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
                                       OR
        [ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
             SECURITIES EXCHANGE ACT OF 1934
                   For the period from January 1, 1999 to December 31, 1999

                         Commission File Number 1-14161

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


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

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



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

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

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

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

                 SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                                      None
                                (Title of class)
        Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes. X No.

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

        As of March 1, 2000, the aggregate market value of the common stock held
by  non-affiliates  (129,408,442  shares) of the  registrant  was  2,628,608,978
(based on the closing price, on such date, of $20.3125 per share).

        As of March 1, 2000, there were 133,876,426 shares of common stock, $.01
par value, outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

Proxy  Statement  dated on or about March 27, 2000 is  incorporated by reference
into Part III hereof.


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<TABLE>
<CAPTION>



                    KEYSPAN CORPORATION D/B/A KEYSPAN ENERGY
                               INDEX TO FORM 10-K

                                                                                              Page
                                                 PART I

<S>           <C>
Item 1.       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>


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                                     PART I

ITEM 1.  BUSINESS

OVERVIEW

KeySpan  Corporation  d/b/a KeySpan Energy (the  "Company" or "KeySpan  Energy")
provides a range of energy-related  services through  operations and investments
in selected areas of the energy industry.  The Company is the fourth largest gas
utility in the United  States with  approximately  1.6 million  customers in New
York  City and Long  Island.  The  Company  engages  in  three  core  downstream
businesses:  natural gas  distribution,  electric  services  and  energy-related
services. It also competes in two additional lines of business:  gas exploration
and production and select energy- related investments.

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

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

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

In November 1999, the Company and Eastern Enterprises ("Eastern") announced that
they had signed a  definitive  merger  agreement  under which the  Company  will
acquire  all of the common  stock of  Eastern  for $64.00 per share in cash (the
"K/E Transaction"). Through its subsidiaries, Eastern is the largest gas utility
in New England. It owns and operates Boston Gas Company, Colonial Gas

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Company  and  Essex  Gas  Company,  all of which are  natural  gas  distribution
companies operating in Massachusetts.

Boston Gas  Company is a  regulated  utility  that  distributes  natural  gas in
eastern  and  central  Massachusetts,  and also sells  natural gas for resale in
Massachusetts.  Boston Gas has been wholly-  owned by Eastern since 1929 and has
been in business for 177 years,  making it the second  oldest gas company in the
United States. Colonial Gas Company also is a regulated utility that distributes
natural  gas in Cape Cod and  eastern  Massachusetts.  Colonial  Gas has been in
business  for 150 years and was  acquired by eastern in August  1999.  Essex Gas
Company  also is a regulated  utility  that  distributes  natural gas in eastern
Massachusetts.  Essex Gas has been in business for 146 years and was acquired by
Eastern in September 1998.

Eastern also owns  Midland  Enterprises  Inc.,  the second  largest  independent
operator of tow boats and barges on the nations  inland river  system;  Transgas
Inc., an unregulated  energy  trucking  company and ServicEdge  Partners,  Inc.,
which  is  engaged  in  heating,   ventilation  and  air  conditioning  ("HVAC")
installation and maintenance.  At December 31, 1999, Eastern had total assets of
$2.0 billion;  long-term  debt and  preferred  stock of $515.2  million;  common
shareholders equity of $754.6 million; gross revenues of $978.7 million of which
$690.8 million (or approximately  71%) were derived from regulated gas sales and
gas  transportation;  operating earnings of $113.4 million;  and earnings before
extraordinary items of $55.1 million.

In July 1999, Eastern announced that it had entered into an agreement to acquire
EnergyNorth  Inc.,  owner of New Hampshire's  largest  natural gas  distributor,
Energy North Natural Gas, Inc. ("Energy North").  Energy North is located across
the border from, but  contiguous to, areas served by Eastern's gas  distribution
subsidiaries.  In connection with the Company's acquisition of Eastern,  Eastern
has  amended  its  agreement  with  EnergyNorth  Inc. to provide for an all cash
acquisition  of  EnergyNorth  Inc.  shares at a price per share of  $61.13.  The
restructured EnergyNorth Inc. merger is expected to close contemporaneously with
the K/E Transaction  (collectively,  the K/E  Transaction  and the  restructured
EnergyNorth Inc.'s merger are referred to as the "Eastern Transaction").

The Eastern Transaction is conditioned upon, among other things, the approval of
Eastern's  shareholders,  the Securities and Exchange Commission (the "SEC") and
the New Hampshire Public Utility  Commission.  The Company  anticipates that the
transaction  will be  completed in the third or fourth  quarter of 2000,  but is
unable to  determine  when or  whether  all of the  required  approvals  will be
obtained.

The Eastern  transaction has a total value of  approximately  $2.5 billion ($1.7
billion in equity and $0.8 billion in assumed debt and preferred stock).

With the  consummation  of the Eastern  Transaction,  the Company  will become a
registered holding company under the Public Utility Holding Company Act of 1935,
as amended  ("PUHCA").  As such,  the corporate and financial  activities of the
Company and its  subsidiaries,  including the ability of each such entity to pay
dividends, will be subject to regulation of the SEC.

The  increased  size and scope of the combined  organization  should  enable the
combined  company  to:  provide  enhanced,   cost-effective   customer  service;
capitalize on the above-average growth

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opportunities for natural gas in the Northeast; and provide additional resources
to the  Company's  unregulated  businesses.  The  combined  company  will  serve
approximately  2.4 million  customers and will be the largest gas distributor in
the Northeast.

As used herein, the "Company" or "KeySpan Energy" refers to KeySpan  Corporation
d/b/a KeySpan  Energy,  Brooklyn  Union and KeySpan Gas East  Corporation  d/b/a
Brooklyn  Union  of Long  Island  ("Brooklyn  Union  of Long  Island"),  its two
principal   gas   distribution   subsidiaries,   and  its  other   subsidiaries,
individually and in the aggregate.  In 1998, the Company changed its fiscal year
end from March 31 to December 31. For financial  reporting  purposes,  financial
statements included, or incorporated by reference,  herein for the period ending
December  31, 1998 are for the nine months then ended and have been  prepared on
the basis that LILCO was deemed the  acquiring  company in the  Combination  for
financial  reporting  purposes.  Unless otherwise  specified,  other information
contained in Part I hereof, for the twelve month periods ended December 31, 1998
and 1997, has been compiled on a combined basis  ("Combined  Company  Basis") to
aggregate the information shown for both KSE and LILCO.  Additional  information
about the Company'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 which are other than
statements of historical  facts,  are  "forward-looking  statements"  within the
meaning of Section  21E of the  Securities  Exchange  Act of 1934,  as  amended.
Without  limiting the  foregoing,  all  statements  under the captions  "Item 7.
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations" and "Item 7A. Quantitative and Qualitative  Disclosures About Market
Risk"   relating  to  the  Company's   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:  available  sources and cost of fuel;  federal
and state regulatory  initiatives that increase  competition,  threaten cost and
investment recovery,  and impact rate structures;  the ability of the Company to
successfully  reduce  its cost  structure;  the  successful  integration  of the
Company's subsidiaries,  including the Eastern Transaction companies; the degree
to which the Company develops unregulated business ventures;  the ability of the
Company  to  identify  and  make  complementary  acquisitions,  as  well  as the
successful  integration of such acquisitions;  inflationary  trends and interest
rates;  and other risks  detailed  from time to time in other  reports and other
documents  filed by the Company with the SEC. For any of these  statements,  the
Company claims the protection of the safe harbor for forward-looking information
contained in the Private  Securities  Litigation Reform Act of 1995, as amended.
For additional  discussion on these risks,  uncertainties  and assumptions,  see
"Item 1. Business," "Item 7.  Management's  Discussion and Analysis of Financial
Condition and Results of Operations" and "Item 7A.  Quantitative and Qualitative
Disclosures About Market Risk" contained herein.

The Company's  principal  executive offices are located at One MetroTech Center,
Brooklyn,  New York 11201 and 175 East Old Country  Road,  Hicksville,  New York
11801 and its telephone

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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.

BUSINESS STRATEGY

The  Company  seeks to become the  premier  energy and  services  company in the
Northeastern United States,  delivering energy,  products and services to people
at their  homes and  businesses.  The Company  engages in three core  downstream
businesses:  natural gas  distribution,  electric  services  and  energy-related
services primarily focused in the Northeast.  It also competes in two additional
lines of business:  gas  exploration  and production  and select  energy-related
investments,  which include  investments  in select  energy  markets or regions,
including the Gulf of Mexico,  Western Canada and Northern Ireland.  The Company
intends  to  grow  through   investments  in  its  core   businesses  and  other
energy-related  activities;  by expanding its gas distribution  business through
the completion of the Eastern  Transaction and the continued  penetration of the
Long Island gas market; by emphasizing  superior customer service; and by taking
advantage of the increasing trend towards  deregulation and competition to offer
an expanded array of energy services to its customers.

Key elements of the Company's business strategy include:

INVESTMENTS IN CORE BUSINESSES AND ENERGY-RELATED  ACTIVITIES.  In recent years,
the Company has made a number of  acquisitions  and  energy-related  investments
designed to enhance its presence in the Northeastern  United States. On June 18,
1999, the Company  acquired the 2,168 megawatt  Ravenswood  electric  generating
plant (the "Ravenswood  Facility") located in Long Island City, Queens, New York
City. The Company's total power generation  capacity,  including its Long Island
generation, now approximates 6,200 megawatts, making it one of the largest power
generators in the region.

As previously  noted, on November 4, 1999, the Company entered into a definitive
merger  agreement  with Eastern to acquire all of its common stock.  The Eastern
Transaction will increase the number of gas distribution  utilities owned by the
Company, to include Boston Gas Company,  Colonial Gas Company, Essex Gas Company
and  EnergyNorth,  resulting in the Company being the largest gas distributor in
the Northeast serving approximately 2.4 million customers.

The Company has also expanded its unregulated energy services  operations in the
Northeast,  through  several  significant  acquisitions,  including  one  of the
largest heating,  ventilation and air conditioning  ("HVAC")  contractors in the
state of Rhode  Island  and a New  Jersey  based HVAC  contractor.  Further,  in
February  2000,  the Company  acquired  additional  companies.  For  information
concerning  these  acquisitions,  see  Note  2  to  the  Consolidated  Financial
Statements, "Business Segment."

Consistent  with the Company's  strategy to make  investments  in certain select
markets outside of the Northeast, the Company made two additional investments in
Western Canada.  In September  1999, the Company  acquired a 37% interest in the
Paddle River gas processing  plant and  associated  gathering  systems  ("Paddle
River");  and in December 1999, the Company  acquired  certain oil properties in
Alberta, Canada.


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These  acquisitions  and  energy-related   investments   reflect  the  Company's
commitment  to enhancing its presence as an energy and service  company  focused
primarily  on  the  customer-oriented  segment  of  the  energy  market  in  the
Northeastern United States, with additional  complementary interests in the Gulf
of Mexico and Western Canadian supply basins, as well as Northern Ireland.

EXPANDED GAS  DISTRIBUTION  SERVICES.  The Company has achieved a high degree of
penetration in its Brooklyn Union service  territory,  with approximately 79% of
all one and two family homes currently  using natural gas for space heating.  In
contrast,  only  28% of one and two  family  homes  in  Brooklyn  Union  of Long
Island's  service  territory  currently use natural gas for space  heating.  The
Company believes that there remains a significant  opportunity for increased gas
heating  penetration of the Long Island service  territory and continues to make
capital expenditures to expand its gas distribution  infrastructure in this area
in order to maximize  long-term growth  objectives  while enhancing  shareholder
value. In addition, the Company expects to provide a focused marketing effort in
both service territories, in an attempt to capitalize on the current substantial
price  advantage  that natural gas enjoys over competing fuel oil in residential
and small  commercial  markets in the  metropolitan  New York City - Long Island
area.  Examples of focused marketing  programs include  concentrated  efforts to
convert current non-heating natural gas customers, which would require little or
minimal capital investment; continued targeting of the new construction segments
where  natural gas heating is the  preferred  choice;  and  conversion to gas of
small to medium size commercial businesses and large volume dual-fuel customers.

SUPERIOR CUSTOMER SERVICE.  The Company's utility operations have an outstanding
reputation for customer service and have consistently  received  excellent marks
for   customer   loyalty  and   satisfaction,   as   measured   by   independent
customer-satisfaction  specialists.  In 1999, for the second  consecutive  year,
Brooklyn Union was awarded the Brand Keys Customer  Loyalty Award, as the United
States  energy  provider  that had  achieved  the  highest  level of  success in
anticipating and exceeding customer expectations.

The Company was also recognized for its outstanding commitment to the community.
In 1999,  Brooklyn  Union was  honored by the New York City  Council on the 30th
Anniversary of its Cinderella Program,  which has contributed to the development
of more than 10,000 units of residential  housing as well as the  revitalization
of commercial facilities in Brooklyn, Queens, and Staten Island.

During 1999,  Chairman and Chief Executive Officer,  Robert B. Catell,  received
the American Gas  Association's  Distinguished  Service Award, the association's
highest  honor.  In addition,  in its Century of Power  edition,  Energy Markets
Magazine  honored Chairman and CEO Robert B. Catell as one of the 20th Century's
100 most influential people in gas and electricity. Mr. Catell was cited for his
role in helping to integrate  U.S. and Canadian gas lines to supply  natural gas
in the Northeast through the Iroquois Transmission System.

The Company intends to continue to emphasize superior customer service,  both to
differentiate itself from competitors as markets become increasingly deregulated
and to take  advantage  of selling  opportunities  available  for  complementary
energy-related  services such as appliance repair and energy system installation
and management.


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EXPANDED SERVICES.  With its strong market presence in the metropolitan New York
City -Long Island area, the Company  believes it is  well-positioned  to provide
customers with an expanded array of  energy-related  services.  In recent years,
the Company  offered gas and electric  marketing  services  throughout New York,
Connecticut, New Jersey, Maryland, Delaware, Pennsylvania and Ohio and appliance
repair, energy management, and related services for residential,  commercial and
industrial  customers  throughout the  metropolitan  New York City - Long Island
area,   as  well  as  in  Rhode   Island.   The  Company   owns  a  fiber  optic
telecommunications  network consisting in excess of 350 miles of fiber optics on
Long Island and, in addition to use in its  operations,  it provides  use of the
network to local carriers. The Company also has become the exclusive provider of
residential fuel cell units  distributed on behalf of a joint venture between GE
MicroGen,  a subsidiary of General  Electric Power Systems and Plug Power in New
York City and Long Island and is the  authorized  service  provider for PC25(TM)
natural-gas-powered   fuel  cells   manufactured  by  International  Fuel  Cells
(IFC)/ONSI(R) Corporation,  subsidiaries of United Technologies, in the New York
metropolitan  area. The Company believes that its investments in the fiber optic
network and fuel cells provide increased growth opportunities for the Company in
new and developing technologies.

INDUSTRY AND COMPETITION

The  electric  and natural  gas sectors of the  regulated  energy  industry  are
undergoing  significant change, as market forces are moving towards replacing or
supplementing  rate regulation as a means of controlling  prices for natural gas
and electricity.  Competition also presents utilities with greater opportunities
to manage the cost of their  natural  gas and  electric  supplies,  and  through
unregulated  affiliates,  to earn  profits on energy  sales and to expand  their
business activities.

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

Between  the 1930's and the late  1970's,  federal and state  energy  regulatory
policies remained  relatively  stable, and the structure of the regulated energy
industry  changed little.  However,  after the energy crises in the 1970's,  new
legislation and changes in regulatory  policy set in motion  competitive  forces
that are continuing to reshape the energy industry.

Beginning  in  1978  with  federal   legislation   that  authorized  the  phased
deregulation of wellhead natural gas prices and the establishment of unregulated
electric generation companies, competition has been increasingly introduced into
segments  of the  regulated  energy  industry.  To foster  competition,  federal
regulators  adopted "open access" rules which  required  interstate  natural gas
pipelines and electric transmission systems to "unbundle" wholesale sales, I.E.,
the sale of gas or electricity for resale,  from transportation and transmission
services. Open access also required

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interstate gas pipelines and electric utilities,  for the first time, to provide
transportation  and transmission  service on a  non-discriminatory  basis to all
qualified customers.  Recent initiatives also permit market forces,  rather than
regulation, to establish rates charged under short-term contracts for interstate
natural  gas  transportation  and  to  determine  the  allocation  of  increased
electricity  costs that result when electric  transmission  constraints  prevent
lower priced electricity from reaching electric  customers.  By enabling natural
gas producers and electric generators to reach new markets, open access policies
have led to intensified  competition  in wholesale  markets and are altering the
geographic  character  of the  industry.  No longer  typified by isolated  local
companies,  the  natural gas and  electric  sectors in many parts of the country
include a growing  number of firms with  regional,  national  and  international
dimensions.

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

In New York  State,  large-volume  retail  customers  have been able to purchase
natural gas supplies directly from non-utility vendors for about 15 years, while
direct sales to  aggregations of small customers have been permitted since 1996.
New York  regulators  have  commenced  initiatives  to  further  enhance  retail
competition in the state. In November 1998, the NYPSC issued a policy  statement
setting forth its vision for furthering  competition in the natural gas industry
and requesting  that each of the gas utility  subsidiaries  file a restructuring
proposal.  In response,  the Company's two gas distribution utility subsidiaries
filed  their  restructuring  proposal  with  the  NYPSC  in  October  1999.  For
additional discussion on gas deregulation, see "NYPSC Regulation."

Similarly,  the NYPSC has been encouraging the development of retail competition
in the electric sector in New York. In the past three years,  electric utilities
have begun to unbundle electric sales from retail  distribution  services,  open
their  franchised  territories  to  competitors,  transfer  control  over  their
transmission systems to an independent system operator, and divest many of their
generating plants. Several New York investor-owned utilities have divested their
non-nuclear  generating  plants,  including  Consolidated  Edison Company of New
York, Inc. ("Con Edison").  In response to a divestiture plan by Con Edison,  in
June 1999, the Company completed the acquisition of the Ravenswood Facility from
Con Edison, as discussed under the heading "The Company - Electric Services."

The  Company's  electric  operations  on Long  Island are  governed by a service
agreement with LIPA, discussed in greater detail below, and FERC. This agreement
generally  provides  for  recovery  of all costs of  production,  operation  and
maintenance, and capital improvements, subject to certain

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incentive  provisions.  Also,  since Long Island is considered a "load  pocket,"
I.E., there are insufficient transmission ties to permit a significant amount of
energy to be  transported  into Long  Island,  at this time,  the Company  faces
minimal  competitive  pressures  associated with its electric operations on Long
Island.

As indicated,  the Company also has electric  operations  in New York City.  The
Company currently bids and sells the energy produced by the Ravenswood  Facility
through bidding it into the energy market  operated by the New York  Independent
System Operator ("NYISO"). Further, the Company has a capacity contract with Con
Edison,  which  provides Con Edison with 100% of the  available  capacity of the
Ravenswood  Facility.  The Company anticipates that this contract will expire on
April 30, 2000, at which time the available capacity of the Ravenswood  Facility
will be bid into the  capacity  auction  conducted  by the NYISO.  New York City
local  reliability  rules  currently  require that 80% of the electric  capacity
needs of New York City is to be provided by  "in-city"  generators.  The Company
expects that the current New York City  reliability  rules will remain in effect
through at least 2000.  However,  in the  future,  should  new,  more  efficient
electric  power  plants be built in New York City  and/or the  in-city  capacity
requirements  be  modified,  the capacity  and energy  sales  quantities  of the
Ravenswood  Facility could be adversely  affected.  The Company can not predict,
however,  when or if new power  plants will be built or the nature of future New
York City requirements.

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

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

THE COMPANY

                                GAS DISTRIBUTION

OVERVIEW

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

                                       10

<PAGE>



systems that consist of  approximately  10,146 miles of distribution  pipelines,
576 miles of transmission pipelines and two gas storage facilities.  The Company
serves approximately 1.6 million customers,  of which approximately 1.5 million,
or 94%, are residential.  Gas is offered for sale to residential  customers on a
"firm"  basis,  and to  commercial  and  industrial  customers  on a  "firm"  or
"interruptible" basis. "Firm" service is offered to customers under schedules or
contracts which anticipate no interruptions,  whereas "interruptible" service is
offered to customers under  schedules or contracts  which  anticipate and permit
interruption on short notice,  generally in peak- load seasons. Gas is available
at any time of the year on an  interruptible  basis, if the supply is sufficient
and the  supply  system  is  adequate.  The  Company  also  participates  in the
interstate  markets by releasing pipeline capacity or bundling pipeline capacity
with gas for  "off-system"  sales.  An "off-  system"  customer  consumes gas at
facilities located outside the Company's service  territories,  by connecting to
the Company's facilities or one of its transporter's  facilities,  at a point of
delivery  agreed to by the Company and the customer.  The Company  purchases its
natural gas for sale to its  customers  under  long-term  supply  contracts  and
short-term  spot  contracts.  Such  gas  is  transported  under  both  firm  and
interruptible transportation contracts. In addition, the Company has commitments
for the provision of gas storage capability and peaking supplies.

For the year ended December 31, 1999, gas revenues were $1.753  billion,  or 59%
of the Company's revenues, and gas operating income was $308.4 million.

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

SALES AND DISTRIBUTION

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


                                       11

<PAGE>



Gas sales and revenues for 1999 by class of customer are set forth below:

<TABLE>
<CAPTION>

                                                                                          Revenues
                                                    Sales            Revenues               (% of
Customer                                           (MDTH)        (thousands of $)          Total)
--------------------------------------------     -----------     -----------------     ---------------

FIRM
<S>                                                  <C>                   <C>                   <C>
Residential Heating.........................         102,135               976,193               55.68
Residential Non-Heating.....................           9,916               192,810               11.00
Temperature-Controlled heating..............          31,112               137,422                1.84
Commercial/Industrial.......................          28,856               226,675               12.93
                                                 -----------     -----------------     ---------------
Total Firm..................................         172,019             1,533,100               87.45
                                                 -----------     -----------------     ---------------
Firm Transportation.........................          21,249                88,168                5.03
Transportation - Electric Generation........          82,503                15,150                0.86
                                                 -----------     -----------------     ---------------
Total Firm Transportation...................         103,752               103,318                5.89
                                                 -----------     -----------------     ---------------
  Total Firm Gas Sales and Transportation...         275,771             1,636,418               93.34
INTERRUPTIBLE...............................          10,903                32,825                1.87
OFF-SYSTEM SALES............................          14,323                32,006                1.83
TRANSPORTATION..............................          29,435                11,492                 .66
                                                 -----------     -----------------     ---------------
  Total Gas Sales and Transportation........         330,432             1,712,741               97.70
OTHER RETAIL SERVICES.......................             N/A                40,391                2.30
  Total Sales and Revenues*.................         330,432             1,753,132              100.00

<
                                                 ===========     =================     ===============
</TABLE>

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


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


<TABLE>
<CAPTION>
                                                      1999               1998              1997
                                                 --------------     --------------    --------------

<S>      <C>                                          <C>                <C>               <C>
Revenues ($000).............................          1,753,132          1,766,949         1,991,793
Net Income ($000)...........................            151,217            133,685  *        134,403
Firm Gas Sales and Transportation (MDTH)....            193,268            179,305           203,587
Transportation - Electric Generation (MDTH).             82,503             40,614                --
Other Deliveries (MDTH).....................             54,661             65,482            73,132
Heating customers...........................            677,000            665,000           657,000
Degree Days, Cooler (Warmer) than Normal %..             (10.0)             (17.5)               0.2
Capital Expenditures ($000).................            213,845            181,700           178,651
</TABLE>

-----------------------
*Excludes non-recurring and special charges associated with the Combination.
   -An MDTH is 10,000 therms  (British  Thermal  Units) and reflects the heating
    content of approximately one million cubic feet of gas. A therm reflects the
    heating content of approximately 100 cubic feet of gas.

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

                                       12

<PAGE>



The yearly  variations in firm gas sales and  transportation  quantities is due,
primarily,  to variations in weather between the periods presented.  Measured in
annual  degree  days,  weather was 10% warmer than normal in 1999,  17.5% warmer
than normal in 1998 and 0.2% colder than normal in 1997.  After  normalizing for
weather, firm sales volumes increased by 2.4% in 1999, as compared to 1998. Firm
sales quantities,  after normalizing for weather, were approximately the same in
1998 as compared to 1997.

Transportation   volumes   related   to   electric   generation,   reflect   the
transportation of gas to the Company's electric generating facilities located on
Long  Island.  The  Company  has  been  reporting  these  quantities  since  the
Combination.

The  decrease  in  other  deliveries  in all  periods  is  primarily  due to the
discontinuance  by Brooklyn Union of its off-system sales program in April 1998.
The program was replaced by a management  agreement with Enron Capital and Trade
Resources  Corp. For a further  discussion  and  additional  information on this
agreement, see "Supply and Storage."

For  additional  details  on gas  revenues,  gas  sales  quantities  and  market
saturation,  see Item 7.  Management's  Discussion  and  Analysis  of  Financial
Condition and Results of Operations.

SUPPLY AND STORAGE

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

Regulatory  actions,  economic  factors  and  changes  in  customers  and  their
preferences  continue to reshape the Company's gas operations  markets. A number
of  multi-family,  commercial and  industrial  customers and a growing number of
residential  customers  currently  purchase  their gas supplies from natural gas
marketers and then contract with the Company for local transportation, balancing
and other unbundled services. Since these customers are no longer reliant on the
Company for sales  service,  the quantity of gas that the Company must obtain to
meet remaining sales  customers'  requirements  has been reduced.  This trend is
likely to continue as state regulators  continue to implement  policies designed
to  encourage  customers  to purchase  their gas from  suppliers  other than the
traditional  gas  utilities.  In October 1999, the Company filed a proposal with
the NYPSC  consistent  with the NYPSC's policy  objective of local  distribution
companies  ending  their role as  providers  of merchant  sales  service for the
natural gas commodity. For further information, see "NYPSC Regulation" below.

PEAK-DAY CAPABILITY. The design criteria for the Company's gas system assumes an
average  temperature  of 0(0)F for peak-day  demand.  Under such  criteria,  the
Company  estimates that the  requirements to supply its firm gas customers would
amount to  approximately  1,863 MDTH of gas for a peak-day  during the 1999/2000
winter  season  and that the gas  supplies  available  to the  Company on such a
peak-day amounts to  approximately  2,033 MDTH. For the 2000/2001 winter season,
the  Company   estimates  that  the  peak-day   requirements   would  amount  to
approximately  1,904 MDTH and that the gas supplies  available to the Company on
such a peak day amounts to

                                       13

<PAGE>



approximately  2,033 MDTH.  The  1999/2000  winter  peak-day  throughput  to the
Company's  customers was 1,721 MDTH,  which  occurred on January 17, 2000, at an
average temperature of 9 degrees  Fahrenheit,  representing 85% of the Company's
per day  capability at that time.  The Company had  sufficient  gas available to
meet the requirements of firm gas customers for the 1999/2000 winter season, and
projects  that it also will have  sufficient  gas supply  available to meet such
requirements  for the 2000/2001  winter season.  The Company's firm gas peak-day
capability is summarized in the following table:



Source                             MDTH per day         % of Total

Pipeline....................            750                 37
Underground Storage.........            779                 38
Peaking Supplies............            504                 25
    Total...................           2,033                100
                                 ===============     ===============

PIPELINES.  The Company  purchases  natural gas for sale to its customers  under
contracts  with  suppliers  located in domestic and Canadian  supply  basins and
arranges for its transportation to the Company's facilities under firm long-term
contracts  with  interstate  pipeline  companies.   For  the  1999/2000  winter,
approximately  78% of the  Company's  natural  gas  supply  was  available  from
domestic sources and 22% from Canadian sources.  The Company has available under
firm   contract  750  MDTH  per  day  of   year-round   and  seasonal   pipeline
transportation  capacity  to its  facilities  in the New York City  metropolitan
area.  Major providers of interstate  pipeline  capacity and related services to
the Company include:  Transcontinental  Gas Pipe Line  Corporation  ("Transco"),
Texas  Eastern   Transmission   Corporation  ("Texas  Eastern"),   Iroquois  Gas
Transmission System ("Iroquois"),  Tennessee Gas Pipeline Company ("Tennessee"),
CNG Transmission  Corporation ("CNG") and Texas Gas Transmission Company ("Texas
Gas").

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

PEAKING  SUPPLIES.  In addition to the pipeline and storage supply,  the Company
supplements  its winter supply with peaking  supplies which are available on the
coldest  days of the  year to  enable  the  Company  to  economically  meet  the
increased requirements of its heating customers.  The Company's peaking supplies
include gas provided by the Company's two liquefied  natural gas ("LNG")  plants
and under peaking supply contracts with four cogeneration facilities/independent
power producers located in its franchise areas. For the 1999/2000 winter season,
the Company has the capability to provide a maximum  peak-day supply of 504 MDTH
on extremely cold days. The LNG plants have a storage  capacity of approximately
2,053 MDTH and  peak-day  throughput  capacity  of 395 MDTH,  or 19% of peak-day
supply.  The Company has  contract  rights  with  Trigen  Services  Corporation,
Brooklyn Navy Cogeneration  Partners, LP, Nissequogue Cogen Partners and the New
York Power Authority to purchase  peaking supplies with a maximum daily capacity
of 110 MDTH and total  available  peaking  supplies  during the winter season of
3,349 MDTH.


                                       14

<PAGE>



GAS SUPPLY MANAGEMENT.  Enron Capital and Trade Resources Corp., a subsidiary of
Enron Corp. ("Enron"), provides gas supply asset management services to Brooklyn
Union.  Under the terms of this agreement,  which has been in effect since April
1, 1998 and expires on March 31, 2000, Enron is responsible for managing certain
aspects of Brooklyn Union's interstate pipeline  transportation,  gas supply and
storage.  Enron is also responsible for satisfying  certain of the Company's gas
supply requirements; however, the Company remains contractually obligated to its
gas suppliers and has not terminated  any of its supply and delivery  contracts.
Pursuant to this  agreement,  Enron paid the Company a fee in 1999, a portion of
which was credited to the  Company's gas  ratepayers,  and obtained the right to
earn   revenues   based  upon  its   management  of  the  Company's  gas  supply
requirements, storage arrangements and off-system capacity.

The  Company  also has an  arrangement  with Coral  Energy  Resources,  L.P.,  a
subsidiary of Shell Oil Company ("Coral"),  whereby Coral assists the Company in
the  origination,   structuring,   valuation  and  execution  of  energy-related
transactions  relating  to  Brooklyn  Union  of Long  Island  and the  Company's
energy-management  services  undertaken  on behalf of LIPA. A sharing  agreement
exists   between  the  gas   ratepayers  and  the  Company  for  off-system  gas
transactions   and  between  the  Company  and  LIPA  for  off-system   electric
transactions.  The Company's  share of the profits on such  transactions is then
shared with Coral.  The Company  also shares in revenues  arising  from  certain
transactions initiated by Coral. This agreement also expires on March 31, 2000.

The Company  currently is in  negotiations  with a large energy  corporation  to
provide  energy supply  management  services to both Brooklyn Union and Brooklyn
Union of Long Island beginning on April 1, 2000.

GAS COSTS. Gas costs for 1999 were $702.0 million and reflect warmer than normal
weather during the year. Variations in gas costs have little impact on operating
results  of the  Company  since its  current  gas rate  structures  include  gas
adjustment  clauses  whereby  variations  between  actual gas costs and gas cost
recoveries  are  deferred  and  subsequently   refunded  to  or  collected  from
customers.

                                ELECTRIC SERVICES

OVERVIEW

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

As more fully described  below,  the Company (i) provides to LIPA all operation,
maintenance and construction  services relating to the Retained Assets through a
Management  Services  Agreement  (the "MSA");  (ii) supplies LIPA with capacity,
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) manages all aspects of the fuel supply for the  Generating  Facilities (as
defined  below) as well as all aspects of the  capacity  and energy  owned by or
under contract to LIPA through an Energy Management  Agreement (the "EMA"). Each
of the MSA, PSA and EMA became  effective  on May 28, 1998 and are  collectively
referred to herein as the "LIPA Agreements."

                                       15

<PAGE>



On June 18, 1999,  the Company  completed its  acquisition of the 2,168 megawatt
Ravenswood  Facility located in New York City from Con Edison for  approximately
$597 million. As a means of financing this acquisition, the Company entered into
a lease agreement with a special  purpose,  unaffiliated  financing  entity that
acquired  a portion  of the  Ravenswood  Facility  directly  from Con Edison and
leased it to a subsidiary of the Company under a ten year lease. The Company has
guaranteed all payment and performance  obligations of its subsidiary  under the
lease. Another subsidiary of the Company provides all operating, maintenance and
construction  services for the facility.  The lease program was  established  in
order to reduce the  Company's  cash  requirements  by $425  million.  The lease
qualifies  as  an  operating  lease  for  financial   reporting  purposes  while
preserving the Company's  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 Company has recorded an asset of  approximately
$200 million, representing its ownership interest in the assets acquired.

The  Company  currently  sells the energy  produced by the  Ravenswood  Facility
through  daily and/or  hourly  bidding into the energy  market  conducted by the
NYISO.  Revenues are recorded when the energy is sold to the NYISO. Further, the
Company has an interim  capacity  contract  with Con Edison  which  provides Con
Edison with 100% of the available capacity of the Ravenswood  Facility under the
capacity  contract.  Capacity  charges  are  billed  to Con  Edison on a monthly
fixed-fee basis. The Company anticipates that this contract will expire on April
30, 2000, at which time the available  capacity of the Ravenswood  Facility will
be bid into an auction process conducted by the NYISO.

For the year ended December 31, 1999,  electric  revenues were $861.6 million or
29% of the Company's revenues and electric operating income was $139.9 million.

GENERATING FACILITY OPERATIONS.

The Company  owns and  operates an  aggregate  of 73 electric  generation  units
throughout Long Island and Queens (the Long Island electric generation units are
referred to as the "Generating  Facilities"),  40 of which can be powered either
by oil or natural gas at the Company's  election.  In recent years,  the Company
has reconfigured  several of its facilities to enable them to burn either oil or
natural  gas,  thus  enabling  the Company to switch  periodically  between fuel
alternatives based upon cost and seasonal environmental requirements.

The following  table  indicates the 1999 summer  capacity of the Company's steam
generation  facilities and internal  combustion  ("IC") Units as reported to the
NYISO:


                                       16

<PAGE>





  LOCATION OF UNITS         Description             Fuel      Units          MW
---------------------- ---------------------- --------------------------  -----
Long Island City           Steam Turbine            Dual*      3           1,743
Northport, L.I.            Steam Turbine            Dual*      3           1,167
Northport, L.I.            Steam Turbine             Oil       1             381
Port Jefferson, L.I.       Steam Turbine            Dual*      2             387
Glenwood, L.I.             Steam Turbine             Gas       2             228
Island Park, L.I.          Steam Turbine            Dual*      2             390
Far Rockaway, L.I.         Steam Turbine            Dual*      1             108
Long Island City              IC Units              Dual*     17             425
Throughout L.I.               IC Units              Dual*     12             296
Throughout L.I.               IC Units               Oil      30           1,075
Total                                                         73           6,200
====================== ====================== =================================
*Dual - Oil or natural gas.


LIPA AGREEMENTS

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

The PSA provides incentives and penalties for the Company to maintain the output
capability of the Generating Facilities, as measured by annual industry-standard
tests of operating  capability,  and plant  availability  and efficiency.  These
combined  incentives and penalties may total as much as $4 million annually.  In
1999, the Company earned approximately $3.3 million in incentives under the PSA.

The PSA provides LIPA with all of the capacity from the  Generating  Facilities.
However,  LIPA has no obligation to purchase energy conversion services from the
Generating  Facilities and is able to purchase energy on a least-cost basis from
all available  sources  consistent  with existing  transmission  interconnection
limitations of the T&D system.  Under the terms of the PSA, LIPA is obligated to
pay for capacity at rates which reflect a large  percentage of the overall fixed
cost  of  maintaining  and  operating  the  Generating  Facilities.  A  variable
maintenance  charge is imposed for each unit of energy actually generated by the
Generating  Facilities.  The PSA  expires on May 28,  2013 and is  renewable  on
similar terms.  However,  the PSA provides LIPA the option of electing to reduce
or  "ramp-down"  the capacity it purchases  from the Company in accordance  with
agreed-upon  schedules.  In years 7  through  10 of the PSA,  if LIPA  elects to
ramp-down,  the Company is  entitled  to receive  payment for 100 percent of the
present value of the capacity charges otherwise payable

                                       17

<PAGE>



over the remaining term of the PSA. If LIPA  ramps-down the generation  capacity
in years 11 through 15 of the PSA, the  capacity  charges  otherwise  payable by
LIPA will be reduced in  accordance  with a formula  established  in the PSA. If
LIPA exercises its ramp-down  option,  the Company may use any capacity released
by LIPA to bid on new LIPA capacity  requirements  or to bid on LIPA's  capacity
requirements to replace other ramped-down  capacity. If the Company continues to
operate the ramped-down capacity,  the PSA requires it to use reasonable efforts
to market the capacity and energy from the ramped-down capacity and to share any
profits  with LIPA.  Capacity  and energy sold by the Company  from  ramped-down
capacity  must be  transported  over the T&D  system,  and the  Company  will be
required to pay LIPA's standard transmission (and, if applicable,  distribution)
rates  for the  service.  The PSA will be  terminated  in the  event  that  LIPA
exercises  its right to purchase,  at fair market value,  all of the  Generating
Facilities in the twelve- month period beginning on May 28, 2001.

