 2000.

     Consolidated  Statement of Capitalization at December 31, 2001 and December
     31, 2000.

     Consolidated  Statement of Cash Flows for the year ended December 31, 2001,
     the year ended December 31, 2000 and the year ended December 31,1999.

     Notes to Consolidated Financial Statements



<PAGE>


2.            Financial Statements Schedules

Consolidated Schedule of Valuation and Qualifying Accounts for the year ended
December 31, 2001, the year ended December 31, 2000 and the year ended December
31, 1999.

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

<TABLE>
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>

                                                                                                         (In Thousands of Dollars)
                   Column A                        Column B                   Column C                 Column D       Column E
----------------------------------------------- ---------------  ---------------------------------  -------------- ---------------
                                                                             Additions
                                                                  ---------------------------------
                                                  Balance at       Charged to                                        Balance at
                                                   beginning        costs and                            Net           end of
                  Description                      of period        expenses        Acquisitions      Deductions       period
----------------------------------------------- ---------------  ---------------  ----------------  -------------- ---------------

Twelve months ended  December 31, 2001
-----------------------------------------------
Deducted from asset accounts:
<S>                                                 <C>              <C>                   <C>         <C>            <C>
  Allowance for doubtful accounts               $    48,314  $        66,500                 -  $       42,515 $        72,299

Additions to liability accounts:
  Reserve for injuries and damages              $    40,700  $         7,643                 -  $       27,463 $        20,880
  Reserves for environmental expenditures       $   157,507  $       115,942                 -  $       15,800 $       257,649

Twelve months ended December 31, 2000
-----------------------------------------------
Deducted from asset accounts:
  Allowance for doubtful accounts               $    20,294  $        26,455  $         19,208  $       17,643 $        48,314

Additions to liability accounts:
  Reserve for injuries and damages              $    36,385  $        20,074  $          3,362  $       19,121 $        40,700
  Reserves for environmental expenditures       $   128,011                -  $         42,637  $       13,141 $       157,507

Twelve months ended December 31, 1999
-----------------------------------------------
Deducted from asset accounts:
  Allowance for doubtful accounts               $    20,026  $        15,793                 -  $       15,525 $        20,294

Additions to liability accounts:
  Reserve for injuries and damages              $    29,075  $        25,930                 -  $       18,620 $        36,385
  Reserves for environmental expenditures       $   130,278  $         5,000                 -  $        7,267 $       128,011
</TABLE>






(b)      Reports on Form 8-K

KeySpan filed Reports on Form 8-K on October 24, 2001, December 6, 2001, January
24, 2002 and February 26, 2002.

In our report on Form 8-K dated October 24, 2001, we disclosed that we had
issued a press release concerning, among other things, our earnings for the
third quarter ended September 30, 2001.

In our report on Form 8-K dated December 6, 2001, we disclosed that we had
issued a press release concerning, among other things, 2002 earnings guidance.

In our Report on Form 8-K, dated January 24, 2002, we disclosed our consolidated
earnings for the fiscal year ended December 31, 2001.





<PAGE>




In our Report on Form 8-K, dated February 26, 2002, we disclosed an adjustment
to our earnings for the fiscal year ended December 31, 2001.

In our Report on Form 8-K, dated March 12, 2002, we disclosed that we had issued
a press release announcing, among other things, that we reached an agreement in
principle with the Long Island LIPA to extend LIPA's option to acquire our Long
Island power plants.

(c)               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.

     2*   Purchase Agreement by and among Eastern  Enterprises,  Landgrove Corp.
          and KeySpan  Corporation  for the  acquisition of Midland  Enterprises
          dated as of January 23, 2002

     3.1  Certificate of Incorporation of the Company  effective April 16, 1998,
          Amendment to Certificate of Incorporation of the Company  effective Ma
          26,1998,  Amendment to  Certificate  of  Incorporation  of the Company
          effective June 1, 1998,  Amendment to the Certificate of Incorporation
          of  the  Company   effective  April  7,  1999  and  Amendment  to  the
          Certificate  of  Incorporation  of the Company  effective  Ma 20, 1999
          (filed as Exhibit  3.1 to the  Company's  Form 10-Q for the  quarterly
          period ended June 30, 1999)


