Exhibit 10.38                       GUARANTEE



                               KEYSPAN CORPORATION



                                  IN FAVOUR OF

                                   LENDERS TO



                         KEYSPAN ENERGY DEVELOPMENT CO.

<PAGE>






                                    GUARANTEE

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                    ARTICLE 1
                         DEFINITIONS AND INTERPRETATION
<S>        <C>                                                                                                  <C>
1.1         Definitions...........................................................................................1
1.2         Headings and Guarantee References.....................................................................6
1.3         Number; Person........................................................................................6
1.4         Time; Including.......................................................................................6
1.5         Legislation...........................................................................................6
1.6         Administrative Agent for Guarantee Beneficiaries......................................................7
1.7         Accounting Principles.................................................................................7

                                    ARTICLE 2
                            No collateral agreements

2.1         Acknowledgement.......................................................................................8
2.2         Subsidiary Assets Not Charged.........................................................................8

                                    ARTICLE 3
                                    Guarantee

3.1         Guarantee.............................................................................................9
3.2         Continuing Guarantee..................................................................................9
3.3         Other Guarantors......................................................................................9
3.4         Borrower..............................................................................................9
3.5         Acknowledgement of Continued Liability...............................................................10
3.6         Payment on Demand; Interest..........................................................................10
3.7         Statement of Obligations.............................................................................11
3.8         Not Bound to Exhaust Recourse........................................................................11
3.9         Corporate Authority..................................................................................11
3.10        Reinstatement........................................................................................12
3.11        Subrogation and Indemnity............................................................................12
3.12        Postponement of Claims...............................................................................12
3.13        Filing of Claims in Insolvency.......................................................................13
3.14        Appropriation........................................................................................13
3.15        Interest Act.........................................................................................13

                                    ARTICLE 4
                            obligations not released

4.1         Obligations Absolute.................................................................................14
4.2         Security provided by the Borrower....................................................................16
4.3         Dealing with the Borrower............................................................................17
4.4         Extensions...........................................................................................17
4.5         Increased Commitments................................................................................18

                                    ARTICLE 5
                         representations and warranties

5.1         Representations and Warranties By the Guarantor......................................................18
5.2         General..............................................................................................20

                                    ARTICLE 6
                                    covenants

6.1         Covenants of the Guarantor...........................................................................21

                                    ARTICLE 7
                             expenses and INDEMNITY

7.1         Expenses.............................................................................................24
7.2         Indemnity............................................................................................25

                                    ARTICLE 8
                                     general

8.1         Notice...............................................................................................26
8.2         Governing Law and Jurisdiction.......................................................................27
8.3         Judgment Currency....................................................................................27
8.4         Payments Free and Clear of Taxes.....................................................................28
8.5         Prohibited Rate......................................................................................30
8.6         Assignment...........................................................................................30
8.7         Severability.........................................................................................31
8.8         Whole Agreement......................................................................................31
8.9         Amendments, Waivers and Consents.....................................................................31
8.10        Further Assurances...................................................................................31
8.11        Time of the Essence..................................................................................31
8.12        Separate Action......................................................................................32
8.13        Waiver and Acknowledgement...........................................................................32
8.14        No Merger............................................................................................32
8.15        Successors and Assigns...............................................................................33
8.16        Execution............................................................................................33
</TABLE>


                                    SCHEDULES



Schedule 1               Litigation Schedule

<PAGE>








                                    GUARANTEE

                               KEYSPAN CORPORATION

         THIS GUARANTEE is made as of July 29th, 1999 by KeySpan Corporation, a
corporation duly organized and existing under the laws of the State of New York
(the "Guarantor"), in favour of the Guarantee Beneficiaries.

     WHEREAS the Lenders have, pursuant to the Credit Agreement,  made available
the Credit Facility to the Borrower;

         AND WHEREAS the obligation of the Lenders to make the Credit Facility
available to the Borrower is conditional on, among other things, the execution
and delivery by the Guarantor of this Guarantee and, as consideration therefor
and in order to induce the Lenders to make the Credit Facility available to the
Borrower, the Guarantor has agreed with the Lenders and the Administrative Agent
to guarantee the due and punctual payment and discharge of the Guaranteed
Obligations in accordance with the provisions of this Guarantee;

         AND WHEREAS the Borrower is an indirect wholly owned Subsidiary of the
Guarantor, and it is in the best interests of the Guarantor that the Credit
Facility be made available by the Lenders to the Borrower;

         NOW THEREFORE, WITNESSETH THAT IN CONSIDERATION of the Lenders entering
into the Credit Agreement with the Borrower and for other good and valuable
consideration, the receipt and adequacy of which is acknowledged by the
Guarantor, the Guarantor covenants and agrees as follows:

                                   ARTICLE 1
                         DEFINITIONS AND INTERPRETATION

1.1      Definitions

         In this Guarantee, unless something in the subject matter or context is
inconsistent therewith:

         "Administrative Agent" means Royal Bank of Canada, when acting in its
         capacity as Administrative Agent under the Credit Agreement, and
         includes any successor Administrative Agent appointed pursuant to
         Section 13.10 of the Credit Agreement;

          "Affiliate" has the meaning set forth in the Business Corporations Act
          (Alberta);

          "Applicable  Environmental Laws" means those Applicable Laws which are
          Environmental Laws;

         "Applicable Law" means, with respect to any person, property,
         transaction or event, all applicable provisions of laws, statutes,
         regulations, rules, guidelines, by-laws, ordinances, treaties, orders,
         policies, judgments, decrees and official directives of any
         Governmental Authority or any person acting under any Governmental
         Authority;

         "Banking Day" means a day, excluding Saturday and Sunday, on which
         banks generally are open for business in Calgary, Alberta, Canada and
         New York, New York, United States of America;

          "Borrower"   means  KeySpan  Energy   Development  Co.,  an  unlimited
          liability  company  organized  and  existing  under  the  laws of Nova
          Scotia,  Canada,  and any successor thereto permitted  pursuant to the
          Credit Agreement;

         "Borrower's Counsel" means the firm of Macleod Dixon, or such other
         firm of legal counsel as the Borrower may from time to time designate;

         "Canadian Dollars" and "Cdn $" mean the lawful money of Canada;

          "Canadian Prime Rate" shall have the meaning given to it in the Credit
          Agreement;

         "Commitment" has the meaning given to it in the Credit Agreement;

         "Consolidated Tangible Net Worth" of the Guarantor means, at any time:
         (a) the total amount of common shareholders' equity of the Guarantor as
         shown on the most current consolidated balance sheet of the Guarantor
         at such time, as determined in accordance with GAAP; less (b) amounts
         in respect of (i) goodwill, trademarks, licenses, patents, patent
         rights, patent licenses, copyrights, trade names, organization
         expenses, licenses, franchises, share issuance expenses and other
         similar assets, and (ii) all other assets which are treated as
         intangibles in accordance with GAAP;

         "Credit Agreement" means the document entitled "Credit Agreement",
         among the Borrower, the Lenders and the Administrative Agent, dated as
         of July 29th, 1999, as amended, restated, replaced or substituted from
         time to time, and includes all agreements and instruments entered into
         by the Borrower pursuant thereto or in connection therewith;

         "Credit Facility" means the extendible revolving/term credit facility
         made available to the Borrower by the Lenders pursuant to, and subject
         to the terms and conditions of, the Credit Agreement;

         "Debt" means senior, unsecured long term debt;

         "Environmental Laws" mean all applicable federal, provincial, state,
         regional, municipal or local laws with respect to the environment or
         environmental or public health and safety matters contained in
         statutes, regulations, rules, by-laws, ordinances, treaties, orders,
         judgments, decrees, approvals, notices, permits or policies, guidelines
         or directives having the force of law;

         "Equivalent Amount" means, on any date, the equivalent amount in
         Canadian Dollars or United States Dollars, as the case may be, after
         giving effect to a conversion of a specified amount of United States
         Dollars to Canadian Dollars or of Canadian Dollars to United States
         Dollars, as the case may be, at the noon spot rate of exchange for
         Canadian interbank transactions established by the Bank of Canada for
         the day in question, or, if such rate is for any reason unavailable, at
         the spot rate quoted for wholesale transactions by the Administrative
         Agent at approximately noon (Toronto time) on that date in accordance
         with its normal practice;

          "Event of Default"  shall have the  meaning  given to it in the Credit
          Agreement;

         "Fiscal Quarter" means the first three months of a Fiscal Year, and
         each successive period of three months in such Fiscal Year;

         "Fiscal Year" means the fiscal year as adopted by the Guarantor from
         time to time and which is currently the one year period commencing on
         January 1 of each year and ending on December 31 of each year;

         "GAAP" shall have the meaning given to it in Section 1.7;

         "Governmental Authority" means:

     (a)  any  government,   parliament  or   legislature,   any  regulatory  or
          administrative  authority,  agency, commission or board (including any
          board  having  jurisdiction  in respect of public  utilities)  and any
          other statute, rule or regulation making entity having jurisdiction in
          the relevant circumstances;

     (b)  any person  acting under  authority of any of the foregoing or under a
          statute, rule or regulation thereof; and

     (c)  any judicial, administrative or arbitral court, authority, tribunal or
          commission having jurisdiction in the relevant circumstances;

          "Guarantee"  means this  guarantee,  as it may be  amended,  restated,
          replaced or substituted from time to time;

          "Guarantee  Beneficiaries"  means,  collectively,  the  Administrative
          Agent and the Lenders;

         "Guaranteed Obligations" means all present and future indebtedness,
         obligations and liabilities of the Borrower to the Guarantee
         Beneficiaries or any of them under or relating to the Credit Agreement,
         whether direct or indirect, absolute or contingent, matured or not,
         liquidated or unliquidated, and whether incurred alone or with others,
         and including, without limitation:

     (a)  indebtedness  for  principal  (including  obligations  in  respect  of
          bankers'  acceptances),  interest  (both  before  and after  maturity,
          default and judgment),  fees  (including  stamping fees and commitment
          fees),  costs and expenses  (including  breakage costs and enforcement
          expenses) and indemnities; and

     (b)  obligations and  liabilities  under any order or judgment of any court
          of  competent  jurisdiction  arising  out of or  related to the Credit
          Agreement;

         "Lenders" means each of the financial institutions named on Schedule A
         to the Credit Agreement as a Lender which has executed the Credit
         Agreement, and any person which has become a party thereto as a Lender,
         and includes Royal Bank of Canada in its capacity as a Lender, but
         excluding any such financial institution, the Commitment of which has
         been reduced to zero, and excluding the Administrative Agent in its
         capacity as the Administrative Agent;

         "Lenders' Counsel" means the firm of Stikeman, Elliott, or such other
         firm of legal counsel as the Administrative Agent may from time to time
         designate;

         "Material Adverse Effect" means, with respect to the Guarantor, a
material adverse effect on:

     (a)  its business, condition (financial or otherwise),  operations,  assets
          or  properties,  taken as a whole;  provided  that a Material  Adverse
          Effect with respect to the Guarantor  shall occur under this paragraph
          (a) only if there has been a Material  Adverse Effect on the Guarantor
          and its Subsidiaries taken as a whole;

     (b)  the validity or enforceability of this Guarantee;

     (c)  the ability of the  Guarantor  to perform its  obligations  under this
          Guarantee;

     (d)  the rights or remedies of the  Guarantee  Beneficiaries  or any one or
          more of them under this Guarantee; or

     (e)  the ability of the  Guarantor  to pay any amounts  payable by it under
          this  Guarantee or under any other  documents  provided to or that the
          Guarantor enters into with the Guaranteed  Beneficiaries or any one or
          more  of  them  in  connection  with  the  Credit  Agreement  or  this
          Guarantee;

         "Moody's" means Moody's Investors Services, Inc., and its successors;

         "person" includes an individual, corporation, partnership, joint
         venture, association, trust, unincorporated organization, government or
         any agency or instrumentality thereof, or any other entity;

          "S&P"  means   Standard  and  Poor's  Ratings  Group,  a  division  of
          McGraw-Hill, Inc., and its successors;

         "Security Interest" means a mortgage, pledge, deposit by way of
         security, charge, hypothec, assignment by way of security, security
         interest, lien (whether statutory, equitable or at common law), title
         retention agreement, lease with option to purchase, right of set-off
         (if created for the purpose of directly or indirectly securing the
         repayment of borrowed money), and any other interest in property or
         assets, howsoever created or arising, that secures payment or
         performance of an obligation, including a trust and statutory deemed
         trust;

         "Subsidiary" means:

(a)               any corporation of which at least a majority of the
                  outstanding shares having by the terms thereof ordinary voting
                  power to elect a majority of the board of directors of such
                  corporation (irrespective of whether, at the time, shares of
                  any other class or classes of such corporation might have
                  voting power by reason of the happening of any contingency,
                  unless the contingency has occurred and then only for as long
                  as it continues) is, at the time, directly or indirectly
                  beneficially owned by the Guarantor or one or more of its
                  Subsidiaries or by the Guarantor and one or more of its
                  Subsidiaries; and

(b)               any partnership of which at least a majority of the
                  outstanding income interests or capital interests are at the
                  time directly or indirectly beneficially owned by the
                  Guarantor or one or more of its Subsidiaries or by the
                  Guarantor and one or more of its Subsidiaries;

         "Taxes" shall have the meaning given to it in the Credit Agreement;

          "United  States  Dollars"  and "U.S.  $" means the lawful money of the
          United States of America; and

         "Year 2000 Compliance" means a product is compliant if the product,
         when used in accordance with its associated documentation, is capable
         of processing, providing, and/or receiving data without material error
         relating to date data which represents or references different
         centuries or more than one century, provided all other products used
         with the product properly exchange similarly accurate date data with
         the product. "Year 2000 Compliant" shall have a corresponding meaning.

1.2      Headings and Guarantee References

(a)               The division of this Guarantee into Articles, Sections,
                  Schedules, the inclusion of a table of contents and the
                  insertion of headings is for convenience of reference only and
                  shall not affect the construction or interpretation of this
                  Guarantee.

(b)               The terms "this Guarantee", "hereof", "hereunder" and similar
                  expressions refer to this Guarantee and not to any particular
                  Article, Section, Schedule or other portion hereof, and
                  include any amendments or supplements hereto. Unless otherwise
                  stated, references herein to Articles, Sections and Schedules
                  are to Articles, Sections and Schedules of this Guarantee.
                  References to "the date hereof" or similar references shall
                  mean the date of this Guarantee.

1.3      Number; Person

         Words importing the singular number only shall include the plural and
vice versa, words importing the masculine gender shall include the feminine and
neuter genders and vice versa.

1.4      Time; Including

     (a)  Unless otherwise  stated,  references to time shall mean local time in
          Calgary, Alberta, Canada.

     (b)  The word  "including"  shall not be construed to limit or restrict the
          generality of the matter that precedes it.

1.5      Legislation

         All references herein to a statute include, unless otherwise stated,
regulations passed or in force pursuant thereto and any amendments to such
statute or regulations from time to time, and any legislation or regulations
substantially replacing the same or substantially replacing any specific
provision to which such reference is made.

1.6      Administrative Agent for Guarantee Beneficiaries

     (a)  Any action that may be taken,  communication or demand given or remedy
          exercised by the Guarantee Beneficiaries hereunder may be taken, given
          or  exercised by the  Administrative  Agent on their  behalf,  and any
          payment  required  to be  made  by  the  Guarantor  to  the  Guarantee
          Beneficiaries  hereunder shall be made to the Administrative  Agent on
          behalf of the Guarantee Beneficiaries.

     (b)  All documents,  statements,  certificates and other materials required
          to be delivered by the Guarantor to the Administrative Agent hereunder
          shall be  delivered  in a  sufficient  number  of  copies to allow the
          Administrative  Agent  to  deliver  one  such  copy to each  Guarantee
          Beneficiary.

     (c)  A reference in this Guarantee to the "Guarantee  Beneficiaries"  shall
          be a reference to the  Guarantee  Beneficiaries  or any one or more of
          them, as the case may be.

     (d)  The Guarantor shall be entitled to rely upon any  certificate,  notice
          or other document (including any facsimile) or other advice, statement
          or instruction  provided to it by the Administrative Agent pursuant to
          this Guarantee. Except with respect to Sections 3.5, 3.14, 7.2 and any
          Lender's  demand or enforcement of remedies  hereunder  (collectively,
          the "Guarantee  Beneficiary  Actions") the Guarantor shall be entitled
          to deal with the  Administrative  Agent with  respect  to all  matters
          under this  Guarantee,  without any  obligation  whatsoever to satisfy
          itself  as to the  authority  of the  Administrative  Agent  to act on
          behalf  of the  Guarantee  Beneficiaries  and  without  any  liability
          whatsoever  to  the  Guarantee  Beneficiaries  for  relying  upon  any
          certificate,  notice or other  document or other advice,  statement or
          instruction   provided   to   it   by   the   Administrative    Agent,
          notwithstanding  any lack of authority of the Administrative  Agent to
          provide the same.

          Notwithstanding the foregoing the applicable Guarantee Beneficiary may
          authorize  the  Guarantor to deal with the  Administrative  Agent with
          respect  to  any  Guarantee  Beneficiary  Action  undertaken  by  that
          Guarantee Beneficiary.

1.7      Accounting Principles

         Wherever in this Guarantee reference is made to "GAAP", such reference
shall be deemed to be to the generally accepted accounting principles in the
United States of America from time to time approved by the American Institute of
Chartered Accountants, or any successor institute, applicable as at the date on
which the relevant determination or calculation is made or required to be made.
Where the character or amount of any asset or liability or item of revenue or
expense is required to be determined, or any consolidation or other accounting
computation is required to be made for the purpose of this Guarantee, such
determination or calculation shall, unless the context otherwise requires, be
made in accordance with GAAP applied on a consistent basis.

                                   ARTICLE 2
                            NO COLLATERAL AGREEMENTS
                            ------------------------

2.1      Acknowledgement

         The Guarantor confirms that its obligations under this Guarantee are
not subject to any promise or condition affecting or limiting its liability, and
no statement, representation, collateral agreement or promise by the Guarantee
Beneficiaries or any of them or by any officer, employee or agent of any of them
forms any part of this Guarantee or has induced the making thereof, or shall be
deemed in any way to affect the Guarantor's liability hereunder. It is intended
that all conditions and limitations relating to this Guarantee are expressly set
out herein, failing which the Guarantor expressly waives reliance on any
conditions or limitations not set forth herein as a defence to or limitation of
its obligations hereunder.

2.2      Subsidiary Assets Not Charged

         This Guarantee is an unsecured guarantee and does not create or grant
any charge on or security over any of the property and assets of the Guarantor
or any of its Subsidiaries, including its Subsidiaries, Brooklyn Union, Brooklyn
Union of Long Island and KeySpan Generation LLC (the "Utility Subsidiaries"). No
lien, levy, execution, seizure, attachment, garnishment or other encumbrance
whatsoever may be placed on or enforced against any of the property and assets
of the Utility Subsidiaries, and no obligation of the Borrower or the Guarantor
may be enforced against any of the Utility Subsidiaries, as a consequence of
this Guarantee or in connection with the enforcement hereof, notwithstanding any
Applicable Law, common law or equitable principle to the contrary, including any
bankruptcy law, principle of consolidation or otherwise whatsoever; provided
that nothing herein shall in any way restrict the Guarantee Beneficiaries from
enforcing any claim or judgment pursuant to this Guarantee against any assets of
the Guarantor, including against the shares or other securities of the Utility
Subsidiaries held by the Guarantor.