The Company has an  inventory  of sulfur  dioxide  ("SO2")  and  nitrogen  oxide
("NOx")  emission  allowances  that may be sold to third party  purchasers.  The
amount of allowances varies from year to year relative to the level of emissions
from the Generating  Facilities which is greatly dependent on the mix of natural
gas and fuel oil used for generation  and the amount of purchased  power that is
imported onto Long Island. In accordance with the PSA, 33% of emission allowance
sales revenues  attributable to the Generating Facilities is kept by the Company
and the other 67% is credited to LIPA. LIPA also has a right of first refusal on
any  potential   emission   allowance   sales  of  the  Generating   Facilities.
Additionally, the Company is bound by 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 affect the market value
of the allowances.

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

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

In addition to the foregoing cost-based incentives and penalties, the Company is
eligible for incentives for performance  above certain  threshold  target levels
and subject to  disincentives  for  performance  below certain  other  threshold
levels, with an intermediate band of performance in which neither incentives nor
disincentives  will apply, for system  reliability,  worker safety, and customer
satisfaction.  In 1999, the Company earned $7.2 million in non-cost  performance
incentives.

                                       18

<PAGE>



The MSA shall  continue  in effect  until May 28,  2006.  Thereafter,  LIPA will
commence a competitive  process to solicit a new management  services agreement.
Generally,  the  Company  is  eligible  to submit a bid for such new  management
services agreement.

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

In exchange for these services, the Company earns an annual fee of $1.5 million,
plus an allowance for certain costs  incurred in performing  services  under the
EMA.  The EMA further  provides  incentives  for control of the cost of fuel and
electricity  purchased  on behalf of LIPA by the Company.  Fuel and  electricity
purchase  prices will be compared to regional price indices and the Company will
receive a payment from LIPA, or be obligated to make a payment to LIPA, for fuel
and/or  purchased  electricity  costs  which are  below or above,  respectively,
specified tolerance bands. The total fuel purchase incentive or disincentive can
be no greater than $5 million annually and the electricity purchase incentive or
disincentive  can be no  greater  than $2 million  annually.  For the year ended
December 31, 1999, the Company earned an aggregate of $5.3 million in incentives
under the EMA.

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

The Company owns the common plant (such as  administrative  office buildings and
computer systems) formerly owned by LILCO and recovers LIPA's allocable share of
the  carrying  costs of such plant  through  the MSA.  The Company has agreed to
provide LIPA,  for a period of 99 years,  the right to enter into leases at fair
market value for common plant or  sub-contract  for common services which it may
assign to a  subsequent  manager of the T&D system.  The Company has also agreed
(i)  for a  period  of 99  years  not to  compete  with  LIPA as a  provider  of
transmission or distribution  service on Long Island;  (ii) that LIPA will share
in synergy (I.E.,  efficiency)  savings over a 10-year period  attributed to the
Combination  (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 Generating Facilities.

                                       19

<PAGE>



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

An agreement also provides for an allocation of liabilities  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 the Company.  LIPA bears 53.6% of the costs associated therewith and the
Company bears the remainder.

In addition,  the Company has assumed environmental  obligations relating to the
Ravenswood  Facility  operations,  but not  including  liabilities  arising from
pre-closing  disposal  of waste at off-site  locations  and any  monetary  fines
arising from Con Edison's pre-closing conduct.  For additional  discussion,  see
"Remediation of Contaminated Property."


                                       20

<PAGE>



                          GAS EXPLORATION & PRODUCTION

The Company is also engaged in the  exploration  and  production of domestic gas
and oil,  through its 64% equity  interest in The  Houston  Exploration  Company
("THEC"),  an  independent  natural gas and oil  company,  and its wholly  owned
subsidiary, KeySpan Exploration and Production, LLC "KeySpan Exploration."

THEC  was  organized  by the  Company  in 1985 to  conduct  natural  gas and oil
exploration and production  activities.  It completed an initial public offering
in 1996 and its shares are currently traded on the New York Stock Exchange under
the symbol "THX." At March 1, 2000,  its  aggregate  market  capitalization  was
approximately $372.3 million (based upon the closing price on the New York Stock
Exchange on that date of $15.5625.  THEC has approximately  23,923,020 shares of
common stock, $.01 par value, outstanding.  More detailed information concerning
the  operations  of THEC is  contained  in the annual,  quarterly  and  periodic
reports filed by THEC with the SEC.

KeySpan   Exploration  was  organized  in  1999,  as  a  Delaware   corporation,
principally  to form a joint  venture  with  THEC.  On March 15,  1999,  KeySpan
Exploration and THEC entered into a joint exploration agreement (the "THEC Joint
Venture")  to explore  for  natural  gas and oil over a term of three  years and
expiring on December 31, 2001, subject to earlier termination,  at the option of
either party, upon proper notice to the other party. THEC contributed all of its
then  undeveloped  offshore  leases  to the  THEC  Joint  Venture,  and  KeySpan
Exploration and Production, LLC acquired a 45% working interest in all prospects
to be drilled under the THEC Joint Venture . THEC retained a 55% interest in the
leases,  and the revenues  generated  from this joint program are shared between
the Company and THEC on a 45% and 55% basis,  respectively.  The Company  commit
approximately $25 million for exploration and development  activities,  and will
reimburse THEC for certain general and  administrative  expenses relating to the
THEC Joint Venture during 2000.

Information  with respect to net proved reserves,  production,  productive wells
and acreage,  undeveloped acreage,  drilling activities,  present activities and
drilling  commitments  is  contained  in Note 16 to the  Consolidated  Financial
Statements, "Supplemental Gas and Oil Disclosures," included herein.

During  1999,  the  Company's  revenues  attributable  to  gas  exploration  and
production  were $150.6 million,  and gas  exploration and production  operating
income was $48.5 million.  Set forth below is certain selected  information with
respect to the Company's gas exploration and production activities:

<TABLE>
<CAPTION>

                                                    1999*          1998          1997
                                                  ----------    -----------    ---------

<S>                                                    <C>            <C>          <C>
Net Proved Reserves (BCFe).......................      553.0          480.3        337.1
Production of Natural Gas and Oil (BCFe).........       71.2           62.8         51.3
Average Realized Price of Natural Gas ($/per MCF)       2.10           2.02         2.25
Average Unhedged Price of Natural Gas ($/per MCF)       2.14           1.96         2.45
Capital Expenditures ($000)......................    183,322        302,837      145,175

</TABLE>

*1999 is the first year which includes KeySpan Exploration's activities.
   -  One billion  cubic feet (BCFe) of gas equals 1,000 MDTH.  Gas reserves and
      production  are stated in BCFe and MCFe,  which  includes  equivalent  oil
      reserves.

                                       21

<PAGE>



The Company's interests in exploration and production have achieved  significant
growth in net proved reserves, production and revenues over the past five years.
The Company,  primarily  through its interests in THEC, has increased net proved
reserves  from 150 BCFe at December  31, 1994 to 553 BCFe at December  31, 1999.
During this period,  annual production increased from 22 BCFe in 1994 to 71 BCFe
in 1999. At the close of 1999, daily production  averaged 195 MMcfe per day. The
Company's oil and gas revenues from its interests in exploration  and production
activities have increased from $42 million in 1994 to $150.6 million in 1999.

In September  1999, the Company and THEC jointly  announced  their  intention to
begin a process to review strategic  alternatives for THEC. The process included
an  assessment  of the  role of  THEC  within  the  Company's  strategic  plans,
including the sale of all or a portion of THEC by the Company.  After completing
the review of strategic  alternatives  for THEC,  the Company  concluded that it
would retain its equity interest in THEC.

In November 1998, the Company  extended a $150 million  revolving credit line to
THEC (the "THEC  Facility").  The THEC Facility matures on March 31, 2000 and is
convertible to equity, if borrowings remain outstanding at maturity.  Currently,
there is approximately  $80 million  outstanding and it is anticipated that such
debt will convert into additional common equity on April 1, 2000, increasing the
Company's equity ownership interest in THEC to approximately 70%.

THEC focuses its operations  offshore in the Gulf of Mexico and onshore in South
Texas,  South  Louisiana,  the Arkoma Basin,  East Texas and West Virginia.  The
geographic  focus of its operations  enables it to manage a comparatively  large
asset base with  relatively  few employees and to add and operate  production at
relatively low incremental costs. THEC seeks to balance its offshore and onshore
activities  so  that  the  lower  risk  and  more  stable  production  typically
associated  with onshore  properties  complement the high potential  exploratory
projects in the Gulf of Mexico by balancing risk and reducing volatility. THEC's
business  strategy is to seek to continue to increase  reserves,  production and
cash flow by pursuing internally generated  prospects,  primarily in the Gulf of
Mexico, by conducting  development and exploratory  drilling on its offshore and
onshore properties and by making selective opportune acquisitions.

OFFSHORE  PROPERTIES.  THEC holds  interests  in 86 lease  blocks,  representing
527,279 gross  (286,953  net) acres,  in federal and state waters in the Gulf of
Mexico, of which 28 have current  operations.  THEC operates 22 of these blocks,
accounting for  approximately 79% of THEC's offshore  production.  Over the past
five years,  THEC has drilled 21 successful  exploratory wells and 18 successful
development wells in the Gulf of Mexico,  representing a historical success rate
of  71%.  During  1999,  THEC  drilled  6  successful  exploratory  wells  and 8
successful development wells on its Gulf of Mexico properties.

ONSHORE   PROPERTIES.   THEC  owns  onshore   natural  gas  and  oil  properties
representing  interests  in 1,179  gross (779 net) wells,  approximately  86% of
which THEC is the operator of record,  and 166,450  gross  (116,639  net) acres.
Over the past five years,  THEC has drilled or  participated  in the drilling of
108 successful  development  wells and 9 successful  exploratory  wells onshore,
representing  a  historical  success rate of 80%.  During 1999,  THEC drilled 31
successful  development wells and 2 successful  exploratory wells on its onshore
properties. During the same period, THEC drilled or participated in the drilling
of 6 development wells that were not successful.

                                       22

<PAGE>



Effective  October 1, 1999,  THEC acquired from a private  undisclosed  party an
interest in offshore  producing  properties in the West Cameron 587 field of the
Gulf of Mexico. The newly acquired properties are comprised of 21 BCFe of proved
reserves  and 6 BCFe of  probable  reserves.  The net  purchase  price  of $21.0
million was paid in cash and  financed by  borrowings  under the THEC  Facility.
THEC plans to drill 2 additional wells and install a minimal structure with test
facilities to commence production in 2000.

JOINT VENTURE

During 1999,  THEC  completed  the  drilling of eight  wells,  six of which were
successful.  At December 31,  1999,  two  additional  joint  venture  wells were
drilled,  and  subsequently,  in January and February 2000, three new wells were
spud. During 2000, the THEC Joint Venture plans to drill  approximately  five to
eight offshore  exploratory  wells and to complete the  development and facility
installation of the successful exploratory wells drilled in 1999.





                                       23

<PAGE>



                             ENERGY-RELATED SERVICES

As part of its  business  strategy,  the Company is focusing  on  continuing  to
develop and grow its energy services  through  non-regulated  subsidiaries  that
market and manage natural gas,  electricity,  and consumer products and services
to residential,  commercial and industrial customers, including those within the
Company's   traditional   utility  service   territories.   These  non-regulated
subsidiaries, some of which are currently in the start-up phase, had revenues of
$188.6 million and an operating loss of $3.4 million in 1999.

ENERGY  MARKETING.  The Company buys,  sells and markets gas and electricity and
arranges  for  transportation  and related  services to over  100,000  customers
throughout the  Northeastern  United States,  including those in the gas service
territories of the Company.

ENERGY MANAGEMENT. The Company owns, designs,  constructs and/or operates energy
systems for  commercial  and  industrial  customers and provides  energy-related
services to clients in the  metropolitan New York City - Long Island area and in
New England.

APPLIANCE  SERVICES.  The Company  provides  various  technical and  maintenance
services to customers  throughout the  metropolitan  New York City - Long Island
area,  including the installation,  maintenance and repair of heating equipment,
water heaters, central air conditioners and other appliances.  With over 125,000
service contracts,  the Company is the largest provider of these services in the
State of New York.

TELECOMMUNICATIONS.  The  Company  owns a fiber  optic  network in excess of 350
miles on Long Island. The fiber optic network serves the telecommunication needs
of the Company on Long Island and also serves  several  carriers under short and
long-term agreements.

FUEL CELLS.  The Company has also become the exclusive  provider of  residential
fuel cell units distributed on behalf of a joint venture between GE MicroGen,  a
subsidiary  of GE Power  Systems and Plug Power in New York City and Long Island
and is the authorized  service  provider for PC25(TM)  natural-gas-powered  fuel
cells  manufactured  by  International  Fuel  Cells  (IFC)/ONSI(R)  Corporation,
subsidiaries of United Technologies,  in the metropolitan New York - Long Island
area.

As previously stated, during 1999 and in February 2000, the Company made several
acquisitions to expand its energy services  operations in the  metropolitan  New
York City - Long Island area and in New England.

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

                                       24

<PAGE>



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


                                       25

<PAGE>



                           ENERGY-RELATED INVESTMENTS

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

During 1999, net income from  energy-related  investments was $7.8 million,  and
the Company's  capital  expenditures  in this segment were $49.4 million,  which
represents  the Company's  acquisition  of a 37% interest in Paddle  River,  its
purchase of certain oil  properties  in Canada,  as well as its share of capital
expenditures in the midstream  natural gas assets owned jointly with Gulf Canada
Resources  Limited ("Gulf Canada") and its capital  expenditures  related to its
investment  in the gas  distribution  system in Northern  Ireland,  as discussed
below.

The  Company  owns a 20%  interest  in  Iroquois,  the  partnership  that owns a
374-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. The Company is also a shipper on Iroquois and currently transports up to
137 MDTH of gas per day on the pipeline.

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

The Company has equity investments in two gas storage facilities in the State of
New York, Honeoye Storage Corporation and Steuben Gas Storage Company.

The Company also has a 50% interest in midstream  natural gas assets  located in
Western Canada owned jointly with Gulf Canada.  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,  as previously discussed, a 37% interest in Paddle
River was acquired by the Company in September  1999 and in December  1999,  the
Company acquired the Nipisi oil property all in Western Canada.



                                       26

<PAGE>



                           REGULATION AND RATE MATTERS

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

PUBLIC UTILITY  HOLDING COMPANY  REGULATION.  KeySpan Energy is a public utility
holding  company,  although it is currently  exempt from most  regulation  under
PUHCA because of the  predominately  intrastate  character of its public utility
subsidiaries.  The only  provision  of PUHCA  from which  KeySpan  Energy is not
currently  exempt is the  requirement  that any person must  obtain  advance SEC
approval for the  acquisition of 5% or more of voting  securities  issued by any
public utility company or public utility holding company. However, following the
consummation of the Eastern Transaction,  the Company will become a "registered"
holding company under PUHCA. As such, the corporate and financial  activities of
the Company and its  subsidiaries,  including  the ability of each entity to pay
dividends  will be  subject to  regulation  of the SEC.  On March 6,  2000,  the
Company  filed  its  application  with the SEC to  become a  registered  holding
company under PUHCA.

KeySpan  Energy also is subject to indirect  regulation by the NYPSC in the form
of conditions  attached to NYPSC orders authorizing the formation of the Company
and approving the Combination, among other matters. Those conditions address the
manner in which  KeySpan  Energy and its  subsidiaries  interact  with their two
NYPSC-regulated  natural  gas  distribution  subsidiaries,  Brooklyn  Union  and
Brooklyn Union of Long Island.

                                NYPSC REGULATION

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

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

                                       27

<PAGE>



Union and  Brooklyn  Union of Long Island have been  providing a  transportation
service option to all their customers in compliance with that NYPSC requirement.

In April 1997,  the NYPSC  ordered gas utilities to cease  providing  non-safety
related  appliance  repair service by no later than May 1, 2000.  Brooklyn Union
stopped  providing  these  services in April 1998,  and  Brooklyn  Union of Long
Island ceased providing non-emergency appliance repair services on July 1, 1999.
During a  transition  period from  September  22, 1999  through  April 30, 2000,
Brooklyn  Union of Long Island is  implementing  a transition  program to assist
customers in their change to new non-emergency appliance service providers.

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

On October 18, 1999,  Brooklyn Union and Brooklyn Union of Long Island (the "Gas
Companies")  filed a Joint  Restructuring  Proposal  (the  "Proposal")  with the
NYPSC.  The Proposal  outlines how the Gas  Companies  would  restructure  their
operations by  encouraging  all gas consumers to migrate to  transportation-only
service. The Proposal is designed to (i) provide significant impetus towards the
Gas Companies exiting the gas supply business and (ii) present opportunities for
the development of a competitive  unbundled gas supply market for all customers.
Settlement  discussions with the Staff of the NYPSC and other interested parties
have been held regarding the Gas Companies' restructuring proposals. The Company
is unable to predict the outcome of this  matter.  For more  information  on gas
deregulation, see Item 7A, Quantitative and Qualitative Disclosures About Market
Risk.

Brooklyn  Union  currently is operating  under a six-year rate plan that ends on
September 30, 2002.  Brooklyn Union is subject to an earnings sharing  provision
under  which it will be  required  to credit  to  certain  customers  60% of any
utility  earnings up to 100 basis points above  specified  common  equity return
levels (other than any earnings associated with discrete  incentives) and 50% of
any utility earnings in excess of 100 basis points above such threshold  levels.
The threshold levels are13.50% for rate years, September 30 1999, 2000 and 2001;
and 13.25% for rate year 2002.  A safety  and  reliability  incentive  mechanism
provides a maximum 12 basis point  pre-tax  penalty  return on common  equity if
Brooklyn  Union  fails to achieve  certain  safety and  reliability  performance
standards,  and a customer service incentive  performance program with a maximum
40 basis point  pre-tax  penalty  return on equity.  With the  exception  of the
simplification of the customer service performance  standards and the imposition
of the earnings sharing provisions, the Brooklyn Union rate plan approved by the
NYPSC in 1996 remains unchanged.

Brooklyn  Union of Long Island  currently is operating  under a three-year  rate
plan. The rate plan applies to the period December 1, 1997 through  November 30,
2000. Under the plan, if Brooklyn Union of Long Island's earned return on common
equity devoted to its operations  exceeds 11.10%, it must credit back to certain
customers 60% of earnings up to 100 basis points above the 11.10% and 50% of any
earnings in excess of a 12.10% return. Both a customer service and a safety and

                                       28

<PAGE>



reliability  incentive performance program became effective on December 1, 1997,
with  maximum  pre-tax  return on equity  penalties  of 40 and 12 basis  points,
respectively,  if  Brooklyn  Union  of Long  Island  fails  to  achieve  certain
performance standards in these areas. At the conclusion of the Brooklyn Union of
Long Island rate plan on November 30, 2000, Brooklyn Union of Long Island or the
NYPSC on its own  motion,  may  initiate  a  proceeding  to revise the rates and
charges of that company.

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

ELECTRIC  SUPPLIERS.  KeySpan Generation LLC ("KeySpan  Generation") and KeySpan
Ravenswood,  Inc. ("KeySpan  Ravenswood"),  KeySpan Energy's electric generation
subsidiaries,  are not subject to NYPSC rate  regulation  because  their  energy
transactions are made exclusively at wholesale;  however, KeySpan Generation and
KeySpan  Ravenswood  are  subject  to NYPSC  financial,  reliability  and safety
regulation.  As wholesale generators,  KeySpan Generation and KeySpan Ravenswood
qualify  for  "lightened"  regulatory  treatment,   I.E.  certain  discretionary
regulations  are waived and others are applied with less  scrutiny than would be
the case for fully-regulated electric utilities.

                               FEDERAL REGULATION

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

The Company also owns an approximate  20% interest in Iroquois and 52% and 18.6%
interests  in the Honeoye and  Steuben  gas  storage  facilities,  respectively.
Iroquois,  Honeoye and Steuben  are fully  regulated  by the FERC as natural gas
companies.

ELECTRIC SUPPLIERS.  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  Generating  Facilities  and the  Ravenswood  Facility  are  subject to FERC
regulation  based  on  their  wholesale  energy   transactions.   LIPA,  KeySpan
Generation,  and the Staff of FERC  stipulated  to  setting  rates  designed  to
recover  $300.5  million in the first year with  agreed-upon  adjustments to set
rates for the remainder of the five-year rate period.  The only party opposed to
this stipulation is the

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County of Suffolk. Parties submitted initial briefs to a FERC Administrative Law
Judge ("ALJ") on December 8, 1998 and reply briefs on January 15, 1999. On April
15, 1999, the presiding ALJ issued an Initial Decision which ordered, subject to
review of the Commission on exceptions or on its own motion,  that the rates and
terms  contained  in the PSA, as modified by the June 30, 1998  Stipulation  and
Agreement, are just and reasonable.  On June 17, 1999, this initial decision was
made a final  order  of the  FERC.  The  FERC  retains  the  ability  in  future
proceedings,  either on its own motion or upon a complaint  filed with the FERC,
to modify KeySpan  Generation's  rates,  either upward or downward,  if the FERC
finds that the public interest requires it to do so.

KeySpan  Ravenswood's  rates  are based on its  market  based  rate  application
approved by FERC.  The rates that KeySpan  Ravenswood  may charge are subject to
mitigation  measures  due to market power  concerns of the FERC.  As is the case
with KeySpan  Generation,  the FERC  retains the ability in future  proceedings,
either on its own  motion or upon a  complaint  filed  with the FERC,  to modify
KeySpan  Ravenswood's  rates,  either upward or downward,  if the FERC concludes
that it is in the public interest to do so.

                          REGULATION IN OTHER COUNTRIES

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

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


                              ENVIRONMENTAL MATTERS

OVERVIEW

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

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<PAGE>



Ensuring  continuing  compliance  with  environmental  requirements  may require
significant  expenditures  for capital  improvements  or  modifications  in some
areas.  Total capital  expenditures for  environmental  improvements and related
studies, for other than MGP matters,  amounted to approximately $1.7 million for
the year ended December 31, 1999, and are expected to be in the $1 to $2 million
range for the year ending December 31, 2000.

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

AIR. Federal, state and local laws currently regulate a variety of air emissions
from new and existing electric  generating  plants,  including SO2, NOx, opacity
and particulate  matter and, in the future,  may also regulate emissions of fine
particulate matter,  hazardous air pollutants,  and carbon dioxide.  The Company
has  submitted   timely   applications   for  permits  in  accordance  with  the
requirements  of Title V of the 1990  amendments  to the  Federal  Clean Air Act
("CAA").  Final  permits  have been  issued  for all of the  Company's  electric
generating  facilities  with  the  exception  of the Far  Rockaway  and  KeySpan
Ravenswood  facilities,  which are  pending.  The  permits  allow the  Company's
electric  generating  plants to  continue  to  operate  without  any  additional
significant expenditures, except as described below.

The  Company's  generating  facilities  are  located  within a CAA severe  ozone
non-attainment  area,  and are subject to the Phase I, II, and III NOx reduction
requirements  established  under the  Ozone  Transportation  Commission  ("OTC")
memorandum of  understanding.  The Company's  investments  in boiler  combustion
modifications and the use of natural gas firing at its steam electric generating
stations has enabled the Company to achieve the NOx emission reductions required
under Phase I and II in a  cost-effective  manner.  In  addition,  software  and
equipment upgrades of approximately $1 million for continuous emissions monitors
("CEM") may be required in 2000 to meet EPA  requirements  for the NOx allowance
tracking/trading  program and certain  other  regulatory  changes  affecting the
operation  of CEM  systems.  The  Company  currently  estimates  that  it may be
required  to spend  between  $5  million  and $25  million  by the year 2003 for
additional  pollution  control  equipment  to  achieve  the  OTC  Phase  III NOx
reduction  requirements and/or new requirements  imposed under the EPA NOx state
implementation  plan,  depending on the actual level of NOx emission  reductions
which are required when pending  regulations are implemented by the State of New
York.

WATER.  The Company  possesses  permits for its generating units which authorize
discharges  from  cooling  water  circulating  systems  and  chemical  treatment
systems. These permits are renewed from

                                       31

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time to time, as required by  regulation.  The Company does not foresee any new,
material obligations arising from these permit renewals.

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

                      REMEDIATION OF CONTAMINATED PROPERTY

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

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

MANUFACTURED  GAS PLANT SITES.  The Company has identified  twenty-six MGP sites
which were historically owned or operated by Brooklyn Union or Brooklyn Union of
Long Island (or such companies' predecessors). Operations at these plants in the
late  1800's and early  1900's may have  resulted  in the  release of  hazardous
substances.  These  former  sites,  some of  which  are no  longer  owned by the
Company, have been identified to both the DEC for inclusion on appropriate waste
site  inventories  and the PSC. The  currently-known  conditions  of fourteen of
these former MGP sites,  their  period and  magnitude  of  operation,  generally
observed cleanup  requirements  and costs in the industry,  current land use and
ownership,  and possible reuse have been considered in establishing  contingency
reserves that are discussed below.

In  1995,  Brooklyn  Union  executed  an ACO with the DEC  which  addressed  the
investigation  and  remediation  of a site in Coney Island,  Brooklyn.  In 1998,
Brooklyn  Union  executed an ACO for the  investigation  and  remediation of the
Clifton MGP site in Staten  Island.  At the  initiative  of DEC, the City of New
York and the  Company  are in  negotiations  on a cost  sharing  arrangement  to
conduct  investigations in 2000 at the Citizen's MGP site in Brooklyn,  which is
now  primarily  owned by the City,  but was  formerly  owned and  operated  by a
Brooklyn  Union  predecessor.  The DEC notified the Company in 1998 that the Sag
Harbor and Rockaway Park MGP sites owned by Brooklyn  Union of Long Island would
require remediation under the State's Superfund program. Accordingly, the

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<PAGE>



Sag  Harbor  and  Rockaway  Park  sites;  as well as the Bay  Shore,  Glen Cove,
Halesite and Hempstead MGP sites;  are the subject of two separate  ACOs,  which
the Company  executed  with the DEC in March and September  1999,  respectively.
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.

The  Company  was  also  requested  by  the  DEC  to  perform  preliminary  site
assessments at the Patchogue,  Babylon, Far Rockaway,  Garden City and Hempstead
(Clinton  St.) MGP sites,  each of which were formerly  owned by LILCO,  under a
separate ACO entered into in September 1999.  Initial studies based on existing,
available  documentation  have been completed for each such site and the DEC has
requested  that the Company  collect  additional  samples at each of the subject
properties.

With the  exception  of the Coney  Island site,  which will be  redeveloped  for
commercial or industrial use, the final end uses for the sites  identified above
and, therefore,  acceptable remediation goals have not yet been determined.  The
Company is required to prepare a feasibility  study for the  remediation of each
such site,  based on cleanup levels derived from risk analyses  associated  with
the  proposed or  anticipated  future use of the  properties.  The  schedule for
completing  this  phase of the work  under  the  ACOs for the  identified  sites
discussed above extends through 2001.

Thus, thirteen sites identified above are currently the subject of ACOs with the
DEC and one is subject to the  negotiation  of such an agreement.  The Company's
remaining  MGP  sites  may  not  become  subject  to  ACOs  in the  future,  and
accordingly no liability has been accrued for these sites. It is possible, based
on  future  investigation,  that  the  Company  may  be  required  to  undertake
investigation  and potential  remediation  efforts at these,  or other currently
unknown former MGP sites.  However, the Company is currently unable to determine
whether or to what extent such additional costs may be incurred.

The  Company  believes  that  in  the  aggregate,   the  accrued  liability  for
investigation  and remediation of the MGP sites  identified above are reasonable
estimates  of  likely  cost  within a range of  reasonable,  foreseeable  costs.
Accordingly,  the  Company  presently  estimates  the cost of its  MGP-  related
environmental  cleanup  activities  will be $123 million;  which amount has been
accrued  by  the  Company  as  its  current  best   estimate  of  its  aggregate
environmental  liability  for known sites.  As previously  indicated,  the total
MGP-related  costs  may be  substantially  higher,  depending  upon  remediation
experience,  selected end use for each site, and actual environmental conditions
encountered.

The NYPSC  approved  rate plans for Brooklyn  Union and  Brooklyn  Union of Long
Island provide for the recovery of such investigation and remediation costs. The
Brooklyn Union rate plan provides, among other things, that if the total cost of
investigation and remediation  varies from that which is specifically  estimated
for a site under  investigation  and/or  remediation,  then Brooklyn  Union will
retain or absorb up to 10% of the  variation.  The Brooklyn Union of Long Island
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,  Brooklyn  Union has  offset  certain  moneys due to
ratepayers against its estimated  environmental  cleanup costs for MGP sites. At
December  31,  1999,  the Company  has  reflected  a  regulatory  asset of $95.6
million.

                                       33

<PAGE>



Expenditures  incurred  to date  by the  Company  with  respect  to  MGP-related
activities total $15.9 million.

Periodic  discussions by the Company with  insurance  carriers and third parties
for  reimbursement  of some portion of MGP site  investigation  and  remediation
costs continue.  In December 1996,  LILCO filed a complaint in the United States
District Court for the Southern District of New York against fourteen  insurance
companies  that issued general  comprehensive  liability  policies to LILCO.  In
January 1998, LILCO commenced a similar action against the same, and additional,
insurance  companies  in New York State  Supreme  Court,  and the federal  court
action subsequently was dismissed.  The state court action is being conducted by
the  Company on behalf of  Brooklyn  Union of Long  Island.  The outcome of this
proceeding  cannot  yet  be  determined.  In  addition,  Brooklyn  Union  is  in
discussions  with  insurance  carriers  regarding  the  possible  resolution  of
coverage claims related to its MGP site investigation and remediation activities
without  litigation.  The  Company is not able to predict  the  outcome of these
discussions.

RAVENSWOOD  FACILITY.  In  connection  with  the  Company's  acquisition  of the
Ravenswood  Facility,  the  Company  assumed  all  of  Con  Edison's  historical
contingent environmental  obligations relating to facility operations other than
liabilities arising from pre-closing disposal of waste at off-site locations and
any  monetary  fines  arising  from  Con  Edison's  pre-closing  conduct.  These
environmental  exposures  are  generally  divided  between  (i)  future  capital
expenditures, in the nature of property and leasehold improvements, necessary to
address  compliance  obligations and (ii)  expenditures  to investigate  and, as
necessary,  remediate certain on-site  contamination which may or may not result
in leasehold improvements.

Presently,  there are four ACOs issued to Con Edison by the DEC. The Company has
contractually  agreed  to  assume  Con  Edison's  remaining  obligations  at the
Ravenswood  Facility  under  these ACOs.  Generally,  the  Company's  derivative
obligations  are expected to include  investigation  and  remediation of certain
petroleum releases,  inspection and any necessary  corrective action for certain
aboveground storage tanks and underground piping, potential upgrades to existing
cooling water intake structures,  and implementation of an air emissions opacity
reduction program. The Company is currently  negotiating a consolidated ACO with
the DEC that will clarify the scope and timing of these activities.

The  Company has  identified  certain  capital  expenditures  for  environmental
compliance  purposes at the Ravenswood  Facility that are  reasonably  likely to
occur. To address an anticipated shortfall of NOx emissions allowances beginning
in May 2003,  the Company may incur capital costs for  additional  air pollution
control equipment.  Alternatively,  the Company may elect to purchase additional
NOx allowances.  The Company may be required to upgrade the Ravenswood  Facility
cooling  intake  structures  in  order to meet  the  best  available  technology
requirements of the Federal Clean Water Act. The extent and cost of any upgrades
are  uncertain and will depend upon the analysis and  interpretation  of certain
studies submitted by the Company to the DEC and subsequently agreed upon between
the DEC and the Company.

Pursuant to its  derivative  ACO  obligations,  the Company  will  complete  the
investigation and remediation of certain petroleum and other hazardous  material
releases at the Ravenswood Facility, as necessary. The Company will also address
similar releases not covered by the ACO's. The

                                       34

<PAGE>



Ravenswood  Facility is located on a former MGP site. The Company has no current
obligation to investigate or remediate the property for contamination  resulting
from historical MGP operations,  although there may be a need to perform certain
site  remediation as part of an overall  improvement of property  related to the
installation  of  new  generation  capacity.   Based  on  information  currently
available for environmental contingencies related to the Ravenswood acquisition,
the Company has accrued $5 million as the minimum liability to be incurred.


EMPLOYEE MATTERS

On December 31, 1999, the Company had approximately  7,723 full-time  employees.
Of that  total,  approximately  4,946  employees  are covered  under  collective
bargaining  agreements;  1,726 employees are  represented by Local 101,  Utility
Division,  of  the  Transport  Workers  Union  of  America,  205  employees  are
represented by Local 3 of the  International  Brotherhood of Electrical  Workers
(the  "IBEW"),  1,882  employees are  represented  by Local 1049 of the IBEW and
1,133 employees are represented by Local 1381 of the IBEW.

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

EXECUTIVE OFFICERS OF THE COMPANY

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

ROBERT B. CATELL

Mr. Catell, age 62, has been a Director of the Company since its creation in May
1998 and served as its President and Chief Operating  Officer from May 1998-July
1998. He was elected  Chairman of the Board and Chief Executive  Officer in July
1998. Mr. Catell joined Brooklyn Union in 1958 and became an officer in 1974. He
was elected Vice President in 1977,  Senior Vice President in 1981 and Executive
Vice  President  in 1984.  He was elected  Chief  Operating  Officer in 1986 and
President in 1990.  Mr. Catell served as President and Chief  Executive  Officer
from 1991 to 1996, when he was elected Chairman and Chief Executive Officer.  In
1997, Mr. Catell was elected Chairman,  President and Chief Executive Officer of
the Company.

LAWRENCE S. DRYER

Mr. Dryer,  age 40, was elected Vice President of Internal Audit for the Company
in  September  1998.  Mr. Dryer had been with the Long Island  Lighting  Company
(LILCO)  since  1992 as  Director  of  Internal  Audit and was  responsible  for
providing  independent  appraisals  and  recommendations  to improve  management
controls and increase operational efficiency.  Prior to joining LILCO, Mr. Dryer
was an Audit Manager with Coopers & Lybrand.

                                       35

<PAGE>



ROBERT J. FANI

Mr. Fani, age 46, was elected Executive Vice President of Strategic  Services in
February  2000.  Mr. Fani joined  Brooklyn  Union in 1976, and held a variety of
management  positions in distribution,  engineering,  planning,  marketing,  and
business  development.  He was elected Vice President in 1992. In 1997, Mr. Fani
was  promoted to Senior Vice  President  of  Marketing  and Sales.  In 1998,  he
assumed that  position  with the Company  and, as of September 1, 1999,  assumed
responsibility for Gas Operations.

WILLIAM K. FERAUDO

Mr. Feraudo,  age 49, was elected  Executive Vice President of KeySpan  Services
Group in February 2000.  KeySpan  Services Group, is the group of  non-regulated
energy  service  companies  focusing on gas  marketing,  energy  management  and
telecommunications. Since its founding in 1996, the group has grown to more than
2,000  employees,  serving  customers in the  Northeast.  Mr.  Feraudo began his
career at Brooklyn  Union in 1971 and rose through a succession  of positions in
Information Systems,  Engineering,  Customer Operations,  Sales, Marketing,  and
Product  Development before being named Senior Vice President in 1994. He served
as  Senior  Vice  President  of Energy  Services  for the  Company  prior to his
promotion to Executive Vice President.

RONALD S. JENDRAS

Mr. Jendras,  age 52, was named Vice President,  Controller and Chief Accounting
Officer of the Company in August 1998. He joined Brooklyn Union in 1969 and held
a variety of positions in the  Accounting  Department  before being named budget
director  in 1973.  In 1983,  Mr.  Jendras  was  promoted to manager of Brooklyn
Union's Rate and Regulatory Affairs area, and in 1997, was named general manager
of the Accounting Division.