     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-aIndenture,  dated as of November 1, 2000, between KeySpan  Corporation
          and the Chase  Manhattan  Bank,  as  Trustee,  with the respect to the
          issuance of Debt  Securities  (filed as Exhibit 4-a to Amendment No. 1
          to Form S-3  Registration  Statement No. 333-43768 an filed as Exhibit
          4-a to the Company's Form 8-K on November 20, 2000)

     4.1-bForm of Note issued in connection with the issuance of the 7.25% notes
          issued on November  20,  2000  (filed as Exhibit 4-b to the  Company's
          Form 8-K on November 20, 2000)

     4.1-cForm of Note  issued in  connection  with the  issuance  of the 7.625%
          notes  issued  on  November  20,  2000  (filed as  Exhibit  4-c to the
          Company's Form 8-K on November 20, 2000)

     4.1-dForm of Note issued in connection  with the issuance of the 8.0% notes
          issued on November  20,  2000  (filed as Exhibit 4-d to the  Company's
          Form 8-K on November 20, 2000)

     4.1-eForm of Note  issued  in  connection  with the  issuance  of the 6.15%
          notes issued on May 24, 2001 (filed as Exhibit 4 to the Company's Form
          8-K on May 24, 2001)

     4.2-aIndenture,  dated  December 1, 1999,  between  KeySpan and KeySpan Gas
          East  Corporation,  the Registrants,  and the Chase Manhattan Bank, as
          Trustee,  with respect to the issuance of Medium-Term Notes, Series A,
          (filed as  Exhibit  4-a to  Amendment  No. 1 to Form S-3  Registration
          Statement No. 333-92003)

     4.2-bForm of  Medium-Term  Note issued in  connection  with the issuance of
          the 7 7/8% note on  February  1, 2000  (filed as Exhibit 4, to KeySpan
          Form 8-K on February 1, 2000)

     4.2-cForm of  Medium-Term  Note issued in  connection  with the issuance of
          the 6.9% notes on January 19, 2001.

     4.3-aParticipation  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's  Form
          10-K for the year ended September 30, 1989)

     4.3-bIndenture  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's  Form  10-K  for the  year  ended
          September 30, 1989)

     4.3-cFirst Supplemental  Participation Agreement dated as of May 1, 1992 to
          Participatio  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's Form
          10-K for the year ended September 30, 1992)

     4.3-dFirst  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 t The  Brooklyn  Union  Gas
          Company's Form 10-K for the year ended September 30, 1992)

     4.4-aParticipation  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's Form
          10-K for the year ended September 30, 1991)

     4.4-bIndenture  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's Form 10-K for the year ended September 30, 1991)






<PAGE>


     4.5-aParticipation  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's Form
          10-K for the year ended September 30, 1992)

     4.5-bIndenture  of Trust,  dated as of July 1, 1992,  between  NYSERDA  and
          Chemical Bank, a 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)

4.6-a    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's Form 10-K for the year
         ended September 30, 1993)

4.6-b    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's Form 10-K for the year ended September 30,
         1993)

4.7-a    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's
         Form S-8 Registration Statement No. 33-66182)

4.7-b    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's Form S-8
         Registration Statement No. 33-66182)

4.7-a    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's
         Form S-8 Registration Statement No. 33-66182)

4.7-b    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's Form S-8
         Registration Statement No. 33-66182)

4.7-a    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's
         Form S-8 Registration Statement No. 33-66182)

4.7-b    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's Form S-8
         Registration Statement No. 33-66182)






<PAGE>



4.8-a    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's Form 10-K for the year
         ended September 30, 1996)

4.8-b    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's Form 10-K for the year ended September
         30, 1996)

4.9-a    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 the Company's Form 10-K for the year ended
         September 30, 1997)

4.9-b    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 the Company's Form 10-K for the year ended September 30,
         1997)

4.9-c    Supplemental Trust Indenture, dated as of January 1, 2000, by and
         between New York State NYSERDA and The Chase Manhattan Bank, as
         Trustee, relating to the GFRBs 1997 Series A (filed as Exhibit 4.11 to
         the Company's Form 10-K for the year ended December 31, 1999)

4.10-a   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)

4.10-b   Indenture of Trust dated as of December 1, 1997 by and between 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)

4.11-a   Participation Agreement, dated as of October 1, 1999, by and between
         NYSERDA and KeySpan Generation LLC relating to the 1999 Pollution
         Control Refunding Revenue Bonds, Series A (filed as Exhibit 4.10 to the
         Company's Form 10-K for the year ended December 31, 1999)