                                    ARTICLE 3
                                    GUARANTEE
                                    ---------

3.1      Guarantee

         The Guarantor hereby absolutely, unconditionally and irrevocably
guarantees to the Guarantee Beneficiaries the due and punctual payment and
discharge of all of the Guaranteed Obligations. The Guarantor covenants that the
Guaranteed Obligations will be duly and punctually paid and discharged in
accordance with the terms of the Credit Agreement, whether the same become due
on maturity, by mandatory prepayment, by demand, by acceleration or otherwise.

3.2      Continuing Guarantee

         This Guarantee shall be a continuing guarantee, shall cover and secure
any ultimate balance of the Guaranteed Obligations owing to the Guarantee
Beneficiaries, and shall be operative and binding notwithstanding that at any
time or times the Guaranteed Obligations may be zero, or that any payments from
time to time may be made to the Guarantee Beneficiaries, or any settlements of
account effected, or any other thing whatsoever done, suffered or permitted, or
any other action short of actual payment of all the Guaranteed Obligations and
any other amounts payable hereunder.

3.3      Other Guarantors

     (a)  This Guarantee shall be operative and binding regardless of whether or
          not any proposed guarantor or any other persons have executed or shall
          execute a guarantee in respect of the Guaranteed  Obligations or is or
          are or shall  become  in any other way  responsible  to the  Guarantee
          Beneficiaries  for or in respect of the Guaranteed  Obligations or any
          part thereof,  and  regardless of whether or not any other persons now
          or hereafter liable to the Guarantee  Beneficiaries for the Guaranteed
          Obligations  or any part  thereof  (whether  under this  Guarantee  or
          otherwise) shall cease to be so liable.

     (b)  The Guarantor's  obligations hereunder shall be joint and several with
          any other  guarantor  guaranteeing  all or any part of the  Guaranteed
          Obligations.

3.4      Borrower

         This Guarantee shall extend to the Borrower's obligations to the
Guarantee Beneficiaries under the Credit Agreement notwithstanding any change or
changes in the name, business, shareholders, directorate, powers, objects,
capital structure, organization or management of the Borrower, and
notwithstanding any reorganization of the Borrower or the amalgamation or other
merger or combination of the Borrower with another or others (including with the
Guarantor, in which case the obligations of the Guarantor under and in respect
of the Credit Agreement shall be direct), or the sale or disposal of any of the
Borrower's properties, business or undertaking in whole or in part to another or
others, or the amendment, surrender, forfeiture or termination of the Borrower's
certificate of incorporation, memorandum of association, articles of association
or by-laws or the receivership, dissolution, insolvency, winding-up,
arrangement, reorganization, bankruptcy or liquidation of or in respect of the
Borrower, and no such event shall lessen, release or discharge the obligations
of the Guarantor under this Guarantee.

3.5      Acknowledgement of Continued Liability

         The Guarantor shall, from time to time, forthwith on the reasonable
request of any Guarantee Beneficiary:

     (a)  deliver to such Guarantee Beneficiary suitable acknowledgements of the
          Guarantor's  continued  liability  hereunder  in such form as Lenders'
          Counsel may advise; and

     (b)  prevent any action brought against the Guarantor  hereunder from being
          barred by any statute of limitations  now or hereafter in force in the
          province of Alberta,  Canada,  the state of New York, United States of
          America  and  elsewhere,  and  in the  event  of  the  failure  of the
          Guarantor to do so, the  Guarantor  hereby  irrevocably  appoints each
          Guarantee  Beneficiary the attorney in fact and agent of the Guarantor
          to make,  execute and deliver such written  acknowledgements  or other
          instruments as may from time to time become  necessary or advisable to
          fully  maintain  and  keep in force  the  liability  of the  Guarantor
          hereunder.

3.6      Payment on Demand; Interest

     (a)  At any time when an Event of  Default  is  continuing,  the  Guarantee
          Beneficiaries shall be entitled to immediate payment of the Guaranteed
          Obligations by the Guarantor on written demand for payment made by the
          Administrative Agent on the Guarantor.

     (b)  If and whenever the Administrative Agent makes demand for payment upon
          the  Guarantor as provided in this  Section,  the  Guarantor  shall be
          liable to the Guarantee Beneficiaries for the amount demanded directly
          as principal,  and not just as surety, and will not plead or assert to
          the contrary in any proceeding  taken by or on behalf of the Guarantee
          Beneficiaries in enforcing this Guarantee.

     (c)  The  Guarantor  shall pay  interest  on the  amount of the  Guaranteed
          Obligations  for which  demand  shall  have been made  hereunder  (but
          without  duplication of interest payable under the Credit  Agreement),
          computed from and including  the date of the  applicable  demand until
          payment in full, both before and after default, maturity and judgment,
          at the rate or rates  provided in the Credit  Agreement  in respect of
          the  obligation so demanded,  calculated  and compounded in the manner
          set out in the Credit Agreement.

     (d)  All amounts  payable by the Guarantor  under this  Guarantee  shall be
          paid  without  set-off  or  counterclaim  and  without  any  deduction
          whatsoever.

     (e)  The Guarantor  acknowledges  that the  Guaranteed  Obligations  may be
          payable either in United States Dollars or Canadian  Dollars or partly
          in one currency  and partly in the other,  and,  without  limiting the
          effect of  Section  8.3,  the  Guarantor  agrees to make all  required
          payments  hereunder  in the  currency  or  currencies  in  which  such
          Guaranteed Obligations are owing by the Borrower.

3.7      Statement of Obligations

         Any account settled between the Administrative Agent and the Borrower
as to the amount of the Guaranteed Obligations shall be conclusive evidence
thereof. All right to question in any way the Guarantee Beneficiaries' present
or future method of dealing with the Borrower, or with any persons now or
hereafter liable to the Guarantee Beneficiaries for the Guaranteed Obligations
or any part thereof, or with any security held by the Guarantee Beneficiaries,
or with any property covered thereby, is hereby waived. The Guarantor waives any
right it may otherwise have to be kept appraised, advised or informed by the
Guarantee Beneficiaries (or any of them) of the activities, or of the position
(financial or otherwise), of the Borrower. The Guarantor hereby renounces all
benefits of discussion and division.

3.8      Not Bound to Exhaust Recourse

         The Guarantee Beneficiaries shall not be bound to exhaust their
recourse against the Borrower or to pursue any rights or remedies they may have
against the Borrower or any other persons, or to pursue any rights or remedies
under any security, or to value any security, or to make any demand on or
present any note or security to the Borrower or any other person, before
demanding or being entitled to payment from the Guarantor hereunder.

3.9      Corporate Authority

         The Guarantee Beneficiaries shall not be concerned to see or enquire
into the status, powers, capacity, authority or ability of the Borrower or any
of its directors, officers or agents acting or purporting to act on its behalf,
and all moneys, advances, renewals and credits in fact borrowed or obtained in
the professed exercise of such powers shall be deemed to form part of the
Guaranteed Obligations even if irregularly, fraudulently, defectively or
informally effected, or in excess of the powers or authority of the Borrower or
any of its directors, officers or agents, and notwithstanding any incapacity or
disability of any thereof, and further notwithstanding any actual or
constructive notice of the Administrative Agent or any of the Guarantee
Beneficiaries of the authority or lack of authority of the Borrower or its
directors, officers, employees or agents.

3.10     Reinstatement

         This Guarantee shall continue to be effective or be reinstated, as the
case may be, if at any time payment of the Guaranteed Obligations or any part
thereof is rescinded or must otherwise be restored or returned by the Guarantee
Beneficiaries or any of them upon the insolvency, bankruptcy or reorganization
of the Borrower or the Guarantor or for any other reason whatsoever, all as
though such payment had not been made.

3.11     Subrogation and Indemnity

         The Guarantor shall not exercise any rights which it may have acquired
by way of subrogation, indemnity or contribution under this Guarantee (by virtue
of any payment being made by it hereunder, or any liability of it to make
payment hereunder, or otherwise) or exercise any right of contribution against
any other guarantor, unless and until all Guaranteed Obligations have been
finally paid and performed in full. If any amount shall be paid (including
through any exercise of set-off rights) to the Guarantor arising out of or based
upon such right of subrogation, indemnity or contribution at a time when the
Guaranteed Obligations have not been finally paid and performed in full, such
amount shall be deemed to have been paid to the Guarantor for the benefit of,
and held by the Guarantor in trust for, the Guarantee Beneficiaries, and shall
forthwith be paid to the Guarantee Beneficiaries, to be credited and applied to
the Guaranteed Obligations, whether matured or unmatured.

3.12     Postponement of Claims

         All indebtedness, obligations and liabilities, present and future,
direct or indirect, of the Borrower to the Guarantor (the "Intercorporate
Debt"), together with each and every security therefor, shall be and is hereby
subordinated and postponed to the prior payment in full of all of the Guaranteed
Obligations, and all monies received by the Guarantor on account of the
principal amount of any Intercorporate Debt, and all monies received by the
Guarantor on account of interest or other amounts paid or payable in respect of
any Intercorporate Debt at any time following the occurrence and during the
continuance of an Event of Default, shall be received and held by the Guarantor
in trust for the Guarantee Beneficiaries, and forthwith upon demand by the
Administrative Agent shall be paid over to the Guarantee Beneficiaries and
applied to the Guaranteed Obligations until the Guaranteed Obligations are
finally paid and satisfied in full, all without prejudice to, and without in any
way limiting or lessening, the liability of the Guarantor to the Guarantee
Beneficiaries under this Guarantee.