GERALD LUTERMAN

Mr Luterman,  age 56, has served as Senior Vice  President  and Chief  Financial
Officer  since August 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  1985-1996,  he held  executive  positions  with
American Express, including Executive Vice President and Chief Financial Officer
of the Consumer Card Division from 1991-1996.

DAVID MANNING

Mr. Manning,  age 49, was elected Senior Vice President of Corporate  Affairs in
April 1999. Before joining KeySpan Energy, Mr. Manning had been president of the
Canadian  Association  of Petroleum  Producers  (CAPP) since 1995.  From 1993 to
1995, he was Deputy Minister of Energy for the Province of Alberta,  Canada, the
source of  approximately  14 percent of the  natural gas supply  serving  United
States markets. 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.

                                       36

<PAGE>



CRAIG G. MATTHEWS

Mr. Matthews,  age 57, has been President and Chief Operating Officer of KeySpan
Energy and Brooklyn Union since January 1999. Mr. Matthews joined Brooklyn Union
in 1965  and  held  various  management  positions  in the  corporate  planning,
financial,  marketing, and engineering areas. He has been an officer since 1977.
He was elected  Vice  President in 1981 and Senior Vice  President  in 1985.  In
1991, Mr. Matthews was named Executive Vice President with  responsibilities for
Brooklyn  Union's  financial,  gas supply,  information  systems,  and strategic
planning functions, as well as Brooklyn Union's energy-related  investments.  In
1996, Mr.  Matthews was promoted to President and Chief  Operating  Officer.  He
also served as  Executive  Vice  President  and Chief  Financial  Officer of the
Company from May 1998 through August 1999.

H. NEIL NICHOLS

Mr.  Nichols,  age 62, was elected Senior Vice President of the Company in March
1999.  He also serves as President  of KeySpan  Energy  Development  Corporation
(KEDC), a position to which he was elected in March 1998. KEDC is a wholly owned
subsidiary of the Company responsible for spearheading energy-related investment
project  development  efforts,  both  domestically  and  internationally.  Since
February 1999, Mr.  Nichols also has  responsibility  for KeySpan Energy Trading
Services, LLC, the Company which provides fuel procurement management and energy
trading services for Brooklyn Union, Brooklyn Union of Long Island 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.

ANTHONY NOZZOLILLO

Mr.  Nozzolillo,  age 51, was  elected  Executive  Vice  President  of  Electric
Operations in February  2000. He previously  served as Senior Vice  President of
the  Company'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.  He served as Senior  Vice  President  of
Finance of the  Company  from May 1998 to  December  1998.  He also  serves as a
Director to the Long Island Museum of Science and Technology.

WALLACE P. PARKER, JR.

Mr.  Parker,  age 50, was elected  Executive Vice President of Gas Operations in
February  2000. He previously  served as the Company's  Senior Vice President of
Human  Resources  from August 1998 to January 2000. He joined  Brooklyn Union in
1971 and served in a wide variety of management positions.  In 1987 he was named
Assistant  Vice  President for marketing  and  advertising  and was elected Vice
President in 1990. In 1994 Mr.  Parker was promoted to Senior Vice  President of
Human Resources.

                                       37

<PAGE>



LENORE F. PULEO

Ms. Puleo,  age 46, was elected  Executive Vice President of Shared  Services in
February  2000.  She  previously  served as Senior  Vice  President  of Customer
Relations for Brooklyn Union from May 1994 to May 1998, and for the Company from
May 1998 to  January  2000.  She  joined  Brooklyn  Union in 1974 and  worked in
management  positions  in  Brooklyn  Union's  Accounting,   Treasury,  Corporate
Planning,  and Human Resources areas. She was given responsibility for the Human
Resources  Department in 1987 and was named a Vice  President in 1990. Ms. Puleo
was promoted to Senior Vice President of Brooklyn Union's Customer  Relations in
1994.

CHERYL T. SMITH

Ms. Smith,  age 48, joined the Company in November 1998 as Senior Vice President
and Chief Information  Officer. She came to the Company from Bell Atlantic where
she served as Vice President of Strategic Billing and Corporate  Systems.  Prior
to Bell Atlantic, she worked at Honeywell Federated Systems Inc. as the Director
of MIS for Honeywell Federal Systems,  Inc. Ms. Smith brings to the Company more
than 25 years of information systems technology experience.

MICHAEL J. TAUNTON

Mr. Taunton, age 44, has been the Company's Vice President of Investor Relations
since September 1998. He joined Brooklyn Union in 1975 and has worked in various
management  positions  in Marketing  and Sales,  Corporate  Planning,  Corporate
Finance  and  Accounting.  During  the  transition  process  he  co-managed  the
day-to-day  operations  of the  merger on behalf of  Brooklyn  Union and  LILCO.
Before that, Mr. Taunton was general manager of the Business Process Improvement
teams that were organized to improve the organization's strategic focus.

COLIN P. WATSON

Mr. Watson,  age 46, was named Senior Vice President of Strategic  Marketing and
E-Business  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  Brooklyn  Union  in  1997  as Vice  President  of  Strategic
Marketing. From 1973 to 1997, he held several positions at NYNEX, including vice
president and managing director of worldwide operations.

ROBERT R. WIECZOREK

Mr.  Wieczorek,  age 57, has been the Company's  Vice  President,  Secretary and
Treasurer  since August 1998. Mr.  Wieczorek  joined  Brooklyn Union in 1976 and
held a variety of accounting/ financial related positions.  In 1981 he was named
Treasurer  responsible  for all cash  management  activities  and for overseeing
pension  fund  investments  and  retirement   administration,   pension  manager
evaluation,  long-term  debt  and  equity  financing,  investor  relations,  and
shareholder  records.  From May 1998 to August 1998,  he was Vice  President and
Auditor of the Company.

STEVEN L. ZELKOWITZ

Mr. Zelkowitz,  age 50, was elected Senior Vice President and General Counsel of
the Company in February 2000. He joined the Company as Senior Vice President and
Deputy  General  Counsel  in October  1998.  Before  joining  the  Company,  Mr.
Zelkowitz  practiced  law with Cullen and Dykman in  Brooklyn,  New York and had
been a partner since 1984. He served on the firm's  Executive  Committee and was
head of its Corporate/Energy Department. Mr. Zelkowitz specialized in energy and
utility  law and  represented  investor-owned  and  municipal  gas and  electric
utilities in New York, New Jersey and Vermont.

<PAGE>

ITEM 2.  PROPERTIES

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


ITEM 3.  LEGAL PROCEEDINGS

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

In October 1998,  the County of Suffolk and the Towns of Huntington  and Babylon
commenced  an action  against  LIPA,  the  Company,  the NYPSC and others in the
United  States  District  Court  for  the  Eastern  District  of New  York  (the
"Huntington Lawsuit").  The Huntington Lawsuit alleges, among other things, that
LILCO  ratepayers  (i) have a property  right to receive or share in the alleged
capital gain that resulted from the transaction with LIPA (which gain is alleged
to be at least $1  billion);  and (ii)  that  LILCO  was  required  to refund to
ratepayers the amount of a Shoreham-related  deferred tax reserve (alleged to be
at least $800 million)  carried on the books of LILCO at the consummation of the
LIPA  transaction.  In December  1998,  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 LIPA
Transaction  and KeySpan  Acquisition  to LILCO's  Chairman  and certain  former
officers and adds the  recipients of the payments as  defendants.  In June 1999,
the Company was served with the second  amended  complaint.  On August 23, 1999,
the Company filed a motion to dismiss the second amended complaint.  Pursuant to
an  agreement  among the  parties,  the  Company's  motion to  dismiss  is being
converted to a summary  judgement  motion. At this time the Company is unable to
determine the outcome of this ongoing proceeding.

                                       39

<PAGE>




A class settlement,  which became effective in June 1989 (COUNTY OF SUFFOLK,  ET
AL., V. LONG ISLAND LIGHTING COMPANY,  ET AL.), resolved a civil lawsuit against
LILCO brought under the federal Racketeer  Influenced and Corrupt  Organizations
Act, alleging that LILCO made inadequate disclosures before the NYPSC concerning
the  construction  and completion of nuclear  generating  facilities.  The class
settlement  provided  electric  customers with rate reductions of $390.0 million
that were being reflected as adjustments to their monthly  electric bills over a
ten-year period which began on June 1, 1990. The class settlement  obligation of
approximately $20 million at December 31, 1999 reflects the present value of the
remaining  reductions  to be  refunded  to  customers.  As a result  of the LIPA
Transaction,  LIPA will provide the remaining balance to its electric  customers
as an  adjustment  to their monthly  electric  bills.  The Company will then, in
turn,  reimburse  LIPA on a monthly basis for such  reductions on the customer's
monthly bill. The Company remains ultimately obligated for amounts due under the
class  settlement.  In November  1999,  class  counsel for the LILCO  ratepayers
served a motion, in the United States District Court for the Eastern District of
New York, seeking an order directing the Company to pay $42 million, in addition
to the amounts  remaining to be paid under the class  settlement.  Class counsel
contends that the required rate  reductions  should have been exclusive of gross
receipts  taxes.  The Company  filed its  opposition  in January  2000 and class
counsel  filed their reply papers in February  2000. In their  February  papers,
class counsel revised their demand to seek an order directing the Company to pay
approximately $22 million,  plus interest,  in addition to the amounts remaining
to be paid under the class  settlement.  The Company  filed its rebuttal  papers
March 1, 2000 and oral  argument  was held March 6, 2000.  On March 9, 2000,  an
order was issued by the court granting class counsel's motion. The Company is in
the process of evaluating  the order and,  accordingly,  is currently  unable to
determine the ultimate  outcome of the  proceeding or what effect,  if any, such
outcome will have on its financial condition or results of operations.

In May 1995, eight  participants of LILCO's Retirement Income Plan ("RIP") filed
a lawsuit against LILCO, the RIP and Robert X. Kelleher, the Plan Administrator,
in the  United  States  District  Court  for the  Eastern  District  of New York
(BECHER,  ET AL., V. LONG ISLAND LIGHTING COMPANY, ET AL.). In January 1996, the
Court ordered that this action be maintained as a class action.  This proceeding
arose in connection with the plaintiffs' withdrawal, approximately 25 years ago,
of  contributions  made to the RIP,  thereby  resulting  in a reduction of their
pension  benefits.  The plaintiffs are now seeking,  among other things, to have
these reduced benefits restored to their pension accounts. In November 1997, the
Company filed a motion for partial summary  judgment with the District Court. On
April 28, 1998, the Court denied the Company's  motion and permitted the Company
to file a further motion for partial summary judgment on additional  grounds. On
January 27, 1999,  the Company  entered a stipulation  of  settlement  which was
filed with the Court  pursuant to which the Company  will pay  approximately  $8
million, a substantial  portion of which is recoverable from LIPA. On August 13,
1999,  the Court  approved the  stipulation  of  settlement  and  dismissed  the
litigation with prejudice.



                                       40

<PAGE>



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, 1999.


                                       41

<PAGE>



                                     PART II

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

The Company's  common stock is listed and traded on the New York Stock  Exchange
and the  Pacific  Stock  Exchange  under the symbol  "KSE." As of March 1, 2000,
there were  approximately  90,500 record holders of the Company'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:


1999                  High             Low         Dividends Per Share
------------------ -----------     -----------    ----------------------
First Quarter        31.313          25.125                .445
Second Quarter       27.690          24.250                .445
Third Quarter        31.060          26.380                .445
Fourth Quarter       29.690          22.630                .445






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

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


                                        1

<PAGE>




ITEM 6.  SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>

                                                         (In Thousands of Dollars, Except Per Share Amounts)
------------------------------------------------------------------------------------------------------------
                                                    Nine Months        Twelve Months    Twelve Months
                                    YEAR ENDED         Ended              Ended            Ended        Year Ended
                                 DECEMBER 31, 1999  December 31, 1998  March 31, 1998   March 31, 1997  December 31, 1996
------------------------------------------------------------------------------------------------------------
<S>                              <C>               <C>             <C>           <C>           <C>
INCOME SUMMARY
REVENUES
Gas distribution                 $      1,753,132  $      856,172  $     645,659 $     672,705 $     684,260
Electric services                         861,582         408,305              -             -             -
Electric distribution                           -         330,011      2,478,435     2,464,957     2,466,435
Gas exploration and production            150,581          70,812              -             -             -
Energy related services and other         189,318          63,181              -             -             -
------------------------------------------------------------------------------------------------------------
TOTAL REVENUES                          2,954,613       1,728,481      3,124,094     3,137,662     3,150,695
OPERATING EXPENSES
Purchased gas                             744,432         331,690        299,469       308,400       322,641
Fuel and purchased power                   17,252          91,762        658,338       646,448       640,610
Operation and maintenance               1,091,166         842,313        511,165       489,868       499,211
Depreciation, depletion and amortization  253,440         294,864        169,770       154,921       171,681
Electric regulatory amortization                -         (40,005)        13,359       121,694        97,698
General taxes                             366,154         257,124        466,326       469,561       472,076
------------------------------------------------------------------------------------------------------------
OPERATING INCOME                          482,169         (49,267)     1,005,667       946,770       946,778
OTHER INCOME (DEDUCTIONS)                  37,496         (38,745)        (6,301)       22,191        26,572
------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INTEREST
    CHARGES AND  INCOME TAXES             519,665         (88,012)       999,366       968,961       973,350
Interest charges                         (124,692)       (138,715)      (404,473)     (435,219)     (447,629)
Income taxes                             (136,362)         59,794       (232,653)     (211,333)     (209,257)
------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS)                         258,611        (166,933)       362,240       322,409       316,464
Preferred stock dividend requirements      34,752          28,604         51,813        52,113        52,216
------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) FOR COMMON STOCK $        223,859  $     (195,537$       310,427$      270,296$      264,248
Foreign currency adjustment                 8,666            (952)             -             -             -
------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS)      $        232,525  $     (196,489$       310,427$      270,296$      264,248
============================================================================================================
FINANCIAL SUMMARY
Earnings per share ($)                       1.62           (1.34)          2.56          2.24          2.20
Cash dividends declared per share ($)        1.78            1.19           1.78          1.78          1.78
Book value per share, year-end ($)          20.28           20.90          21.88         21.07         20.89
Market value per share, year-end ($)        23.19           31.00          31.50         24.00         22.13
Shareholders                               90,500         103,239         78,314        77,691        86,607
Capital expenditures ($)                  725,670         676,563        297,230       294,943       291,618
Total assets ($)                        6,730,691       6,895,102     11,900,725    11,849,574    12,209,679
Common equity ($)                       2,715,025       3,022,908      2,662,447     2,549,049     2,523,369
Redeemable preferred stock ($)            363,000               -        562,600       638,500       638,500
Preferred stock ($)                        84,339         447,973              -        63,598        63,664
Long term debt ($)                      1,682,702       1,619,067      4,381,949     4,457,047     4,456,772
Total capitalization ($)                4,482,066       5,089,948      7,606,996     7,708,194     7,682,305
===============================================================================================================
UTILITY OPERATING STATISTICS
Gas data (MDTH)
  Firm gas and transportation sales       275,771          87,179         58,304        60,276        62,375
  Other sales                              54,661          38,088         21,025        19,838        16,588
  Maximum daily capacity, year end      2,033,000       2,033,000        745,000       772,000       771,995
Total active gas meters                 1,628,497       1,610,202        464,563       458,910       457,809
Gas heating customers                     677,000         665,000        295,000       289,000       286,000

</TABLE>


                                                     1

<PAGE>



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

KeySpan  Corporation,  d/b/a KeySpan Energy (the "Company" or "KeySpan Energy"),
is a holding  company  operating two utilities  that  distribute  natural gas to
approximately 1.6 million customers in New York City and on Long Island,  making
it the fourth  largest  gas-distribution  company in the  United  States.  Other
KeySpan Energy companies market a portfolio of gas-marketing and energy- related
services in the  Northeast,  own and operate  electric-generation  plants in New
York City and on Long Island,  and provide  operating  and customer  services to
approximately 1.1 million electric  customers of the Long Island Power Authority
("LIPA").  The Company's other energy  activities  include:  gas exploration and
production, primarily through The Houston Exploration Company ("THEC"); domestic
pipelines and storage; and international activities, including gas processing in
Canada, and gas pipelines and local distribution in Northern Ireland.  (See Note
2 to the Consolidated  Financial Statements,  "Business Segments" for additional
information on each operating segment.)

The Company was formed on May 28, 1998 as a result of a transaction between Long
Island  Lighting  Company  ("LILCO")  and  LIPA  (the  "LIPA  Transaction")  and
following  the  acquisition  (the  "KeySpan   Acquisition")  of  KeySpan  Energy
Corporation  ("KSE").  (See Note 14 to the  Consolidated  Financial  Statements,
"Sale of LILCO Assets, Acquisition of KeySpan Energy Corporation and Transfer of
Assets and Liabilities to the Company" for additional information.)

On November 4, 1999, the Company entered into a definitive  merger  agreement to
acquire all of the common stock of Eastern Enterprises ("Eastern"). Eastern is a
holding company that owns and operates,  primarily, Boston Gas Company, Colonial
Gas Company,  Essex Gas Company and Midland  Enterprises,  Inc. Eastern has also
entered into an agreement to acquire all of the common stock of  EnergyNorth,  a
provider  of gas  distribution  services  to  customers  in New  Hampshire.  The
acquisition of Eastern is conditioned upon, among other things,  the approval of
Eastern  shareholders,  the Securities and Exchange Commission ("SEC") and, with
respect  to the  EnergyNorth  transaction,  the  New  Hampshire  Public  Utility
Commission.  Upon  consummation  of the Eastern  transaction,  the Company  will
become a registered holding company under the Public Utility Holding Company Act
of 1935,  as  amended.  The Company  anticipates  that the  transaction  will be
consummated  in the third or fourth  quarter of 2000, but is unable to determine
when  or if all  required  approvals  will  be  obtained.  (See  Note  11 to the
Consolidated  Financial  Statements,  "Acquisition of Eastern  Enterprises"  for
further details.)

Current  period  consolidated  results of  operations  are reported for the year
ended  December 31, 1999.  In 1998 the Company  changed its fiscal year end from
March 31 to December 31.  Therefore,  results of operations for the period ended
December  31, 1998  reflect the nine month  transition  period  April 1, 1998 to
December 31, 1998 (the "Transition  Period").  The Transition Period consists of
the following: (i) the period April 1, 1998 through May 28, 1998, which reflects
the results of LILCO only prior to the LIPA Transaction and KeySpan Acquisition;
and (ii) the period May 29, 1998 through December 31, 1998, which represents the
results of the fully  consolidated  Company,  which  includes  the  KSE-acquired
companies, i.e. The Brooklyn Union Gas Company ("Brooklyn Union")

                                              2

<PAGE>



and subsidiaries  comprising the Gas Exploration and Production,  Energy Related
Services and Energy  Related  Investment  segments.  As required  under purchase
accounting,  the results of  operations  for all  periods  prior to May 29, 1998
reflect results of LILCO only, and do not include results of KSE.

Due to the change in the composition of the Company's  operations and the change
in the Company's fiscal year, both occurring in 1998,  results of operations for
the year ended December 31, 1999, for the Transition  Period, and for the fiscal
year ended March 31, 1998 are not truly comparable for the following reasons.

Prior to the LIPA Transaction,  LILCO provided fully integrated electric service
to its  customers.  Included  within  electric  rates charged to customers was a
return on the capital  investment in the  generation  and the  transmission  and
distribution  ("T&D") assets, as well as recovery of the electric business costs
to operate the system.  Upon completion of the LIPA  Transaction,  the nature of
the  Company's  electric  business  changed  from  that of owner of an  electric
generation and T&D system, with significant capital investment, to a new role as
owner of the non-nuclear  generation facilities and as manager of the T&D system
now  owned by  LIPA.  In its new  role,  the  Company's  capital  investment  is
significantly  reduced and  accordingly,  its  revenues  under  various  service
contracts with LIPA reflect that reduction.

Also contributing to the  non-comparability  between reporting  periods,  is the
integration of the KSE- acquired  companies since May 29,1998.  The KSE-acquired
companies,  which include the gas  distribution  operations  of Brooklyn  Union,
contribute  significantly to results of operations.  Income available for common
stock for the KSE-acquired companies, for the period January 1, 1998 through May
28, 1998 was $63.4 million and is not reflected in results of operations for the
Transition Period.

The change in the Company's  fiscal year also  contributed  significantly to the
non-comparability between reporting periods. As previously mentioned, results of
operations  for the Transition  Period  reflect  results for the period April 1,
1998 through  December 31, 1998.  As a result,  the  Transition  Period does not
reflect  earnings  from gas  heating-season  operations.  The  Company  realizes
approximately 80% of its gas distribution-related earnings, or approximately 50%
of its consolidated earnings, during the months of January through March, due to
the large percentage of gas heating sales to total gas sales.

Since the  reporting  periods  are not truly  comparable  we have  provided,  in
addition to the  discussion  of the results of operations  between  periods that
follows,  a discussion of operating  results for each  business  segment for the
year ended  December 31, 1999 compared to the full twelve months ended  December
31,  1998.  The  intent of this  additional  disclosure  is to  provide a better
explanation of the variations in operating results between two comparable twelve
month  periods for the Company's on- going  business  activities.  (See "Segment
Review of Operations - Combined Company Comparison".)


The commentary that follows should be read in conjunction  with the Notes to the
Consolidated Financial Statements.

                                              3

<PAGE>



CONSOLIDATED REVIEW OF HISTORICAL RESULTS

EARNINGS SUMMARY

Consolidated  earnings  for  1999  were  $223.9  million,  or $1.62  per  share.
Consolidated  results  for the  Transition  Period  reflected  a loss of  $195.5
million,  or $1.34 per share.  During the Transition  Period,  the Company:  (i)
incurred substantial  non-recurring charges associated with the LIPA Transaction
of $107.9 million after-tax,  or $0.74 per share,  principally  reflecting taxes
associated  with the sale of assets to the Company by LIPA and the  write-off of
certain  regulatory  assets that were no longer  recoverable  under various LIPA
agreements;  (ii) incurred  charges  amounting to $83.5  million  after- tax, or
$0.57 per share,  associated with  implementing an early retirement  program and
charges associated with the write-off of a  customer-billing  system that was in
development;  (iii) made a $20 million donation ($13 million after-tax, or $0.09
per share) to establish the KeySpan  Foundation;  and (iv) recorded an after-tax
non-cash  impairment charge of $54.1 million,  or $0.37 per share,  representing
the Company's  share of the impairment  charge recorded by THEC to recognize the
effect of low wellhead prices on its valuation of proved gas reserves. (See Note
15 to  the  Consolidated  Financial  Statements,  "Costs  Related  to  the  LIPA
Transaction  and  Special  Charges"  for  further  details  of  these  charges.)
Excluding these  non-recurring and special charges,  earnings for the Transition
Period were $63.0  million,  or $0.43 per share.  Earnings for the twelve months
ended  March 31,  1998 were  $310.4  million,  or $2.56 per share,  and as noted
above, reflect results of operations of the former LILCO only.



                                              4

<PAGE>



Consolidated  income (loss)  available for common stock by reporting  segment is
set forth in the following table for the periods indicated:
<TABLE>
<CAPTION>

                                                                        (IN THOUSANDS OF DOLLARS)
-----------------------------------------------------------------------------------------------------------
                                                             Transition Period
                                                  April 1, 1998 through December 31, 1998
                                                  ---------------------------------------
                                                                                            Fiscal Year
                                   Year Ended                   Subsequent                     Ended
                                  December 31,    Prior to the    to the                     March 31,
                                      1999        Acquisition   Acquisition     Total          1998
-----------------------------------------------------------------------------------------------------------
<S>                              <C>              <C>          <C>           <C>           <C>
Income (Loss ) Available for
Common Stock:
Gas Distribution                 $       151,217  $     (4,659)$      13,241 $      8,582  $      33,815
Electric Services                         77,099        45,141        11,978       57,119        276,612
Gas Exploration and Production            15,772             -         2,218        2,218              -
Energy Related Services                   (1,298)            -        (3,708)      (3,708)             -
Energy Related Investments                 7,753             -        (4,186)      (4,186)             -
Other                                    (26,684)            -         2,959        2,959              -
-----------------------------------------------------------------------------------------------------------
Consolidated                      $      223,859  $      40,482$       22,502  $   62,984  $      310,427
Special Charges                                                                  (258,521)
-----------------------------------------------------------------------------------------------------------
Consolidated including                                                          $(195,537)
    Special Charges
-----------------------------------------------------------------------------------------------------------
</TABLE>


The increase in Gas Distribution  earnings in 1999 as compared to the Transition
Period and the fiscal  year  ended  March 31,  1998,  reflects,  primarily,  the
addition of Brooklyn  Union from the date of the KeySpan  Acquisition.  Brooklyn
Union's income  available for common stock in 1999 was $109.6 million.  Further,
earnings for the Transition  Period do not include  earnings from heating season
operations   (months  of  January  through  March)  when  the  Company  realizes
approximately 80% of its gas related earnings.  The decrease in earnings for the
Transition  Period as  compared  to the fiscal year ended March 31, 1998 is also
due to the absence of heating  season  operations  associated  with  LILCO's gas
distribution operations during the Transition Period.

In 1999,  earnings from Electric  Services  reflect  service-fees  under various
service  contracts  with LIPA and earnings from the  operations of the Company's
investment  in the  2,168  megawatt  Ravenswood  electric  generation  facility,
("Ravenswood  Facility") located in Queens, New York, purchased in June 1999. In
order  to  reduce  its  cash  requirements,  the  Company  entered  into a lease
agreement with a special purpose,  unaffiliated financing entity that acquired a
portion of the Ravenswood  Facility and leased it to a subsidiary of the Company
under a ten year lease. Electric Services earnings increased in 1999 as compared
to the  Transition  Period due,  primarily to the  acquisition of the Ravenswood
Facility which  contributed $47.5 million to Electric Services earnings in 1999.
Further,  1999 results  reflect a full twelve month period of earnings  from the
service  contracts with LIPA. (For additional  details on the electric  revenues
and the Ravenswood Facility

                                              5

<PAGE>



see  "Electric  Services-  Revenue  Mechanisms"  and Note 9 to the  Consolidated
Financial   Statements,    "Contractual    Obligations,    and   Contingencies",
respectively.)

As previously mentioned,  the Company's operating results under its arrangements
with LIPA are  significantly  lower  than  those  experienced  prior to the LIPA
Transaction,  reflecting  the  change in the  nature of the  Company's  electric
business. As a result, earnings subsequent to the LIPA Transaction reflect these
reduced  margins;  therefore,  earnings for 1999 and the  Transition  Period are
significantly  lower than those  experienced for the fiscal year ended March 31,
1998.

Results  of  operations  in 1999 from Gas  Exploration  and  Production,  Energy
Related Services,  and Energy Related  Investments reflect operations for a full
twelve months as compared to seven months for the  Transition  Period.  Earnings
from Gas Exploration  and Production  operations in 1999 have benefited from the
combined effect of increases in gas production  volumes and gas prices.  Results
of  operations  in  1999  from  Energy  Related   Services  and  Energy  Related
Investments  reflect the  continued  development  and  integration  of companies
acquired over the past few years.

Losses from the Other  segment  reflect  preferred  stock  dividends and general
expenses incurred by the corporate and administrative  areas of the Company that
have not been allocated to the various business  segments,  offset,  in part, by
interest income earned on temporary cash  investments.  Interest income has been
decreasing  as the  Company  continues  to use  cash  to  finance  acquisitions,
repurchase shares of its common stock, and retire maturing debt.

REVENUES

Consolidated  revenues  are  derived,  primarily,  from the  Company's  two core
operating segments - Gas Distribution and Electric Services.  In 1999, these two
core segments  accounted for  approximately  88% of consolidated  revenues.  The
increase in consolidated  revenues of $1.2 billion, or 71%, in 1999, as compared
to the Transition Period, reflects,  primarily, revenues from gas heating sales.
For the months of January 1999 through  March 1999,  gas  distribution  revenues
were $718.3 million or approximately 41% of total gas distribution  revenues for
the entire year. The Transition Period,  which reflects the period April 1, 1998
through  December  31,  1998,  does not include  revenues  from  heating  season
operations for the months of January  through March.  Further,  revenues in 1999
reflect a full twelve  month  period for all  segments,  whereas the  Transition
Period reflects revenues for only seven months from the KSE- acquired companies.
Revenues in 1999 also include  $150.8  million of revenues  from the  Ravenswood
Facility and were further  enhanced from the acquisition of companies  reflected
in the Energy Related Services segment.

Consolidated  revenues for the Transition  Period decreased by $1.4 billion,  or
45%, as compared to the fiscal year ended March 31, 1998 due to the  significant
reduction in electric revenues. Electric revenues for the Transition Period were
derived  from service  agreements  with LIPA for the period May 29, 1998 through
December 31, 1998 and two months of electric services under LILCO. As previously
mentioned,  prior to the  LIPA  Transaction,  LILCO  provided  fully  integrated
electric  service to its customers.  Included  within  electric rates charged to
customers was a return on the

                                              6

<PAGE>



capital  investment in the generation and T&D assets, as well as recovery of the
electric  business  costs to operate the  system.  Upon  completion  of the LIPA
Transaction,  the Company's  capital  investment was  significantly  reduced and
accordingly,  its revenues under the LIPA contracts reflect that reduction. This
change in the nature of the Company's  electric  operations also  contributed to
the  comparative  decrease in  revenues  for 1999 as compared to the fiscal year
ended March 31, 1998.

See Segment  Review of Operations - Combined  Company  Comparison for additional
information regarding revenues for each segment.

OPERATING EXPENSES

Operating  expenses were $2.5 billion in 1999, and $1.8 billion and $2.1 billion
for the  Transition  Period and fiscal year ended March 31, 1998,  respectively.
The increase in 1999 as compared to the Transition Period of $694.7 million,  or
39.1%, is due, in part, to the increased reporting time frame and to an increase
of $248.9 million in operations and maintenance expense  reflecting,  primarily,
the addition of the KSE-acquired  companies.  The decrease in operating expenses
for the Transition Period as compared to the fiscal year ended March 31, 1998 of
$340.7 million or 16.0%, is due,  primarily to the shorter  reporting period and
the  discontinuance  of fuel and  purchased  power expense  associated  with the
electric  generating  facilities on Long Island,  offset, in part, by operations
and maintenance expenses of the KSE-acquired companies.

PURCHASED GAS

Variations in gas costs have little  impact on operating  results as the current
gas rate  structure  of each of the  Company's  two gas  distribution  utilities
includes a gas adjustment clause pursuant to which variations between actual gas
costs and gas cost  recoveries  are  deferred and  subsequently  refunded to, or
collected from customers.  Comparative  variations  between the reported periods
are due to the addition of the  KSE-acquired  companies,  changes in gas volumes
and prices, and the differences in the reporting periods presented.

FUEL AND PURCHASED POWER

Electric  fuel expense was $17.3  million in 1999,  and $91.8 million and $658.3
million for the Transition  Period and for the fiscal year ended March 31, 1998,
respectively. In accordance with the Energy Management Agreement ("EMA") between
the Company and LIPA, LIPA is responsible for paying directly the costs of fuel,
as well as purchased power to satisfy the energy needs of LIPA's customers. As a
result,  since May 29,  1998,  the Company no longer  incurs any  electric  fuel
expense for Long Island  generation or purchased  power  expense.  Electric fuel
expense for 1999 reflects fuel purchases to operate the Ravenswood Facility.





                                              7

<PAGE>



OPERATIONS AND MAINTENANCE EXPENSE

Operations and maintenance  expense was $1.1 billion in 1999, and $842.3 million
and $511.2  million  for the  Transition  Period and fiscal year ended March 31,
1998,  respectively.  The  increase  in all  periods  was due  primarily  to the
addition of the KSE-acquired  companies.  Operations and maintenance expense for
these  companies  was  $483.6  million  for  1999  and  $284.1  million  for the
Transition  Period.   Further,  the  increase  in  comparative   operations  and
maintenance  expense  in  1999  was  due,  in  part,  to the  operations  of the
Ravenswood  Facility,  which added  $61.3  million to  expense.  Operations  and
maintenance  expense for the Transition  Period  included $63.8 million of costs
associated  with  the  write-off  of a  customer  billing  system  that  was  in
development and a charge of $64.6 million  associated  with an early  retirement
program.

On a comparable twelve month basis however, the Company has realized significant
reductions in operations and  maintenance  expense  derived,  in part, from cost
reduction  measures  and  operating  efficiencies  employed  during the past few
years. To gain a better  perspective of operations and maintenance  expense on a
comparable  twelve  month  basis see  Segment  Review of  Operations  - Combined
Company Comparison.

ELECTRIC REGULATORY AMORTIZATIONS

Prior to the LIPA Transaction,  the Rate Moderation Component ("RMC"),  included
within electric  regulatory  amortizations,  represented the difference  between
LILCO's  revenue  requirements  under  conventional  ratemaking and the revenues
provided by its electric rate structure.

In April 1998,  the New York Public  Service  Commission  (NYPSC")  authorized a
revision, effective December 1, 1997, to LILCO's method of recording its monthly
RMC  amortization.  As a result of this  change,  for the  period  April 1, 1998
through May 28, 1998,  LILCO recorded $51.5 million more of non-cash RMC credits
to income,  or $33.5  million  after-tax,  than it would have under the previous
method.  In addition,  for the fiscal year ended March 31, 1998,  LILCO recorded
approximately  $65.1  million more of non-cash  RMC credits to income,  or $42.5
million  after-tax,  than it would have under the previous method. In connection
with the LIPA  Transaction,  which  included  the sale of all  electric  related
regulatory assets, the RMC and all other electric regulatory  amortizations were
discontinued.

OTHER OPERATING EXPENSES

Depreciation  and depletion  expense  reflects gas utility property and electric
generation  property  additions  for  all  periods  and  electric  T&D  property
additions  for  the  periods  prior  to  the  LIPA  Transaction.   In  addition,
depreciation  and  depletion  expense  in 1999  and for the  Transition  Period,
includes  depletion  expense  associated  with the gas production  activities of
THEC. The decrease in depreciation and depletion  expense in 1999 as compared to
the  Transition  Period is due,  primarily,  to the fact that THEC  recorded  an
impairment  charge of $130  million in December  1998 to reduce the value of its
proved gas reserves in accordance with the asset ceiling test limitations of the
SEC

                                              8

<PAGE>



applicable to gas exploration and development operations accounted for under the
full  cost  method.  Excluding  this  impairment  charge,  depreciation  expense
increased  in all  periods  due to property  additions  and the  addition of the
KSE-acquired  companies.  Offsetting these increases,  in part, is the effect on
depreciation  expense from the sale of  significant  property  related assets to
LIPA as a result of the LIPA Transaction.

Operating taxes  principally  include state and local taxes on utility  revenues
and  property.  The  applicable  property  base  and tax  rates  generally  have
increased in all periods.  The increase in operating  taxes in 1999, as compared
to the Transition  Period,  reflects the addition of the KSE- acquired companies
for a full  twelve  month  period,  and  operating  taxes  associated  with  the
Ravenswood Facility.  Operating taxes associated with the KSE-acquired companies
was $140.8 million in 1999 and $69.8 million during the Transition  Period.  The
Ravenswood  Facility had operating  taxes of $19.6 million in 1999.  Significant
property  related assets were sold to LIPA as part of the LIPA  Transaction and,
as a result,  subsequent to May 28, 1998,  property taxes related to such assets
are no longer  incurred by the Company.  Therefore,  operating taxes in 1999 and
for the Transition Period are significantly lower than for the fiscal year ended
March 31, 1998.

OTHER INCOME AND DEDUCTIONS

Other income includes equity  earnings from  subsidiaries  comprising the Energy
Related  Investments  segment,  primarily  the  Company's  20%  interest  in the
Iroquois Gas  Transmission  System LP  ("Iroquois")  and 50%  investment in Gulf
Midstream Services Partnership ("GMS"). In addition,  other income also includes
interest income from temporary cash investments. Equity earnings in 1999 reflect
twelve  months of results  for  Iroquois  as  compared  to only seven  months of
results for the Transition  Period.  Further,  GMS was acquired in December 1998
and,  therefore,  there  are no  equity  earnings  associated  with  GMS for the
Transition  Period.  The Company  recognized equity earnings of $7.1 million and
$5.8 million for 1999,  from its  investment in Iroquois and GMS,  respectively.
Interest income has decreased in 1999, as compared to the Transition  Period, as
the Company continues to use cash to make acquisitions, repurchase shares of its
common  stock,  and retire  maturing  debt.  Other  income and  deductions  also
includes  the  minority  interest  effect  associated  with  the  Company's  64%
ownership  interest in THEC.  Other  income and  deductions  for the  Transition
Period reflects  non-recurring  charges  associated with the LIPA Transaction of
$107.9 million after- tax and a $20 million before-tax charge for the funding of
the KeySpan Foundation.  (See Note 15 to the Consolidated  Financial Statements,
"Costs Related to the LIPA Transaction and Special Charges".)