4.11-b   Trust Indenture, dated as of October 1, 1999, by and between NYSERDA
         and The Chase Manhattan Bank, as Trustee, relating to the 1999
         Pollution Control Refunding Revenue Bonds, Series A (filed as Exhibit
         4.10 to the Company's Form 10-K for the year ended December 31, 1999)

4.12      Indenture  dated as of December 1, 1989 between Boston Gas Company and
          The Bank of New York,  Trustee  (Filed as  Exhibit  4.2 to Boston  Gas
          Company's Form S-3 (File No. 33- 31869).






<PAGE>



4.13     Agreement of Registration, Appointment and Acceptance dated as of
         November 18, 1992 among Boston Gas Company, The Bank of New York as
         Resigning Trustee, and The First National Bank of Boston as Successor
         Trustee. (Filed as an exhibit to Boston Gas Company's S-3 Registration
         S (File No. 33-31869))

4.14.    Second Amended and Restated First Mortgage Indenture for Colonial Gas
         Company dated as of June 1, 1992 (filed as Exhibit 4(b) to Colonial Gas
         Company's Form 10-Q for the quarter ended June 30, 1992)

4.15     First Supplemental Indenture for Colonial Gas Company dated as of June
         15, 1992 (filed as Exhibit 4(c) to Colonial Gas Company's Form 10-Q for
         the quarter ended June 30, 1992)

4.16     Second Supplemental Indenture for Colonial Gas Company dated as of
         September 27, 1995 (filed as Exhibit 4(c) to Colonial Gas Company's
         Form 10-K for the fiscal year ended December 31, 1995)

4.17     Amendment to Second Supplemental Indenture for Colonial Gas Company
         dated as of October 12, 1995 (filed as Exhibit 4(d) to Colonial Gas
         Company's Form 10-K for the fiscal year ended December 31, 1995)

4.18     Third Supplemental Indenture for Colonial Gas Company dated as of
         December 15, 1995 (filed as Exhibit 4(f) to Colonial Gas Company's Form
         S-3 Registration Statement dated January 5, 1998)

4.19     Fourth Supplemental Indenture for Colonial Gas Company dated as of
         March 1, 1998 (filed as Exhibit 4(l) to Colonial Gas Company's Form
         10-Q for the quarter ended March 31, 1998)

4.20      Trust Agreement dated as of June 22, 1990 between Colonial Gas Company
          (as Trustor)  and Shawmut  Bank,  N.A. (as Trustee)  (filed as Exhibit
          10(d) to Colonial  Gas  Company's  Form 10-Q for the period ended June
          30, 1990)

4.21      Gas Service,  Inc. General and Refunding Mortgage Indenture,  dated as
          of June 30, 1987, as amended and supplemented by a First  Supplemental
          Indenture,  dated as of October 1, 1988, and by a Second  Supplemental
          Indenture,  dated as of  August  31,  1989  (filed as  Exhibit  4.1 to
          EnergyNorth,  Inc.'s Form 10-K for the fiscal year ended September 30,
          1989 (File No. 0- 11035)

4.22     Third Supplemental Indenture, dated as of September 1, 1990, to Gas
         Service, Inc. General and Refunding Mortgage Indenture, dated as of
         June 30, 1987 (filed as Exhibit 4.2 to EnergyNorth, Inc.'s Form 10-K
         for the fiscal year ended September 30, 1990 (File No. 0- 11035)

4.23      Fourth  Supplemental  Indenture,  dated as of January 10, 1992, to Gas
          Service,  Inc. General and Refunding Mortgage  Indenture,  dated as of
          June 30, 1987 (filed as Exhibit 4.3 of  EnergyNorth,  Inc.'s Form 10-K
          for the fiscal year ended September 30, 1992 (File No. 0- 11035)

4.24     Fifth Supplemental Indenture, dated as of February 1, 1995, to Gas
         Service, Inc. General and Refunding Mortgage Indenture, dated as of
         June 30, 1987 (filed as Exhibit 4.4 to EnergyNorth, Inc.'s Form 10-K
         for the fiscal year ended September 30, 1996 (File No. 1- 11441)