3.13     Filing of Claims in Insolvency

         Notwithstanding Section 3.12, on request by the Administrative Agent,
the Guarantor will file, enforce and collect all claims against the Borrower in
any receivership, bankruptcy or other proceedings in which the filing of claims
is contemplated by law in respect of any indebtedness of the Borrower to the
Guarantor, and will hold in trust and assign to the Administrative Agent, on
behalf of the Guarantee Beneficiaries, all of the Guarantor's rights thereunder.
If the Guarantor fails to file, enforce or collect any such claim:

     (a)  the  Administrative  Agent,  as  attorney  in fact  and  agent  of the
          Guarantor,  is hereby authorized to do so in the name of the Guarantor
          or, in its discretion, to assign the claim to the Administrative Agent
          on behalf of the Guarantee Beneficiaries and to cause a proof of claim
          to be filed in the  Guarantee  Beneficiaries'  name or the name of the
          Administrative Agent; and

     (b)  in all such cases, the person or persons  authorized to pay such claim
          shall  be  fully  authorized  and  entitled  to pay  to the  Guarantee
          Beneficiaries or the  Administrative  Agent the full amount payable on
          the  claim  in  the  proceeding  before  making  any  payment  to  the
          Guarantor,  and to the extent  necessary  to give effect  hereto,  the
          Guarantor hereby assigns to the Administrative  Agent on behalf of the
          Guarantee   Beneficiaries  all  of  its  rights  to  any  payments  or
          distributions  to which the Guarantor  otherwise  would be entitled in
          such proceeding.

3.14     Appropriation

         The Guarantee Beneficiaries shall be at liberty (without in any way
prejudicing or affecting their rights hereunder) to appropriate any payment made
or monies received to any portion of the Guaranteed Obligations, whether then
due or to become due, and from time to time to revoke or alter any such
appropriation, all as the Guarantee Beneficiaries see fit; provided that any
such payment or monies shall first be applied against Guaranteed Obligations
which are due before being appropriated to Guaranteed Obligations which are not
due.

3.15     Interest Act

         The Guarantor hereby acknowledges that certain of the rates of interest
applicable to the Guaranteed Obligations or any other amounts payable by the
Guarantor hereunder may be computed on the basis of a year of 360 days or 365
days, as the case may be, and paid for the actual number of days elapsed. For
purposes of the Interest Act (Canada), whenever any interest is calculated using
a rate based on a year of 360 days or 365 days, as the case may be, such rate,
determined pursuant to such calculation, when expressed as an annual rate, is
equivalent to the amount obtained when the product of:

     (a)  the  applicable  rate based on a year of 360 days or 365 days,  as the
          case may be; and

     (b)  the actual number of days in the calendar year in which the period for
          such interest is payable (or compounded) ends;

is divided by 360 or 365, as the case may be.

                                   ARTICLE 4
                            OBLIGATIONS NOT RELEASED

4.1      Obligations Absolute

         The obligations of the Guarantor hereunder shall be absolute and
unconditional, and shall not be released, discharged or in any way lessened,
abated or reduced by:

     (a)  the  Guarantee  Beneficiaries  agreeing  to  any  renewal,  extension,
          change, variation, alteration, waiver or modification in or in respect
          of the Guaranteed  Obligations,  the Credit Agreement or any security,
          or anything done, suffered or permitted by the Guarantee Beneficiaries
          in relation to the Guaranteed  Obligations,  the Credit Agreement,  or
          any security,  including any amendment or change in the manner,  time,
          place  or  calculation  of  payment  of  the  Guaranteed   Obligations
          (including increases or decreases in interest rates);

     (b)  extensions  of time or any  indulgence  being given to the Borrower or
          any other person by the Guarantee Beneficiaries,

     (c)  any contest by the  Borrower or any other person as to the validity or
          enforceability  of any terms of the Credit  Agreement  or any security
          provided  in respect of the Credit  Agreement  or of the amount of the
          Guaranteed Obligations;

     (d)  any  defence,  counter-claim  or right  of  set-off  available  to the
          Borrower or the Guarantor,  whether in connection  with this Guarantee
          or the Credit Agreement or any unrelated transaction;

     (e)  the merging of the Credit  Agreement,  any security or the  Guaranteed
          Obligations or other obligations of the Borrower in, or any alteration
          thereof by virtue of, any subsequent agreement or amending agreement;

     (f)  the  Guarantee  Beneficiaries  agreeing to any  compromise,  proposal,
          arrangement  or plan of  reorganization  affecting the Borrower or any
          other guarantor;

     (g)  the  Guarantee  Beneficiaries  agreeing  to the release at any time or
          from  time to time of any  other  guarantor  or  other  person  liable
          directly or as surety or otherwise for the  Guaranteed  Obligations or
          any part thereof, or the addition of any guarantor, endorser or surety
          from time to time;

     (h)  the Guarantee Beneficiaries failing or omitting to take, or refraining
          from  taking,  any action to  enforce  the  Credit  Agreement,  or any
          security or any rights or remedies thereunder, or proving the claim or
          part of the claim of the Guarantee  Beneficiaries  in any liquidation,
          bankruptcy, winding-up, compromise, receivership, arrangement or other
          proceeding relating to the Borrower or any other person;

     (i)  the lack of validity or  enforceability  (in whole or in part) for any
          reason of, or any  informality,  defect or irregularity in or omission
          from,  the  Guaranteed  Obligations,   the  Credit  Agreement  or  any
          security,   or  any  impossibility,   impracticability,   frustration,
          illegality,  force majeure,  act of government or change in Applicable
          Laws, or the loans,  advances or other  obligations  constituting  the
          Guaranteed  Obligations having been made in excess of the power of the
          Guarantee  Beneficiaries  or any of them or in contravention of any of
          their governing statutes or constating documents;

     (j)  any  invalidity,   irregularity  or   unenforceability  of  any  term,
          condition, covenant or obligation in or arising under, or pursuant to,
          this Guarantee or the Credit  Agreement or any other guarantee held by
          the   Administrative   Agent  or  the  Lenders   for  the   Guaranteed
          Obligations;

     (k)  any common law or statute bar on  enforcement of the whole or any part
          of the Guaranteed  Obligations,  the Credit Agreement or any security,
          or any stay of  proceedings  in respect of the  Borrower  or any other
          direct or indirect guarantor of the Guaranteed Obligations;

     (l)  any defence that the  Guarantor  might have based on a failure to have
          been or to have  remained  informed  of the  condition  (financial  or
          otherwise)  of  the  Borrower  or  any  other  guarantor,  or  of  any
          circumstances  affecting  the ability of the Borrower to perform under
          the Credit Agreement;

     (m)  any incapacity, disability or lack or limitation of status or power of
          the Borrower,  the Guarantor or any other  guarantor of the Guaranteed
          Obligations;

     (n)  any  notice  by the  Guarantor  purporting  in any  way to  limit  its
          liability hereunder in respect of any Guaranteed Obligations,  whether
          arising prior or subsequent to such notice;

     (o)  the bankruptcy, insolvency, liquidation,  dissolution or winding up of
          the Borrower,  the Guarantor or any other  guarantor of the Guaranteed
          Obligations;

     (p)  any  Applicable  Law now or  hereafter  in effect in any  jurisdiction
          affecting  any of the  Guaranteed  Obligations  or the  rights  of the
          Administrative Agent or the Lenders with respect thereto; or

     (q)  any other event or  circumstance  which might  otherwise  constitute a
          legal  or  equitable  defence  available  to,  or  discharge  of,  the
          Guarantor,  the  Borrower or any other  person of or in respect of the
          Guaranteed Obligations;

in each case regardless of how substantial or material such event or
circumstance mentioned above may be, or however prejudicial it may be to the
Guarantor, and without any requirement for notice to the Guarantor of any of the
foregoing.

4.2      Security provided by the Borrower

     (a)  Without   limiting  the  generality  of  Section  4.1,  the  Guarantee
          Beneficiaries   shall,   subject  to  the  provisions  of  the  Credit
          Agreement,  be at liberty (without in any way prejudicing or affecting
          their rights  hereunder) from time to time to receive any security for
          the  Guaranteed  Obligations  or any  part  thereof  as they  may deem
          proper, and may give-up, vary, exchange,  release,  discharge,  waive,
          postpone, subordinate, abandon or otherwise deal with, or fail to deal
          with,  security  or any part  thereof or property  covered  thereby or
          allow  the  Borrower  or  others  to deal  with the  property  covered
          thereby, all as the Guarantee  Beneficiaries may consider expedient or
          appropriate;  provided that nothing in this  Guarantee  shall obligate
          the Borrower or the Guarantor to provide any such security.

     (b)  The Guarantee Beneficiaries may, without releasing in whole or in part
          the  Guarantor,  abstain  from  perfecting  or  registering,  or  from
          continuing  any  such  perfection  or  registration,  or  from  taking
          advantage of, any security or the  provisions of any  Applicable  Laws
          relating thereto.

     (c)  The Guarantee Beneficiaries may realize or refrain from realizing upon
          any security when, and in such manner as, the Guarantee  Beneficiaries
          deem  expedient,  and the  Guarantor  waives  any right it may have to
          receive notice of any actions or proceedings taken in respect thereof.

     (d)  Neither:

          (i)  any loss of or in respect of any security or the property covered
               thereby,   whether   occasioned  by  the   negligence  or  wilful
               misconduct of the Guarantee Beneficiaries or otherwise (including
               improvident  or  improper  handling,  collection  or  realization
               thereof or thereunder); nor

          (ii) the failure by the Guarantee Beneficiaries,  in whole or in part,
               to put or keep  themselves  in a position to deliver the security
               or  any of it to  the  Guarantor  on  payment  of the  Guaranteed
               Obligations;

               shall in any way limit,  lessen or release or otherwise abate the
               liability of the Guarantor hereunder.