Other income and  deductions  for the fiscal year ended March 31, 1998 primarily
includes a charge of $31 million  before-tax  with  respect to certain  benefits
earned  by former  officers  of LILCO  offset by  carrying  charges  on  certain
electric  regulatory assets resulting from electric  ratemaking  mechanisms that
have been discontinued due to the LIPA Transaction.




                                              9

<PAGE>



INTEREST EXPENSE

The  decrease  in interest  expense in 1999 and for the  Transition  Period,  as
compared  to the fiscal  year  ended  March 31,  1998,  primarily  reflects  the
significantly  reduced  level  of  outstanding  debt  resulting  from  the  LIPA
Transaction.   Upon   consummation  of  the  LIPA   Transaction,   LIPA  assumed
substantially  all of the  outstanding  debt of LILCO.  The Company,  in return,
issued  promissory notes to LIPA for its continuing  obligation to pay principal
and interest on certain  series of bonds that were assumed by LIPA.  Outstanding
debt at December 31, 1999 was $1.7  billion as compared to $4.5  billion  (LILCO
only) prior to the LIPA Transaction.  In addition, interest expense in 1999 also
reflects the repayment of $397 million of promissory notes due LIPA that matured
in June 1999. The reduction in interest expense in 1999 from the lower levels of
debt  outstanding  was  offset,  in  part,  by the  interest  expense  from  the
KSE-acquired companies for the full twelve months.

INCOME TAXES

Income tax expense  reflects the level of pre-tax  income in all periods and for
1999,  an  adjustment  to  deferred  tax expense and current tax expense for the
utilization  of  previously  deferred net operating  loss ("NOL")  carryforwards
recorded in 1998. In the Transition Period, the Company recorded,  as a deferred
tax  asset,  a benefit  of $71.1  million  for NOL  carryforwards.  The  Company
estimates  that $57.4  million of the benefits from the NOL  carryforwards  from
1998 will be  realized in its  consolidated  1999  federal and state  income tax
returns, and accordingly, applied the NOL benefits in its 1999 federal and state
tax provisions.  Pre-tax income and the related  deferred income tax expense for
the Transition Period were significantly affected by charges related to the LIPA
Transaction,  the write-off of a customer billing system, charges related to the
early  retirement  program,  and  the  impairment  charge  associated  with  the
write-down of proved gas  reserves.  (See Note 3 to the  Consolidated  Financial
Statements, "Income Tax".)


                                              10

<PAGE>



SEGMENT REVIEW OF OPERATIONS - COMBINED COMPANY COMPARISON

Due to the change in the  structure  of the  Company's  electric  business  as a
result of the LIPA  Transaction  and the  requirements  of  purchase  accounting
applicable  to the KeySpan  Acquisition  (as discussed  previously),  results of
operations  for 1999 are not truly  comparable to the results of operations  for
the Transition Period. For comparative purposes, we have combined the results of
operations,  excluding  non-recurring and special charges,  of KSE and LILCO for
the  entire  twelve  month  period  ended  December  31,  1998.   This  combined
presentation is intended to reflect the results of the Company as if the KeySpan
Acquisition occurred on the first day of the reporting period,  January 1, 1998.
This "combined company basis" format will also be used to explain  variations in
operating  results,  for each business segment,  between the twelve months ended
December 31, 1999 and 1998.

Consolidated  income (loss)  available for common stock,  on a combined  company
basis excluding non- recurring and special charges,  by reporting segment is set
forth in the following table for the periods indicated:


                                                    (IN THOUSANDS OF DOLLARS)
================================================================================
                                                      "Combined Company"
                                   Year Ended        Twelve Months Ended
                                December 31, 1999     December 31, 1998
----------------------------- --------------------- ------------------------
Income (Loss ) Available for
Common Stock:
Gas Distribution              $             151,217 $              133,685
Electric Services                            77,099                120,568*
Gas Exploration and Production               15,772                  8,995
Energy Related Services                      (1,298)                (8,623)
Energy Related Investments                    7,753                 (6,098)
Other                                       (26,684)                 1,279
--------------------------------------------------------------------------------
                              $             223,859 $              249,806
================================================================================
               *  1998 reflects the LIPA service  agreements  for the period May
                  29, 1998 through December 31, 1998 and electric  operations of
                  the former  LILCO for the period  January 1, 1998  through May
                  28, 1998.







                                              11

<PAGE>



GAS DISTRIBUTION

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

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


                                                      (IN THOUSANDS OF DOLLARS)
================================================================================
                                                            "Combined Company"
                                          Year Ended        Twelve Months Ended
                                       December 31, 1999     December 31, 1998
--------------------------------------------------------------------------------
Revenues                         $         1,753,132  $           1,766,949
Cost of gas                                  702,044                702,669
Revenue taxes                                108,488                109,194
--------------------------------------------------------------------------------
Net Revenues                                 942,600                955,086
--------------------------------------------------------------------------------
Operations and maintenance                   415,888                464,296
Depreciation and amortization                102,997                 91,438
Operating taxes                              115,305                106,891
--------------------------------------------------------------------------------
Total Operating Expenses                     634,190                662,625
--------------------------------------------------------------------------------
Operating Income                 $           308,410  $             292,461
================================================================================
Earnings for Common Stock        $           151,217  $             133,685
================================================================================
Firm gas sales (MDTH)                        172,019                165,331
Firm transportation (MDTH)                    21,249                 13,974
Transportation -
Electric Generation (MDTH)                    82,503                 40,614
Other sales (MDTH)                            54,661                 65,482
Degree days                                    4,296                  3,940
Warmer than normal                             10.0%                  17.5%
================================================================================

                                              12

<PAGE>



NET REVENUES

Net gas revenues decreased in 1999 by $12.5 million, or 1.3%, due primarily,  to
rate reductions associated with the KeySpan Acquisition.  Brooklyn Union reduced
rates to its core  customers by $23.9  million on an annual basis  effective May
29, 1998 and Brooklyn  Union of Long Island  reduced its rates to core customers
by $12.2 million annually  effective  February 5, 1998 and by an additional $6.3
million  annually  effective May 29, 1998. For the year ended December 31, 1999,
rate reductions  impacted revenues by approximately $19.2 million as compared to
1998.

Firm sales  quantities,  normalized for weather  variations,  increased by 2.4%,
contributing  approximately  $10 million to net revenues.  Firm sales  additions
were  generated  primarily on Long Island from the addition of new gas customers
and oil to gas  conversions.  Weather  normalized  firm  sales  on  Long  Island
increased by 3.7% and by 1.6% in the Company's New York City service area.  Long
Island has a very low  natural gas  saturation  rate and  significant  gas-sales
growth  opportunities  remain available.  The Company estimates that only 28% of
one and  two-family  homes on Long  Island  currently  use natural gas for space
heating,  while 28% of the multi-family  market and 69% of the commercial market
use gas for space  heating.  In this service area,  the Company will seek growth
through  the  expansion  of its  distribution  system  as  well as  through  the
conversion  of  residential  homes  and the  pursuit  of  opportunities  to grow
multi-family, industrial and commercial markets.

In the Company's service area of the New York City boroughs of Brooklyn,  Queens
and Staten Island,  79% of one and two- family homes currently use gas for space
heating,  while 54% of the multi-family  market and 76% of the commercial market
use gas for space heating.  In these areas,  the Company  intends to seek growth
with an  aggressive  marketing  effort  designed  to  encourage  conversions  of
residential and  multi-family  homes and businesses from fuel oil to natural gas
heating.

In the large volume  heating  markets,  which  include large  apartment  houses,
government  buildings and schools,  gas service is provided under rates that are
set to compete with prices of alternative fuel,  including No. 2 and No. 6 grade
heating  oil.  During  1999,  gas  generally  sold at a premium to heating  oil.
However,  due to the recent increase in the price of heating grade fuel oil, gas
is currently  selling at a discount to heating oil. The Company  increased sales
in this market in 1999, by  approximately  $6 million,  through  aggressive unit
pricing and the addition of new customers.

Contributing  to the reduction in comparative net margins in 1999 was a decrease
in certain  regulatory  incentives  earned by the Company,  offset,  in part, by
revenue benefits associated with colder weather.  Further, since April 1998, net
revenues no longer reflect revenues derived from Brooklyn Union's  appliance and
repair  services  since these services have been  "spun-off" to another  Company
subsidiary and are now reflected in the Energy Related Services segment.

SALES, TRANSPORTATION AND OTHER VOLUMES

Comparative  firm  gas  sales  volumes  increased  by 4.0% in  1999,  due to the
increase in normalized firm sales, as discussed  above, and the benefits derived
from colder weather in 1999 as compared to 1998.

                                              13

<PAGE>



Firm gas  transportation  volumes also increased in 1999, as a result of natural
gas  deregulation  initiatives.  At  December  31,  1999,  approximately  46,000
residential,  commercial and industrial  customers,  with annual requirements of
approximately  22,000  MDTH,  or 10% of the  Company's  annual  firm gas  system
requirements, purchased their gas supply from sources other than the Company, as
compared to 32,900 customers with annual  requirements of  approximately  19,500
MDTH in 1998. The Company's net margins are not affected by customers  opting to
purchase   their  gas  supply  from  sources  other  than  the  Company,   since
distribution  rates  charged to  transportation  customers are the same as those
charged  to  sales  customers.   (See  Item  7A.  Quantitative  and  Qualitative
Disclosures About Market Risk for a discussion of competitive  issues facing the
Company.)

Transportation   volumes   related   to   electric   generation,   reflect   the
transportation of gas to the Company's electric generating facilities located on
Long  Island.   The  Company  began  reporting  these  volumes  since  the  LIPA
Transaction. Net revenues from these volumes are marginal.

Other sales volumes include on-system  interruptible  volumes,  off-system sales
volumes (sales made to customers outside of the Company's  service  territories)
and related transportation. The decrease in these sales reflects, primarily, the
fact that Brooklyn Union  discontinued  its off-system  sales program  beginning
April 1, 1998 and replaced it with a management agreement with Enron Capital and
Trade  Resources  Corp.  and its  parent  company,  Enron  Corp.  (collectively,
"Enron"),  in which Enron pays the Company a fixed fee in exchange for the right
granted Enron to earn revenues based upon its management of Brooklyn Union's gas
supply  requirements,  storage  arrangements,  and off-  system  capacity.  This
agreement  expires on March 31, 2000. The Company  currently is in  negotiations
with a large energy corporation to provide energy supply management  services to
both  Brooklyn  Union and  Brooklyn  Union of Long Island  beginning on April 1,
2000.

OPERATING EXPENSES

Comparative  operating  expenses  decreased in 1999 by $28.4  million,  or 4.3%.
During the year, the Company realized  significant  reductions in operations and
maintenance  expense  reflecting,  primarily,  the  benefits  derived  from cost
reduction  measures  and  operating  efficiencies  employed  during the past few
years.  Such measures  included,  but were not limited to, the early  retirement
program completed in 1998, in which over 600 employees participated. The Company
intends to continue its on-going cost  containment  initiatives  and anticipates
further reductions in operations and maintenance  expenses in 2000. In addition,
Brooklyn Union's  "spin-off" of non-safety  related appliance repair services to
KeySpan Energy Solutions LLC, a Company subsidiary, in April 1998 contributed to
the reduction in operations and maintenance  expense for this segment.  Brooklyn
Union of Long Island discontinued  providing non-safety related appliance repair
services on July 1, 1999, further reducing operating expenses for this segment.

The  increase  in  depreciation  and  amortization  expense  reflects  continued
property additions and, more significantly,  amortization of previously deferred
merger related expenses. As provided for in the Stipulation Agreement,  which in
effect  approved  the  KeySpan  Acquisition,   the  Company's  gas  distribution
subsidiaries  deferred  certain  merger related costs at the time of the merger.
These costs

                                              14

<PAGE>



are being amortized over a ten year period. (See Gas Distribution - Rate Matters
for further  details on the  Stipulation  Agreement.)  Further,  operating taxes
which include state and local taxes on property have increased as the applicable
property base and tax rates generally have increased.

EARNINGS

Earnings increased in 1999 by $17.5 million, or 13.1% due primarily,  to the net
result  of the  aforementioned  items.  In  addition,  earnings  were  favorably
affected  by  carrying  charges  on  certain  regulatory   deferrals  previously
mentioned and lower interest expense.

                                              15

<PAGE>



ELECTRIC SERVICES

The Electric  Services segment  primarily  consists of subsidiaries that own and
operate  oil and gas fired  generating  plants in Queens  and Long  Island,  and
through  long-term  contracts,  manage the  electric  T&D  system,  the fuel and
electric  purchases,  and the off-system  electric sales for LIPA.  Prior to the
LIPA Transaction, LILCO provided fully integrated electric distribution services
to over one million customers on Long Island.

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)
=====================================================================================================
                                                                      Electric
                              Electric Services  Electric Services   Distribution
                              ----------------- ------------------   ------------
                                                  `                    January 1, 1998    "Combined Company"
                                   Year Ended     May 29, 1998 through   through          Twelve Months Ended
                              December 31, 1999   December 31, 1998     May 28, 1998      December 31, 1998
----------------------------- ----------------- ------------------    --------------      -------------------
<S>                           <C>               <C>                <C>            <C>
Revenues

  Management Services
      Agreement ("MSA")       $         398,304 $          226,374 $            - $           226,374

  Power Supply
      Agreement ("PSA")                 303,163            178,367              -             178,367

  Energy Management
      Agreement ("EMA")                   6,535              3,564              -               3,564

  Ravenswood Facility                   150,836                  -              -                   -

  Electric Distribution                       -                  -        885,693             885,693

  Other                                   2,744                  -              -                   -


Total Revenues                          861,582            408,305        885,693           1,293,998
----------------------------- ----------------- ------------------ -------------- -------------------
Operating expenses

  Fuel and purchased power               17,252                  -        257,786             257,786

  Operations and maintenance            527,729            289,943        171,960             461,903

  Depreciation                           44,334             22,913         56,491              79,404

  Regulatory amortizations                    -                  -        (79,874)            (79,874)

  Operating taxes                       132,327             65,129        153,289             218,418

Total Operating Expenses                721,642            377,985        559,652             937,637
----------------------------- ----------------- ------------------ -------------- -------------------
Operating Income              $         139,940 $           30,320 $      326,041 $           356,361
----------------------------- ----------------- ------------------ -------------- -------------------
Earnings for Common Stock     $          77,099 $           11,978 $      108,590 $           120,568
----------------------------- ----------------- ------------------ -------------- -------------------
</TABLE>




                                              16

<PAGE>



REVENUES

Revenues  related to the LIPA  service  contracts  have  increased  in 1999,  as
compared to the Transition Period, due primarily, to the fact that 1999 reflects
a full year of  operations  under these  contracts.  In  addition  in 1999,  the
Company earned $15.8 million  associated  with non-cost  performance  incentives
provided for under these agreements,  as compared to the maximum incentive level
of $16.5 million.  (See Electric  Services- Revenue  Mechanisms- LIPA Agreements
for a further  description of these agreements.)  Revenues were further enhanced
in 1999 by the  operations of the Ravenswood  Facility.  Total revenues in 1999,
however,  decreased  by  $432.4  million,  or 33.4%,  as  compared  to 1998.  As
previously  indicated,  in addition to revenues  from the  Ravenswood  Facility,
electric  revenues  are also derived from  service  agreements  with LIPA.  As a
result of the change in the nature of the Company's  electric  operations due to
the  LIPA  Transaction,  the  Company's  electric  capital  investment  has been
significantly  reduced and accordingly,  its revenues and margins under the LIPA
contracts reflect that reduction.

OPERATING EXPENSES

Operating  expenses in 1999 decreased by $216.0 million,  or 23.0%,  compared to
1998,  reflecting  primarily,  the  discontinuance  of fuel and purchased  power
expense  associated with the generating  facilities  located on Long Island.  In
accordance  with the EMA, LIPA is responsible  for paying  directly the costs of
fuel, as well as purchased power to satisfy LIPA's customers.  As a result,  the
Company  since May 29, 1998 no longer  incurs any electric fuel expense for Long
Island generation or purchased power expense. Further,  depreciation expense and
operating  taxes  have  also  decreased  in 1999 due to the sale of  significant
property related assets to LIPA as a result of the LIPA Transaction.  Offsetting
these  reductions  is  the   discontinuance   of  certain  electric   regulatory
amortizations,  as  previously  discussed,  and an  increase in  operations  and
maintenance  expense.  Since the LIPA  Transaction,  operations and  maintenance
expense  includes the costs  associated  with the  management  of the T&D assets
acquired by LIPA. All T&D related costs are expensed when incurred and recovered
from  LIPA  through  monthly  billings  in  accordance  with  the  terms  of the
Management  Services  Agreement entered into between the Company and LIPA. Prior
to the LIPA Transaction, all T&D related construction costs were capitalized and
charged to  depreciation  expense over the estimated  useful life of the related
asset.

EARNINGS

In addition to the effect on earnings from the above mentioned  items,  earnings
in 1999 were  favorably  affected  by a decrease  of $135.3  million in interest
expense reflecting the significantly reduced level of outstanding debt resulting
from  the  LIPA  Transaction.   Further,   prior  to  the  KeySpan  Acquisition,
approximately  $18.2  million of preferred  stock  dividends  were  allocated to
electric operations.  Partially offsetting these benefits was the elimination of
carrying charges on certain electric  regulatory  assets resulting from electric
ratemaking mechanisms that have been discontinued due to the LIPA Transaction.


                                              17

<PAGE>



GAS EXPLORATION AND PRODUCTION

The Gas Exploration and Production segment is engaged in gas and oil exploration
and production,  and the development and acquisition of domestic natural gas and
oil properties.  This segment consists,  primarily,  of the Company's 64% equity
interest in THEC.  In September  1999,  the Company and THEC  jointly  announced
their intention to begin a process to review  strategic  alternatives  for THEC.
The process  included  an  assessment  of the role of THEC within the  Company's
strategic plans,  including the possible sale of all or a portion of THEC by the
Company. After completing the review, the Company concluded that it would retain
its equity interest in THEC.  Further,  under a pre-existing credit arrangement,
approximately  $80 million in debt owed by THEC to the Company will be converted
into common  equity on April 1, 2000.  The  Company's  common  equity  ownership
interest in THEC will increase to approximately 70% upon such conversion.

Selected  financial data and operating  statistics for the Gas  Exploration  and
Production  segment  are set  forth  in the  following  table  for  the  periods
indicated.

                                                      (IN THOUSANDS OF DOLLARS)
================================================================================
                                                              "Combined Company"
                                                                Twelve Months
                                             Year Ended             Ended
                                          December 31, 1999   December 31, 1998*
================================================================================
Revenues                              $         150,581 $                127,124
Operating Expenses                              102,051                  107,089
--------------------------------------------------------------------------------
Operating Income                      $          48,530 $                 20,035
--------------------------------------------------------------------------------
Earnings for Common Stock             $          15,772 $                  8,995
--------------------------------------------------------------------------------
Production Data:
   Natural gas production (Mmcf)                 71,227                   62,829
   Natural gas (per Mcf) realized     $            2.10 $                   2.02
   Proved reserves at year-end (BCFe)               553                      480
================================================================================
        *  Excludes  an  after-tax  charge  of $54.1  million  representing  the
           Company's share of an impairment charge to reduce the value of proved
           gas reserves.


OPERATING INCOME

Operating income increased by $28.5 million,  or 142.2%,  in 1999 as compared to
1998, due to higher  revenues and, to a lesser  extent,  a decrease in operating
expenses.  Revenues in 1999 reflect the benefits  derived from a 13% increase in
production volumes,  combined with an 4% increase in average realized gas prices
(average  wellhead  price received for  production  including  hedging gains and
losses).  At  December  31,  1999,  THEC had 541 BCFe of net proved  reserves of
natural gas, of which 75% was classified as proved  developed.  The  comparative
decrease in operating expenses in

                                              18

<PAGE>



1999 was largely due to a lower  depletion rate resulting,  primarily,  from the
ceiling test write down in 1998.

EARNINGS

Operating  income above  represents  100% of THEC's actual  results for 1999 and
1998, excluding the impairment charge.  Earnings however,  reflect the Company's
64% ownership  interest.  This principally  accounts for the difference  between
operating income and earnings.  Additionally, THEC incurred $8.7 million more in
interest expense in 1999 due to higher levels of debt outstanding.



                                              19

<PAGE>



ENERGY RELATED SERVICES

The Company's Energy Related Services segment primarily  includes KeySpan Energy
Management  Inc.  ("KEM"),   KeySpan  Energy  Services  Inc.  ("KES"),   KeySpan
Communications  Corporation,  KeySpan Energy  Solutions,  LLC ("KESol"),  Fritze
KeySpan,  LLC ("Fritze"),  and Delta KeySpan Inc. ("Delta").  These subsidiaries
own,  design  and/or  operate  energy  systems  for  commercial  and  industrial
customers and provide energy-related appliance services and heating, ventilation
and air conditioning system installation and maintenance services to residential
and commercial  clients located  primarily within the New York City metropolitan
area and Rhode Island. In addition, subsidiaries in this segment: market gas and
electricity,  and arrange transportation and related services, largely to retail
customers,  including  those  served  by  the  Company's  two  gas  distribution
subsidiaries;  and  own  a  fiber  optic  network  on  Long  Island.  KESol  was
established  in April 1998,  Fritze was acquired in November  1998 and Delta was
acquired in September 1999.

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


                                                     (IN THOUSANDS OF DOLLARS)
================================================================================
                                                             "Combined Company"
                                                               Twelve Months
                                      Year Ended                   Ended
                                  December 31, 1999          December 31, 1998
================================================================================
Revenues                   $                 188,630  $                 88,822
Operating Expenses         $                 192,077                   103,120
--------------------------------------------------------------------------------
Operating Loss                                (3,447) $                (14,298)
-------------------------------------------------------------------------------
Loss for Common Stock      $                  (1,298) $                 (8,623)
================================================================================


The  decrease in the loss in 1999 as compared to 1998,  is due to an increase in
revenues of 112%,  offset, in part, by an increase in operating expenses of 86%.
The  increase in  comparative  revenues  was due, in part,  to the  inclusion of
revenues from Fritze for a full twelve month period.  Fritze  contributed  $39.6
million to the increase in segment revenues in 1999.  Delta, the Company's newly
acquired  heating,   ventilation  and  air  conditioning   ("HVAC")  contractor,
contributed  revenues of $12.3 million in 1999.  Further,  the combined revenues
from KEM, KES and KESol  increased by $43.9 million in 1999, due to the benefits
derived from companies  acquired during the past two years and the growth in the
number of customers purchasing energy from KES and services from KESol.

The  comparative  increase  in  operating  expenses  for both  periods,  was due
primarily, to the acquisition of Fritze and Delta, the integration of operations
of other companies  acquired during the past few years, and increased  purchased
gas costs of KES necessary to serve a larger  customer  base.  The formation and
commencement  of operations of KESol,  in April 1998,  also  contributed  to the
comparative increase in operating expenses in 1999.


                                              20

<PAGE>



The Company has been  successful in  integrating  the operations of its recently
acquired  companies into its consolidated  operations.  Fritze,  Delta and other
energy management  operations  posted profitable  results in 1999. KES and KESol
both incurred  losses in 1999, as both companies  seek to establish  significant
market penetration.  Gas deregulation of commodity purchases in the Northeast is
still in its infancy and gas sales margins have remained slim,  contributing  to
the loss incurred by KES. In February 2000, the Company acquired three companies
that provide  energy  related  services in the New York  metropolitan  area with
combined revenues of approximately  $170 million.  The newly acquired  companies
include, an  engineering-consulting  firm, a plumbing and mechanical contracting
firm, and a firm specializing in mechanical contracting and HVAC.



                                              21

<PAGE>



ENERGY RELATED INVESTMENTS

Earnings  for this  segment are  derived,  primarily,  from the  Company's:  20%
interest in the Iroquois Gas Transmission  System LP; 50% ownership  interest in
Gulf Midstream  Services  Partnership  ("GMS");  and 50% interest in the Premier
Transco  Pipeline and a 24.5% interest in Phoenix  Natural Gas, both in Northern
Ireland.

Comparative  earnings  from this  segment  increased  by $13.9  million in 1999,
reflecting,  primarily, earnings from the Company's investment in GMS, formed in
December 1998, and more favorable  results from investments in Northern Ireland.
In addition,  in 1998 results of operations from this segment reflect  after-tax
costs of $7.8 million to settle certain  contracts  associated with the sale, in
1997,  of  certain   cogeneration   investments   and  related  fuel  management
operations.  These  subsidiaries are accounted for under the equity method since
the Company's  ownership interests are 50% or less.  Accordingly,  equity income
from these  investments  is reflected in other  income and  (deductions)  in the
Consolidated Statement of Income.


OTHER

The Other segment incurred a loss of $26.7 million in 1999 compared to income of
$1.3 million in 1998 and,  generally,  reflects  preferred  stock  dividends and
charges incurred by the corporate and  administrative  areas of the Company that
have not been allocated to the various business  segments,  offset,  in part, by
interest income earned on temporary cash  investments.  Interest income has been
decreasing  as  the  Company  continues  to  utilize  cash  to  finance  certain
acquisitions,  repurchase  shares of its common stock, and retire maturing debt.
Also, all preferred stock dividends were allocated to the Other segment in 1999,
whereas,  prior to the LIPA Transaction preferred stock dividends were allocated
to gas and electric operations.



                                              22

<PAGE>



FUTURE OUTLOOK

Results of operations  for 1999 reflect  strong  results from the Company's core
gas-distribution  operations.  These results reflect gas sales growth, primarily
on Long Island,  as the benefits from the  Company's  gas expansion  initiatives
begin to be realized.  Gas sales growth on Long Island was  approximately  4% in
1999,  after  normalizing  for weather  variations.  Moreover,  ongoing  synergy
programs have proven to be  successful.  In addition,  the  Company's  June 1999
acquisition of the  Ravenswood  Facility  provided the Company with  significant
earnings  enhancement.  Results  from  operations  of  the  Ravenswood  Facility
contributed  $0.34 per share to  consolidated  earnings  in 1999.  Finally,  the
successful  integration of companies  purchased by the Energy  Related  Services
segment are expected to form the basis for additional  benefits to  consolidated
earnings in future years.

For 2000, the Company intends to continue its gas distribution growth activities
throughout its service  territory,  and  especially on Long Island,  through the
conversion  of  residential  homes  and the  pursuit  of  opportunities  to grow
multi-family, industrial and commercial markets. Gas sales growth throughout the
Company's service territory in 2000, is anticipated to grow at approximately the
same  rate as 1999.  As the  Company  evolves  within  the new  deregulated  gas
environment,  gas sales growth will remain a critical core strategy. The Company
sells gas to its firm customers at the Company's cost for such gas. In addition,
rates include a charge to recover the costs of distribution,  including a profit
margin for return of and on invested  capital.  As the Company adds customers to
its  gas   distribution   network,   the  Company's  gross  profit  margin  from
transportation  sales  should  increase  incrementally.  As a  result,  customer
additions are and will remain critical to the Company's earnings  enhancement in
the future, regardless of whether a customer purchases gas from the Company or a
third party supplier.

Further,  the Company intends to grow its Energy Related Services  operations in
order to deliver an extensive array of home energy-related services and business
solutions to a broad spectrum of customers.  These operations are expected to be
enhanced through the acquisition of companies providing energy-related services.
In line with this strategy, as previously mentioned,  the Company acquired three
additional companies, in February 2000 that provide energy-related services.

A key component in the Company's  strategy for growth in the Northeast region is
its anticipated  acquisition of Eastern. In November 1999, the Company announced
that it has signed a definitive  agreement  with Eastern under which the Company
will acquire all of the common stock of Eastern.  Eastern is the largest natural
gas distribution company in New England with significant upside potential due to
the  relatively low  penetration of customers  using gas for heat in the region.
The  Northeast  region  represents  a  significant   portion  of  the  country's
population and energy consumption.  With recent price spikes for fuel oil in the
Northeast,  the Company  anticipates  even  stronger  demand for natural gas and
related  services.  Together,  KeySpan and Eastern will have  approximately  2.4
million customers making the "new" company the largest gas distribution  company
in the Northeast. Further, the Company expects pre-tax annual synergy savings to
be approximately $30 million. The transaction,  which will be accounted for as a
purchase,  is expected to close in the third or fourth  quarter of calendar year
2000. Upon consummation of the transaction, the Company will become

                                              23

<PAGE>



a registered  holding  company under the Public Utility  Holding  Company Act of
1935,  as  amended.  The  transaction  has a total value of  approximately  $2.5
billion ($1.7  billion in equity and $0.8 billion in assumed  debt.) See Note 11
to the Consolidated  Financial Statements,  "Acquisition of Eastern Enterprises"
for additional information on the transaction.

As  mentioned,  the Company  intends to continue its gas  expansion  initiatives
throughout  its service  territory,  and  especially  on Long  Island,  and will
continue  to seek  additional  synergies  in all its  operations.  In 2000,  the
Company   anticipates   continued  earnings  growth  in  core   gas-distribution
operations,  full  annual  benefits  from  the  Ravenswood  Facility,  continued
successful  integration of companies providing  energy-related  services and gas
sales  growth from the  acquisition  of  Eastern.  To ensure that its assets are
utilized in the most effective  manner,  the Company will continue to review and
evaluate the strategic nature of all its assets deployed.

LIQUIDITY, CAPITAL EXPENDITURES AND FINANCING, AND DIVIDENDS

LIQUIDITY

The increase in cash flow from  operations in 1999 as compared to the Transition
Period,  reflects the  significant  positive  cash flows that are realized  from
revenues  generated during a heating season,  continued strong results from core
utility  operations,  cash  generated  from  the  Ravenswood  Facility,  and the
benefits  derived from the integration of  KSE-acquired  companies for an entire
twelve month period. Approximately 75% of total annual gas revenues are realized
during  the  heating  season  (November  1 to April 30) as a result of the large
proportion  of  heating  sales  compared  to  total  gas  sales.   Results  from
gas-heating  season  operations are not reflected in the Transition  Period,  as
previously  explained.  Further,  cash flow from operations in 1999 reflects the
utilization  of a  $57.4  million  NOL on  income  tax  payments  for  1999,  as
previously discussed.  Moreover,  during the Transition Period, $250 million was
funded into  Voluntary  Employee  Beneficiary  Trusts to fund  certain  employee
postretirement  welfare benefits and, as a result, cash flow from operations for
the Transition Period was adversely  affected.  The slight decrease in cash flow
from  operations  in 1999 as compared  to the fiscal year ended March 31,  1998,
reflects,  primarily, lower margins realized from electric operations due to the
LIPA Transaction,  as previously  discussed,  offset, in part, by increased cash
flows from KSE-acquired companies and utilization of the NOL.

At December 31, 1999,  the Company had cash and temporary  cash  investments  of
$128.6 million compared to $942.8 million at December 31, 1998. During the year,
the Company  deployed its cash to, among other things:  acquire a portion of the
Ravenswood  Facility  for a cash  requirement  of  approximately  $214  million;
purchase  shares of its common  stock on the open market for $299  million;  and
retire maturing debt of $397 million. In addition, the Company utilized its cash
on-hand and internally  generated funds to expand its gas distribution  network,
primarily on Long Island and expand its operations through increased investments
in energy-related activities.

In November  1999,  the  Company  negotiated  a $700  million  revolving  credit
agreement,  with a one- year term and one-year renewal option, with a commercial
bank. This credit facility is used to

                                              24

<PAGE>



support the Company's $700 million  commercial  paper  program.  At December 31,
1999,  the Company had $208.3  million of  commercial  paper  outstanding  at an
annualized  interest rate of 6.56%.  The proceeds  received from the issuance of
commercial paper were used to repay  outstanding  borrowings under the Company's
previous  existing line of credit  (discussed  below) and for general  corporate
purposes.  During 2000, the Company  anticipates issuing commercial paper rather
than  borrowing  on  the  revolving  credit  agreement.   (See  Note  8  to  the
Consolidated  Financial  Statements,  "Notes Payable" for further information on
the credit agreement.)

Prior to the new revolving credit  agreement and commercial  paper program,  the
Company  had an  available  unsecured  bank  line of  credit  of  $300  million.
Borrowings were made under the facility during the months of September,  October
and November 1999 to finance seasonal working capital needs. This line of credit
was terminated upon the execution of the new revolving credit agreement.

In addition,  THEC has an unsecured  available  line of credit with a commercial
bank that provides for a maximum commitment of $250 million,  subject to certain
conditions.  During 1999,  THEC  borrowed $48 million under this facility and at
December 31, 1999, $181 million was outstanding.  Also, a subsidiary included in
the Energy  Related  Investment  segment has a revolving  loan  agreement with a
financial  institution in Canada.  Borrowings  under this agreement  during 1999
were  U.S.$13.5  million,  and at  December  31,  1999,  U.S.$86.4  million  was
outstanding.  (See Note 7 to the Consolidated  Financial Statements,  "Long-Term
Debt" for further information on these agreements.)


CAPITAL EXPENDITURES AND FINANCING

Capital Expenditures
Consolidated  capital  expenditures  during  1999 were  $725.7  million  and are
reflected in the following business segments.

Capital expenditures related to the Gas Distribution segment were $213.8 million
in 1999 and were primarily for the renewal and replacement of mains and services
and for the expansion of the gas distribution system on Long Island.

Electric  Services  had capital  expenditures  of $245.2  million  during  1999,
reflecting  primarily,  the Company's  June 1999  acquisition  of the Ravenswood
Facility.  As a means of financing the  acquisition,  the Company entered into a
lease  agreement  with a special  purpose,  unaffiliated  financing  entity that
acquired a portion of the facility  directly  from Con Edison and leased it to a
subsidiary of the Company. The acquisition cost of the facility was $597 million
and the lease  program was  established  in order to reduce the  Company's  cash
requirement  by $425  million.  The  balance of the funds  needed to acquire the
facility,  including the purchase of inventory and materials,  was approximately
$214 million and was provided from cash on hand. (See Note 9 to the Consolidated
Financial  Statements,  "Contractual  Obligations  and  Contingencies"  for more
details on the lease agreement.) Capital  expenditures during 1999 also included
costs to maintain the generating facilities located on Long Island.

                                              25

<PAGE>



Capital  expenditures  related to Gas  Exploration  and  Production  were $183.3
million  during 1999.  These  capital  expenditures  reflected,  in part,  costs
related to the development of properties  acquired in Southern  Louisiana and in
the Gulf of Mexico  and costs  related  to the  continued  development  of other
properties previously acquired. Capital expenditures also included $35.6 million
related to the Company's  joint venture with THEC to explore for natural gas and
oil. The Company will commit  approximately  $25 million to the drilling program
in 2000.  The joint  venture may be  terminated,  upon notice,  at the option of
either party at the end of a given calendar quarter.

Capital  expenditures  of $20.6  million  during 1999 related to Energy  Related
Services,  includes the acquisition of HVAC  contractors in Rhode Island and New
Jersey that build and install HVAC systems primarily for commercial customers.

Capital  expenditures  related to the Energy  Related  Investments  segment were
$49.4 million  during 1999.  In 1999,  the Company,  through GMS,  completed the
acquisition of Richland  Petroleum's 37% interest in the Paddle River Gas Plant.
The gas plant,  located in Alberta,  Canada,  is capable of  processing up to 82
million cubic feet of gas per day. In addition,  in December  1999,  the Company
purchased   certain  oil   properties  in  Alberta,   Canada  that  can  produce
approximately 1600 barrels of oil per day. Capital  expenditures related to this
segment  also include the  Company's  share of capital  expenditures  in GMS and
expenditures for the on-going expansion and upgrade of a gas distribution system
in Northern Ireland, in which the Company has a 24.5% ownership interest.

Common plant capital  expenditures  were $13.4  million  during 1999 and reflect
primarily,   the  purchase  of  computer  equipment  and  miscellaneous   office
equipment.

Consolidated capital expenditures for 2000, exclusive of expenditures  necessary
for the Eastern acquisition, are estimated to be at approximately the same level
as 1999.  The amount of future  capital  expenditures  is reviewed on an ongoing
basis  and  can  be  affected  by  timing,   scope  and  changes  in  investment
opportunities.