4.25      Sixth Supplemental  Indenture,  dated as of September 15, 1997, to Gas
          Service,  Inc. General and Refunding Mortgage  Indenture,  dated as of
          June 30, 1987 (filed as Exhibit 4.5 to EnergyNorth Natural Gas, Inc.'s
          Amendment No. 1 to Registration  Statement on Form S-1, No. 333-32949,
          dated September 10, 1997)

4.26     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)

4.27     Indenture between Midland Enterprises and State Street Bank and Trust
         Company dated as of April 2, 1990 (filed as Exhibit 2.2 to Midland
         Enterprises Registration Statement No 333- 21120)

4.28      Indenture  between  Midland  Enterprises  and The Chase Manhattan Bank
          dated as of  September  29,  1998  (filed as  Exhibit  4.2 to  Midland
          Enterprises Registration Statement (File No. 333-61137))

4.29      Indenture  dated as of June 1, 1986  between the Company and  Centerre
          Trust Company of St. Louis, Trustee. (Filed as an Exhibit to Company's
          registration  statement  on Form S-2,  filed June 19,  1986,  File No.
          33-6597).

4.30     Twelfth Supplemental Indenture dated as of December 1, 1990, providing
         for a 10.10 percent Series due 2020. (Filed as Exhibit 4-14 to the
         Company's Form 10-Q for the quarter ended February 28, 1991).

4.31     Fifteenth Supplemental Indenture dated as of December 1, 1996 providing
         for a 7.28 percent Series due 2017. (Filed as Exhibit 4.5 to the
         Company's Form 10-Q for the quarter ended February 28, 1997).

4.32     Bond Purchase Agreement dated December 1, 1990, between Allstate Life
         Insurance Company of New York, and Essex County Gas Company. (Filed as
         an Exhibit to Company's Form 10-Q for the quarter ended February 28,
         1991).






<PAGE>



10.1     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)

10.2      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)

10.3*    Credit Agreement among KeySpan Corporation, the several Lenders, Fleet
         National Bank and Royal Bank of Scotland PLC, as Co-Documentation
         Agents, ABN AMRO Bank, N.V. and Citibank, N.A., as Co-Syndication
         Agents and the Chase Manhattan Bank, as Administrative Agent for
         $1,400.000.000, dated as of September 19, 2001

10.4-a   Letter of Credit and Reimbursement Agreement, dated as of December 1,
         2000, by and between KeySpan Generation LLC and National Westminister
         Bank PLC relating to the Electric Facilities Revenue Bonds ("EFRBs")
         Series 1997A (filed as Exhibit 4.10 to the Company's Form 10-K for the
         year ended December 31, 2000). .

10.4-b*   Extension  Agreement,  dated as of November 1, 2001 by and between
          KeySpan Generation LLC and National  Westmnister Bank PLC, relating to
          the Letter of Credit and Reimbursement Agreement, dated as of December
          1, 2000

10.5-a   Amended and Restated Credit Agreement among The Houston Exploration
         Company and Chase Bank of Texas, National Association, as agent, dated
         March 30,1999, (filed as Exhibit 10.2 to The Houston Exploration
         Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
         1999 (File No. 001-11899) and incorporated by reference ).

10.5-b   First Amendment and Supplement to Amended and Restated Credit Agreement
         dated May 4, 1999 by and among The Houston Exploration Company and
         Chase Bank of Texas, National Association, as agent, (filed as Exhibit
         10.1 to The Houston Exploration Company's Quarterly Report on Form 10-Q
         for the quarter ended June 30, 1999 (File No. 001-11899) and
         incorporated by reference ).

10.5-c   Second Amendment to Amended and Restated Credit Agreement between The
         Houston Exploration Company and Chase Bank of Texas, National
         Association, as agent, dated October 6, 1999, (filed as Exhibit 10.32
         to The Houston Exploration Company's Quarterly Report on Form 10-Q for
         the quarter ended September 30, 1999 (File No. 001-11899)).

10.5-d   Third Amendment and Supplement to Amended and Restated Credit Agreement
         between The Houston Exploration Company and Chase Bank of Texas,
         National Association, as agent, dated December 9, 1999 (filed as
         Exhibit 10.20 to the Company's Form 10-K for the year ended December
         31, 1999)






<PAGE>



10.6     Subordinated Loan Agreement dated November 30, 1998 between The Houston
         Exploration Company and MarketSpan Corporation (KeySpan Corporation)
         (filed as Exhibit 10.30 to The Houston Exploration Company's Annual
         Report on Form 10-K for the year ended December 31, 1998).