     (e)  The Guarantor shall not have any recourse  against the  Administrative
          Agent  or  the  Lenders   for  any   invalidity,   non-perfection   or
          unenforceability  of any security held by the Administrative  Agent or
          the  Lenders  in  respect  of  the   Guaranteed   Obligations  or  any
          irregularity  or  defect  in the  manner  or  procedure  by which  the
          Administrative Agent or the Lenders realize on such security,  whether
          occasioned by the fault of the Administrative  Agent or the Lenders or
          otherwise.

4.3      Dealing with the Borrower

         It is the intent of the Guarantor and the Guarantee Beneficiaries that
the Guarantee Beneficiaries may discontinue, reduce, increase or otherwise vary
the Guaranteed Obligations and otherwise deal, in the broadest sense of that
word, with the Borrower and others, including any other guarantor, as the
Guarantee Beneficiaries may see fit, all without prejudice to or in any way
limiting or lessening the Guarantor's liability hereunder and without necessity
for obtaining the consent of, or giving notice to, the Guarantor.

4.4      Extensions

         Without limiting the generality of the foregoing Sections in this
Article, the Guarantor hereby specifically authorizes and consents to any
requests now or hereafter made by the Borrower from time to time for any
extension of the revolving period or any maturity date under the Credit
Agreement, and to the granting by the Guarantee Beneficiaries of any such
extension from time to time, regardless of whether or not the Guarantor signs or
otherwise consents to any particular request. For certainty, but without
limitation, all amounts advanced and otherwise owing during any such extended
period, and all interest thereon and fees, expenses and indemnities related
thereto, shall form part of the Guaranteed Obligations.

4.5      Increased Commitments

         Notwithstanding anything to the contrary contained herein if and
whenever the Guarantee Beneficiaries and the Borrower amend or restate the
Credit Agreement by agreement in writing to increase the aggregate principal
amount of the Commitments, the Guarantor shall not be liable hereunder to pay
any such aggregate principal amount of the Commitments in excess of Cdn.
$200,000,000 (or the Equivalent Amount thereof) unless the Guarantor has agreed
in writing with the Guarantee Beneficiaries to be liable for such excess
aggregate principal amount; provided that the foregoing provisions of this
Section shall not relieve the Guarantor of any other obligations under this
Guarantee all of which other obligations shall continue in full force and effect
and shall be binding on the Guarantor.

                                   ARTICLE 5
                         REPRESENTATIONS AND WARRANTIES
                         ------------------------------

5.1      Representations and Warranties By the Guarantor

         The Guarantor represents and warrants to the Guarantee Beneficiaries as
follows, and acknowledges that the Guarantee Beneficiaries are relying on such
representations and warranties in entering into the Credit Agreement and making
the Credit Facility available to the Borrower:

     (a)  Incorporation and Registration: it is:

          (i)  duly  organized and validly  existing under the laws of the State
               of New York and is a valid  and  subsisting  corporation  in good
               standing under the laws of the State of New York;

          (ii) duly  licensed,  registered  or qualified to carry on business in
               the State of New York, and in all other  jurisdictions  where the
               character  of its  property  owned or leased or the nature of the
               activities conducted by it makes such licensing,  registration or
               qualification  necessary and where a failure to so register would
               have a Material Adverse Effect in respect of the Guarantor;

          (iii)a public  corporation  with its common  shares  listed and posted
               for trading on the New York Stock Exchange;

     (b)  Corporate  Power  and  Capacity:  it has  the  full  corporate  power,
          capacity and authority to own or lease its properties, to carry on its
          businesses as presently  conducted,  to guarantee  obligations  and to
          perform  all  of  its  obligations  hereunder.  Without  limiting  the
          generality of the foregoing,  there are no restrictions,  limitations,
          conditions  or  constraints  of  any  nature  whatsoever  (whether  by
          Applicable  Law,  contract or  otherwise)  in respect of or  adversely
          affecting  the power,  capacity  and  authority  of the  Guarantor  to
          execute,  deliver  and  perform  all of  its  obligations  under  this
          Guarantee;

     (c)  Principal  Business;   Licenses  and  Permits:  it  has  obtained  and
          continues  to hold all  licences,  permits,  franchises,  consents and
          other  authorizations  materially  necessary  to its  ownership of its
          material property and to the conduct of its material business;

     (d)  Authorizations:  it is duly  authorized  to guarantee  the  Guaranteed
          Obligations and to execute,  deliver and perform its obligations under
          and in  respect  of  this  Guarantee,  and  all  corporate  steps  and
          proceedings  necessary  for the due  execution  and  delivery  of this
          Guarantee by it and the performance of its obligations  hereunder have
          been taken;

     (e)  Validity and Enforceability: this Guarantee has been duly executed and
          delivered by it and constitutes a legal,  valid and binding obligation
          of it,  enforceable by the Guarantee  Beneficiaries in accordance with
          its terms,  subject,  as to  enforcement  of remedies,  to  applicable
          bankruptcy,  reorganization,  insolvency,  moratorium or other similar
          Applicable  Laws affecting  creditor's  rights  generally from time to
          time in  effect,  and to  equitable  principles,  which  may limit the
          availability  of certain  remedies,  including  the remedy of specific
          performance;

     (f)  Non-Violation of Instruments: the execution,  delivery and performance
          by it of this  Guarantee  does not and will not:  (i)  contravene  its
          charter or by-laws; (ii) contravene any Applicable Laws (including any
          financial   assistance   prohibitions  of  Applicable   Laws);   (iii)
          contravene any instrument,  indenture,  contract or other agreement or
          commitment to which it or its assets are bound, or require any consent
          thereunder,  except  to the  extent  that  if any  such  contravention
          occurred or if such consent was not received that in either case there
          would  not be a  Material  Adverse  Effect on the  Guarantor;  or (iv)
          contravene  any  resolution  of  its  directors  or  officers  or  any
          committee of either;

     (g)  Approvals and Consents: no consent,  authorization,  approval or other
          action  by,  and no  notice to or filing  or  registration  with,  any
          Governmental  Authority  is  required  to be obtained or made by or on
          behalf  of  the  Guarantor  for  the  due   execution,   delivery  and
          performance  by it of this  Guarantee  or to ensure  the  validity  or
          enforceability  thereof  against  it,  other than those that have been
          made or obtained;

     (h)  No  Actions:  there  are no  actions,  suits,  claims  or  proceedings
          (including  counterclaims or third party proceedings)  existing or, to
          its  knowledge,   threatened   against  it  or  its  property  or  its
          Subsidiaries or their  properties  before any  Governmental  Authority
          having  jurisdiction in the circumstances in respect of which there is
          a reasonable  possibility of a determination  adverse to the Guarantor
          or any of its Subsidiaries  which would be reasonably likely to have a
          Material  Adverse  Effect in respect of the  Guarantor,  except as set
          forth on Schedule 1 hereto;

     (i)  Title to Shares:  it has indirect  ownership of 100% of the issued and
          outstanding  shares  of  every  class  of  the  capital  stock  of the
          Borrower,  free and clear of any Security  Interests or adverse claims
          whatsoever;

     (j)  Pari Passu: all of its payment  obligations  under this Guarantee rank
          at least pari passu in priority of payment  with its other Debt and in
          priority to all of its  indebtedness  for borrowed money to any of its
          Affiliates;

     (k)  Financial Information:  its audited consolidated financial statements,
          (including its consolidated balance sheet, its consolidated  statement
          of income and its consolidated statement of cash flows) for the period
          ending December 31, 1998 are true and correct in all material respects
          as at the date  thereof,  have (in  respect  of  financial  data) been
          prepared in  accordance  with GAAP,  and fairly  present its financial
          position and condition as at the date thereof;

     (l)  Financial  Condition:  since  December  31, 1998  nothing has occurred
          (whether  external  or  internal  to it)  which  has had,  or would be
          reasonably likely to have, a Material Adverse Effect in respect of the
          Guarantor; and

     (m)  Ratings of Debt:  its Debt is rated A3 by Moody's  and A- by S&P as of
          the date hereof.

5.2      General

     (a)  The  Guarantor  acknowledges  that the  Guarantee  Beneficiaries  have
          entered into the Credit  Agreement  and agreed to extend credit to the
          Borrower  in full  reliance  upon the  foregoing  representations  and
          warranties.  Such  representations  and warranties shall survive until
          the Credit  Agreement and this Guarantee  have been  terminated by the
          Guarantee Beneficiaries.  Any investigations made at any time by or on
          behalf  of any of or all of  the  Guarantee  Beneficiaries  shall  not
          diminish in any respect whatsoever any Guarantee  Beneficiary's  right
          to rely on such representations and warranties.

     (b)  All  statements  certified  as  true  in  any  certificates  or  other
          documents and all  information  contained in any financial  statements
          delivered by or on behalf of the  Guarantor  under or pursuant to this
          Guarantee shall constitute  representations and warranties made by the
          Guarantor to the Guarantee Beneficiaries under this Guarantee.