Financing
In October 1999, the Company's wholly-owned subsidiary,  KeySpan Generation, LLC
issued,  through the New York State Energy Research and  Development  Authority,
$41.1 million of Pollution  Control  Revenue Bonds,  1999 Series A. The proceeds
from this  financing  were used to  extinguish  $45.5  million of the  Company's
promissory  notes due LIPA. The initial interest rate on these tax- exempt bonds
was  established  at  3.95%,  which  rate  applies  through  January  13,  2000.
Thereafter,  the interest rate will be reset based on an auction procedure.  The
Company  anticipates  that the interest rate on these  tax-exempt  bonds will be
substantially  lower  than the  interest  rate on the two  series of bonds it is
replacing, which were 7.50% and 7.80%.

In December 1999,  Brooklyn Union of Long Island and the Company jointly filed a
shelf  registration  statement with the SEC in anticipation  of issuing,  during
2000,  up to $600  million of Medium Term  Notes.  These notes will be issued by
Brooklyn Union of Long Island and unconditionally  guaranteed by the Company. On
February 1, 2000, Brooklyn Union of Long Island issued $400 million 7.875

                                              26

<PAGE>



% Notes due  February  1, 2010,  the net  proceeds of which were used to replace
$397  million of the  Company's  promissory  notes due LIPA that matured in June
1999. (See Note 7 to the Consolidated Financial Statements, "Long-Term Debt" for
a further  discussion of these  financings  and the  associated  repayments of a
portion of the promissory notes.)

In addition to the above financing,  the Company intends to access the financial
markets in 2000 to replace maturing  preferred stock and to finance the purchase
of Eastern. In June 2000, $363 million of preferred stock series 7.95% Series AA
will mature.  The Company currently  anticipates  issuing  additional  preferred
stock to replace this maturing  series.  The timing of this issuance will depend
on market conditions during 2000.

As  previously  mentioned,  on November  4, 1999,  the  Company  entered  into a
definitive  agreement  with Eastern,  pursuant to which the Company will acquire
all of the  outstanding  common stock of Eastern.  The  transaction  has a total
value of approximately  $2.5 billion ($1.7 billion in equity and $0.8 billion in
assumed debt and preferred stock).  The Company expects to raise $1.7 billion of
initial  financing to purchase  Eastern in  short-term  markets,  a  significant
portion  of  which  will  be  replaced  with  long-term  financing  as  soon  as
practicable thereafter.

In  connection  with the  Company's  anticipated  purchase  of  Eastern  and the
anticipated  issuance of long-term  debt  securities,  the Company  entered into
forward  interest rate lock  agreements in January and February 2000, to hedge a
portion of the risk that the cost of the future  issuance of fixed-rate debt may
be adversely  affected by changes in interest rates. The agreements have a total
notional  principal  amount of $400  million.  (See Note 10 to the  Consolidated
Financial  Statements,  "Hedging,  Derivative  Financial  Instruments  and  Fair
Values" for additional details.)

In 1998, the Company's Board of Directors authorized the repurchase of a portion
of the Company's outstanding common stock. The initial  authorization  permitted
the repurchase of up to 10 percent of the Company's then  outstanding  stock, or
approximately  15 million  common  shares.  A second  authorization  permits the
Company to use up to an  additional  $500  million of cash for the  purchase  of
common shares.  As of December 31, 1999, the Company had  repurchased 25 million
of its common shares for $723 million.

During 2000,  the Company will  continue its on-going  evaluation of its capital
structure  and its debt and  equity  levels.  Further,  the  Company  intends to
actively manage its balance sheet to maintain  investment  grade ratings at each
of its rated entities. At December 31, 1999 the Company's ratio of debt to total
capitalization  was 35%.  The Company  estimates  that,  based on its  projected
financings  in  2000,  its  ratio  of  debt  to  total  capitalization  will  be
approximately 60% at the end of 2000,  assuming a certain level of dividends and
earnings.

DIVIDENDS

The Company is currently paying a dividend at an annual rate of $1.78 per common
share.  The  Company's  dividend  policy is  reviewed  annually  by the Board of
Directors. The amount and timing

                                              27

<PAGE>



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.

Pursuant  to the  NYPSC's  orders  dated  February  5, 1998 and  April 14,  1998
approving the KeySpan  Acquisition,  Brooklyn Union's and Brooklyn Union of Long
Island's  ability to pay  dividends to the parent  company is  conditioned  upon
maintenance of a utility capital  structure with debt not exceeding 55% and 58%,
respectively,  of  total  utility  capitalization.  In  addition,  the  level of
dividends  paid by both  utilities may not be increased from current levels if a
40 basis  point  penalty is  incurred  under the  customer  service  performance
program. At the end of Brooklyn Union's and Brooklyn Union of Long Island's rate
years  (September  30, 1999 and November 30, 1999,  respectively),  the ratio of
debt to total utility  capitalization was 44% and 47%,  respectively.  Moreover,
upon consummation of the acquisition of Eastern, the Company expects to register
as a holding  company under the Public Utility  Holding  Company Act of 1935, as
amended. As a result, the corporate and financial  activities of the Company and
each of its  subsidiaries  (including  their  ability  to pay  dividends  to the
Company) will also be subject to regulation by the SEC.

GAS DISTRIBUTION - RATE MATTERS

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

Under the  Stipulation,  effective May 29, 1998,  Brooklyn Union's base rates to
core customers  were reduced by $23.9 million  annually.  In addition,  Brooklyn
Union is now subject to an earnings sharing provision  pursuant to which it will
be required to credit core customers with 60% of any utility  earnings up to 100
basis points above  certain  threshold  return on equity levels over the term of
the rate plan (other than any earnings associated with discrete  incentives) and
50% of any utility  earnings in excess of 100 basis points above such  threshold
levels.  The threshold  levels are 13.50% for the rate years ended September 30,
1999 through  2001,  and 13.25% for the rate year 2002.  Brooklyn  Union did not
earn above its threshold return level in its rate year ended September 30, 1999.

The Stipulation also required Brooklyn Union of Long Island to reduce base rates
to its customers by $12.2 million annually  effective February 5, 1998 and by an
additional $6.3 million annually effective May 29, 1998.  Brooklyn Union of Long
Island is subject  to an  earnings  sharing  provision  pursuant  to which it is
required to credit to firm  customers  60% of any  utility  earnings in any rate
year up to 100 basis  points  above a return on equity of 11.10%  and 50% of any
utility  earnings in excess of a return on equity of 12.10%.  Brooklyn  Union of
Long Island did not earn above its threshold return level in its rate year ended
November 30, 1999. At the  conclusion of the Brooklyn  Union of Long Island rate
plan on November 30, 2000, Brooklyn Union of Long Island or the NYPSC on its own
motion,  may  initiate  a  proceeding  to revise  the rates and  charges of that
company.

                                              28

<PAGE>



ELECTRIC SERVICES - REVENUE MECHANISMS

LIPA AGREEMENTS

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

Management Services Agreement ("MSA")

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

Power Supply Agreement ("PSA")

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

                                              29

<PAGE>



maintenance of the output capability of the generating facilities.  The PSA runs
for a term of fifteen
years.

In addition,  beginning on May 28, 2001, LIPA will have the right for a one-year
period to acquire all of the  Company's  Long  Island  based  generating  assets
included in the PSA at the fair market  value at the time of the exercise of the
right, which value will be determined by independent appraisers.

Energy Management Agreement ("EMA")

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

RAVENSWOOD FACILITY

At the time of the Company's  purchase of the Ravenswood  Facility,  the Company
and Con Edison entered into energy and capacity  contracts.  The energy contract
provided Con 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 New York Independent System Operator
("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,  the  Company  began  selling  the energy  produced  by the
Ravenswood  Facility  through daily and/or hourly  bidding into the NYISO energy
markets.  The Company also has the option 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.  At this point in time,  the Company has sold
energy exclusively  through the NYISO. The capacity contract,  which is still in
effect,  provides  Con  Edison  with  100%  of  the  available  capacity  of the
Ravenswood  Facility.  The Company anticipates that this contract will expire on
April 30, 2000, at which time the available capacity of the Ravenswood  Facility
will be bid into on the auction process conducted by the NYISO. The Company also
has the  option  to  sell  the  capacity  through  contracts  with  LSEs.  It is
anticipated  that in  2000,  at least  75% of the net  profit  margins  from the
Ravenswood  Facility  will be derived from  capacity  sales  through  either the
auction process associated with the NYISO or contracts with LSEs.


                                              30

<PAGE>



ENVIRONMENTAL MATTERS

The Company 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.  The Company  estimates  that the remaining cost of its
manufactured  gas  plant  ("MGP")  related   environmental  cleanup  activities,
including costs associated with the Ravenswood  Facility,  will be approximately
$128 million and has recorded a related liability for such amount.  Further,  as
of December 31, 1999,  the Company has expended a total of $15.9  million.  (See
Note 9 to the Consolidated  Financial Statements,  "Contractual  Obligations and
Contingencies".)

YEAR 2000 ISSUES

The  Company   experienced  no  significant  Year  2000  related   abnormalities
associated  with the roll over to the year 2000.  All systems  needed to deliver
gas and  electric  services to  customers,  as well as those  systems  needed to
manage daily  business  functions  performed  without  significant  malfunction.
Nevertheless,  the Company  continues to monitor systems for any unexpected Year
2000 related abnormalities.

The Company has spent a total of approximately $29.6 million to address the Year
2000  issue.  While the Year 2000  Project  is  virtually  complete,  some minor
expenses  will be incurred  for the  continued  review of systems to monitor for
Year  2000  abnormalities.  The  largest  portion  of the Year  2000  costs  was
attributable  to  the  assessment,   modification,   and  testing  of  corporate
information  technology ("IT") supported  computer software and in-house written
applications.  The  Company's  implementation  of the Year 2000  Project did not
directly  result in  delaying  any IT  projects.  The  Company's  cash flow from
operations  and cash on-hand have been  sufficient to fund the Year 2000 Project
expenditures.


                                              31

<PAGE>



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The  Company and its  subsidiaries  are subject to various  risk  exposures  and
uncertainties associated with their operations. The most significant contingency
involves  the  evolution  of  the  gas  distribution   industry  toward  a  more
competitive and deregulated  environment.  Most important to the Company, is the
evolution of  regulatory  policy as it pertains to the  Company's  fixed charges
associated  with its firm gas purchase  contracts  related to its historical gas
merchant  role.  In addition,  the Company is exposed to  commodity  price risk,
interest  rate risk and, to a much less  degree,  foreign  currency  translation
risk. Set forth below is a description of these  exposures and an explanation as
to how  the  Company  and its  subsidiaries  have  managed  and,  to the  extent
possible, sought to reduce these risks.

REGULATORY ISSUES AND THE COMPETITIVE ENVIRONMENT

The Gas Industry:  The energy industry continues to undergo fundamental changes,
which may have a  significant  impact on the  future  financial  performance  of
utilities, as regulatory authorities, elected officials and customers seek lower
energy prices and broader choices.

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

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

As required by NYPSC's  policy  statement,  the Company's  two gas  distribution
subsidiaries  filed a joint  restructuring  proposal  with the NYPSC in  October
1999.  The filing  offers a  comprehensive  restructuring  plan  designed to (i)
provide a significant  impetus toward  exiting the gas supply  business and (ii)
present the NYPSC with an  opportunity  to realize  its vision of a  competitive
unbundled gas supply market for all customers within the transitional time frame
of three to seven  years.  Under the  proposal the  Company's  gas  distribution
subsidiaries  would  continue  to be the  provider  of last  resort  during  the
transition period. The restructuring plan seeks to "jump start" the migration of
the mass customer market  (especially  the residential and the small  commercial
and  industrial  markets)  from  bundled  utility  sales  service  to  unbundled
transportation service, accelerates the elimination of

                                              32

<PAGE>



regulatory cost burdens from the gas supply market, provides protections for low
income customers, and sets forth a plan to minimize potential strandable costs.

Currently,  the Company's gas distribution  subsidiaries  have contracts for the
purchase of upstream interstate  transportation,  storage and supply with annual
fixed demand charges of approximately  $280 million.  These contracts have terms
that range from one to fourteen years and the associated  demand charges through
the term of the  contracts  are  approximately  $1.6  billion.  The  Company has
estimated its strandable  costs as the costs under these  contracts in excess of
market value.  The Company has assumed that, if it were  necessary to assign the
contracts to third  parties,  the Company  could recover the market value of the
underlying assets.  Therefore, the difference between the contract costs and the
market value is the potential "strandable" costs. The Company estimates that, if
the gas  distribution  subsidiaries  continue to recover  demand charges for the
next five years,  then the estimated  potential  strandable  costs for contracts
that will not expire by 2005 and would not be needed to provide  service to firm
transportation  customers will be, on a present value basis,  approximately  $78
million.

In its  proposal,  the  Company  has  set  forth  a plan  to  recover  potential
strandable costs during the transition period. The plan includes the creation of
a price differential  between gas utility bundled service and unbundled services
available in the marketplace.  The increased  revenue  generated from this price
differential  would be retained by the Company's gas  distribution  subsidiaries
for future  application  to recover  costs  associated  with the  transition  to
competition,  including  strandable costs. In addition,  the Company  recommends
retention of certain customer refunds that otherwise would have been refunded to
customers  during  the  transition  period.  The plan  also  recommends  certain
financial  incentives and mechanisms to mitigate potential strandable costs. The
Company believes that implementation of this plan, or some variation designed to
achieve  the  same   objectives,   will  allow  both  of  its  gas  distribution
subsidiaries to fully recover their strandable costs.

The  Company  believes  that its  proposal  strikes  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 Company  currently is
not able to determine the outcome of this proceeding and what effect, if any, it
may have on its operations.

The  Electric  Industry:  As  previously   mentioned,   the  Company's  electric
operations on Long Island are generally  governed by its service agreements with
LIPA. The agreements have terms of eight to fifteen years and generally  provide
for recovery of virtually all costs of  production,  operation and  maintenance.
Also,  since  Long  Island  is  considered  a "load  pocket",  i.e.,  there  are
insufficient  transmission  ties to permit a significant  amount of energy to be
transported into Long Island,  the Company faces minimal  competitive  pressures
associated with its electric operations on Long Island at this time.

With its  investment in the Ravenswood  Facility,  the Company also has electric
operations in New York City. The Company  currently sells the energy produced by
the  Ravenswood  Facility  through  daily and/or  hourly  bidding into the NYISO
energy markets. Further, the Company has a capacity

                                              33

<PAGE>



contract with Con Edison,  which  provides Con Edison with 100% of the available
capacity of the Ravenswood Facility.  The Company anticipates that this contract
will  expire on April 30,  2000,  at which time the  available  capacity  of the
Ravenswood  Facility  will be bid into on the auction  process  conducted by the
NYISO. New York City local  reliability  rules currently require that 80% of the
electric  capacity  needs  of New  York  City  is to be  provided  by  "in-city"
generators.  At this time,  there is a current  shortage of in-city capacity and
the  Company,  therefore,  anticipates  that it can  sell  the  capacity  of the
Ravenswood  Facility at a level  approaching  the FERC  mandated  price cap. The
Company expects that the current local  reliability  rules will remain in effect
at least through 2000. However, should new, more efficient electric power plants
be built in New York City  and/or the  requirement  that 80% of in-city  load be
served by in-city  generators  be modified,  capacity  and energy sales  volumes
could be adversely affected.  The Company can not predict,  however,  when or if
new  power  plants  will  be  built  or the  nature  of  future  New  York  City
requirements.

DERIVATIVE FINANCIAL INSTRUMENTS

As previously mentioned,  and more fully detailed in Note 10 to the Consolidated
Financial  Statements,  "Hedging,  Derivative  Financial  Instruments  and  Fair
Values",  the Company  hedges a portion of its exposure to commodity  price risk
and interest rate risk. All of the Company's derivative  financial  instruments,
except for certain  interest rate swaps,  are and will continue to be classified
as  cash-flow  hedges.  As a result,  implementation  of  Statement of Financial
Accounting  Standards ("SFAS") No. 133,  "Accounting for Derivative  Instruments
and Hedging  Activities" when adopted, is not expected to have a material effect
on  the  Company's  net  income,   but  could  have  a  significant   effect  on
comprehensive  income  because  of  fluctuations  in  the  market  value  of the
derivatives  employed for hedging  certain risks.  Under SFAS No. 133,  periodic
changes  in market  value are  recorded  as  comprehensive  income,  subject  to
effectiveness,  and  then  included  in  net  income  to  match  the  underlying
transactions.

Commodity   Hedges  and  Financial   Instruments:   The  Company's  gas  utility
subsidiaries, marketing, and gas exploration and production subsidiaries employ,
from time to time, derivative financial instruments, such as natural gas and oil
futures,  options and swaps,  for the purpose of hedging  exposure to  commodity
price risk.

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

Interest Rate Hedges:  The Company  continually  monitors the cost  relationship
between  fixed and variable  rate debt.  In line with its  objective to minimize
capital costs, the Company periodically enters into hedging transactions through
interest rate swaps that effectively convert the terms of the

                                              34

<PAGE>



underlying debt  obligations from fixed to variable and/or variable to fixed. In
addition,  the Company also enters into hedges to fix the rate on commitments to
issue debt securities  prior to the actual  financing.  Swap agreements are only
entered into with creditworthy counter parties.

FOREIGN CURRENCY FLUCTUATIONS

The  Company  follows  the  principles  of  SFAS  No.  52,   "Foreign   Currency
Translation"  for recording its  investments in foreign  affiliates.  Due to the
Company's  purchases of certain Canadian interests and its continued  activities
in Northern  Ireland,  the Company's  investment in foreign  affiliates has been
growing.  At December 31, 1999, the Company's net assets in these affiliates was
approximately  $251.0 million and at December 31, 1999, the accumulated  foreign
currency translation  adjustment was $7.7 million favorable.  (See Note 1 to the
Consolidated   Financial   Statements,   "Summary  of   Significant   Accounting
Policies".)

For  additional   information  concerning  market  risk,  see  Note  10  to  the
Consolidated Financial Statements,  "Hedging,  Derivative Financial Instruments,
and Fair Values".



                                              35

<PAGE>



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

FINANCIAL STATEMENT RESPONSIBILITY

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

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


                                              36

<PAGE>

<TABLE>
<CAPTION>


                                  CONSOLIDATED BALANCE SHEET
                                   (IN THOUSANDS OF DOLLARS)



                                                       DECEMBER 31, 1999        December 31, 1998
                                                      --------------------     --------------------
ASSETS

CURRENT ASSETS
<S>                                               <C>                      <C>
   Cash and temporary cash investments            $                128,602 $                942,776
   Customer accounts receivable                                    419,826                  320,836
   Other accounts receivable                                       240,973                  230,479
   Allowance for uncollectible accounts                            (20,294)                 (20,026)
   Special deposits                                                 60,863                  131,196
   Gas in storage, at average cost                                 144,256                  145,277
   Materials and supplies, at average cost                          84,813                   74,193
   Other                                                            98,914                   72,818
                                                      --------------------     --------------------
                                                                 1,157,953                1,897,549
                                                      --------------------     --------------------


EQUITY INVESTMENTS AND OTHER                                       391,731                  303,681
                                                      --------------------     --------------------

PROPERTY
   Electric                                                      1,346,851                1,109,199
   Gas                                                           3,449,384                3,257,726
   Other                                                           375,657                  345,007
   Accumulated depreciation                                     (1,589,287)              (1,480,038)
   Gas exploration and production, at cost                       1,177,916                  994,104
   Accumulated depletion                                          (520,509)                (447,733)
                                                       --------------------     --------------------
                                                                 4,240,012                3,778,265
                                                      --------------------     --------------------

DEFERRED CHARGES
   Regulatory assets                                               319,167                  279,524
   Goodwill, net of amortizations                                  255,778                  254,040
   Other                                                           366,050                  382,043
                                                       --------------------     --------------------
                                                                   940,995                  915,607
                                                      --------------------     --------------------
                                                       --------------------     --------------------

TOTAL ASSETS                                      $              6,730,691 $              6,895,102
                                                      ====================     ====================

</TABLE>

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

                                              37

<PAGE>

<TABLE>
<CAPTION>


                                  CONSOLIDATED BALANCE SHEET
                                   (IN THOUSANDS OF DOLLARS)



                                                        DECEMBER 31, 1999       December 31, 1998
                                                       -------------------     --------------------
LIABILITIES AND CAPITALIZATION

CURRENT LIABILITIES
<S>                                               <C>                      <C>
   Current maturities of long-term debt           $                      - $                398,000
   Current redemption of preferred stock                           363,000                        -
   Accounts payable and accrued expenses                           645,347                  519,288
   Notes payable                                                   208,300                        -
   Dividends payable                                                61,306                   66,232
   Taxes accrued                                                    50,437                   69,742
   Customer deposits                                                31,769                   29,774
   Interest accrued                                                 28,093                   19,965
                                                       --------------------     --------------------
                                                                 1,388,252                1,103,001
                                                       -------------------     --------------------

DEFERRED CREDITS AND OTHER LIABILITIES
   Regulatory liabilities                                           26,618                   27,854
   Deferred income tax                                             186,230                   71,549
   Postretirement benefits and other reserves                      501,603                  457,459
   Other                                                            66,200                   75,740
                                                       --------------------     --------------------
                                                                   780,651                  632,602
                                                       -------------------     --------------------

CAPITALIZATION
   Common stock, $.01 par value, authorized
   450,000,000 shares; outstanding 133,866,077
   and 144,628,654 shares stated at                              2,973,388                2,973,388
   Retained earnings                                               456,882                  474,188
   Accumulated foreign currency adjustment                           7,714                     (952)
   Treasury stock purchased                                       (722,959)                (423,716)
                                                       -------------------     --------------------
     Total common shareholders' equity                           2,715,025                3,022,908
   Preferred stock                                                  84,339                  447,973
   Long-term debt                                                1,682,702                1,619,067
                                                       --------------------     --------------------
TOTAL CAPITALIZATION                                             4,482,066                5,089,948
                                                       --------------------     --------------------
MINORITY INTEREST IN SUBSIDIARY COMPANIES                           79,722                   69,551
                                                       -------------------     --------------------
TOTAL LIABILITIES AND CAPITALIZATION              $              6,730,691 $              6,895,102
                                                       ===================     ====================
</TABLE>

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

                                              38

<PAGE>


<TABLE>
<CAPTION>

                               CONSOLIDATED STATEMENT OF INCOME
                      (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)

============================================================================================================
                                                                          Nine Months      Fiscal Year
                                                        YEAR ENDED           Ended            Ended
                                                     DECEMBER 31, 1999  December 31, 1998  March 31, 1998
============================================================================================================
<S>                                                  <C>                    <C>              <C>
Gas Distribution                                     $         1,753,132    $       856,172  $       645,659
Electric Services                                                861,582            408,305                -
Electric Distribution                                                  -            330,011        2,478,435
Gas Exploration and Production                                   150,581             70,812                -
Energy Related Services and Other                                189,318             63,181                -
                                                          --------------      -------------      -----------
Total Revenues                                                 2,954,613          1,728,481        3,124,094
                                                          --------------      -------------      -----------
OPERATING EXPENSES
Purchased gas                                                    744,432            331,690          299,469
Fuel and purchased power                                          17,252             91,762          658,338
Operations and maintenance                                     1,091,166            842,313          511,165
Depreciation, depletion and amortization                         253,440            294,864          169,770
Electric regulatory amortizations                                      -            (40,005)          13,359
Operating taxes                                                  366,154            257,124          466,326
                                                          --------------      -------------      -----------
Total Operating Expenses                                       2,472,444          1,777,748        2,118,427
                                                          --------------      -------------      -----------

OPERATING INCOME                                                 482,169            (49,267)       1,005,667
                                                          --------------      -------------      -----------

OTHER INCOME AND (DEDUCTIONS)
Income from equity investments                                    15,347              5,841                -
Interest income                                                   26,993             50,104            7,022
Transaction related expenses (net of $99,701 income tax)               -           (107,912)               -
Minority interest                                                (11,141)            29,141                -
Other                                                              6,297            (15,919)         (13,323)
                                                          --------------      -------------      -----------
Total Other Income                                                37,496            (38,745)          (6,301)
                                                          --------------      -------------      -----------
INCOME (LOSS) BEFORE INTEREST CHARGES AND INCOME TAXES           519,665            (88,012)         999,366
                                                          --------------      -------------      -----------
INTEREST CHARGES                                                 124,692            138,715          404,473
                                                          --------------      -------------      -----------
INCOME TAXES
   Current                                                        26,618             26,142           85,794
   Deferred                                                      109,744            (85,936)         146,859
                                                          --------------      -------------      -----------
Total Income Taxes                                               136,362            (59,794)         232,653
                                                          --------------      -------------      -----------
NET INCOME (LOSS)                                                258,611           (166,933)         362,240
Preferred stock dividend requirements                             34,752             28,604           51,813
                                                          --------------      -------------      -----------
EARNINGS (LOSS) FOR COMMON STOCK                     $           223,859    $      (195,537)   $     310,427
Foreign Currency Adjustment                                        8,666               (952)               -
                                                          --------------      -------------      -----------
COMPREHENSIVE INCOME (LOSS)                          $           232,525    $      (196,489)   $     310,427
                                                          ==============      =============      ===========
AVERAGE COMMON SHARES OUTSTANDING (000)                          138,526            145,767          121,415
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE   $              1.62    $        (1.34)    $        2.56
                                                          ==============      =============      ===========
</TABLE>


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

                                              39

<PAGE>

<TABLE>
<CAPTION>


                          CONSOLIDATED STATEMENT OF RETAINED EARNINGS
                                   (IN THOUSANDS OF DOLLARS)
==========================================================================================================
                                                                        Nine Months         Fiscal Year
                                                    YEAR ENDED             Ended               Ended
                                                 DECEMBER 31, 1999   December 31, 1998     March 31, 1998
==========================================================================================================
<S>                                             <C>                 <C>                 <C>
BALANCE AT BEGINNING OF PERIOD                  $          474,188  $           956,092 $          861,751
Net income (loss) for period                               258,611             (166,933)           362,240
----------------------------------------------------------------------------------------------------------
                                                           732,799              789,159          1,223,991
Deductions
Cash dividends declared on common stock                    246,251              214,012            216,086
Cash dividends declared on preferred stock                  34,752               28,604             51,813
Other, primarily write-off of capital stock expense         (5,086)              72,355                  -
----------------------------------------------------------------------------------------------------------
BALANCE AT END OF PERIOD                        $          456,882  $           474,188 $          956,092
==========================================================================================================
</TABLE>
<TABLE>
<CAPTION>

                           CONSOLIDATED STATEMENT OF CAPITALIZATION

============================================================================================================
                                                   SHARES ISSUED                 (IN THOUSANDS OF DOLLARS)
------------------------------------------------------------------------------------------------------------
                                          DECEMBER 31,     December 31,        DECEMBER 31,       December 31,
                                              1999             1998                1999               1998
------------------------------------------------------------------------------------------------------------
COMMON SHAREHOLDERS' EQUITY
<S>                                           <C>            <C>          <C>                 <C>
Common stock, $0.01 par value                 133,866,077    144,628,654  $            1,337  $           1,446
Premium on capital stock                                                           2,972,051          2,971,942
Retained earnings                                                                    456,882            474,188
Accumulated foreign currency adjustment                                                7,714               (952)
Treasury stock purchased                       24,971,577     14,209,000            (722,959)          (423,716)
------------------------------------------------------------------------------------------------------------
TOTAL COMMON SHAREHOLDERS' EQUITY                                                  2,715,025          3,022,908
------------------------------------------------------------------------------------------------------------
PREFERRED STOCK - REDEMPTION REQUIRED
Par value $25 per share
   7.95% Series AA                             14,520,000     14,520,000             363,000            363,000
------------------------------------------------------------------------------------------------------------
Less - Mandatory redemption of preferred stock                                       363,000                  -
------------------------------------------------------------------------------------------------------------
Total Preferred Stock - Redemption Required                                                -            363,000
------------------------------------------------------------------------------------------------------------
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                93,390         99,727               9,339              9,973
------------------------------------------------------------------------------------------------------------
Total Preferred Stock - No Redemption Required                                        84,339             84,973
------------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK                                                     $           84,339  $         447,973
------------------------------------------------------------------------------------------------------------
</TABLE>

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


                                              40

<PAGE>


<TABLE>
<CAPTION>

                           CONSOLIDATED STATEMENT OF CAPITALIZATION
                                         (CONTINUED)


                                                                               (IN THOUSANDS OF DOLLARS)
=============================================================================================================
                                                                               DECEMBER 31,     December 31,
LONG-TERM DEBT                               INTEREST RATE        SERIES           1999             1998
-------------------------------------------------------------------------------------------------------------
<S>                                              <C>              <C>          <C>             <C>
AUTHORITY FINANCING NOTES
POLLUTION CONTROL REVENUE BONDS
   October 1, 2028                              variable          1999A        $       41,125  $               -
ELECTRIC FACILITIES REVENUE BONDS
   December 1, 2027                             variable          1997A                24,880             24,880
-------------------------------------------------------------------------------------------------------------
TOTAL AUTHORITY FINANCING NOTES                                                        66,005             24,880
-------------------------------------------------------------------------------------------------------------
PROMISSORY NOTES TO LIPA
DEBENTURES
   July 15, 1999                                 7.30%                                      -            397,000
   March 15, 2023                                8.20%                                270,000            270,000
POLLUTION CONTROL REVENUE BONDS
   December 1, 2006                              7.50%            1976A                     -             26,375
   December 1, 2009                              7.80%            1979B                     -             19,100
   March 1, 2016                                 5.15%            1985A                58,022             58,022
   March 1, 2016                                 5.15%            1985B                50,000             50,000
ELECTRIC FACILITIES REVENUE BONDS
   September 1, 2019                             7.15%            1989B                35,030             35,030
   June 1, 2020                                  7.15%            1990A                73,900             73,900
   December 1, 2020                              7.15%            1991A                26,560             26,560
   February 1, 2022                              7.15%            1992B                13,455             13,455
   August 1, 2022                                6.90%            1992D                28,060             28,060
   November 1, 2023                              5.30%            1993B                29,600             29,600
   October 1, 2024                               5.30%            1994A                 2,600              2,600
   August 1, 2025                                5.30%            1995A                15,200             15,200
-------------------------------------------------------------------------------------------------------------
Total Promissory Notes to LIPA                                                        602,427          1,044,902
-------------------------------------------------------------------------------------------------------------
GAS FACILITIES REVENUE BONDS
   April 1, 2020                                 6.368%          1993A,B               75,000             75,000
   December 1, 2020                             variable           1997               125,000            125,000
   January 1, 2021                               5.50%             1996               153,500            153,500
   February 1, 2024                              6.75%            1989A                45,000             45,000
   February 1, 2024                              6.75%            1989B                45,000             45,000
   June 1, 2025                                  5.60%            1993C                55,000             55,000
   July 1, 2026                                  6.95%           1991A,B              100,000            100,000
   July 1, 2026                                  5.635%        1993D-1,D-2             50,000             50,000
-------------------------------------------------------------------------------------------------------------
Total Gas Facilities Revenue Bonds                                                    648,500            648,500
-------------------------------------------------------------------------------------------------------------
Unamortized Discount on Debt                                                           (1,635)            (1,750)
-------------------------------------------------------------------------------------------------------------
Total                                                                               1,315,297          1,716,532
Less Current Maturities                                                                     -            398,000
Other Subsidiary Debt                                                                 367,405            300,535
-------------------------------------------------------------------------------------------------------------
Total Long-Term Debt                                                                1,682,702          1,619,067
-------------------------------------------------------------------------------------------------------------
Total Capitalization                                                           $    4,482,066  $       5,089,948
==============================================================================================================

</TABLE>

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

                                              41

<PAGE>

<TABLE>
<CAPTION>

                             CONSOLIDATED STATEMENT OF CASH FLOWS
                                  (IN THOUSANDS OF DOLLARS)

=====================================================================================================
                                                                        Nine Months     Fiscal Year
                                                        YEAR ENDED         Ended           Ended
                                                       DECEMBER 31,    December 31,      March 31,
                                                           1999            1998             1998
=====================================================================================================
OPERATING ACTIVITIES
<S>                                                   <C>              <C>              <C>
Net Income (Loss)                                     $       258,611  $    (166,933)   $     362,240
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
     PROVIDED BY (USED IN) OPERATING ACTIVITIES
   Depreciation, depletion and amortization                   253,440         294,864         169,770
   Electric regulatory amortizations                                -        (40,005)        (10,273)
   Deferred income tax                                        109,744        (85,936)         146,859
   Income from equity investments                            (15,347)         (5,841)               -
   Dividends from equity investments                            9,368           4,219               -
CHANGES IN ASSETS AND LIABILITIES
   Accounts receivable                                      (132,114)        (81,024)           8,334
   Materials and supplies, fuel oil and gas in storage        (9,789)        (63,195)          14,391
   Accounts payable and accrued expenses                       83,493         132,028        (54,835)
   Interest accrued                                             8,128       (151,268)         (2,624)
   Special deposits                                            52,373        (41,040)        (58,159)
   Pensions and other post retirement benefits               (22,000)       (283,774)               -
   Other                                                      (6,902)          27,617          98,381
                                                          -----------     -----------     -----------
Net Cash Provided by (Used in) Operating Activities           589,005       (460,288)         674,084
                                                          -----------     -----------     -----------
INVESTING ACTIVITIES
Capital expenditures                                        (725,670)       (676,563)       (297,230)
Net cash from KeySpan Acquisition                                   -         165,168               -
Net proceeds from LIPA Transaction                                  -       2,314,588               -
Other                                                          30,006          13,466        (31,987)
                                                          -----------     -----------     -----------
Net Cash (Used in) Provided by Investing Activities         (695,664)       1,816,659       (329,217)
                                                          -----------     -----------     -----------
FINANCING ACTIVITIES
Proceeds from sale of common stock                                  -          10,170          43,218






Treasury stock purchased                                    (299,243)       (423,716)               -
Issuance of preferred stock                                         -          84,973               -
Issuance of notes payable                                     208,300               -               -
Issuance of long-term debt                                    102,648         112,535               -
Payment of long-term debt                                   (442,475)       (103,000)         (2,050)
Preferred stock dividends paid                               (34,760)        (28,604)        (51,833)
Common stock dividends paid                                 (249,567)       (210,177)       (215,790)
Other                                                           7,582        (36,695)         (2,032)
                                                          -----------     -----------     -----------
Net Cash (Used in) Financing Activities                     (707,515)       (594,514)       (228,487)
                                                          -----------     -----------     -----------
Net (Decrease) Increase in Cash and Cash   Equivalents      (814,174)         761,857         116,380
                                                          ===========     ===========     ===========
Cash and cash equivalents at beginning of period      $       942,776  $      180,919   $      64,539
Net (Decrease) Increase in cash and cash equivalents        (814,174)         761,857         116,380
                                                          -----------     -----------     -----------
Cash and Cash Equivalents at End of Period            $       128,602  $      942,776   $     180,919
                                                          ===========     ===========     ===========
Interest paid                                         $       109,614  $      125,914   $     364,864
Income tax paid                                       $        38,700  $       94,680   $     108,980
</TABLE>

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

                                              42

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A.  ORGANIZATION OF THE COMPANY

KeySpan Corporation, d/b/a KeySpan Energy (the "Company" or "KeySpan Energy") is
a holding  company  operating  two  utilities  that  distribute  natural  gas to
approximately 1.6 million customers in New York City and on Long Island,  making
it the fourth  largest  gas-distribution  company in the  United  States.  Other
KeySpan  Energy  companies  market a  portfolio  of gas-  marketing  and energy-
related services in the Northeast, own and operate electric-generation plants in
New York City and on Long Island, and provide operating and customer services to
approximately 1.1 million electric  customers of the Long Island Power Authority
("LIPA").  The Company's other energy  activities  include:  gas exploration and
production, primarily through The Houston Exploration Company ("THEC"); domestic
pipelines and storage; and international activities, including gas processing in
Canada, and gas pipelines and local distribution in Northern Ireland.  (See Note
2, "Business Segments" for additional information on each operating segment.)

The Company is the successor to Long Island  Lighting  Company  ("LILCO"),  as a
result of a  transaction  with LIPA (the "LIPA  Transaction")  and following the
acquisition (the "KeySpan  Acquisition") of KeySpan Energy Corporation  ("KSE").
On May 28, 1998, the Company completed two business  combinations as a result of
which  it  (i)  became  the  successor  operator  of  the  non-nuclear  electric
generating  facilities,  gas  distribution  operations and common plant formerly
owned by LILCO and entered  into  long-term  service  agreements  to operate the
electric transmission and distribution ("T&D") system acquired by LIPA; and (ii)
acquired KSE, the parent  company of The Brooklyn  Union Gas Company  ("Brooklyn
Union").  (See Note 14, "Sale of LILCO  Assets,  Acquisition  of KeySpan  Energy
Corporation and Transfer of Assets and Liabilities to the Company".)