10.7     Subordination Agreement dated November 25, 1998 entered into and among
         MarketSpan Corporation (KeySpan Corporation), The Houston Exploration
         Company and Chase Bank of Texas, National Association (filed as Exhibit
         10.31 to The Houston Exploration Company's Annual Report on Form 10-K
         for the year ended December 31, 1998 (File No. 001-11899)).

10.8     First Amendment to Subordinated Loan Agreement and Promissory Note
         between KeySpan Corporation and The Houston Exploration Company dated
         effective as of October 27, 1999 (filed as Exhibit 10.14 to the
         Company's Form 10-K for the year ended December 31, 1999).

10.9     Amended and Restated Credit Agreement among The Houston Exploration
         Company and Chase Bank of Texas, National Association, as agent, dated
         March 30,1999, (filed as Exhibit 10.2 to The Houston Exploration
         Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
         1999 (File No. 001-11899) and incorporated by reference ).

10.10*    Credit  Agreement  among KeySpan  Energy  Development  Co.,  several
          Lenders and the Royal Bank of  Montreal,  as Agent,  for  $125,000,000
          (Canadian) Credit Facility, dated as of October 13, 2000

10.11*    Consent,   Waiver  and  Amending  Agreement  among  KeySpan  Energy
          Development  Co.,  several Lenders and the Royal Bank of Montreal,  as
          Agent, for the $125,000,000  (Canadian)  Credit Facility,  dated as of
          December 22, 2000

10.12*    Second  Amending  Agreement  among KeySpan Energy  Development  Co.,
          several  Lenders  and the Royal Bank of  Montreal,  as Agent,  for the
          $125,000,000 (Canadian) Credit Facility, dated as of October 12, 2001

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

10.14     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)

10.15    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)






<PAGE>



10.16     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)

10.17*    Generation  Purchase Rights  Agreement  between Long Island Lighting
          Company and Long Island Power Authority dated as of June 26, 1997

10.18*    Letter Agreement between KeySpan and the Long Island Power Authority
          Regarding  Agreement In Principle for the Extension of the  Generation
          Purchase Right Agreement dated as of March 11, 2002

10.19    Employment Agreement dated September 10, 1998, between KeySpan 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    Amendment dated as of February 24, 2000, to the Employment Agreement
         dated September 10, 1998, between KeySpan and Robert B. Catell (filed
         as Exhibit 10.12-a to the Company's Form 10-K for the year ended
         December 31, 2000)

10.21    Employment Agreement effective as of March 1, 2001, between KeySpan and
         Craig G. Matthews (filed as Exhibit 10.13 to the Company's Form 10-K
         for the year ended December 31, 2000)

10.22    Employment Agreement effective as of July 29, 1999, between KeySpan and
         Gerald Luterman (filed as Exhibit 10.10 to the Company's Form 10-K for
         the year ended December 31, 1999)

10.23    Employment Agreement dated as of November 8, 2000, between KeySpan and
         Chester R. Messer (filed as Exhibit 10.15 to the Company's Form 10-K
         for the year ended December 31, 2000)

10.24    Change of Control Agreement dated as of September 22, 1999, between
         Eastern, Boston Gas Company and Chester R. Messer (filed as Exhibit
         10.11.5 to Eastern's Form 10-Q for the quarterly period ended September
         30, 1999, File No. 1-2297).

10.25    Employment Agreement dated as of November 8, 2000 between KeySpan and
         Joseph A. Bodanza (filed as Exhibit 10.17 to the Company's Form 10-K
         for the year ended December 31, 2000)
10.26    Change of Control Agreement dated as of September 22, 1999, between
         Eastern, Boston Gas Company and Joseph A. Bodanza (filed as Exhibit
         10.18 to the Company's Form 10-K for the year ended December 31, 2000)

10.27*   Amended Directors' Deferred Compensation Plan

10.28    Corporate Annual Incentive Compensation and Gainsharing Plan (filed as
         Exhibit 10.20 to KeySpan's Form 10-K for the year ended December 31,
         2000)

10.29    Senior Executive Change of Control Severance Plan effective as of
         October 30, 1998 (filed as Exhibit 10.20 to the Company's Form 10-K for
         the year ended December 31, 1998)






<PAGE>



10.30    KeySpan's Amended Long Term Performance Incentive Compensation Plan
         effective May 20, 1999 (filed as Exhibit A to the Company's 2001 Proxy
         Statement on March 23, 2001).