                                    ARTICLE 6
                                    COVENANTS
                                    ---------

6.1      Covenants of the Guarantor

         The Guarantor covenants and agrees with the Guarantee Beneficiaries
that it shall:

     (a)  Maintain  Corporate  Existence:  except as permitted by paragraph (d),
          maintain and preserve its corporate existence and organization in good
          standing  in each  jurisdiction  in which  it  carries  on a  material
          business or owns material  property,  and make all corporate and other
          filings  necessary  therefore,  and obtain and maintain all  licences,
          permits,  franchises,  consents  and other  authorizations  materially
          necessary to the ownership of its material property and to the conduct
          of its material business in each such jurisdiction;

     (b)  Conduct  Business:  carry on and continuously  conduct its businesses,
          activities and operations in an efficient,  diligent and  businesslike
          manner and in accordance with good industry  practices  unless failure
          to do so would not have a Material Adverse Effect on the Guarantor;

     (c)  Comply with Laws:  comply in all  material  respects  with  Applicable
          Laws, including Applicable  Environmental Laws, where failure to do so
          would be likely to have a  Material  Adverse  Effect in respect of the
          Guarantor;

     (d)  Reorganizations:  not become a party to any transaction whereby all or
          any substantial  part of its property would become the property of any
          other  person,  whether  by  way  of  reconstruction,  reorganization,
          arrangement, recapitalization, consolidation, dissolution, winding-up,
          liquidation,  amalgamation, merger, combination, transfer, sale, lease
          or otherwise, unless:

          (i)  the  successor  or  acquiror   resulting  from  such  transaction
               ("Successor   Corporation")  is  (or  upon  consummation  of  the
               transaction   will  be)  a  corporation  or  other  legal  entity
               incorporated,  continued or  amalgamated  and validly  subsisting
               under the laws of the  United  States of  America  (or one of its
               States), the laws of Canada (or one of its Provinces) or the laws
               of a member state of the European Union;

          (ii) the   Successor   Corporation   has   executed,   prior   to   or
               contemporaneously with the consummation of such transaction, such
               instruments,  if any, as are, in the opinion of Lenders'  Counsel
               (acting  reasonably),  necessary  or  advisable  to evidence  the
               obligation  of the Successor  Corporation  to observe and perform
               all the Guarantor's obligations under this Guarantee;

          (iii)no default has occurred and is  continuing  under this  Guarantee
               immediately  prior to such  transaction or will occur or would be
               continuing   under   this   Guarantee   immediately   after  such
               transaction;

          (iv) such  transaction does not result in a Material Adverse Effect in
               respect of the  Guarantor,  or  adversely  affect the validity or
               enforceability of this Guarantee in any manner; and

          (v)  the Debt of the Successor  Corporation has been assigned a rating
               of at  least  Baa3  by  Moody's  (or an  equivalent  rating  by a
               substitute  rating  entity  which  are  both  acceptable  to  the
               Guarantee Beneficiaries) and BBB- by S&P (or an equivalent rating
               by a substitute  rating  entity which are both  acceptable to the
               Guarantee Beneficiaries);

     (e)  Annual  Financial  Statements:  furnish to the  Administrative  Agent,
          within  120 days after the end of each of its  Fiscal  Years,  audited
          annual financial statements of it (including,  without limitation, its
          consolidated  balance sheet, its consolidated  statement of income and
          its consolidated statement of cash flows), prepared in accordance with
          GAAP and  setting  forth in each  case  comparative  figures  from its
          preceding  fiscal  year,   together  with  a  report  of  auditors  of
          recognized national standing thereon;

     (f)  Quarterly Financial  Statements:  furnish to the Administrative Agent,
          within 60 days  after the end of each of its  first,  second and third
          Fiscal Quarters and within 120 days after the end of its fourth Fiscal
          Quarter, of each of its Fiscal Years,  unaudited financial  statements
          of it for  each  such  quarter  (including,  without  limitation,  its
          consolidated  balance sheet, its consolidated  statement of income and
          its consolidated  statement of cash flows) prepared in accordance with
          GAAP,  setting  forth  in  each  case  comparative   figures  for  the
          corresponding period in the preceding fiscal year;

     (g)  Other Financial Reports:  promptly furnish to the Administrative Agent
          any  financial  or  operating  statements  or reports  relating to its
          business or affairs as the Administrative Agent may reasonably request
          from time to time in writing;

     (h)  Maintain  Property:  maintain,  protect and  preserve its property and
          assets in accordance with good business  practice except to the extent
          that failure to do so would not have a Material  Adverse Effect on the
          Guarantor;

     (i)  Notices: promptly given written notice to the Administrative Agent of:

          (i)  Defaults:  any  breach  of  a  representation,  warranty  or  any
               covenant, or other default,  under this Guarantee,  promptly (but
               in any event with 7 Banking  Days) after it becomes  aware of the
               same;

          (ii) Financial  Reporting:  any  material  amendment  to its method of
               financial reporting,  together with full particulars thereof, the
               reasons therefor and effect thereof;

          (iii)Actions Against:  the commencement of, or any new development in,
               any action, suit or proceeding against it before any Governmental
               Authority  which  individually  or  together  with any such other
               actions,  suits or  proceedings  against it could  reasonably  be
               expected to have a Material Adverse Effect;

          (iv) Amendments to Charter or By-laws:  any material  amendment of its
               charter  or  by-laws,  such  notice  to  include  a  copy  of the
               amendment;

          (v)  Credit Agreement  Defaults:  any material default by it under any
               agreement or  agreements  creating,  evidencing  or  guaranteeing
               indebtedness  for borrowed money in an aggregate amount in excess
               of   U.S.$50,000,000   (or  the   Equivalent   Amount   in  other
               currencies),  or any  default or event  which  could  entitle the
               lender  or holder  thereof  to  accelerate  the  payment  of such
               indebtedness in excess of such aggregate amount; and

          (vi) Rating  Changes:  any change in the rating of its Debt by Moody's
               or S&P, or the failure of either Moody's or S&P to rate its Debt;

     (j)  Maintain Ownership of Borrower:  maintain direct or indirect ownership
          of all of the  issued  and  outstanding  shares of all  classes of the
          capital stock of the Borrower;

     (k)  Restriction on Disposition of Assets: not, in any Fiscal Year, sell or
          dispose of (other than in connection with a transaction  permitted by,
          and undertaken in accordance  with the provisions of, Section  6.1(d))
          any  substantial  part of its  property or assets;  provided  that the
          foregoing  shall  not  prohibit  any such sale or  disposition  which,
          together with all other such sales or dispositions in any Fiscal Year,
          could not  reasonably be expected to have a Material  Adverse  Effect;
          and provided  further that in any event,  the  Guarantor  shall at all
          times, both before and after any such sale or disposition, continue to
          have  a   Consolidated   Tangible   Net   Worth   equal  of  at  least
          U.S.$1,600,000,000;

     (l)  Subordination:  ensure that payment of all long term debt for borrowed
          money  (including any current  portion of that long term debt) owed by
          the  Guarantor  to any  Affiliate of the  Guarantor  is postponed  and
          subordinated  in  right  of  payment  to all  amounts  payable  by the
          Guarantor to the Guarantee Beneficiaries under this Guarantee;

     (m)  Guaranteed   Obligations  Pari  Passu:   ensure  that  the  Guaranteed
          Obligations  rank at least pari passu in priority of payment  with all
          other long term debt for borrowed money of the Guarantor;

     (n)  Maintenance  of  Ratings:  cause its Debt to continue to be assigned a
          rating by each of Moody's and S&P;

     (o)  Remain  Publicly  Traded:  cause  its  common  stock or  other  equity
          securities  to continue to be listed and posted for trading on the New
          York Stock Exchange;

     (p)  Pay all Amounts:  punctually pay all amounts payable by it pursuant to
          this Guarantee; and

     (q)  Year 2000 Compliance:  take all reasonable  commercial efforts as part
          of its Year  2000  Compliance  program,  to ensure  that its  material
          mission-critical computer systems and programs are Year 2000 Compliant
          as soon as practicable and, in any event before December 31, 1999.

                                   ARTICLE 7
                             EXPENSES AND INDEMNITY
                             ----------------------

7.1      Expenses

         The Guarantor shall pay to the Guarantee Beneficiaries all reasonable
out-of-pocket costs and expenses, including all reasonable legal fees (on a
solicitor and his own client basis) and other expenses incurred by the Guarantee
Beneficiaries from time to time in the enforcement, realization and collection
of or in respect of this Guarantee. All such amounts shall be payable by the
Guarantor on demand, shall bear interest at a rate per annum equal to the
Canadian Prime Rate plus 2% per annum, calculated from the date incurred by the
Guarantee Beneficiaries to the date paid by the Guarantor, compounded monthly on
the last day of each month, both before and after default, maturity and
judgment.

7.2      Indemnity

         The Guarantor shall indemnify the Guarantee Beneficiaries and hold them
harmless against all losses, costs, expenses, liabilities, claims or damages
(collectively, the "Claims") incurred by the Guarantee Beneficiaries as a result
of:

     (a)  any  representation  or warranty  made herein by the  Guarantor  being
          incorrect at the time it was made;

     (b)  a  default  by  the  Guarantor  in  the  payment  of  any   Guaranteed
          Obligations;

     (c)  the failure by the  Guarantor  to comply with any of its  covenants or
          other obligations hereunder; or

     (d)  non-compliance by the Guarantor with Applicable Environmental Laws;

provided that this indemnity shall not apply in respect of any Claims which are
caused by the gross negligence or wilful misconduct of the Guarantee Beneficiary
claiming to be indemnified.

         Without limiting the generality of the foregoing, the foregoing
indemnities shall extend to:

          (i)  reasonable  legal fees (on a solicitor and his own client basis),
               including  the  costs  of  defending  and/or  counterclaiming  or
               claiming  over against  third parties in respect of any action or
               matter; and

          (ii) any amounts  payable  arising out of a  settlement  of any action
               brought against the Guarantee  Beneficiaries  with or without the
               consent of the Guarantor.

         The foregoing indemnities shall also extend to the officers, directors,
employees, agents, shareholders and assignees of the Guarantee Beneficiaries,
and the Guarantee Beneficiaries will hold the benefit of the foregoing
indemnities in trust for such indemnified parties to the extent necessary to
give effect hereto. A certificate of a Guarantee Beneficiary (accompanied by
reasonably detailed particulars) as to the amount of any such loss or expense
shall be prima facie proof of the amount thereof. The amount required to be paid
by the Guarantor hereunder shall be payable by the Guarantor on demand, and
shall bear interest at Canadian Prime Rate plus 2% per annum, calculated from
the date any indemnified amount is paid by any one or more Guarantee
Beneficiaries to the date paid by the Guarantor, both before and after default,
maturity and judgment. The undertakings and indemnities set out in this Section
shall survive the payment and satisfaction of the Guaranteed Obligations and the
termination of the Credit Agreement and this Guarantee.