B.  BASIS OF PRESENTATION

The Consolidated  Financial  Statements presented herein reflect the accounts of
the Company and its subsidiaries.  Most of the Company's  subsidiaries are fully
consolidated  in the  financial  information  presented,  except for  subsidiary
investments in the Energy Related  Investment segment which are accounted for on
the equity method as the Company does not have a controlling  voting interest or
otherwise  have  control  over  the  management  of  investee   companies.   All
significant intercompany transactions have been eliminated.

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

The financial  statements  presented  herein include the year ended December 31,
1999, the nine

                                        1

<PAGE>



month period April 1, 1998 through December 31, 1998 (the "Transition  Period"),
and the fiscal year ended March 31,  1998.  For  financial  reporting  purposes,
LILCO  is  deemed  the  acquiring  company  pursuant  to a  purchase  accounting
transaction, in which KSE was acquired.  Consequently,  financial results of the
Company prior to May 29, 1998 reflect those of LILCO only. Since the acquisition
of  KSE  was  accounted  for  as a  purchase,  related  accounting  adjustments,
including  goodwill,  have been  reflected in the financial  statements  herein.
Further,  in September 1998, the Company changed its fiscal year end to December
31.

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  Company's  accounting  records for its two  regulated gas utilities and its
generation  subsidiaries are maintained in accordance with the Uniform System of
Accounts  prescribed by the Public  Service  Commission of the State of New York
("NYPSC") and the Federal Energy Regulatory  Commission ("FERC"),  respectively.
However, the Company's electric generation subsidiaries are not subject to NYPSC
rate  regulation,  but  they  are  subject  to FERC  regulation.  The  Company's
financial  statements  reflect  the  ratemaking  policies  and  actions of these
regulators in conformity  with  generally  accepted  accounting  principles  for
rate-regulated enterprises.

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



                                        2

<PAGE>



The following table presents the Company's net regulatory assets at December 31,
1999 and December 31, 1998.

                                                   (IN THOUSANDS OF DOLLARS)

                                           December 31, 1999  December 31, 1998
------------------------------------------ -------------------- ---------------
Regulatory Assets
   Regulatory tax asset                    $             65,462 $       68,780
   Property taxes                                        40,434         12,792
   Environmental costs                                   95,627        100,505
   Postretirement benefits other than pensions           48,553         51,788
   Costs associated with the KeySpan Acquisition         69,091         45,659
Total Regulatory Assets                    $            319,167 $      279,524
Regulatory Liability                                     26,618         27,854
Total Net Regulatory Assets                $            292,549 $      251,670
========================================== ==================== ================

The  regulatory  assets  above are not  included  in the  Company's  rate  base.
However,  the Company  records  carrying  charges on the  property tax and costs
associated  with the KeySpan  Acquisition  deferrals.  The Company  also records
carrying charges on its regulatory  liability.  The remaining  regulatory assets
represent,  primarily,  costs for which expenditures have not yet been made, and
therefore, carrying charges are not recorded. The Company anticipates recovering
these costs in its gas rates  concurrently  with future  cash  expenditures.  If
recovery is not concurrent with the cash  expenditures,  the Company will record
the appropriate level of carrying charges.

The  Company  estimates  that full  recovery of its  regulatory  assets will not
exceed 15 years,  except for the tax  regulatory  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 the Company to recover its costs in the future, all or a portion
of the Company's  regulated  operations  may no longer meet the criteria for the
application  of SFAS No. 71. In that event,  a write-down of all or a portion of
the Company's  existing  regulatory  assets and liabilities could result. If the
Company had been unable to  continue to apply the  provisions  of SFAS No. 71 at
December 31, 1999, the Company would have applied the provisions of SFAS No. 101
"Regulated  Enterprises - Accounting for the  Discontinuation  of Application of
FASB  Statement  No. 71". The Company  estimates  that the  write-off of its net
regulatory  asset  could  result in a charge to net income of $190.2  million or
$1.37 per share after-tax,  which would be classified as an extraordinary  item.
In management's opinion, the Company's regulated subsidiaries will be subject to
SFAS No. 71 for the foreseeable future.

As part of the LIPA  Transaction,  the Company has entered into various  service
agreements  with LIPA that  prescribe  the  conduct  of the  Company's  electric
operations. These agreements allow the

                                        3

<PAGE>



Company to recover its costs incurred to service the agreements and  potentially
allow the  Company to earn a certain  level of profit.  The  Company's  electric
operations,  other than the generation function which is FERC regulated,  are no
longer  subject  to rate  regulation  and,  as a result,  the  Company no longer
applies SFAS No. 71 to certain of its electric operations.

D.  REVENUES

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

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

The gas utility tariffs contain 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.

Electric revenues since the LIPA Transaction are primarily derived from billings
to  LIPA  for  management  of  LIPA's  T&D  system,  electric  generation,   and
procurement of fuel. In addition,  electric  revenues also include revenues from
the Company's  investment in the 2,168 megawatt  Ravenswood  electric generation
facility  ("Ravenswood  Facility") which the Company acquired in June 1999. (See
Note 9,  "Contractual  Obligations and  Contingencies"  for a description of the
Ravenswood transaction.)

The  agreements  with LIPA include  provisions  for the Company to earn,  in the
aggregate,  approximately  $11.5  million per year (plus up to an  additional $5
million per year if certain  cost  savings are  achieved)  in annual  management
service  fees  from  LIPA for the  management  of the LIPA  T&D  system  and the
management of all aspects of fuel and power supply.  Costs in excess of budgeted
levels are assumed by the Company up to $15 million,  while cost  reductions  in
excess of $5 million from budgeted levels are shared with LIPA. These agreements
also contain  certain non- cost  incentive  and penalty  provisions  which could
impact  earnings.  Billings  associated  with  generation  capacity are based on
pre-determined  levels  of supply to be  dispatched  to LIPA on a yearly  basis.
Rates  charged to LIPA  include  fixed and  variable  components.  The  variable
component is billed to LIPA on a monthly basis and is dependent on the amount of
megawatt  hours  dispatched.  In  addition,  billings  related to  transmission,
distribution  and delivery  services are based, in part, on negotiated  budgeted
levels.

The  Company  currently  sells the energy  produced by the  Ravenswood  Facility
through daily and/or

                                        4

<PAGE>



hourly bidding into the New York  Independent  System Operator  ("NYISO") energy
markets.  Revenues are recorded  when the energy is sold to the NYISO.  Further,
the Company currently has a capacity  contract with Consolidated  Edison Company
of New York,  Inc.  ("Con  Edison"),  which provides Con Edison with 100% of the
available  capacity of the Ravenswood  Facility.  Capacity charges are billed to
Con  Edison on a monthly  fixed-fee  basis in  accordance  with the terms of the
capacity  contract.  The Company  anticipates  that this contract will expire on
April 30, 2000, at which time the available capacity of the Ravenswood  Facility
will be bid into on the auction process conducted by the NYISO.

Prior  to the  LIPA  Transaction,  electric  revenues  were  comprised  of cycle
billings  rendered to residential,  commercial and industrial  customers and the
accrual of electric  revenues for services  rendered to customers  not billed at
month-end.   In  addition,   LILCO's  rate  structure  provided  for  a  revenue
reconciliation  mechanism  which  eliminated  the impact on earnings of electric
sales that were above or below the levels reflected in rates. Moreover,  LILCO's
electric tariff  included a fuel cost  adjustment  ("FCA") clause which provided
for the  disposition  of the  difference  between actual fuel costs and the fuel
costs allowed in base tariff rates.  LILCO deferred these  differences to future
periods for recovery from or refund to customers,  except for base electric fuel
costs in excess of actual  electric fuel costs,  which were credited to the Rate
Moderation Component ("RMC") as incurred.

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.  As part of the LIPA Transaction,  all T&D assets were sold
to LIPA,  and as a result,  all costs  incurred  under the  Management  Services
Agreement in  connection  with the  Company's  provision of services for the T&D
system subsequent to May 28, 1998 are expensed and charged to LIPA. As a result,
electric  depreciation now consists of depreciation of the non-nuclear  electric
generating facilities formerly owned by LILCO and the Ravenswood Facility.

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

               Period                              Electric      Gas
               -------                             --------      ---
        Year Ended December 31, 1999               3.56%         2.85%
        Nine Months Ended December 31, 1998        2.54%         2.07%
        Fiscal Year Ended March 31, 1998           3.20%         2.06%




                                        5

<PAGE>




F.  GAS EXPLORATION AND PRODUCTION PROPERTY - DEPLETION

The full cost method of  accounting is used for  investments  in natural gas and
oil properties.  Under this method,  all costs of  acquisition,  exploration and
development  of natural gas and oil reserves are  capitalized  into a "full cost
pool" as  incurred,  and  properties  in the pool are  depleted  and  charged to
operations  using the  unit-of-production  method  based on the ratio of current
production to total proved natural gas and oil reserves. To the extent that such
capitalized costs (net of accumulated  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 from  operating  activities.  Once  incurred,  such
impairment  of gas  properties  is not  reversible  at a later  date even if gas
prices  increase.  In December  1998,  THEC, the Company's 64% owned gas and oil
exploration and production subsidiary, recorded a $130 million write-down to its
investment  in its proved gas reserves,  which is reflected in the  accompanying
financial statements

As of December 31, 1999, THEC estimates, using prices in effect as of such date,
that the ceiling  limitation  imposed under full cost accounting  rules exceeded
actual capitalized costs.

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

G.  HEDGING AND DERIVATIVE FINANCIAL INSTRUMENTS

Commodity  Derivatives:  The Company's utility,  marketing subsidiaries and THEC
employ, from time to time, derivative financial instruments to hedge exposure in
cash  flows due to  fluctuations  in the price of  natural  gas.  The  Company's
hedging  strategies meet the criteria for hedge accounting  treatment under SFAS
No. 80,  "Accounting for Futures  Contracts."  Accordingly,  gains and losses on
these  instruments  are  recognized  concurrently  with the  recognition  of the
related physical transactions.

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

Interest  Rate   Derivatives:   The  Company   continually   assesses  the  cost
relationship between fixed and variable rate debt. In line with its objective to
minimize   capital  costs,   the  Company   periodically   enters  into  hedging
transactions  that effectively  convert the terms of underlying debt obligations
from fixed to  variable  and/or  variable  to fixed.  Monthly  payments  made or
received are  recognized as an adjustment  to interest  expense as incurred.  In
addition,  the Company also enters into hedges to fix the rate on commitments to
issue debt securities prior to the actual financing.

                                        6

<PAGE>



Hedging  transactions  that  effectively  convert the terms of  underlying  debt
obligations  from fixed to  variable  and/or  variable  to fixed are  considered
fair-value hedges. All of the Company's other derivative  financial  instruments
are,  and will  continue to be  classified  as  cash-flow  hedges.  As a result,
implementation  of SFAS No. 133,  "Accounting  for  Derivative  Instruments  and
Hedging  Activities," when adopted, is not expected to have a material effect on
the Company's net income,  but could have a significant  effect on comprehensive
income because of fluctuations  in the market value of the derivatives  employed
for hedging certain risks.  Under SFAS No. 133, periodic changes in market value
are  recorded  as  comprehensive  income,  subject  to  effectiveness,  and then
included in net income to match the underlying transactions.

H.  EQUITY INVESTMENTS

Certain  subsidiaries  own as  their  principal  assets  investments,  including
goodwill,  representing  ownership  interests  of 50% or less in  energy-related
businesses that are accounted for under the equity method.

I.  INCOME TAX

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

J.  SUBSIDIARY COMMON STOCK ISSUANCES TO THIRD PARTIES

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

K.  FOREIGN CURRENCY TRANSLATION

The  Company  follows  the  principles  of  SFAS  No.  52,   "Foreign   Currency
Translation,"  for recording its investments in foreign  affiliates.  Under this
statement,  all  elements of  financial  statements  are  translated  by using a
current exchange rate.  Translation  adjustments result from changes in exchange
rates from one reporting  period to another.  At December 31, 1999,  the foreign
currency  translation  adjustment was included in comprehensive  income and as a
separate component of shareholders' equity.

L.  GOODWILL

At December 31, 1999, the Company has recorded  goodwill in the amount of $255.8
million,  representing the excess of acquisition cost over the fair value of net
assets acquired. Goodwill is

                                        7

<PAGE>



amortized  over  15 to  40  years.  The  Company's  recorded  goodwill,  net  of
accumulated amortizations,  consists of approximately $164.1 million relating to
the  KeySpan   Acquisition  and  approximately  $91.7  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 and
Canada which are accounted for under the equity method.

M.  RECENT ACCOUNTING PRONOUNCEMENTS

In June 1999, the Financial  Accounting Standards Board ("FASB") issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective  Date of SFAS No. 133." SFAS No. 137 defers the effective  date of
SFAS No. 133 to fiscal years  beginning  after July 15,  2000.  The Company will
therefore, adopt SFAS No. 133 in the first quarter of fiscal year 2001. SFAS No.
133 establishes  accounting and reporting  standards for derivative  instruments
and for hedging activities. It requires that an entity recognize all derivatives
as either  assets or  liabilities  in the  statement of  financial  position and
measure those  instruments at fair value.  As previously  mentioned,  all of the
Company's  derivative  financial  instruments,  except for certain interest rate
swaps, are and will continue to be classified as cash-flow  hedges. As a result,
implementation of SFAS No. 133 when adopted,  is not expected to have a material
effect on the  Company's  net  income,  but could have a  significant  effect on
comprehensive  income  because  of  fluctuations  in  the  market  value  of the
derivatives  employed for hedging  certain risks.  Under SFAS No. 133,  periodic
changes  in market  value are  recorded  as  comprehensive  income,  subject  to
effectiveness,  and  then  included  in  net  income  to  match  the  underlying
transactions.


NOTE 2. BUSINESS SEGMENTS

The Company has six reportable  segments:  Gas Distribution,  Electric Services,
Gas  Exploration  and  Production,   Energy  Related  Services,  Energy  Related
Investments and Other.

The Gas  Distribution  segment  consists of the Company's  two gas  distribution
subsidiaries.  Brooklyn Union provides gas distribution services to customers in
the New York City boroughs of Brooklyn,  Queens and Staten  Island,  and KeySpan
Gas East d/b/a Brooklyn Union of Long Island  ("Brooklyn  Union of Long Island")
provides gas  distribution  services to customers in the Long Island counties of
Nassau and Suffolk and the Rockaway Peninsula of Queens County.

The Electric Services segment consists of Company  subsidiaries that operate the
electric T&D system owned by LIPA, own and sell capacity and energy to LIPA from
the  Company's  generating  facilities  located on Long  Island and manage  fuel
supplies  for LIPA to fuel  the  Company's  Long  Island  generating  facilities
through  long-term  service  contracts  that have terms that range from eight to
fifteen years, as well as, Company  subsidiaries that own, lease and operate the
2,168 megawatt  Ravenswood  Facility,  located in Long Island City, Queens. (See
Note 9,  "Contractual  Obligations and  Contingencies"  for a description of the
Ravenswood  transaction.)  Currently,  the Company's primary electric generation
customers are LIPA and Con Edison.

                                        8

<PAGE>



The Gas Exploration and Production segment is engaged in gas and oil exploration
and production,  and the development and acquisition of domestic natural gas and
oil  properties.  This segment  consists of the Company's 64% equity interest in
THEC, an independent natural gas and oil exploration company, as well as KeySpan
Exploration and Production LLC, the Company's wholly owned subsidiary engaged in
a joint  venture  with THEC.  In  September  1999,  the Company and THEC jointly
announced  their intention to begin a process to review  strategic  alternatives
for THEC.  The  process  included an  assessment  of the role of THEC within the
Company's  strategic  plans,  including the possible sale of all or a portion of
THEC by the Company.  After completing the review, the Company concluded that it
would retain its equity interest in THEC.  Further,  under a pre-existing credit
arrangement,  approximately $80 million in debt owed by THEC to the Company will
be converted  into common equity on April 1, 2000.  The Company's  common equity
ownership  interest  in THEC  will  increase  to  approximately  70%  upon  such
conversion.  The Company will commit  approximately  $25 million to the drilling
program with THEC in 2000, which may be terminated,  upon notice,  at the option
of either party.

The Company's Energy Related Services segment primarily  includes KeySpan Energy
Management  Inc.  ("KEM"),   KeySpan  Energy  Services  Inc.  ("KES"),   KeySpan
Communications  Corporation,  KeySpan Energy  Solutions,  LLC ("KESol"),  Fritze
KeySpan,  LLC ("Fritze"),  and Delta KeySpan Inc.  ("Delta").  KEM owns, designs
and/or  operates  energy systems for  commercial  and  industrial  customers and
provides  energy-related  services to clients located  primarily  within the New
York City  metropolitan  area.  KES markets gas and  electricity,  and  arranges
transportation  and related  services,  largely to retail  customers,  including
those  served  by the  Company's  two  gas  distribution  subsidiaries.  KeySpan
Communications  Corporation  owns a fiber optic  network on Long Island.  KESol,
Fritze  and  Delta  provide  various  appliance,  heating,  ventilation  and air
conditioning  ("HVAC")  services  to  customers  within  the  Company's  service
territory,  New Jersey and Rhode Island.  KESol was  established  in April 1998,
Fritze was acquired in November  1998 and Delta was acquired in September  1999.
Further, in February 2000, the Company acquired three additional companies.  The
newly acquired companies include, an engineering-consulting firm, a plumbing and
mechanical  contracting firm, and a firm specializing in mechanical  contracting
and HVAC.

Subsidiaries  in the Energy  Related  Investments  segment  include a 20% equity
interest  in the  Iroquois  Gas  Transmission  System LP; a 50%  interest in the
Premier  Transco  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 owned jointly with Gulf Canada  Resources  Limited,  through the
Gulf Midstream Services  Partnership  ("GMS").  These subsidiaries are accounted
for under the equity method since the Company's  ownership  interests are 50% or
less.  Accordingly,  equity income from these  investments is reflected in other
income and (deductions) in the Consolidated Income Statement.

The Other segment represents primarily,  preferred stock dividends,  unallocated
administrative   expenses  and  interest   income   earned  on  temporary   cash
investments.  In 1999, all preferred stock dividends were allocated to the Other
segment whereas,  prior to the LIPA Transaction,  preferred stock dividends were
allocated to gas and electric operations.

                                        9

<PAGE>



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

                                       10

<PAGE>
<TABLE>
<CAPTION>




YEAR ENDED DECEMBER 31, 1999                                                    (IN THOUSANDS OF DOLLARS)
======================================================================================================================
                                                           Energy      Energy
                      Gas       Electric   Gas Exploration Related     Related
                  Distribution  Services   and Production  Services  Investments    Other     Eliminations Consolidated
======================================================================================================================
<S>                  <C>         <C>        <C>           <C>        <C>          <C>                     <C>
Revenues             $1,753,132  $ 861,582  $     150,581 $  188,630 $        688 $        - $          - $     2,954,613
----------------------------------------------------------------------------------------------------------------------
Purchased gas           702,044          -              -     42,388            -          -            -         744,432

Fuel and purchased
  power                       -     17,252              -          -            -          -            -          17,252

Operations and
  maintenance           405,095    479,149         27,662    145,929        7,560     25,771            -       1,091,166

Depreciation, depletion
  and amortization      102,997     44,334         74,051      3,757        1,099     27,202            -         253,440

Operating taxes         223,793    132,327            338          3            8      9,685            -         366,154

Intercompany billings    10,793     48,580              -          -            -    (59,373)           -               -
-----------------------------------------------------------------------------------------------------------------------
Total expenses      $ 1,444,722  $ 721,642  $     102,051 $  192,077 $      8,667 $    3,285 $          - $     2,472,444
-----------------------------------------------------------------------------------------------------------------------
Operating income
   (loss)            $  308,410  $ 139,940  $      48,530 $   (3,447)$     (7,979)$   (3,285)$          - $       482,169
======================================================================================================================
Earnings (loss) for
  common stock       $  151,217  $  77,099  $      15,772 $   (1,298)$      7,753 $  (26,684)$          - $       223,859
======================================================================================================================
Basic and diluted EPS $    1.09  $    0.56  $        0.11 $   (0.01) $       0.06 $   (0.19) $          - $          1.62
======================================================================================================================
Additional Information:

Interest income           3,942          -              -          -        5,016     19,393       (1,358)         26,993

Interest expense         83,000     22,380         13,307          -        3,726     91,563      (89,284)        124,692

Income from equity
  method subsidiaries         -          -              -          -       15,347          -            -          15,347

Total assets          3,774,563  1,267,931        646,657    202,124      503,549  2,584,674   (2,248,807)      6,730,691

Investment in equity
  method subsidiaries         -          -              -     13,393      341,874      4,016            -         359,283

Capital expenditures    213,845    245,177        183,322     20,605       49,427     13,294            -         725,670
======================================================================================================================
</TABLE>

        Electric  Services  revenues  from,  primarily  LIPA and Con Edison,  of
        $858.8  million  for  the  year  ended  December  31,  1999,  represents
        approximately  29% of the Company's  consolidated  revenues  during that
        period.

        Eliminating items include  intercompany  interest income and expense and
the elimination of certain intercompany accounts receivable.


                                       11

<PAGE>


<TABLE>
<CAPTION>

NINE MONTHS ENDED DECEMBER 31, 1998                                             (IN THOUSANDS OF DOLLARS)
======================================================================================================================
                                                          Energy    Energy
                     Gas        Electric  Gas Exploration Related    Related
                  Distribution  Services  and Production  Services Investments   Other    Eliminations Consolidated
======================================================================================================================
<S>                 <C>                  <C>            <C>                                          <C>
Revenues            $ 856,172$   738,316 $       70,812 $  63,064$       117$          $ -          -$   1,728,481
----------------------------------------------------------------------------------------------------------------
Purchased gas         318,703          -              -    12,987          -          -             -      331,690

Fuel and purchased
  power                     -     91,762              -         -          -          -             -       91,762

Operations and
  maintenance         280,442    337,898         15,879    54,152      3,750     21,713             -     713,834*

Depreciation, depletion
  and amortization     57,351      5,895         47,114     1,117        256     13,126             -     124,859*

Operating taxes       121,280    126,015            373       722          1      8,733             -      257,124

Intercompany billings   7,221     23,922              -         -          -    (31,143)            -            -

Total expenses      $ 784,997$   585,492$        63,366$   68,978$     4,007$    12,429$            -$   1,519,269
----------------------------------------------------------------------------------------------------------------
Operating income
     (loss)         $  71,175$   152,824$         7,446$   (5,914)$    (3,890)$ (12,429)$           -$     209,212
----------------------------------------------------------------------------------------------------------------
Earnings (loss) for
common stock before
special charges     $   8,582 $   57,119 $        2,218 $   (3,212)$    (4,186)$   2,463            -$      62,984*
----------------------------------------------------------------------------------------------------------------
Basic and diluted
    EPS             $    0.06$      0.39 $         0.02$     (0.03)$           $    0.02 $          -$        0.43*
----------------------------------------------------------------------------------------------------------------
Additional Information:

Interest income         1,328          -              -          -           -    49,200         (424)      50,104

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

Income  from equity
  method subsidiaries       -          -              -          -       5,841         -            -        5,841

Total assets        3,452,361    693,162        500,162    116,771     429,157 4,439,307    2,735,818)   6,895,102

Investment in equity
  method subsidiaries       -          -              -          -     289,193         -            -      289,193

Capital expenditures  128,405     54,090        182,729     28,421     231,791    51,127            -      676,563
----------------------------------------------------------------------------------------------------------------
        *Excludes non-recurring charges associated with the LIPA Transaction and
        special  charges.  Total  non-recurring  and special charges were $258.5
        million  after-tax.  See Note 15 - Costs Related to the LIPA Transaction
        and Special Charges.

        Electric  Services  revenues  from  LIPA of $408.3  million,  represents
        approximately  24% of the Company's  consolidated  revenues for the nine
        months ended December 31, 1998.

          Eliminating items include intercompany interest income and expense and
          the   elimination  of  certain   intercompany   accounts   receivable.
          ----------------------------------------------------------------------

</TABLE>

                                       12

<PAGE>



FISCAL YEAR ENDED MARCH 31, 1998 (IN THOUSANDS OF DOLLARS)

                                     Electric
                  Gas Distribution  Distribution  Consolidated
-----------------------------------------------------------
Revenues          $      645,659$   2,478,435$    3,124,094
-----------------------------------------------------------
Purchased gas            299,469            -       299,469

Fuel and purchased
  power                        -      658,338       658,338

Operations and
  maintenance            107,221      403,944       511,165

Depreciation and
  amortization            38,584      144,545       183,129

Operating taxes           77,734      388,592       466,326

Total expenses    $      523,008$   1,595,419$    2,118,427
-----------------------------------------------------------
Operating income  $      122,651$     883,016$    1,005,667
-----------------------------------------------------------
Earnings for common
  stock           $       33,815$     276,612$      310,427
-----------------------------------------------------------
Basic and diluted $PS       0.28$        2.28$         2.56
-----------------------------------------------------------
Additional Information:
Interest income              923        6,099         7,022
Interest expense          52,409      352,064       404,473
Total assets           1,444,745   10,455,980    11,900,725
Capital expenditures     78, 897      218,333       297,230
-----------------------------------------------------------





NOTE 3. INCOME TAX

The Company  will file  consolidated  federal  and state  income tax returns for
calendar  year  1999.  A tax  sharing  agreement  between  the  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.

In 1998,  the Company  incurred  tax net  operating  losses  ("NOL") for federal
purposes  of $148.9  million and for state  purposes  of $211.0  million for the
period May 29, 1998 through  December 31, 1998, which can be carried forward for
twenty years or until 2017.  In accordance  with SFAS No. 109 - "Accounting  For
Income  Taxes," the Company  believed  that it was more likely than not that the
tax benefits of these losses would be realized.  Therefore, in 1998 deferred tax
assets and related tax benefits for the tax effect of the NOL carryforwards were
recorded by the Company ($52.1 million for federal income tax purposes and $19.0
million for state income tax purposes).

The Company  estimates that the benefits  associated with the NOL  carryforwards
from 1998, $57.4 million ($52.1 million for federal income tax purposes and $5.3
million for state  income tax  purposes),  will be realized in its  consolidated
1999 federal and state income tax returns.

                                       13

<PAGE>



Accordingly,  the NOL benefits have been applied in the 1999 current federal and
state tax provisions.

Income tax  expense  (benefit)  is  reflected  as  follows  in the  Consolidated
Statement of Income:

                                                       (IN THOUSANDS OF DOLLARS)
--------------------------------------------------------------------------------
                                                 Nine Months
                               Year Ended           Ended      Fiscal Year Ended
                            December 31, 1999  December 31, 1998  March 31, 1998
--------------------------------------------------------------------------------
Current  income tax             $     26,618 $       26,142$           85,794
Deferred  income tax                 109,744        (85,936)          146,859
--------------------------------------------------------------------------------
                                     136,362        (59,794)          232,653
--------------------------------------------------------------------------------
Current - transaction related (1)          -        291,365                 -
Deferred - transaction related (2)         -       (391,066)                -
--------------------------------------------------------------------------------
                                           -        (99,701)                -
--------------------------------------------------------------------------------
Total  income tax (benefit)   $      136,362 $     (159,495$          232,653
----------------------------- -------------- --------------------------------

(1)  Primarily  represents  income taxes associated with the sale of assets (the
     "Transferred  Assets") to the Company by LIPA, which taxes were paid by the
     Company,  partially  offset by tax  benefits  recognized  upon  funding  of
     postretirement benefits.

(2)  Primarily represents the deferred federal income taxes necessary to account
     for the  difference  between the carryover  basis of the assets sold to the
     Company for financial reporting purposes and the new increased tax basis.


The  components  of  deferred  tax assets  and  (liabilities)  reflected  in the
Consolidated Balance Sheet are as follows:

                                                       (IN THOUSANDS OF DOLLARS)
--------------------------------------------------------------------------------
                                        December 31, 1999    December 31, 1998
-------------------------------------- -------------------- -------------------
Reserves not currently deductible      $             35,569 $            37,833
Benefits of tax loss carryforwards                   13,694              71,096
Property related differences                       (155,063)            (89,934)
Regulatory tax asset                                (22,912)            (24,073)
Property taxes                                      (49,172)            (34,541)
Other items - net                                    (8,348)            (31,929)
--------------------------------------------------------------------------------
Net deferred tax liability             $           (186,230)$           (71,549)
--------------------------------------------------------------------------------



                                       14

<PAGE>



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

<TABLE>
<CAPTION>
                                                             (IN THOUSANDS OF DOLLARS)
---------------------------------------------------------------------------------------
                                                           Nine Months      Fiscal Year
                                           Year Ended         Ended            Ended
                                          December 31,     December 31,      March 31,
                                              1999             1998             1998
------------------------------------------------------------------------------------------
<S>                                     <C>                     <C>       <C>
Computed at the statutory rate          $        138,241        $(114,249)$        208,213
Adjustments related to:
     Net benefit from LIPA Transaction (1)             -          (31,503)               -
     Tax credits                                  (2,154)          (1,809)          (2,464)
     Excess of book over tax depreciation              -            2,859           17,912
     Minority interest in THEC                     3,105          (10,220)               -
     Other items - net                            (2,830)          (4,573)           8,992
-----------------------------------------------------------------------------------------
        Total income tax (benefit)      $        136,362        $(159,495)$        232,653
=========================================================================================
        Effective income tax rate                    35%              N/A              39%
-----------------------------------------------------------------------------------------
</TABLE>

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


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



                                       15

<PAGE>



NOTE 4.  POSTRETIREMENT BENEFITS

PENSION PLANS: The following information represents consolidated results for the
Company and its subsidiaries  (Brooklyn Union, Brooklyn Union of Long Island and
the former LILCO),  whose  noncontributory  defined  benefit pension plans cover
substantially  all  employees.  Benefits  are  based  on years  of  service  and
compensation. Funding for pensions is in accordance with requirements of federal
law and regulations. Prior to the KeySpan Acquisition, pension benefits had been
managed separately by the Company's regulated subsidiaries,  which were the only
subsidiaries  with defined benefit plans.  The Company is currently  integrating
its plans and allocations to individual business segments.

The amounts  presented are consolidated for periods  subsequent to May 28, 1998.
Prior to that date the  amounts  pertain  solely to the plan of LILCO.  Brooklyn
Union of Long  Island is  subject to certain  deferral  accounting  requirements
mandated by the NYPSC for pension costs and other postretirement benefit costs.

The calculation of net periodic pension cost follows:

                                                       (IN THOUSANDS OF DOLLARS)
--------------------------------------------------------------------------------
                            Year Ended      Nine Months Ended  Fiscal Year Ended
                          December 31, 1999  December 31, 1998    March 31, 1998
--------------------------------------------------------------------------------
Service cost, benefits earned
    during the period        $     38,372        $   24,608           $   21,114

Interest cost on projected
     benefit  obligation          106,888            66,341               56,379

Return on plan assets            (457,529)          (51,745)           (196,300)

Special termination charge (1)          -            61,558                    -

Net amortization and deferral     310,224           (33,942)             147,713
--------------------------------------------------------------------------------
Total pension cost           $     (2,045)       $   66,820           $   28,906
================================================================================
(1) Early retirement plan completed in December 1998.



                                       16

<PAGE>



The following  table sets forth the pension plans' funded status at December 31,
1999 and December 31, 1998.  Plan assets  principally are common stock and fixed
income securities.
<TABLE>

                                                       (IN THOUSANDS OF DOLLARS)
--------------------------------------------------------------------------------
                                         December 31, 1999     December 31, 1998
--------------------------------------------------------------------------------
Change in benefit obligation:
 <S>                                         <C>                  <C>
  Benefit obligation at beginning of period $   (1,650,120)      $    (825,159)

  Benefit obligation of acquisitions (1)           (11,700)           (674,100)

  Service cost                                     (38,372)            (24,608)

  Interest cost                                   (106,888)            (66,341)

  Amendments                                       (31,350)                  -

  Actuarial gain (loss)                            205,798             (61,929)

  Special termination benefits (2)                       -             (61,558)

  Benefits paid                                    102,817              63,575
--------------------------------------------------------------------------------
Benefit obligation at end of period             (1,529,815)         (1,650,120)
--------------------------------------------------------------------------------
Change in plan assets:

  Fair value of plan assets at
  beginning of period                            1,675,604             919,100

  Fair value of KSE plan assets                          -             754,127

  Actual return on plan assets                     457,529              51,745

  Employer contribution                             18,009              13,500

  Benefits paid                                   (102,817)            (62,868)
--------------------------------------------------------------------------------
Fair value of plan assets at end of period       2,048,325           1,675,604
---------------------------------------  -----------------  ------------------
  Funded status                                    518,510              25,484

  Unrecognized net (gain) from past experience
    different from that assumed and from
    changes in assumptions                        (667,652)           (158,103)

  Unrecognized prior service cost                   80,087              54,234

  Unrecognized transition obligation                 3,163               4,138
--------------------------------------------------------------------------------
Net accrued pension cost reflected
  on consolidated balance sheet             $      (65,892)      $     (74,247)
================================================================================
</TABLE>

(1) Reflects the Ravenswood acquisition in 1999 and the KSE-acquisition in 1998.
(2) Early retirement plan completed in December 1998.

--------------------------------------------------------------------------------
                                                  Nine Months       Fiscal Year
                                 Year Ended           Ended             Ended
                             December 31, 1999 December 31, 1998  March 31, 1998
--------------------------- ----------------- -----------------  ---------------
Assumptions:

   Obligation discount                7.50%             6.50%             7.00%

   Asset return                       8.50%             8.50%             8.50%

   Average annual increase in
       compensation                   5.00%             5.00%             4.50%

---------------------------  ---------------  -----------------  ---------------

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

OTHER  POSTRETIREMENT  BENEFITS:  RETIREE  HEALTH CARE AND LIFE  INSURANCE:  The
following  information  represents  consolidated results for the Company and its
subsidiaries  (Brooklyn  Union,  Brooklyn  Union of Long  Island  and the former
LILCO) who sponsor noncontributory defined benefit plans covering certain health
care and life  insurance  benefits for retired  employees.  The Company has been
funding a portion  of future  benefits  over  employees'  active  service  lives
through   Voluntary   Employee   Beneficiary    Association   ("VEBA")   trusts.
Contributions  to  VEBA  trusts  are  tax  deductible,  subject  to  limitations
contained in the Code.  Prior to the KeySpan  Acquisition  other  postretirement
benefits had been managed  separately by the Company's  regulated  subsidiaries,
which were the only  subsidiaries  with defined  benefit  plans.  The Company is
currently integrating its plans and allocations to individual business segments.

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

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

                                                                                (IN THOUSANDS OF DOLLARS)
-------------------------------------------------------------------------------------------------------------
                                                                       Nine Months
                                                Year Ended                Ended             Fiscal Year Ended
                                            December 31, 1999       December 31, 1998         March 31, 1998
---------------------------------------- ------------------------ ---------------------- ---------------------
<S>                                            <C>                    <C>                       <C>
Service cost, benefits earned
     during the period                         $    16,747            $     9,569               $  12,204

Interest cost on accumulated post-
     retirement benefit obligation                  42,616                 26,414                  27,328

Return on plan assets                              (97,452)               (13,857)                 (6,164)

Special termination charge (1)                           -                  3,073                       -

Net amortization and deferral                       64,039                (14,665)                (10,468)
-----------------------------------------------------------------------------------------------------------
Other postretirement benefit cost              $    25,950             $   10,534               $  22,900
---------------------------------------- ------------------ ---------------------- -----------------------

</TABLE>

(1)   Early retirement plan completed in December 1998.



                                       17

<PAGE>



The following table sets forth the plan's funded status at December 31, 1999 and
December 31,  1998.  Plan assets  principally  are common stock and fixed income
securities.