10.31    Rights Agreement dated March 30, 1999, between the KeySpan and the
         Rights Agent (filed as Exhibit 4 to the Company's Form 8-K, on March
         30, 1999)

10.32    Generating Plant and Gas Turbine Asset Purchase and Sale Agreement for
         Ravenswood for Ravenswood Generating Plants and Gas Turbines dated
         January 28, 1999, between the KeySpan and Consolidated Edison Company
         of New York, Inc. (filed as Exhibit 10(a) to the Company's Form 10-Q
         for the quarterly period ended March 31, 1999)

10.33    Lease Agreement dated June 9, 1999, between KeySpan-Ravenswood, Inc.
         and LIC Funding, Limited Partnership (filed as Exhibit 10.2 to the
         Company's Form 10-Q for the quarterly period ended June 30, 1999)

10.34    Guaranty dated June 9, 1999, from the KeySpan in favor of LIC Funding,
         Limited Partnership (filed as Exhibit 10.1 to the Company's Form 10-Q
         for the quarterly period ended June 30, 1999)

10.35    Redacted Gas Resource Portfolio Management and Gas Sales Agreement
         between Boston Gas Company, Colonial Gas Company, Essex Gas Company
         (collectively, KEDNE) and El Paso Energy Marketing Company dated as of
         September 14, 1999, as amended (filed as Exhibit 10.1 to Eastern
         Enterprises Form 10-K for the period ended December 31, 1999)

10.36-a  Restated Exploration Agreement between The Houston Exploration Company
         and KeySpan Exploration and Production, L.L.C., dated June 30, 2000,
         (filed as Exhibit 10.1 to The Houston Exploration Company's Quarterly
         Report on Form 10-Q for the quarter ended September 30, 2000, File No.
         001-11899).

10.36-b  Exploration Agreement between The Houston Exploration Company and
         KeySpan Exploration and Production, L.L.C., dated March 15,1999, (filed
         as Exhibit 10.1 to The Houston Exploration Company's Quarterly Report
         on Form 10-Q for the quarter ended March 31, 1999 (File No. 001-11899)
         and incorporated by reference).

10.-36c  First Amendment to the Exploration Agreement between The Houston
         Exploration Company and KeySpan Exploration and Production, L.L.C.
         dated November 3, 1999 (filed as Exhibit 10.19 to The Houston
         Exploration Company's Annual Report on Form 10-K for the year ended
         December 31, 1999 (File No. 001-11899) and incorporated by reference ).

21*      Subsidiaries of the Registrant

23.1*    Consent of Arthur Andersen LLP, Independent Auditors






<PAGE>



24.1*     Power  of   Attorney   executed   by  Robert  B.   Catell,   which  is
          substantially  the  same as  Powers  of  Attorney  made by  Lilyan  F.
          Affinito,  Andrea S.  Christensen,  Howard R. Curd, Donald H. Elliott,
          Alan H.  Fishman,  Vicki L. Fuller,  J. Atwood  Ives,  James R. Jones,
          James L. Larocca,  Stephen W.  McKessy,  Edward D. Miller and James Q.
          Riordan on March 7, 2002

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

* Filed herewith



<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.

                                               KEYSPAN CORPORATION



March 14, 2001                             By: /S/Gerald Luterman
                                                ----------------------
                                                Gerald Luterman
                                                Executive Vice President and
                                                Chief Financial Officer


March 14, 2001                             By: /S/Ronald S. Jendras
                                               --------------------
                                                Ronald S. Jendras
                                                Vice President, Controller and
                                                Chief Accounting 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 14, 2001.




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

                      *
          ------------------------
            Andrea S. Christensen              Director

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


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

                      *
          ________________________             Director
               Alan H. Fishman





<PAGE>




                      *
          ________________________             Director
               Vicki L. Fuller

                      *
          ________________________             Director
               J. Atwood Ives

                      *
          ________________________             Director
               James R. Jones

                      *
          ________________________             Director
              James L. Larocca


                      *
          ________________________             Director
             Stephen W. McKessy


                      *
          ________________________             Director
              Edward D. Miller


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


           By:/s/ Gerald Luterman
              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.