                                    ARTICLE 8
                                     GENERAL
                                     -------

8.1      Notice

         Any notice, communication or demand to be made or given hereunder shall
be in writing and may be made or given by personal delivery or by telecopy or
other electronic means of communication addressed as follows:

                  To the Guarantor:

                  KeySpan Corporation
                  1 Metro Tech Centre
                  Brooklyn, New York
                  11201
                  Attention:        Treasurer
                  Telecopier No.:   (718) 403-6421


                  To the Administrative Agent and Guarantee Beneficiaries:

                  Royal Bank of Canada
                  Global Syndications - Canada
                  12th Floor, South Tower
                  Royal Bank Plaza, 200 Bay Street
                  Toronto, Ontario
                  M5J 2J2
                  Attention:        Manager, Agency
                  Telecopier No.:   (416) 974-2407


or such other address or telecopy number as any party may from time to time
notify the other in accordance with this Section. Any notice, communication or
demand made or given by personal delivery during usual business hours at the
place of receipt on a Banking Day shall conclusively be deemed to have been
given on the day of actual delivery thereof. Any notice, communication or demand
made or given by personal delivery or by telecopier or other electronic means of
communication after normal business hours at the place of receipt or otherwise
than on a Banking Day shall be conclusively deemed to have been made or given at
9:00 a.m. on the Banking Day following actual delivery or transmittal, as the
case may be.

8.2      Governing Law and Jurisdiction

     (a)  This Guarantee and any other  documents  delivered  hereunder shall be
          governed by and interpreted in accordance with the laws of Alberta and
          the laws of Canada  applicable  therein,  and shall in all respects be
          treated as Alberta contracts.

     (b)  The Guarantor  hereby (i) irrevocably  submits to the  jurisdiction of
          the  courts  of the  Province  of  Alberta  over any  suit,  action or
          proceeding  arising  out  of  or  relating  to  this  Guarantee;  (ii)
          irrevocably  agrees that all claims in respect of any suit;  action or
          proceeding  may  be  heard  and  determined  in  such  courts;   (iii)
          irrevocably  waives,  to the  fullest  extent  permitted  by law,  any
          objection  which it may have or  hereafter  have to the  laying of the
          venue of any such suit,  action or  proceeding  brought in such courts
          and any claim that any such suit, action or proceeding brought in such
          courts has been brought in an inconvenient forum; and (iv) irrevocably
          appoints  Macleod Dixon (the "Process  Agent"),  with an office at the
          date hereof at 3700, 400 - 3rd Avenue S.W., Calgary, Alberta, T2P 4H2,
          as its authorized  agent to accept and acknowledge  service of any and
          all process which may be served in any suit, action or proceeding, and
          upon which such  process may be served.  Service of all process  which
          may be served in any suit,  action or  proceeding on the Guarantor may
          be made by  delivering a copy of such process to the Process  Agent at
          the  Process   Agent's  above  address,   and  the  Guarantor   hereby
          irrevocably  authorizes  and directs the Process Agent to receive such
          service on its behalf. Notwithstanding the foregoing the Guarantor may
          from time to time  request by notice in writing to the  Administrative
          Agent that the person  designated  as Process Agent and/or the address
          of the Process Agent be changed and if the Administrative Agent agrees
          to that change  "Process Agent" as used herein shall mean that the new
          person  designated as Process Agent or if applicable,  the new address
          of the  Process  Agent as  agreed  by the  Administrative  Agent.  The
          Guarantor  agrees  that  a  final  judgment  in  any  such  action  or
          proceeding shall be conclusive and may be enforced in any other manner
          provided by law. Nothing in this section shall affect the right of the
          Administrative  Agent and the  Lenders to serve  process in any manner
          permitted by law, or limit the rights of the Administrative  Agent and
          the Lenders to bring  proceedings  against the Guarantor in the courts
          of any other jurisdiction.

8.3      Judgment Currency

     (a)  If, for the purpose of  obtaining or  enforcing  judgment  against the
          Guarantor in any court in any  jurisdiction,  it becomes  necessary to
          convert into any other currency (such other currency being hereinafter
          in this Section 8.3 referred to as the "Judgment  Currency") an amount
          due in Canadian  Dollars or United States Dollars under this Guarantee
          (including a conversion of United States Dollars to Canadian Dollars),
          the conversion shall be made at the rate of exchange prevailing on the
          Banking Day immediately preceding:

          (i)  the date of actual  payment of the amount due, in the case of any
               proceeding  in the  courts  of any  jurisdiction  that  will give
               effect to such conversion being made on such date; or

          (ii) the date on  which  the  judgment  is  given,  in the case of any
               proceeding in the courts of any other jurisdiction;

          (the date as of which such conversion is made pursuant to this Section
          8.3 being hereinafter in this Section 8.3 referred to as the "Judgment
          Conversion Date").

     (b)  If, in the case of any  proceeding  in the  court of any  jurisdiction
          referred to in Section 8.3,  there is a change in the rate of exchange
          prevailing between the Judgment Conversion Date and the date of actual
          payment of the amount due,  the  Guarantor  shall pay such  additional
          amount (if any) as may be  necessary to ensure that the amount paid in
          the  Judgment  Currency,  when  converted  at  the  rate  of  exchange
          prevailing on the date of payment, will produce the amount of Canadian
          Dollars or United States Dollars, as the case may be, which could have
          been purchased with the amount of Judgment Currency  stipulated in the
          judgment or judicial  order at the rate of exchange  prevailing on the
          Judgment Conversion Date.

     (c)  Any amount due from the Guarantor  under the provisions of Section 8.3
          shall be due as a separate debt and shall not be affected by or merged
          into any judgment being obtained for any other amounts due under or in
          respect of this Guarantee.

     (d)  The term  "rate of  exchange"  in this  Section  8.3 means the rate of
          exchange at which the  Administrative  Agent is able,  on the relevant
          date, to purchase the currency converted for the Judgment Currency.

8.4      Payments Free and Clear of Taxes

     (a)  All payments to the Guarantee  Beneficiaries  by the  Guarantor  under
          this Guarantee shall be made free and clear of, and without  deduction
          or  withholding  for,  any and all Taxes  imposed by any  Governmental
          Authority,  unless  such Taxes are  required by  Applicable  Law to be
          deducted or withheld. If the Guarantor shall be required by Applicable
          Law to deduct or  withhold  any such  Taxes  from or in respect of any
          amount  payable  hereunder,  then (i) the  amount  payable  under this
          Guarantee shall be increased (and for greater  certainty,  in the case
          of  interest,  the amount of interest  shall be  increased)  as may be
          necessary  so  that,   after  making  all   required   deductions   or
          withholdings  (including deductions or withholdings  applicable to any
          additional  amounts  paid  under  this  Section  8.4),  the  Guarantee
          Beneficiaries  receive an amount  equal to the amount  they would have
          received if no such deduction or withholding  had been made,  (ii) the
          Guarantor  shall make such deductions or  withholdings,  and (iii) the
          Guarantor  shall  immediately pay the full amount deducted or withheld
          to the relevant  Governmental  Authority in accordance with Applicable
          Law.

     (b)  The Guarantor agrees to immediately pay any present or future stamp or
          documentary  taxes or any other  excise or  property  taxes,  charges,
          financial  institutions  duties,  debits taxes or similar  levies (all
          such taxes,  charges,  duties and levies  being  referred to as "Other
          Taxes") which arise from any payment made by the  Guarantor  hereunder
          or from the execution,  delivery or registration of, or otherwise with
          respect to, this Guarantee.

     (c)  The Guarantor shall indemnify the Guarantee Beneficiaries for the full
          amount of Taxes or Other Taxes  (including,  without  limitation,  any
          Taxes or Other Taxes imposed by any jurisdiction on amounts payable by
          the   Guarantor   under  this  Section  8.4)  paid  by  the  Guarantee
          Beneficiaries or any of them, and any liability (including  penalties,
          interest and  expenses)  arising from or with respect to such Taxes or
          Other Taxes,  whether or not they were correctly or legally  asserted.
          Payment under this  indemnification  shall be made within 10 days from
          the date the relevant Guarantee Beneficiaries makes a written claim to
          the Guarantor in respect  thereof.  A certificate  as to the amount of
          such Taxes or Other Taxes  submitted to the  Guarantor by the relevant
          Guarantee Beneficiaries shall be conclusive evidence,  absent manifest
          error, of the amount due from the Guarantor to the relevant  Guarantee
          Beneficiaries.

     (d)  The Guarantor  shall furnish to the relevant  Guarantee  Beneficiaries
          the original or a certified  copy of a receipt  evidencing  payment of
          Taxes or Other  Taxes made by the  Guarantor  within 30 days after the
          date of any payment of Taxes or Other Taxes.

     (e)  The  provisions of this Section 8.4 shall survive the  termination  of
          the  Credit   Agreement  and  this   Guarantee  and  the  payment  and
          satisfaction of all Guaranteed Obligations.

8.5      Prohibited Rate

     (a)  Notwithstanding  anything herein or elsewhere contained, if and to the
          extent  that under any  circumstances  the  effective  annual  rate of
          interest  (including,  to the extent applicable to such determination,
          the  aggregate  of all  charges and  expenses,  whether in the form of
          fees,  fines,  penalties,  commissions or similar charges or expenses)
          received or to be received by the  Guarantee  Beneficiaries  would but
          for this Section be a rate that is prohibited by Applicable Laws (such
          rate  being  hereinafter  called  the  "Prohibited  Rate"),  then  the
          effective  annual  rate  of  interest  shall  be and be  deemed  to be
          adjusted to the highest rate (hereinafter  called the "Adjusted Rate")
          that the  Guarantor  could  validly  have agreed to pay the  Guarantee
          Beneficiaries by contract on the date hereof under Applicable Laws.