                                                   (IN THOUSANDS OF DOLLARS)
--------------------------------------------------------------------------------
                                            December 31, 1999  December 31, 1998
------------------------------------------ ------------------- -----------------
Change in benefit obligation:

  Benefit obligation at beginning of period  $   (728,255)      $   (358,941)

  Benefit obligation of acquisitions (1)           (3,075)          (226,645)

  Service cost                                    (16,747)            (9,569)

  Interest cost                                   (42,616)           (26,414)

  Plan participants' contributions                   (716)              (900)

  Amendments                                        8,631                  -

  Actuarial gain (loss)                           148,126           (121,228)

  Special termination benefits (2)                      -             (3,073)

  Benefits paid                                    32,599             18,515
--------------------------------------------------------------------------------
Benefit obligation at end of period              (602,053)          (728,255)
------------------------------------------ -------------- ------------------
Change in plan assets:

  Fair value of plan assets at
          beginning of period                     478,778            108,165

  Fair value of KSE plan assets                        -            113,917

  Actual return on plan assets                     97,452             13,857

  Employer contribution                             4,503            250,000

  Plan participants' contribution                     716                  -

  Benefits paid                                   (32,599)            (7,161)
--------------------------------------------------------------------------------
Fair value of plan assets at end of period        548,850            478,778
------------------------------------------ ------------------- ----------------
  Funded status                                   (53,204)          (249,477)

  Unrecognized net (gain) loss from past
     experience different from that
     assumed and from changes in assumptions      (66,318)           145,834

  Unrecognized prior service cost                  (8,477)               166
--------------------------------------------------------------------------------
Accrued benefit cost reflected on
  consolidated balance sheet                 $   (127,999)      $   (103,477)
------------------------------------------ ------------------- -----------------

(1) Reflects the Ravenswood acquisition in 1999 and the KSE-acquisition in 1998.
(2) Early retirement plan completed in December 1998.


<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
                                              Year Ended          Nine Months Ended       Fiscal Year Ended
                                           December 31, 1999       December 31, 1998        March 31, 1998
--------------------------------------- ---------------------- ------------------------ ----------------------
Assumptions:
<S>                                             <C>                     <C>                     <C>
 Obligation discount                            7.50%                   6.50%                   7.00%
 Asset return                                   8.50%                   8.50%                   8.50%
 Average annual increase in  compensation       5.00%                   5.00%                   4.50%
--------------------------------------- ---------------------- ------------------------ ----------------------
</TABLE>

The measurement of plan  liabilities  also assumes a health care cost trend rate
of 6% annually. A 1%

                                       18

<PAGE>



increase in the health care cost trend rate would have the effect of  increasing
the  accumulated  postretirement  benefit  obligation as of December 31, 1999 by
$80.9  million and the net periodic  health care expense by $8.1  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, 1999 by
$66.6 million and the net periodic health care expense by $6.7 million.

In 1993,  LILCO adopted the provisions of SFAS No. 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 will  reimburse the Company for costs  related to  postretirement
benefits of the electric  business unit  employees,  therefore,  the Company has
reclassified the regulatory asset for  postretirement  benefits  associated with
electric business unit employees to a deferred asset.

In 1994, LILCO established VEBA trusts for union and non-union employees for the
funding of costs collected in rates for postretirement  benefits. For the fiscal
year ended March 31,  1998,  the trusts were funded with a  contribution  of $21
million. In May 1998, an additional $250 million was funded into the trusts.

NOTE 5. CAPITAL STOCK

COMMON STOCK:  Currently the Company has 450,000,000 shares of authorized common
stock.  In 1998, the Company  initiated a program to repurchase a portion of its
outstanding  common  stock on the open  market.  As of December  31,  1999,  the
Company had  repurchased  25 million  common shares for $723.0  million.  During
1999,  the Company  purchased  1.9 million  shares for $52.5 million on the open
market for the  dividend  reinvestment  feature  of its  Investor  Program,  the
Employee Stock Discount  Purchase Plan for Employees,  and the Employee  Savings
Plan.

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

At December 31, 1999,  14,520,000  redeemable  shares of 7.95%  Preferred  Stock
Series AA par value  $25 was  outstanding  totaling  $363  million,  which has a
mandatory  redemption  requirement on June 1, 2000. The Company also has 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 93,390
shares  outstanding  of 6%  Preferred  Stock  Series A par  value  $100,  in the
aggregate totaling $84.3 million.




                                       19

<PAGE>



NOTE 6.  NONQUALIFIED STOCK OPTIONS

At December 31, 1999, the Company had  stock-based  compensation  plans that are
described below. Moreover,  under a separate plan, THEC has issued approximately
2.4 million stock options to key THEC employees.  The Company and THEC apply APB
Opinion  25,   "Accounting   for  Stock  Issued  to   Employees,"   and  related
Interpretations in accounting for their plans. Accordingly, no compensation cost
has been  recognized  for these fixed  stock  option  plans in the  Consolidated
Financial  Statements  since the exercise prices and market values were equal on
the grant dates. Had compensation  cost for these plans been determined based on
the fair value at the grant  dates for awards  under the plans  consistent  with
SFAS No. 123,  "Accounting  for  Stock-Based  Compensation,"  the  Company's net
income and earnings per share would have been decreased to the proforma  amounts
indicated below:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
                                                            Year Ended         Nine Months Ended
                                                         December 31, 1999     December 31, 1998
<S>                                      <C>                 <C>                  <C>
--------------------------------------------------------------------------------------------
Income (loss) available for
   common stock (000):                   As reported         $223,859             ($195,537)
                                         Proforma            $215,416             ($198,996)

Earnings per share:                      As reported           $1.62                ($1.34)
                                         Proforma              $1.56                ($1.37)
--------------------------------------------------------------------------------------------
</TABLE>

The weighted  average fair value of grants issued in 1999 was $3.65.  All grants
are  estimated on the date of the grant using the  Black-Scholes  option-pricing
model. The following weighted average assumptions were used for grants issued in
1999: dividend yield of 6.58%; expected volatility of 23.43%; risk free interest
rate of 5.72%;  and expected  lives of 6 years.  The weighted  average  exercise
price is $27.58 for the 1999 grants. There were no grants issued in 1998.

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

<TABLE>
<CAPTION>

--------------------------------------------------------------------------------
                                      Year Ended              Nine Months Ended
                                  December 31, 1999           December 31, 1998
---------------------------------------------------------------------------------
                                            Weighted Average            Weighted Average
Fixed Options                      Shares    Exercise Price    Shares    Exercise Price
------------------------------------------------------------------------------------
<S>                                 <C>         <C>          <C>            <C>
Outstanding at beginning of period  921,066     $30.80       992,300        $30.70

Granted during the year           4,149,000     $27.58         --            --

Exercised                            (2,666)    $27.75       (13,631)       $28.67

Forfeited                           (99,002)    $27.22       (57,603)       $29.45
--------------------------------------------------------------------------------
Outstanding at end of period      4,968,398     $28.18       921,066        $30.80
------------------------------------------------------------------------------------
Exercisable at end of period      3,638,448     $28.53       921,066        $30.80
---------------------------- -   -------------------------------------------------------
</TABLE>
<PAGE>




                     Weighted Average
 Number Outstanding  Remaining          Weighted Average   Number Exercisable
at December 31, 1999 Contractural Life  Exercise Price    at December 31, 1999
--------------------------------------------------------------------------------
     168,066          6 years             $27.00           168,066

    344,000           7 years             $30.50           344,000

     409,000          8 years             $32.63           409,000

    2,645,332         9 years             $27.88         2,306,312

    1,402,000        10 years             $27.03           411,070
--------------------------------------------------------------------------------
    4,968,398                                            3,638,448
--------------------------------------------------------------------------------

Prior to the KeySpan Acquisition, KSE had reserved for issuance 1,500,000 shares
of  nonqualified  stock  options  and had issued  426,000,  363,500  and 202,800
nonqualified stock options in November 1997, 1996 and 1995, respectively.  Under
the terms of the Merger  Agreement,  all options vested upon consummation of the
KeySpan Acquisition.

NOTE 7. LONG-TERM DEBT

GAS FACILITIES REVENUE BONDS:  Brooklyn Union can issue tax-exempt bonds through
the New York State Energy Research and Development Authority. Whenever bonds are
issued for new gas  facilities  projects,  proceeds  are  deposited in trust and
subsequently withdrawn to finance qualified  expenditures.  There are no sinking
fund  requirements  on any of the Company's Gas  Facilities  Revenue  Bonds.  At
December 31, 1999,  Brooklyn Union had $648.5 million of Gas Facilities  Revenue
Bonds outstanding. The interest rate on the variable rate series due December 1,
2020 is reset weekly and ranged from 1.97% to 5.35%  through  December 31, 1999,
at which time the average rate was 5.35%. At January 14, 2000, the interest rate
on the variable  rate series due December 1, 2020 was changed to an auction rate
with a standard auction period of seven days.

In November  1999,  the Company  entered into an interest rate swap agreement in
which $90 million of its Gas Facility Revenue Bonds,  6.75% Series A and B, were
effectively exchanged for floating rate debt. (See Note 10, "Hedging, Derivative
Financial Instruments and Fair Values.")

In December 1998, the Company  purchased a portfolio of securities  representing
direct purchase  obligations of the United States  Government.  These securities
were placed in trust,  irrevocably  dedicated  to the  repayment  of certain Gas
Facilities  Revenue Bonds,  thereby effecting an in- substance  defeasance.  The
in-substance defeasance,  of approximately $8.6 million,  represented $4 million
of outstanding  bonds of each of the 6.75% Series 1989A due February 1, 2024 and
6.75% Series 1989B due February 1, 2024 including interest.  The Company has not
been relieved of its

                                       21

<PAGE>



obligation  and  remains  the  primary  obligor  for this debt.  Therefore,  the
liability is recognized on the accompanying Consolidated Balance Sheet.

AUTHORITY FINANCING NOTES: The Company's electric generation subsidiary can also
issue  tax-  exempt  bonds  through  the New  York  State  Energy  Research  and
Development Authority.  At December 31, 1999, $66 million of Authority Financing
Notes were outstanding.

In October 1999, the Company issued $41.1 million of Authority  Financing  Notes
1999 Series A Pollution  Control  Revenue Bonds due October 1, 2028. The initial
interest  rate on these  bonds  was  established  at 3.95% and  applied  through
January  13,  2000.  Thereafter,  the  interest  rate will be reset  based on an
auction  procedure.  The proceeds  from this  issuance were used to extinguish a
portion  of the  Company's  obligation  under a  promissory  note to LIPA.  (See
"Promissory Notes" for additional information.)

The Company  also has  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 2.00% to 5.85% through  December 31,
1999 at which time the average rate was 5.85%.

PROMISSORY   NOTES:  In  accordance  with  the  LIPA  Agreement,   LIPA  assumed
substantially  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 the Company.  In accordance with the LIPA Agreement,
the  Company  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.

In October 1999, the Company extinguished its obligation under a promissory note
to LIPA, as previously  indicated,  relating to the 7.50% 1976A Series Pollution
Control Revenue Bonds due December 1, 2006 and the 7.80% 1979B Series  Pollution
Control  Revenue Bonds due December 1, 2009. The Company's  obligation for these
bonds of $47.2 million  consisted of the  principal  amount of $45.5 million and
$1.7  million of  interest  accrued and unpaid.  In  addition,  in June 1999 the
Company  extinguished its obligation under a promissory note to LIPA relating to
the 7.30%  Debentures  due July 15, 1999.  The  Company's  obligation  for these
debentures of $411.5 million  consisted of the principal  amount of $397 million
and $14.5  million of interest  accrued and unpaid.  The  carrying  value of the
promissory notes at December 31, 1999 was $602.4 million.

The  promissory  notes issued to LIPA included an allocation  for certain of the
Authority  Financing Notes. On March 1, 1999, LIPA converted the weekly variable
interest  rate  features  on the  Authority  Financing  Notes  Series  1993B due
November 1, 2023,  Series  1994A due October 1, 2024 and Series 1995A due August
1, 2025 to a fixed rate of 5.30%. In addition,  on March 1, 1999, LIPA converted
the annual  variable  interest rate features on the  Authority  Financing  Notes
Series 1985A

                                       22

<PAGE>



due March 1, 2016 and Series 1985B due March 1, 2016 to a fixed rate of 5.15%.


OTHER LONG-TERM DEBT: On February 1, 2000,  Brooklyn Union of Long Island issued
$400 million of 7.875 % Medium Term Notes due February 1, 2010. The net proceeds
from the issuance of these notes were used to repay the Company for its costs in
extinguishing  certain  promissory  notes  to LIPA,  as  previously  noted.  For
additional  information on Brooklyn Union of Long Island's issuance see Note 12,
"KeySpan Gas East Corporation Summary Financial Data".

THEC has an  unsecured  available  line of credit  with a  commercial  bank that
provides for a maximum commitment of $250 million subject to certain conditions,
which supports borrowings under a revolving loan agreement.  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.  THEC
borrowed $48 million under this facility  during 1999, and at December 31, 1999,
borrowings of $181 million were outstanding and $0.4 million was committed under
outstanding  letter of credit  obligations.  Borrowings under this facility bear
interest,  at THEC's option,  at rates indexed at a premium to the Federal Funds
rate or LIBOR rate, or based on the prime rate.  The weighted  average  interest
rate on this debt was 6.59% at December 31, 1999.  In addition,  at December 31,
1999,  THEC had $100  million  of  8.625%  Senior  Subordinated  Notes  due 2008
outstanding.  These notes were issued in a private  placement  in March 1998 and
are subordinate to borrowings under THEC's line of credit.

A subsidiary of the Energy Related  Investment  segment has a revolving 12 month
loan  agreement with a financial  institution  in Canada at the Canadian  Dollar
Deposit Offered Rate. During 1999,  borrowings under this agreement were US$13.5
million.  At December 31, 1999 borrowings of US$86.4 million were outstanding at
an  interest  rate  of  5.60%.  These  borrowings  were  used  to  fund  capital
expenditures.

DEBT MATURITY SCHEDULE: The Company does not have any long-term debt maturing in
the next five years.

NOTE 8.  NOTES PAYABLE

In November  1999,  the  Company  negotiated  a $700  million  revolving  credit
agreement,  with a one- year term and one-year renewal option, with a commercial
bank.  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.
This credit  facility is used to support the Company's  $700 million  commercial
paper  program.  The Company  began issuing  commercial  paper during the fourth
quarter of 1999.  The average daily  outstanding  balance during the quarter was
$199.2  million at a weighted  average  annualized  interest  rate of 6.54%.  At
December  31,  1999,  the  Company  had  $208.3  million  of  commercial   paper
outstanding at an

                                       23

<PAGE>



annualized  interest rate of 6.56%.  The proceeds  received from the issuance of
commercial  paper was used to repay  outstanding  borrowings under the Company's
previous  existing line of credit  (discussed  below) and for general  corporate
purposes.  During 2000, the Company  anticipates issuing commercial paper rather
than borrowing on the revolving credit agreement.

Prior to the new revolving credit  agreement and commercial  paper program,  the
Company  had an  available  unsecured  bank  line of  credit  of  $300  million.
Borrowings were made under this facility during the months of September, October
and November 1999. The average daily outstanding balance during these months was
$83.7 million at a weighted average annualized interest rate of 5.53%. This line
of  credit  was  terminated  upon  the  execution  of the new  revolving  credit
agreement.

NOTE 9. CONTRACTUAL OBLIGATIONS AND CONTINGENCIES

LEASE OBLIGATIONS:  Lease costs included in operation expense were $47.1 million
in 1999  reflecting,  primarily,  the Ravenswood  lease of $11.6 million and the
lease of the Company's Brooklyn headquarters of $11.3 million.  Lease costs also
include  leases  for  other  buildings,  office  equipment,  vehicles  and power
operated equipment. Lease costs for the nine months ended December 31, 1998 were
$28.9 million.  The future minimum lease payments under various  leases,  all of
which are operating leases,  are $51.8 million per year over the next five years
and $108.2 million, in the aggregate, for all years thereafter.

The Company  acquired the 2,168  megawatt  Ravenswood  Facility  located in Long
Island  City,   Queens,  New  York,  from  Con  Edison  on  June  18,  1999  for
approximately  $597  million.  In order to  reduce  its cash  requirements,  the
Company  entered into a lease  agreement  with a special  purpose,  unaffiliated
financing  entity  that  acquired a portion of the  facility  directly  from Con
Edison and leased it to a subsidiary of the Company under a ten year lease.  The
Company has guaranteed all payment and performance obligations of its subsidiary
under the lease.  Another  subsidiary  of the Company  provides  all  operating,
maintenance  and  construction  services for the facility.  The lease relates to
approximately  $425 million of the acquisition  cost of the facility.  The lease
qualifies  as  an  operating  lease  for  financial   reporting  purposes  while
preserving the Company's  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.

In connection with the financing of the  acquisition of the Ravenswood  Facility
in June 1999 by a wholly-owned  subsidiary of the Company,  certain post-closing
conditions including the transfer of certain governmental permits,  receipt of a
consent  order for the facility  and the delivery of evidence  that the facility
complies with applicable  zoning  requirements  were to be fulfilled by December
15,  1999.  Following  notice to  affected  parties,  including  the  holders of
approximately  $412 million of notes issued in connection with the  acquisition,
the Company was advised in January 2000 that several such  noteholders  believed
the steps taken thus far were not  sufficient to satisfy fully the  post-closing
conditions.  Under the  relevant  financing  documents,  failure to complete the
required  actions on a timely basis  constitutes  an Event of Default,  which in
turn could

                                       24

<PAGE>



give various parties to the Ravenswood financing, including the noteholders, the
right to foreclose on the  Ravenswood  property  and/or  terminate the Company's
leasehold  interest and rights in the property.  To date, no party has sought to
take or indicated that it is contemplating  taking any such action.  The Company
has timely  fulfilled  all of its payment  obligations  and believes that it has
also  timely  fulfilled  all  other  obligations  under the  relevant  financing
documents.

The  Company  is  currently  seeking  to  resolve  remaining  issues  concerning
compliance  with the  December 15  post-closing  conditions  and, in  connection
therewith,  has  obtained  extensions  of  the  deadlines  for  certain  of  the
conditions.

FIXED CHARGES UNDER FIRM  CONTRACTS:  The Company's  utility  subsidiaries  have
entered into various  contracts for gas delivery,  storage and supply  services.
The  contracts  have  remaining  terms that cover  from one to  fourteen  years.
Certain  of these  contracts  require  payment of annual  demand  charges in the
aggregate amount of approximately $280 million.  The Company is liable for these
payments regardless of the level of service it requires from third parties. Such
charges  are,  currently,  recovered  from utility  customers  as gas costs.  In
response to a NYPSC policy statement regarding gas industry  restructuring,  the
Company estimated that, if the gas distribution subsidiaries were to continue to
recover  the  demand  charges  for the  next  five  years,  then  the  estimated
strandable costs (contract costs above market value) for contracts that will not
expire by 2005 and would not be needed to provide service to firm transportation
customers  will be, on a present  value basis,  approximately  $78 million.  For
purposes of this  calculation,  the Company has assumed  that,  if it exited the
merchant  function  and if it were  necessary  to assign the  contracts to third
parties,  the Company could recover the market value of the  underlying  assets.
Therefore, the difference between the contract costs and the market value is the
potential "strandable" costs.

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

In October 1998,  the County of Suffolk and the Towns of Huntington  and Babylon
commenced  an action  against  LIPA,  the  Company,  the NYPSC and others in the
United  States  District  Court  for  the  Eastern  District  of New  York  (the
"Huntington Lawsuit").  The Huntington Lawsuit alleges, among other things, that
LILCO  ratepayers  (i) have a property  right to receive or share in the alleged
capital gain that resulted from the transaction with LIPA (which gain is alleged
to be at least $1  billion);  and (ii)  that  LILCO  was  required  to refund to
ratepayers the amount of a Shoreham-related  deferred tax reserve (alleged to be
at least $800 million)  carried on the books of LILCO at the consummation of the
LIPA  Transaction.  In December  1998,  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 LIPA
Transaction  and  KeySpan  Acquisition  to LILCO's  chairman  and certain of its
officers and adds the  recipients of the payments as  defendants.  In June 1999,
the Company was served with the second amended complaint. On August 23, 1999,

                                       25

<PAGE>



the Company filed a motion to dismiss the second amended complaint.  Pursuant to
an  agreement  among the  parties,  the  Company's  motion to  dismiss  is being
converted to a summary  judgment  motion.  At this time the Company is unable to
determine the outcome of this ongoing proceeding.



THE CLASS SETTLEMENT: The Class Settlement,  which became effective in June 1989
(County of Suffolk,  et al., v. Long Island Lighting Company et al.), resolved a
civil lawsuit against LILCO brought under the federal  Racketeer  Influenced and
Corrupt  Organizations  Act,  alleging  that LILCO made  inadequate  disclosures
before  the  NYPSC   concerning  the  construction  and  completion  of  nuclear
generating  facilities.  The class settlement  provided electric  customers with
rate  reductions of $390.0  million that were being  reflected as adjustments to
their monthly electric bills over a ten-year period which began on June 1, 1990.
The Class  Settlement  obligation of  approximately  $20 million at December 31,
1999 reflects the present  value of the  remaining  reductions to be refunded to
customers. As a result of the LIPA Transaction,  LIPA will provide the remaining
balance to its electric  customers as an adjustment  to their  monthly  electric
bills.  The Company will then,  in turn,  reimburse  LIPA on a monthly basis for
such reductions on the customer's  monthly bill. The Company remains  ultimately
obligated under the Class  Settlement.  In November 1999,  class counsel for the
LILCO  ratepayers  served a motion,  in the United States District Court for the
Eastern District of New York,  seeking an order directing the Company to pay $42
million,  in  addition  to the  amounts  remaining  to be paid  under  the Class
Settlement. Class counsel contends that the required rate reductions should have
been  exclusive of gross  receipts  taxes.  The Company filed its  opposition in
January 2000 and class  counsel  filed their reply papers in February  2000.  In
their  February  papers,  class  counsel  revised  their demand to seek an order
directing  the Company to pay  approximately  $22  million,  plus  interest,  in
addition to the amounts  remaining  to be paid under the Class  Settlement.  The
Company filed its rebuttal papers March 1, 2000 and oral argument was held March
6, 2000.  On March 9,  2000,  an order was  issued by the court  granting  class
counsel's  motion.  The Company is in the process of  evaluating  the order and,
accordingly,  is  currently  unable to  determine  the  ultimate  outcome of the
proceeding  or what effect,  if any,  such  outcome  will have on its  financial
condition or results of operations.

ENVIRONMENTAL MATTERS - MANUFACTURED GAS PLANT SITES: The Company has identified
twenty-six manufactured gas plant ("MGP") sites which were historically owned or
operated by Brooklyn Union or Brooklyn Union of Long Island (or such  companies'
predecessors).  Operations  at these  plants in the late 1800's and early 1900's
may have  resulted in the release of hazardous  substances.  These former sites,
some of which are no longer owned by the Company,  have been  identified to both
the  New  York  State  Department  of  Environmental  Conservation  ("DEC")  for
inclusion on appropriate waste site inventories and the PSC. The currently-known
conditions of fourteen of these former MGP sites,  their period and magnitude of
operation,  generally  observed cleanup  requirements and costs in the industry,
current land use and  ownership,  and  possible  reuse have been  considered  in
establishing contingency reserves that are discussed below.

In 1995,  Brooklyn Union executed an  Administrative  Orders on Consent  ("ACO")
with the DEC

                                       26

<PAGE>



which  addressed the  investigation  and  remediation of a site in Coney Island,
Brooklyn.  In 1998,  Brooklyn  Union executed an ACO for the  investigation  and
remediation of the Clifton MGP site in Staten  Island.  At the initiative of the
DEC, the City of New York and the Company are in  negotiations on a cost sharing
arrangement  to  conduct  investigations  in 2000 at the  Citizen's  MGP site in
Brooklyn,  which is now primarily  owned by the City, but was formerly owned and
operated by a Brooklyn Union  predecessor.  The DEC notified the Company in 1998
that the Sag Harbor and Rockaway Park MGP sites owned by Brooklyn  Union of Long
Island  would  require   remediation  under  the  State's   Superfund   program.
Accordingly,  the Sag Harbor and Rockaway Park sites;  as well as the Bay Shore,
Glen Cove,  Halesite and  Hempstead  MGP sites;  are the subject of two separate
ACOs,  which the  Company  executed  with the DEC in March and  September  1999,
respectively.   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.

The  Company  was  also  requested  by  the  DEC  to  perform  preliminary  site
assessments at the Patchogue,  Babylon, Far Rockaway,  Garden City and Hempstead
(Clinton  St.) MGP sites,  each of which were formerly  owned by LILCO,  under a
separate ACO entered into in September 1999.  Initial studies based on existing,
available  documentation  have been completed for each such site and the DEC has
requested  that the Company  collect  additional  samples at each of the subject
properties.

With the  exception  of the Coney  Island site,  which will be  redeveloped  for
commercial or industrial use, the final end uses for the sites  identified above
and, therefore,  acceptable remediation goals have not yet been determined.  The
Company is required to prepare a feasibility  study for the  remediation of each
such site,  based on cleanup levels derived from risk analyses  associated  with
the  proposed or  anticipated  future use of the  properties.  The  schedule for
completing  this  phase of the work  under  the  ACOs for the  identified  sites
discussed above extends through 2001.

Thus, thirteen sites identified above are currently the subject of ACOs with the
DEC and one is subject to the  negotiation  of such an agreement.  The Company's
remaining  MGP  sites  may  not  become  subject  to  ACOs  in the  future,  and
accordingly no liability has been accrued for these sites. It is possible, based
on  future  investigation,  that  the  Company  may  be  required  to  undertake
investigation  and potential  remediation  efforts at these,  or other currently
unknown former MGP sites.  However, the Company is currently unable to determine
whether or to what extent such additional costs may be incurred.

The  Company  believes  that  in  the  aggregate,   the  accrued  liability  for
investigation  and remediation of the MGP sites  identified above are reasonable
estimates  of  likely  cost  within a range of  reasonable,  foreseeable  costs.
Accordingly,  the  Company  presently  estimates  the cost of its  MGP-  related
environmental  cleanup  activities  will be $123 million;  which amount has been
accrued  by  the  Company  as  its  current  best   estimate  of  its  aggregate
environmental  liability  for known sites.  As previously  indicated,  the total
MGP-related  costs  may be  substantially  higher,  depending  upon  remediation
experience,  selected end use for each site, and actual environmental conditions
encountered.

                                       27

<PAGE>



The NYPSC  approved  rate plans for Brooklyn  Union and  Brooklyn  Union of Long
Island provide for the recovery of such investigation and remediation costs. The
Brooklyn Union rate plan provides, among other things, that if the total cost of
investigation and remediation  varies from that which is specifically  estimated
for a site under  investigation  and/or  remediation,  then Brooklyn  Union will
retain or absorb up to 10% of the  variation.  The Brooklyn Union of Long Island
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,  Brooklyn  Union has  offset  certain  moneys due to
ratepayers against its estimated  environmental  cleanup costs for MGP sites. At
December  31,  1999,  the Company  has  reflected  a  regulatory  asset of $95.6
million.   Expenditures  incurred  to  date  by  the  Company  with  respect  to
MGP-related activities total $15.9 million.

Periodic  discussions by the Company with  insurance  carriers and third parties
for  reimbursement  of some portion of MGP site  investigation  and  remediation
costs continue.  In December 1996,  LILCO filed a complaint in the United States
District Court for the Southern District of New York against fourteen  insurance
companies  that issued general  comprehensive  liability  policies to LILCO.  In
January 1998, LILCO commenced a similar action against the same, and additional,
insurance  companies  in New York State  Supreme  Court,  and the federal  court
action subsequently was dismissed.  The state court action is being conducted by
the  Company on behalf of  Brooklyn  Union of Long  Island.  The outcome of this
proceeding  cannot  yet  be  determined.  In  addition,  Brooklyn  Union  is  in
discussions  with  insurance  carriers  regarding  the  possible  resolution  of
coverage claims related to its MGP site investigation and remediation activities
without  litigation.  The  Company is not able to predict  the  outcome of these
discussions.

ENVIRONMENTAL MATTERS - OTHER: The Company will be responsible for environmental
obligations   relating  to  the  Ravenswood   Facility   operations  other  than
liabilities arising from pre-closing disposal of waste at off-site locations and
any  monetary  fines  arising from Con Edison's  pre-closing  conduct.  Based on
information  currently available for environmental  contingencies related to the
Ravenswood  Facility  acquisition,  the  Company has  accrued an  additional  $5
million as the minimum liability to be incurred.

The  Company is  awaiting  final  development  of state and  federal  regulatory
programs  with respect to NOx  reduction  requirements  for its  existing  power
plants.  The  Company's  compliance  strategy  may be  composed  of fuel  choice
decisions, acquisition of emission credits, and installation of emission control
equipment.  The extent of  development of new generation in the region will also
impact the Company's compliance strategy. Although the Company is evaluating its
alternatives,   final  decisions   cannot  be  made  until  pending   regulatory
requirements  and  new  generation  decisions  are  clarified.  Expenditures  to
implement a final strategy are not expected to begin until 2001.

Additional capital expenditures associated with the renewal of the surface water
discharge  permits for the  Company's  power  plants may be required by the DEC.
Until the  Company's  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

                                       28

<PAGE>



upgrades cannot be determined.

NOTE 10.  HEDGING, DERIVATIVE FINANCIAL INSTRUMENTS, AND FAIR VALUES

NATURAL GAS AND OIL FUTURES, OPTIONS AND SWAPS: The Company's utility, marketing
and gas  exploration and production  subsidiaries  employ  derivative  financial
instruments,  such as natural gas and oil  futures,  options and swaps,  for the
purpose of hedging exposure to commodity price risk.

Utility tariffs  applicable to certain  large-volume  customers permit gas to be
sold at prices  established  monthly  within a specified  range  expressed  as a
percentage of prevailing  alternate  fuel oil prices.  The Company uses 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 the
sales to its large- volume market.  The "long" gas position  follows,  generally
within a range of 80% to 120%,  the cost of gas to serve this  market  while the
offsetting oil swap position correspondingly replicates,  within the same range,
the selling  price of gas.  The Company also uses  standard New York  Mercantile
Exchange  ("NYMEX") gas futures to stabilize gas price  volatility  for its firm
customers during the winter months as recommended by the NYPSC.

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

THEC  utilizes  collars to hedge future sales prices on a portion of its natural
gas production to achieve a more predictable cash flow, as well as to reduce its
exposure to adverse price fluctuations of natural gas. For any particular collar
transaction,  the  counter  party is  required  to make a payment to THEC if the
settlement  price for any  settlement  period is below the floor  price for such
transaction,  and THEC is required to make  payment to the counter  party if the
settlement  price for any settlement  period is above the ceiling price for such
transaction. For any particular floor transaction, the counter party is required
to make a payment to THEC if the settlement  price for any settlement  period is
below the floor  price for such  transaction.  THEC is not  required to make any
payment in connection with a floor transaction.

The following  table sets forth  selected  financial  data  associated  with the
Company's derivative financial instruments that were outstanding at December 31,
1999.
<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------
   GAS: TYPE OF        FISCAL YEAR OF    FIXED PRICE PER         VOLUME               FAIR VALUE
    CONTRACTS            MATURITY              MCF                (MCF)                 ($000)
------------------     -------------     ----------------     -------------         --------------

<S>                        <C>            <C>                     <C>                       <C>
Futures                    2000           $2.135-$2.584           5,430,000                   (488)

Collars                    2000
   Ceiling                                $2.697-$3.648          10,950,000                      -
   Floor                                  $2.200-$2.550          10,950,000                  1,292

Swaps                    2000/2001           $2.6448             10,767,500                 (2,013)
</TABLE>



<TABLE>
<CAPTION>

   OIL: TYPE OF        FISCAL YEAR OF    FIXED PRICE PER         VOLUME               FAIR VALUE
    CONTRACTS            MATURITY             GALLON            (GALLONS)               ($000)
------------------     -------------     ----------------     -------------         --------------
<S>                      <C>                 <C>                 <C>                        <C>
Swaps                    2000/2001           $0.5565             72,744,000                 (4,753)
------------------ --  ------------- --- ---------------- --  ------------- --- --- --------------
</TABLE>

The fair values shown in the above table represent the amounts the Company would
have  received or paid if it had closed those  derivative  positions on December
31,  1999.  If the Company had applied the  requirements  of SFAS No. 133 to the
above  derivative  financial  instruments  at December 31,  1999,  comprehensive
income would have reflected a reduction of $6.0 million.

As of December 31, 1999, no futures  contract  extended  beyond  November  2000.
Margin  deposits with brokers at December 31, 1999 of $4.0 million were recorded
in other in the  current  assets  section  of the  Consolidated  Balance  Sheet.
Deferred losses on closed positions were $5.4 million at December 31, 1999. Such
deferrals are generally recorded in net income within one month.

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

INTEREST RATE SWAPS: In November 1999, the Company entered into an interest rate
swap agreement in which $90 million of its Gas Facilities  Revenue Bonds,  6.75%
Series A and B, were  effectively  exchanged  for floating rate debt at The Bond
Market  Association  Swap Index.  The interest  rate swap  agreement  expires in
twenty-five  years,  but can be terminated  earlier based on certain  market and
contract conditions.  For the term of the agreement,  the Company will receive a
fixed interest payment of 5.54%. The variable interest rate is reset on a weekly
basis.  For the period November 10, 1999 through  December 31, 1999 the weighted
average variable  interest rate that the Company was obligated to pay was 3.89%.
The gain on the  interest  rate swap,  which was  immaterial,  reduced  recorded
interest expense.  The fair value of the interest rate swap at December 31, 1999
was $4.2 million and represents the estimated amount that the Company would have
to pay if the swap had been settled at the then current market rate.

                                       30

<PAGE>



In connection  with the Company's  anticipated  purchase of Eastern  Enterprises
(See  Note  11,  "Acquisition  of  Eastern")  and the  anticipated  issuance  of
long-term debt securities for the acquisition,  the Company entered into forward
interest rate lock agreements in January and February 2000 to hedge a portion of
the  risk  that  the  cost of the  future  issuance  of  fixed-rate  debt may be
adversely  affected by changes in interest  rates.  Under an interest  rate lock
agreement,  the  Company  agrees  to pay  or  receive  an  amount  equal  to the
difference  between  the net  present  value of the cash  flows  for a  notional
principal  amount  of  indebtedness  based on the  existing  yield of a  hedging
instrument  at the  date of the  agreement  and at the  date  the  agreement  is
settled.  Gains and losses on interest rate lock agreements will be deferred and
amortized  over the  life of the  underlying  debt to be  issued.  The  notional
amounts of the  agreements  are not  exchanged.  The Company  has  entered  into
interest rate lock agreements with more than one major financial  institution in
order to minimize  counterparty  credit risk.  The details of the four  interest
rate lock agreements are set forth in the following table.


--------------------------------------------------------------------------------
                                           Notional Amount
     Trade Date        Hedge Instrument         ($000)            Lock Rate
--------------------  ------------------  ------------------  ------------------
Swap locks:

  January 14, 2000       10 Year Swap          150,000              7.49%

  January 25, 2000       10 Year Swap          100,000              7.50%

Treasury locks:

  February 7, 2000     30 Year Treasury        100,000              6.43%

  February 8, 2000     30 Year Treasury         50,000              6.32%
--------------------  ------------------  ------------------  ------------------


FAIR VALUE OF FINANCIAL  INSTRUMENTS:  The fair value of the Company's preferred
stock at December 31, 1999 was $454.6  million and the carrying value was $447.3
million.  At December 31, 1999 the Company has classified as a current liability
on the  Consolidated  Balance Sheet $363 million of preferred  stock which has a
mandatory redemption requirement of June 1, 2000.

The  Company's   long-term  debt  consists  primarily  of  publicly  traded  Gas
Facilities  Revenue Bonds,  Authority  Financing Notes and Debentures,  the fair
value of which is  estimated  on quoted  market  prices  for the same or similar
issues.  The  Authority  Financing  Notes and  Debentures  are  included  in the
promissory  notes  to  LIPA.  As  previously  indicated,  there  is no  maturing
long-term debt within the next five years.

The fair values and carrying amounts of the Company's long-term debt at December
31, 1999 and December 31, 1998 were as follows:


                                       31

<PAGE>



FAIR VALUE                               (IN THOUSANDS OF DOLLARS)
---------------------------------------------------------------------
                           DECEMBER 31, 1999     December 31, 1998
-------------------------- ------------------ -- ------------------

Gas facilities revenue bonds$         632,409    $          687,863
Authority financing notes              66,005                24,880
Promissory notes                      569,233             1,097,226
--------------------------------------------------------------------
Total                       $       1,267,647    $        1,809,969
========================== ================== == ==================



CARRYING AMOUNT                         (IN THOUSANDS OF DOLLARS)
--------------------------------------------------------------------
                           DECEMBER 31, 1999     December 31, 1998
-------------------------- ------------------ -- ------------------

Gas facilities revenue bonds $          648,500    $          648,500
Authority financing notes                66,005                24,880
Promissory notes                        602,427             1,044,902
-----------------------------------------------------------------------
Total                        $        1,316,932    $        1,718,282
========================== ================== == ==================

At December 31, 1999, THEC's $100 million 8.625% Senior  Subordinated  Notes due
2008 had a fair  market  value of $96  million.  All  other  THEC debt and other
subsidiary  debt is  carried  at an  amount  approximating  fair  value  because
interest  rates  are  based  on  current  market  rates.   All  other  financial
instruments  included in the  Consolidated  Balance  Sheet are stated at amounts
that approximate fair values.