     (b)  If the  Guarantee  Beneficiaries  have  received  a payment or partial
          payment which would, but for this Section,  constitute  payment at the
          Prohibited  Rate,  then any  amount  or  amounts  so  received  by the
          Guarantee Beneficiaries in excess of the Adjusted Rate shall and shall
          be  deemed to have  comprised  a credit to be  applied  to  subsequent
          payments on account of interest, fees or other amounts properly due to
          the Guarantee  Beneficiaries,  or if no further amounts are due, shall
          be repaid to the Guarantor.

     (c)  It is the intent of this Section that under no circumstances shall the
          Guarantee  Beneficiaries  be  entitled to receive nor shall it in fact
          receive any payment of interest,  fees or other amounts at a rate that
          is prohibited under Applicable Laws.

8.6      Assignment

     (a)  The Guarantee  Beneficiaries may assign, or grant  participations  in,
          this  Guarantee  (in whole or in part) to any  person to whom they are
          entitled to assign  interests,  or grant  participations in the Credit
          Agreement  provided that such an assignment or grant of  participation
          is made  concurrently  with a  corresponding  assignment  or  grant of
          participation under the Credit Agreement.

     (b)  Subject to Section  6.1(d),  the Guarantor shall not assign its rights
          or  obligations  hereunder  without the prior  written  consent of the
          Guarantee Beneficiaries.

     (c)  In the event that another Lender is appointed as Administrative  Agent
          pursuant  to  and  in  accordance  with  the  Credit  Agreement,   the
          Administrative  Agent shall give notice to the  Guarantor and shall be
          entitled  to assign  to such  successor  Administrative  Agent all its
          rights and  obligations  hereunder and the  Guarantor  shall take such
          actions and execute and deliver to the Administrative  Agent and other
          such  successor   Administrative  Agent  all  such  documents  as  the
          Administrative  Agent and its counsel shall reasonably request for the
          purpose of effecting the assignment.

8.7      Severability

         Any provision of this Guarantee which is prohibited or unenforceable in
any jurisdiction shall not invalidate the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.

8.8      Whole Agreement

         This Guarantee constitutes the whole and entire agreement with regard
to the subject matter hereof and cancels and supersedes any prior agreements,
undertakings, declarations, commitments and representations, written or oral, in
respect thereof.

8.9      Amendments, Waivers and Consents

         This Guarantee may only be amended by agreement in writing between the
Guarantor and the Administrative Agent, and provisions hereof may be waived or
matters consented to by the Guarantee Beneficiaries only if the Guarantee
Beneficiaries so agree in writing. Any waiver or consent by the Guarantee
Beneficiaries under any provision of this Guarantee may be given subject to any
conditions thought fit by the Guarantee Beneficiaries. Any waiver or consent
shall be effective only in the specific instance and for the purpose for which
it is given.

8.10     Further Assurances

     (a)  The  Guarantor  shall  promptly cure any defect by it in the execution
          and delivery of this Guarantee.

     (b)  The Guarantor,  at its expense,  shall promptly execute and deliver to
          the Guarantee Beneficiaries,  upon request by the Administrative Agent
          in  writing,  all  such  other  and  further  documents,   agreements,
          opinions,  certificates and instruments in order to give effect to the
          covenants and agreements of the Guarantor in this Guarantee, and shall
          make  any  recording,  file  any  notice  or  obtain  any  consent  in
          connection   therewith,   all  as  may  be  reasonably   necessary  or
          appropriate.

8.11     Time of the Essence

         Time shall be of the essence of this Guarantee.

8.12     Separate Action

         In case of default hereunder, the Guarantee Beneficiaries may maintain
an action or separate successive actions upon this Guarantee against the
Guarantor whether or not the Borrower is joined therein or a separate action is
brought against the Borrower or any other guarantor or any judgment obtained
against any of them. The Guarantee Beneficiaries' rights shall not be exhausted
by the exercise of any of the Guarantee Beneficiaries' rights hereunder or
otherwise against the Guarantor or by any number of successive actions until and
unless all Guaranteed Obligations have been fully paid an performed, and each of
the Guarantor's obligations hereunder has been fully paid and performed.

8.13     Waiver and Acknowledgement

     (a)  The Guarantor hereby expressly waives:

               (i)  notice of acceptance of this Guarantee;

               (ii) notice of the  existence  or  creation  of all or any of the
                    Guaranteed Obligations;

               (iii)presentment,  demand, notice of dishonour,  protest, and all
                    other notices whatsoever; and

               (iv) all diligence in collection or protection of or  realization
                    upon  the  Guaranteed  Obligations  or any  thereof,  or any
                    obligation hereunder;

     (b)  The Guarantor hereby acknowledges that:

               (i)  the   Guarantor   has   received  and  reviewed  the  Credit
                    Agreement; and

               (ii) this  Guarantee  is  intended  to  guarantee  payment of the
                    Guaranteed Obligations.

8.14     No Merger

         Neither the taking of any judgment nor the exercise of any right or
remedy shall operate to extinguish the liability of the Guarantor to make
payment of the Guaranteed Obligations nor shall the acceptance of any payment
constitute or create any novation, and it is further agreed that the taking of a
judgment or judgments under any of the covenants herein contained shall not
operate as a merger of such covenants.

8.15     Successors and Assigns

         This Guarantee shall be binding upon the Guarantor, its successors and
assigns, and shall enure to the benefit of the Lenders, the Administrative Agent
and their respective successors and assigns.

8.16     Execution

         This Guarantee may be executed by facsimile transmission. Any facsimile
transmission copy of this Guarantee shall be considered an original copy. The
Guarantor shall promptly deliver to the Administrative Agent an original
executed copy of this Guarantee immediately following facsimile transmission of
an executed copy of this Guarantee being delivered.

         IN WITNESS WHEREOF the Guarantor has executed this Guarantee.

                                 KEYSPAN CORPORATION


                                 By:
                                        ----------------------------------------
                                        Name:
                                        Title:


<PAGE>









                                   SCHEDULE 1

                               LITIGATION SCHEDULE

Legal Proceedings Regarding Environmental Matters

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

The Guarantor'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. Software and equipment upgrades of approximately $1
million for continuous emissions monitors ("CEM") may be required in 1999-2000
to meet EPA requirements for the NOx allowance tracking/trading program and
certain other regulatory changes affecting the operation of CEM systems. The
Guarantor currently estimates that it may be required to spend between $10
million and $35 million by the year 2003 for additional pollution control
equipment to achieve the OTC Phase III NOx reduction requirements and/or new
requirements imposed under the EPA NOx state implementation plan, depending on
the actual level of NOx emission reductions which are required when pending
regulations are implemented by the State of New York.

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

On behalf of Long Island Power Authority ("LIPA"), the Guarantor provides
management and operations support for the LIPA-Connecticut Light and Power
Company electric transmission cable system located under the Long Island Sound
(the "Sound Cable"). The Connecticut Department of Environmental Protection
("DEP") and the New York State Department of Environmental Conservation ("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.

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 Guarantor generates materials which are subject to these laws.
From time to time, the Guarantor has received notices under these laws
concerning possible claims with respect to sites at which hazardous substances
generated by the Guarantor and other potentially responsible parties ("PRPs")
allegedly were disposed.

The DEC has notified the Guarantor, pursuant to the State Superfund program,
that the Guarantor 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 Guarantor currently is
unable to estimate its share, if any, of the costs required to investigate and
remediate this site.

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

The Guarantor has several former MGP sites that will require investigation
and/or remediation. In 1995, the Guarantor executed an ACO with the DEC which
addressed the investigation and remediation of the Brooklyn Borough Works site
in Coney Island, Brooklyn. In 1998, the Guarantor executed an ACO for the
investigation and remediation of the Clifton MGP site in Staten Island. Both of
these properties are owned by the Guarantor. The City of New York has notified
the Guarantor that a property now owned by the City which was formerly owned and
operated by a Brooklyn Union of Long Island predecessor, the Citizen's Site,
should be investigated. The Guarantor has submitted an investigation study plan
and requested cost sharing for this property with the City. The Guarantor is
awaiting the City's response. Two ACO's were executed on March 31, 1999 for
Brooklyn Union of Long Island MGP sites. One ACO addressed two MGP sites
classified as "Class II Sites" on the State registry of inactive hazardous waste
sites. The other ACO addressed the four other MGP sites. Both ACO's generally
require Brooklyn Union of Long Island to investigate the condition of each site
and conduct remediation activities depending on the results of the
investigation. The investigation of the Class II listed sites will proceed
first, to be followed by the investigation of the four other sites in three
month intervals.

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

Ravenswood. In June 1999 the Guarantor acquired the 2,168 megawatt Ravenswood
electric generating facility located in Queens, New York from Consolidated
Edison Company of New York, Inc. ("Con Ed") for approximately $597 million. The
Guarantor has assumed all of Con Ed's historical and current environmental
contingency 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 Ed's pre-closing conduct. Presently, there are
four ACO's issued to Con Ed by the DEC. Generally, the Guarantor'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. Pursuant to its derivative obligations, the Guarantor will
complete the investigation and remediation of certain petroleum and other
hazardous material releases at Ravenswood, as necessary. The Guarantor will also
address similar releases not covered by the ACO's. The Ravenswood facility is
also located on a former MGP site. In general, costs arising from remediation of
MGP wastes could be material. Based on information currently available for
environmental contingencies related to the Ravenswood acquisition, the Guarantor
has accrued $5 million as the minimum liability to be incurred.