NOTE 11.  ACQUISITION OF EASTERN ENTERPRISES

On November 4, 1999, the Company and Eastern Enterprises  ("Eastern")  announced
that the companies  have signed a definitive  merger  agreement  under which the
Company  will acquire all of the common stock of Eastern for $64.00 per share in
cash.  This represents a premium of 24% over the Eastern closing price of $51.56
on  November  3, 1999,  and a 45%  premium  over the  average of the last 90-day
trading period.  The Agreement and Plan of Merger was filed as an exhibit to the
Company's Form 8-K filed on November 5, 1999.

The transaction has a total value of approximately $2.5 billion ($1.7 billion in
equity  and $0.8  billion  in  assumed  debt and  preferred  stock)  and will be
accounted  for as a  purchase.  The  increased  size and  scope of the  combined
organization  should  enable the  Company 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 the Company's
unregulated businesses. The combined companies will serve 2.4 million customers.

It is  anticipated  that the combined  company will have assets of $8.8 billion,
$4.3 billion in revenues,  and EBITDA of approximately $950 million. The Company
expects  pre-tax annual cost savings will be  approximately  $30 million.  These
cost savings result  primarily from the  elimination of duplicate  corporate and
administrative  programs,   greater  efficiencies  in  operations  and  business
processes, and

                                       32

<PAGE>



increased purchasing efficiencies. The Company expects to achieve reductions due
to the merger through a variety of programs which would include hiring  freezes,
attrition and separation  programs.  All union  contracts  will be honored.  The
Company  expects to raise $1.7 billion of initial  financing for the transaction
in short-term  markets, a significant  portion of which the Company  anticipates
will be replaced with long-term financing as soon as practicable.

The merger is  conditioned,  among other  things,  upon the  approval of Eastern
shareholders,  the  Securities  and Exchange  Commission  and the New  Hampshire
Public Utility Commission.  The Company anticipates that the transaction will be
consummated  in the third or fourth  quarter of 2000, but is unable to determine
when or if all required approvals will be obtained.

In connection  with the merger,  Eastern has amended its merger  agreement  with
EnergyNorth,  Inc.  ("EnergyNorth")  to provide for an all cash  acquisition  of
EnergyNorth shares at a price per share of $61.13. The restructured  EnergyNorth
merger  is  expected  to  close   contemporaneously   with  the  KeySpan/Eastern
transaction.

Following  the  announcement  that the Company has entered  into an agreement to
purchase  Eastern  Enterprises,  Standard & Poor's  Rating  Services  placed the
Company's  and  certain of its  subsidiaries',  as well as  Eastern's  corporate
credit, senior unsecured debt, and preferred stock on Credit Watch with negative
implications. Similarly, Moody's Investors Service also placed the Company's and
certain of its  subsidiaries',  as well as Eastern's  corporate  credit,  senior
unsecured  debt,  commercial  paper and  preferred  stock on review for possible
downgrade.

Eastern owns and operates  Boston Gas Company,  Colonial Gas Company,  Essex Gas
Company, Midland Enterprises Inc. ("Midland"),  Transgas Inc. ("Transgas"),  and
ServicEdge Partners, Inc. ("ServicEdge").  Upon completion of the pending merger
with EnergyNorth, Inc., Eastern will serve over 800,000 natural gas customers in
Massachusetts and New Hampshire. Midland,  headquartered in Cincinnati, Ohio, is
the leading carrier of coal and a major carrier of other dry bulk cargoes on the
nation's  inland  waterways.  Transgas  is the  nation's  largest  over-the-road
transporter  of liquefied  natural gas.  ServicEdge  is the largest  unregulated
provider of residential HVAC equipment  installation and service to customers in
Massachusetts.

NOTE 12. KEYSPAN GAS EAST CORPORATION SUMMARY FINANCIAL DATA

KeySpan Gas East  Corporation  d/b/a Brooklyn Union of Long Island,  is a wholly
owned  subsidiary  of KeySpan  Corporation.  Brooklyn  Union of Long  Island 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  immediately  prior to
the LIPA  Transaction.  Brooklyn Union of Long Island provides gas  distribution
services to customers in the Long Island  counties of Nassau and Suffolk and the
Rockaway peninsula of Queens county. Brooklyn Union of Long Island 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 the Company. On February 1, 2000,

                                       33

<PAGE>



Brooklyn  Union of Long Island  issued $400 million of 7.875%  Medium Term Notes
due 2010. The following  represents  summarized  balance sheet data for Brooklyn
Union of Long Island.

                                                      (IN THOUSANDS OF DOLLARS)
--------------------------------------------------------------------------------
                                     December 31, 1999   December 31, 1998
---------------------------------------------- --------------------------
Current assets                $        358,415    $               256,186

Noncurrent assets                    1,327,692                  1,330,661

Current liabilities                    548,331                    505,784

Noncurrent liabilities
   including long-term debt            484,702                    467,736

Net assets (1)                $        653,074    $               613,327
------------------------------- -------------- ---- ---------------------

      (1)Net  Assets   reflect   total  assets  less   current  and   noncurrent
         liabilities.  Intercompany  accounts receivable are included in current
         assets and  long-term  intercompany  accounts  payable are  included in
         noncurrent liabilities.

Prior to the LIPA Transaction, certain of LILCO's income statement accounts were
recorded  in its books and records as  directly  related to its gas  operations.
These items  included:  revenues,  purchased gas costs,  certain  operations and
maintenance ("O&M") expenses,  depreciation of gas utility plant, revenue taxes,
certain other income and deductions, and federal income taxes.

Certain  income and expense  accounts  common to both  LILCO's gas and  electric
operations prior to the LIPA Transaction have been allocated/determined based on
the following  basis,  which is consistent with the methodology  utilized by the
NYPSC to establish rates.

Common O&M expenses, operating taxes (excluding revenue taxes) and miscellaneous
income and deductions were based upon methodologies employing:  number of active
meters; revenues;  utility plant; and labor associated with gas operations, as a
percentage of total operations.

Interest income, interest expense and preferred stock dividend requirements were
allocated  based upon gas utility plant as a percentage of total utility  plant,
(including certain electric related regulatory assets), adjusted for appropriate
deferred federal income taxes.

Depreciation  on common plant was based upon an annual study of the  utilization
of common facilities by the gas and electric operations of LILCO.

The Company believes that the basis of allocation described above is reasonable.
Reported  results of  operations  and the  financial  position  of  LILCO's  gas
operations  may have been  different  if such  operations  were  conducted  as a
separate  subsidiary of LILCO,  rather than as part of a combined integrated gas
and electric company.

Certain common assets which were previously part of LILCO's  operations prior to
May 28, 1998

                                            34

<PAGE>



have been transferred to other  subsidiaries of the Company (e.g.  common plant,
inventory,  etc.).  Income and expenses related to these assets prior to May 28,
1998 have been allocated in the accompanying financial statements. After May 28,
1998, Brooklyn Union of Long Island has been charged by affiliated companies for
the use of these assets,  resulting in an operating expense of $10.8 million for
the twelve  months ended  December 31, 1999 and $7.2 million for the nine months
ended December 31, 1998.

The following represents  summarized income statement data for Brooklyn Union of
Long Island.

                                                   (IN THOUSANDS OF DOLLARS)
--------------------------------------------------------------------------------
                                            Nine Months
                          Year Ended            Ended        Fiscal Year Ended
                         December 31,        December 31,        March 31,
                             1999              1998 (1)             1998
--------------------- ------------------  ------------------ ------------------
Revenues              $          637,088  $          356,634 $          645,659

Operating Income (2)  $          115,075  $           24,854 $          122,651

Net Income            $           41,517  $          (11,891)$           40,558
--------------------- ------------------  ------------------ ------------------

(1)For the period  April 1, 1998  through May 28, 1998 (the period  prior to the
   LIPA Transaction),  certain income and expense items,  common to both LILCO's
   gas  and  electric  operations,  were  allocated  to  its  gas  and  electric
   operations consistent with the methodology utilized by the NYPSC to establish
   rates.
(2)Operating  income is  defined  as  revenues  less  cost of gas and  operating
   expenses.  Operating expenses include the following expenses:  operations and
   maintenance,  depreciation and amortization and operating taxes. Further, for
   the  nine  months  ended  December  31,  1998  operating  income  includes  a
   before-tax charge of $8.7 million reflecting  Brooklyn Union of Long Island's
   portion of an early retirement program implemented by the Company.

NOTE 13.   SHAREHOLDER RIGHTS PLAN

On March 30, 1999 the Board of  Directors of the Company  adopted a  Shareholder
Rights  Plan (the  "Plan")  designed to protect  shareholders  in the event of a
proposed takeover of the Company. 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 the Company's  common stock
without  the  consent of the  Company's  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.


                                            35

<PAGE>



NOTE 14. SALE OF LILCO ASSETS,  ACQUISITION  OF KEYSPAN ENERGY  CORPORATION  AND
TRANSFER OF ASSETS AND LIABILITIES TO THE COMPANY

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

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

Moreover,  all of LILCO's outstanding  long-term debt as of May 28, 1998, except
for its 1997 Series A Electric  Facilities  Revenue  Bonds due  December 1, 2027
which were assigned to the Company,  was assumed by LIPA. In accordance with the
LIPA  Transaction,  the Company  issued  promissory  notes to LIPA  amounting to
$1.048  billion  which  represented  an amount  equivalent to the sum of (i) the
principal  amount of 7.30% Series  Debentures due July 15, 1999 and 8.20% Series
Debentures  due March  15,  2023  outstanding  as of May 28,  1998,  and (ii) an
allocation of certain of the Authority  Financing  Notes.  The promissory  notes
contain  identical  terms to the debt  referred  to in items (i) and (ii) above.
(See Note 7, "Long-Term Debt" for additional information.)

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

As a result of these  transactions,  holders of KSE common  stock  received  one
share of the

                                            36

<PAGE>



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

The  purchase  price  of  $1.223  billion  for the  acquisition  of KSE has been
allocated to assets acquired and liabilities  assumed based upon their estimated
fair values. The fair value of the utility assets acquired is represented by its
book value which  approximates the value recognized by the NYPSC in establishing
rates  for  regulated  utility  services.  The  estimated  fair  value  of KSE's
non-utility  assets  approximated  their carrying  values.  At May 28, 1998, the
Company  recorded  goodwill  in  the  amount  of  $170.9  million,  representing
primarily  the  excess of the  acquisition  cost over the fair  value of the net
assets acquired; the goodwill is being amortized over 40 years.

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


================================================================================
Proforma Results                             Nine Months        Fiscal Year
(In Thousands of Dollars Except                 Ended              Ended
Per Share Amounts):                      December 31, 1998   March 31, 1998
----------------------------------- ------------------- -----------------
Revenues                            $         1,907,129 $       4,554,093
Operating income                    $             4,416 $         914,272
Net income (loss)                   $         (212,424) $         436,794
Earnings (loss) per share           $            (1.38) $            2.78

NOTE 15. COSTS RELATED TO THE LIPA TRANSACTION AND SPECIAL CHARGES

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


                                            37

<PAGE>



Further,  the Company  incurred  charges  related to the KeySpan  Acquisition of
$83.5 million after-tax.  These charges reflect a $42.0 million after-tax charge
for an early  retirement  program  initiated by the Company in December  1998 in
which  approximately 600 employees  participated,  and a $41.5 million after-tax
charge for the write-off of a customer  billing system that was in  development.
Also,  in December  1998,  the Company made a $20 million  donation ($13 million
after-tax) to establish the KeySpan Foundation,  a not-for-profit  philanthropic
foundation that will make donations to local charitable community organizations.

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

NOTE 16. SUPPLEMENTAL GAS AND OIL DISCLOSURES (UNAUDITED)

This  information  includes  amounts  attributable  to 100% of THEC and  KeySpan
Exploration and Production,  LLC at December 31, 1999.  Shareholders  other than
the Company had a minority interest of 36% in THEC at December 31, 1999 and 1998
and a 34% minority interest in 1997. Gas and oil operations,  and reserves, were
predominantly located in the United States in all years.
<TABLE>
<CAPTION>

CAPITALIZED COSTS RELATING TO GAS AND OIL PRODUCING ACTIVITIES

At December 31,                                            1999              1998
-------------------------- ------------------------- ----------------- ----------------
                                                         (In Thousands of Dollars)

<S>                                                  <C>               <C>
Unproved properties not being amortized              $         176,876 $        145,317

Properties being amortized - productive and nonproductive      979,615          828,168
---------------------------------------------------- ----------------- ----------------
Total capitalized costs                                      1,156,491          973,485

Accumulated depletion                                         (512,465)        (438,974)
---------------------------------------------------------------------------------------
   Net capitalized costs                             $         644,026 $        534,511
-------------------------- ------------------------- ----------------- ----------------
</TABLE>

The  following  is a  break-out  of  the  costs  which  are  excluded  from  the
amortization calculation as of December 31, 1999, by year of acquisition: 1999 -
$29.9 million,  1998 - $66.1 million, and prior years $68.3 million. The Company
cannot accurately  predict when these costs will be included in the amortization
base, but it is expected that these costs will be evaluated within the next five
years.


                                            38

<PAGE>



 COSTS INCURRED IN PROPERTY ACQUISITION, EXPLORATION AND DEVELOPMENT ACTIVITIES

Year Ended December 31,           1999             1998            1997
--------------------------- ---------------- ---------------- ---------------
                                        (In Thousands of Dollars)

Acquisition of properties-

   Unproved properties      $         13,107 $         33,803 $        16,613

   Proved properties                  42,573          162,083          24,007

Exploration                           39,649           55,611          44,119

Development                           87,965           51,046          59,244
--------------------------------------------------------------------------------
Total costs incurred        $        183,294 $        302,543 $       143,983
--------------------------- ---------------- ---------------- ---------------



RESULTS OF OPERATIONS FROM GAS AND OIL PRODUCING ACTIVITIES*
================================================================================
Year Ended December 31,                  1999          1998          1997
------------------------------------ ------------- ------------- -------------
                                             (In Thousands of Dollars)

Revenues                             $     150,581 $     127,124 $     116,349
------------------------------------ ------------- ------------- -------------
Production and lifting costs                23,851        21,166        18,379

Depletion                                   74,051       209,838        59,081
--------------------------------------------------------------------------------
Total expenses                              97,902       231,004        77,460
------------------------------------ ------------- ------------- -------------
Income before taxes                         52,679      (103,880)       38,889

Income Taxes                                17,477       (37,410)       12,397
------------------------------------ ------------- ------------- -------------
Results of operations                $      35,202 $     (66,470)$      26,492
-----------------------------        ------------- ------------- -------------
   *(excluding corporate overhead and interest costs)


The gas and oil reserves  information  is based on estimates of proved  reserves
attributable to the interest of THEC 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.


RESERVE QUANTITY INFORMATION NATURAL GAS (MMCF)
================================================================================
At December 31,                   1999             1998            1997
------------------------------ ----------  --------------- ---------------
Proved reserves

   Beginning of year              470,447          330,601         320,474

   Revisions of previous           45,510           (4,656)        (18,743)

   Extensions and discoveries      70,741           67,272          75,651

   Production                     (69,679)         (61,479)        (50,310)

   Purchases of reserves in place  20,779          139,994           3,778

   Sales of reserves in place      (3,492)          (1,285)           (249)
--------------------------------------------------------------------------------
Proved reserves-
   End of year (a)                534,306          470,447         330,601
------------------------------------------------  --------------- --------------
Proved developed reserves-
   Beginning of year              369,931          256,632         236,544
--------------------------------------------------------------------------------
   End of year (b)                399,482          369,931         256,632
================================================================================

(a) Includes  minority interest of 189,427;  169,361;  and 112,404 in 1999, 1998
and 1997, respectively.

(b) Includes minority interest of 143,043; 133,175; and 87,255 in 1999, 1998 and
1997, respectively.





CRUDE OIL, CONDENSATE AND NATURAL GAS LIQUIDS (MBBLS)
================================================================================
At December 31,                         1999            1998             1997
--------------------------------  ---------------- ---------------  ------------
Proved reserves

   Beginning of year                      1,650           1,077            1,131

   Revisions of previous estimates          237            (105)            (62)

   Extensions and discoveries             1,574             249              184

   Production                              (258)           (225)           (171)

   Purchases of reserves in place             2             665                1

   Sales of reserves in place               (69)            (11)             (6)
--------------------------------------------------------------------------------
Proved reserves-
   End of year (a)                        3,136           1,650            1,077
--------------------------------  ------------- ---------------  ---------------
Proved developed reserves-
   Beginning of year                      1,498             914            1,013
--------------------------------------------------------------------------------
   End of year (b)                        2,059           1,498              914
--------------------------------------- ---------------  -----------------------
(a) Includes  minority  interest of 890;  594;  and 366 in 1999,  1998 and 1997,
respectively.

(b) Includes  minority  interest of 647;  539;  and 311 in 1999,  1998 and 1997,
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, except for those
reserves devoted to future  production that is hedged.  Such reserves are priced
at their respective hedged amounts.  The standardized  measure does not purport,
nor should it be interpreted,  to present the fair value of gas and oil reserves
of THEC 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,  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.

<PAGE>


STANDARDIZED  MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED GAS
AND OIL RESERVES

--------------------------------------------------------------------------------
At December 31,                                    1999             1998
-------------------------------------------  ----------------- ---------------
                                                 (In Thousands of Dollars)

Future cash flows                            $       1,146,966 $       878,448

Future costs -

   Production                                         (194,527)       (153,567)

   Development                                        (128,645)       (103,915)
-------------------------------------------  ----------------- ---------------
Future net inflows before income tax                   823,794         620,966

Future income taxes                                   (160,940)        (89,032)
-------------------------------------------  ----------------- ---------------
Future net cash flows                                  662,854         531,934

10% discount factor                                   (182,222)       (135,874)
--------------------------------------------------------------------------------
Standardized measure of discounted
  future net cash flows                      $         480,632 $       396,060
-------------------------------------------  ----------------- ---------------
(a)  Includes  minority  interest  of  168,921  and  142,582  in 1999 and  1998,
respectively.



<TABLE>
<CAPTION>

CHANGES IN STANDARDIZED  MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM PROVED
RESERVE QUANTITIES
======================================================================================================
Year Ended December 31,                                        1999           1998           1997
--------------------------------------------------------- -------------- -------------- --------------
                                                                   (In Thousands of Dollars)
<S>                                                       <C>            <C>            <C>
Standardized measure -
   beginning of year                                      $      396,060 $      315,380 $      452,582

Sales and transfers, net of production costs                    (126,730)      (105,958)       (97,968)

Net change in sales and transfer prices,
   net of production costs                                        47,330       (104,137)      (223,169)

Extensions and discoveries and improved
   recovery, net of related costs                                106,076         72,333        114,893

Changes in estimated future development costs                    (25,730)        (6,656)       (20,499)

Development costs incurred during the period
   that reduced future development costs                          40,563         15,891         16,154

Revisions of quantity estimates                                   51,375         (4,982)       (23,156)

Accretion of discount                                             41,293         37,706         57,700

Net change in income taxes                                       (47,097)        44,812         62,733

Net purchases of reserves in place                                19,018        155,259          1,855

Changes in production rates (timing) and other                   (21,526)       (23,588)       (25,745)
-------------------------------------------------------------------------------------------------------
Standardized measure -
   end of year                                            $      480,632 $      396,060 $      315,380
------------------------------------------                -------------- -------------- --------------
</TABLE>


AVERAGE SALES PRICES AND PRODUCTION COSTS PER UNIT
--------------------------------------------------------------------------------
Year Ended December 31,                       1999          1998          1997
-------------------------------------  -------------- ------------- ------------
Average sales price*

   Natural gas ($/MCF)                           2.14          1.96         2.45

Oil, condensate and natural gas liquid ($/Bbl)  16.41         12.18        18.33

Production cost per equivalent MCF ($)           0.26          0.26         0.28
--------------------------------------------------------- ----------------------
*Represents  the cash price  received  which  excludes the effect of any hedging
transactions.



ACREAGE
--------------------------------------------------------------------------------
At December 31, 1999                     Gross         Net
---------------------------------- ------------- ------------
Producing                             299,707      196,219
Undeveloped                           394,022      322,577
--------------------------------------------------------------------------------



NUMBER OF PRODUCING WELLS
--------------------------------------------------------------------------------
At December 31, 1999                  Gross         Net
------------------------------- ------------- ------------
Gas wells                               1,247      822.6
Oil wells                                   4        2.4
------------------------------- ------------- ------------


<TABLE>
<CAPTION>

DRILLING ACTIVITY (NET)
---------------------------------------------------------------------------------------------------------------
Year Ended December 31,               1999                        1998                         1997
-------------------------- -------------------------- ---------------------------- ----------------------------

                            Producing   Dry    Total   Producing    Dry    Total    Producing    Dry    Total
                            ---------   ---    -----   ---------    ---    -----    ---------    ---    -----

<S>                           <C>       <C>    <C>       <C>        <C>     <C>       <C>        <C>     <C>
Net developmental wells       29.7      3.1    32.8      19.2       4.6     23.8      29.3       8.5     37.8

Net exploratory wells          2.9      1.0     3.9       1.6       4.2     5.8        3.8       2.9     6.7
-------------------------------------------------------------------------------------------------------------
</TABLE>



WELLS IN PROCESS
--------------------------------------------------------------------------------
At December 31, 1999                 Gross         Net
------------------------------- ------------- ------------
Exploratory                          2.0          0.8
Developmental                        1.0          1.0
------------------------------- ------------- ------------



                                       42

<PAGE>

<TABLE>


SUMMARY OF QUARTERLY INFORMATION (UNAUDITED)

The  following  is a table of financial  data for each quarter of the  Company's
year ended December 31, 1999.
                             (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------
                      Quarter Ended  Quarter Ended  Quarter Ended  Quarter Ended
                           3/31/99        6/30/99       9/30/99         12/31/99
--------------------------------------------------------------------------------
<S>                             <C>          <C>           <C>           <C>
Operating revenues              961,108      543,526       538,469       911,510

Operating income                242,226       61,211        36,783       141,949

Net income                      143,221       22,989         9,016        83,385

Earnings for common stock       134,532       14,299           328        74,700

Basic and diluted earnings
        per common share   (A)     0.94         0.10          0.00          0.56

Dividends declared                0.445        0.445         0.445         0.445
--------------------------------------------------------------------------------
</TABLE>

(A) 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.


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

                             (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------
                              Quarter Ended   Quarter Ended   Quarter Ended
                                  6/30/98      9/30/98          12/31/98
----------------------------------------------------------------------------
Operating revenues (a)               570,856      434,581       723,044

Operating income (loss)              124,735      (18,645)     (155,357)

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

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

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

Dividends declared                    0.300(d)     0.445         0.445
----------------------------------------------------------------------------


(A) INCLUDES  REVENUES FROM VARIOUS LIPA SERVICE  AGREEMENTS  FOR THE PERIOD MAY
    29, 1998 THROUGH  DECEMBER 31, 1998 AND ELECTRIC  DISTRIBUTION  REVENUES FOR
    THE PERIOD APRIL 1, 1998 THROUGH MAY 28, 1998.

(B) REFLECTS THE FOLLOWING AFTER-TAX CHARGES:  LIPA TRANSACTION CHARGES OF $97.6
    MILLION;  KEYSPAN ACQUISITION CHARGES OF $83.5 MILLION; AN IMPAIRMENT CHARGE
    OF $54.1  MILLION  TO  WRITE-DOWN  THE VALUE OF PROVED GAS  RESERVES;  AND A
    CHARGE OF $13.0 MILLION TO ESTABLISH THE KEYSPAN FOUNDATION. (SEE NOTE 15 TO
    THE CONSOLIDATED FINANCIAL STATEMENTS,"COSTS RELATED TO THE LIPA TRANSACTION
    AND SPECIAL CHARGES.")

(C) QUARTERLY  EARNINGS  PER  SHARE ARE  BASED ON THE  AVERAGE  NUMBER OF SHARES
    OUTSTANDING  DURING THE QUARTER.  BECAUSE OF THE  CHANGING  NUMBER OF COMMON
    SHARES OUTSTANDING IN EACH QUARTER,  THE SUM OF QUARTERLY EARNINGS PER SHARE
    DOES NOT EQUAL EARNINGS PER SHARE FOR THE YEAR.

(D)  PRORATED  PORTION FOR  APPROXIMATELY  TWO MONTHS OF A DIVIDEND OF $1.78 PER
     SHARE ANNUALLY.



                                       43

<PAGE>



REPORT OF ARTHUR ANDERSEN LLP, 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,  1999 and  December  31, 1998 and the related
Consolidated Statements of Income, Retained Earnings and Cash Flows for the year
ended  December  31, 1999 and the nine months ended  December  31,  1998.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audit.

We conducted our audit in accordance with 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 audit  provides a  reasonable  basis for our
opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial  position and  capitalization  of KeySpan
Corporation  and  subsidiaries as of December 31, 1999 and December 31, 1998 and
the results of their operations and their cash flows for the year ended December
31, 1999 and the nine  months  ended  December  31,  1998,  in  conformity  with
accounting principles generally accepted in the United States.

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

ARTHUR ANDERSEN LLP

January 27, 2000
New York, New York

                                       44

<PAGE>



REPORT OF ERNST & YOUNG LLP, INDEPENDENT PUBLIC ACCOUNTANTS

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

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

We conducted our audit 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 audit  provides a  reasonable  basis for our
opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,  results of  operations  and cash flows of Long  Island
Lighting  Company for the twelve months ended March 31, 1998, in conformity with
accounting  principles  generally  accepted in the United  States.  Also, in our
opinion,  the related financial statement schedule,  when considered in relation
to the  basic  financial  statements  taken as a whole,  presents  fairly in all
material respects the information set forth therein.
During the twelve months ended March 31, 1998 the Company  changed its method of
accounting for revenues provided for under the Rate Moderation Component.



ERNST & YOUNG LLP




May 22, 1998
Melville, New York




                                       45

<PAGE>

<TABLE>
<CAPTION>

                 SCHEDULED OF VALUATION AND QUALIFYING ACCOUNTS


                                                                          (In Thousands of Dollars)
----------------------------------------------------------------------------------------------------
              Column A                Column B            Column C            Column D    Column E
----------------------------------------------------------------------------------------------------
                                                         Additions
----------------------------------------------------------------------------------------------------
                                                              Adjustment for
                                                               the KeySpan
                                                                                           Balance
                                     Balance at  Charged to    Acquisition                    at
                                      Beginning   Costs and      and LIPA     Deduction     End of
            Depreciation              of Period   Expenses     Transaction       (1)        Period
------------------------------------ ----------- -----------  -------------- ------------ ----------
<S>                                    <C>         <C>                         <C>         <C>
Twelve months ended December 31, 1999
Deducted from asset accounts:
Allowance for doubtful accounts        $20,026     $15,793         --          $15,525     $20,294
Nine months ended December 31, 1998
Deducted from asset accounts:
Allowance for doubtful accounts        $23,483     $11,064        $3,777       $18,298     $20,026
Twelve months ended March 31, 1998
Deducted from asset accounts:          $23,675     $23,239         --          $23,431     $23,483
Allowance for doubtful accounts
------------------------------------ ----------- -----------  -------------- ------------ ----------
</TABLE>

(1) UNCOLLECTIBLE ACCOUNTS WRITTEN OFF, NET OF RECOVERIES.




                                       46

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

     None.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

A  definitive  proxy  statement is expected to be filed with the SEC on or about
March 27, 2000 (the "Proxy Statement"). The information required by this item is
set forth under the caption "Executive Officers of the Company" in Part I hereof
and under the captions  "Election of Directors"  and "Section  16(a)  Beneficial
Ownership  Reporting  Compliance"  contained  in  the  Proxy  Statement,   which
information is incorporated herein by reference thereto.

ITEM 11.  EXECUTIVE COMPENSATION

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

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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


                                       35

<PAGE>



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

1.       FINANCIAL STATEMENTS

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

           Report of Independent Public Accountants
           Consolidated  Statement  of Income  for the year ended  December  31,
                1999,  the nine months ended  December 31, 1998,  and the fiscal
                year ended March 31, 1998.
           Consolidated  Statement  of  Retained  Earnings  for the  year  ended
                December 31, 1999,  the nine months ended December 31, 1998, and
                the fiscal year ended March 31, 1998.
           Consolidated  Balance  Sheet at December  31, 1999 and  December  31,
           1998.  Consolidated  Statement of Capitalization at December 31, 1998
           and December 31,
                1998.
           Consolidated  Statement of Cash Flows for the year ended December 31,
                1999,  the nine months ended  December 31, 1998,  and the fiscal
                year ended March 31, 1998.
           Notes to Consolidated Financial Statements

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

1.    FINANCIAL STATEMENTS

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

         Report of Independent Public Accountants
         Consolidated  Statement of Income for the year ended December 31, 1999,
             the nine months ended  December 31, 1998, and the fiscal year ended
             March 31, 1998.
         Consolidated Statement of Retained Earnings for the year ended December
             31, 1999,  the nine months ended  December 31, 1998, and the fiscal
             year ended March 31, 1998.
         Consolidated  Balance Sheet at December 31, 1999 and December 31, 1998.
         Consolidated  Statement  of  Capitalization  at  December  31, 1998 and
         December 31,
             1998.
         Consolidated  Statement  of Cash Flows for the year ended  December 31,
             1999,  the nine months ended December 31, 1998, and the fiscal year
             ended March 31, 1998.
         Notes to Consolidated Financial Statements

2.       Financial Statements Schedules

Consolidated  Schedule of Valuation and  Qualifying  Accounts for the year ended
December 31, 1999,  the nine months ended December 31, 1998, and the fiscal year
ended March 31, 1998.

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

3.    Exhibits

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

     10.21  Agreement  and Plan of Merger  dated  November 4, 1999,  between the
            Company,  Eastern  Enterprises  and ACJ  Acquisition  LLC  (filed as
            Exhibit 2 to the Company's Form 8-K on November 5, 1999)

     10.22Amendment  No. 1 to Agreement  and Plan of Merger,  dated  January 26,
          2000, between the Company, Eastern Enterprises and ACJ Acquisition LLC



<PAGE>



      3.1   Certificate  of  Incorporation  of the Company  effective  April 16,
            1998,  Amendment  to  Certificate  of  Incorporation  of the Company
            effective May 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 May 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    Participation  Agreements  dated as of  February  1,  1989,  between
            NYSERDA  and  The  Brooklyn  Union  Gas  Company   relating  to  the
            Adjustable Rate Gas Facilities  Revenue Bonds ("GFRBs") Series 1989A
            and  Series  1989B  (filed as  Exhibit 4 to The  Brooklyn  Union Gas
            Company Form 10-K for the year ended September 30, 1989)

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

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

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

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

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



<PAGE>



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

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

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

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

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

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

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

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

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



<PAGE>



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

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

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

   *4.10    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

            Trust  Indenture,  dated as of October 1, 1999,  by and  between New
            York State Energy Research and Development  Authority  (NYSERDA) and
            The Chase Manhattan Bank, as Trustee, relating to the 1999 Pollution
            Control Refunding Revenue Bonds, Series A

   *4.11    First Supplemental Trust Indenture,  dated as of January 1, 2000, by
            and between New York State Energy Research and Development Authority
            (NYSERDA) and The Chase Manhattan Bank, as Trustee,  relating to the
            GFRBs 1997 Series A

     *4.12Credit Agreement,  dated as of November 8, 1999, among the Company, as
          Borrower, the Several Lenders,  Citibank,  N.A., as Syndication Agent,
          European American Bank, as Documentation Agent and The Chase Manhattan
          Bank, as  administrative  Agent,  for a $700,000,000  revolving credit
          loan

   *4.13    Indenture,  dated December 1, 1999,  between the Company and KeySpan
            Gas East Corporation, the Registrants, and the Chase Manhattan Bank,
            as Trustee,  with the 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)

   4.14     Form of Medium-Term Note issued in connection with the issuance of 7
            7/8%  notes  (filed  as  Exhibit  4, to the  Company's  Form  8-K on
            February 1, 2000)


     10.1 Agreement of Lease between  Forest City Jay Street  Associates and The
          Brooklyn  Union Gas  Company  dated  September  15,  1988 (filed as an
          exhibit to The


<PAGE>



     Brooklyn Union Gas Company Form 10-K for the year ended September 30, 1996)

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

     10.3 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)

     10.4 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)

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

     10.6 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)

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

   10.8     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)

     *10.9Employment  Agreement  effective  as of  September 1, 1999 between the
          Company and Craig G. Matthews

     *10.10  Employment  Agreement  effective  as of July 29,  1999  between the
          Company and Gerald Luterman

   10.11    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%


<PAGE>



     Senior  Subordinated  Notes  Due  2008  (including  form  of 8 5/8%  Senior
     Subordinated   Note  Due  2008)  (filed  as  Exhibit  4.1  to  The  Houston
     Exploration Company's  Registration  Statement on Form S-4 (No. 333-50235))

     10.12  Subordinated  Loan  Agreement  dated  November  30, 1998 between The
     Houston Exploration Company and MarketSpan Corporation d/b/a KeySpan Energy
     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).

   10.13    Subordination  Agreement  dated  November  25, 1998 entered into and
            among MarketSpan  Corporation d/b/a KeySpan Energy 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)).

     *10.14 First Amendment to  Subordinated  Loan Agreement and Promissory Note
            between  KeySpan  Corporation  and The Houston  Exploration  Company
            dated effective as of October 27, 1999.

     10.15Exploration  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)).

     *10.16 First  Amendment to the  Exploration  Agreement  between The Houston
          Exploration  Company and KeySpan  Exploration and  Production,  L.L.C.
          dated November 3, 1999.

     10.17  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)).

     10.18  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)).

     10.19  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)).


<PAGE>



     *10.20 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.

     10.21  Directors' Deferred  Compensation Plan of the Company effective July
            1, 1998 (filed as Exhibit 10.16 to the  Company's  Form 10-K for the
            year ended December 31, 1998)

            10.22 Corporate Annual Incentive  Compensation  Plan effective as of
                  September  10, 1998 (filed as Exhibit  10.18 to the  Company's
                  Form 10-K for the year ended December 31, 1998)

     10.23  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)

     10.24  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 Company 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)

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

     10.26  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)

     10.27  Guaranty  dated  June 9,  1999,  from  the  Company  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)

         * 21 Subsidiaries of the Registrant

         23.1  Consent of Arthur Andersen LLP, Independent Auditors

         23.2  Consent of Ernst and Young LLP, Independent Auditors

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

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



<PAGE>



     27   Financial  Data  Schedule  on  Schedule  U-T for the fiscal year ended
          December 31, 1999

* Filed herewith



4.   Reports on Form 8-K

In its Report on Form 8-K dated November 5, 1999,  the Company  reported that it
has entered into a definitive agreement with Eastern,  pursuant to which KeySpan
will acquire all of the outstanding common stock of Eastern.

In its Report on Form 8-K dated September 16, 1999, the Company reported:

      (1)that it intends to begin a process to review strategic alternatives for
         the Houston  Exploration  Company, in which the Company has a 64% share
         ownership.

      (2)that it  currently  believes  that its  earnings  for the  year  ending
         December 31, 1999, will exceed most securities analysts' estimates.

In its  Report  on Form 8-K dated  December  2, 1999 the  Company  reported  its
consolidated financial statements for each of the nine months ended December 31,
1998,  the twelve months ended March 31, 1998,  the three months ended March 31,
1997 and the twelve months ended  December 31, 1996 with a new note,  containing
summarized  financial  information  for KeySpan Gas East  Corporation,  had been
added.












<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
                                       d/b/a KeySpan Energy



March 9, 2000                          By: /s/Gerald Luterman
                                           Gerald Luterman
                                           Senior Vice President and
                                           Chief Financial Officer


March 9, 2000                          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 9, 2000.


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

                               Senior Vice-President and Chief Financial Officer
                                (Principal financial officer)
      /s/Gerald Luterman
       Gerald Luterman


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








<PAGE>




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

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

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

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

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






<PAGE>



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

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

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

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

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

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

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

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


    By: /s/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.