SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

                       Commission File Number 333-92003-01

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


                 NEW YORK                                            11-3434848
(State or other jurisdiction of incorporation                  (I.R.S. employer
 or organization)                                           identification no.)

        175 EAST OLD COUNTRY ROAD, HICKSVILLE, NEW YORK                11801
           (Address of principal executive offices)                  (Zip code)



                                 (631) 755-6650
              (Registrant's telephone number, including area code)

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

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

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

          Indicate the number of shares outstanding of the registrant's class of
common stock as of March 1, 2000

          All common stock, 100 shares, are held by KeySpan Corporation

         The registrant  meets the  conditions set forth in General  Instruction
(I)(1)(a)  and (b) of Form  10-K and is  therefore  filing  this  form  with the
reduced disclosure format.


                       DOCUMENTS INCORPORATED BY REFERENCE






<PAGE>

<TABLE>
<CAPTION>


                          KEYSPAN GAS EAST CORPORATION
                       D/B/A BROOKLYN UNION OF LONG ISLAND
                               INDEX TO FORM 10-K

                                                                                                                  Page
                                                                                                                  ----
                                                            PART I
<S>             <C>                                                   <C>                                        <C>
Item 1.          Business................................................................................          1

Item 2.          Properties..............................................................................         11

Item 3.          Legal Proceedings.......................................................................         11

Item 4.          Submission of Matters to a Vote of Security Holders.....................................         11


                                                            PART II

Item 5.          Market for Registrant's Common Equity and Related Stockholder Matters                            11

Item 6.          Selected Financial Data.................................................................         11

Item 7.          Management's Discussion and Analysis of Financial Condition and Results
                 of Operations...........................................................................         12

Item 7A.         Quantitative and Qualitative Disclosures About Market Risk..............................         21

Item 8.          Financial Statements....................................................................         23

Item 9.          Changes in and Disagreements with Accountants on Accounting and
                 Financial Disclosure....................................................................         48

                                                           PART III

Item 10.         Directors and Executive Officers of the Registrant......................................         48

Item 11.         Executive Compensation..................................................................         48

Item 12.         Security Ownership of Certain Beneficial Owners and Management                                   48

Item 13.         Certain Relationships and Related Transactions..........................................         48

Item 14.         Exhibits, Financial Statement Schedules and Reports on Form 8-K.........................         48
</TABLE>





<PAGE>



                                     PART I

ITEM 1.  BUSINESS

KeySpan Gas East Corporation d/b/a Brooklyn Union of Long Island (the "Company")
is a wholly owned  subsidiary of KeySpan  Corporation  d/b/a KeySpan Energy (the
"Parent"),  the successor to the Long Island Lighting  Company  ("LILCO"),  as a
result of a transaction with the Long Island Power Authority ("LIPA") (the "LIPA
Transaction")  and following the  acquisition  (the  "KeySpan  Acquisition")  of
KeySpan Energy Corporation ("KSE"). The Company was formed on May 7, 1998 and on
May  28,  1998  acquired  substantially  all of the  assets  related  to the gas
distribution business of LILCO immediately prior to the LIPA Transaction.  Prior
thereto,  the  Company  was  included  as  part  of  LILCO's  gas  and  electric
operations.  (See Note 8, "Sale of LILCO Assets,  Acquisition  of KeySpan Energy
Corporation  and Transfer of Assets and Liabilities to the Parent".) The Company
provides gas  distribution  services to customers in the Long Island counties of
Nassau  and  Suffolk  and the  Rockaway  Peninsula  of  Queens  County  and owns
substantially all of the gas distribution assets formerly owned by LILCO.

In 1998,  the Company  changed its fiscal year end from March 31 to December 31.
For financial reporting purposes, financial statements included, or incorporated
by reference,  herein for the period  ending  December 31, 1998 are for the nine
months then ended. Unless otherwise  specified,  other information  contained in
Part I hereof,  for the periods ended  December 31, 1998 and 1997 reflect a full
twelve month period.

Certain  statements  contained  in this  Annual  Report on Form 10-K  concerning
expectations,  beliefs, plans, objectives,  goals, strategies,  future events or
performance and underlying assumptions and other statements which are other than
statements of historical  facts,  are  "forward-looking  statements"  within the
meaning of Section  21E of the  Securities  Exchange  Act of 1934,  as  amended.
Without  limiting the  foregoing,  all  statements  under the captions  "Item 7.
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations" and "Item 7A. Quantitative and Qualitative  Disclosures About Market
Risk"   relating  to  the  Company's   future   outlook,   anticipated   capital
expenditures,  future  cash flows and  borrowings,  and  sources of funding  are
forward-looking  statements.  Such  forward-looking  statements reflect numerous
assumptions and involve a number of risks and  uncertainties  and actual results
may differ materially from those discussed in such statements. Among the factors
that could cause actual results to differ materially are:  available sources and
cost  of  fuel;   federal  and  state   regulatory   initiatives  that  increase
competition,  threaten cost and investment recovery, and impact rate structures;
the  ability  of  the  Company  to  successfully   reduce  its  cost  structure;
inflationary  trends and interest  rates;  and other risks detailed from time to
time in  other  reports  and  other  documents  filed  by the  Company  with the
Securities and Exchange  Commission  ("SEC").  For any of these statements,  the
Company claims the protection of the safe harbor for forward-looking information
contained in the Private  Securities  Litigation Reform Act of 1995, as amended.
For additional discussion on these risks, uncertainties and assumptions, see

                                        1

<PAGE>



"Item 1. Business," "Item 7.  Management's  Discussion and Analysis of Financial
Condition and Results of Operations" and "Item 7A.  Quantitative and Qualitative
Disclosures About Market Risk" contained herein.

The  Company's  principal  executive  office is located at 175 East Old  Country
Road, Hicksville, New York 11801 and its telephone number is (631) 755-6650.

THE COMPANY
OVERVIEW
The Company sells, distributes and transports natural gas in a service territory
of  approximately  1,233  square  miles on Long  Island.  The  Company  owns and
operates  gas  distribution,  transmission  and storage  systems that consist of
approximately 6,348 miles of distribution  pipelines,  331 miles of transmission
pipelines and a gas storage facility.  The Company serves approximately  478,000
customers,  of which  approximately  426,000  or 89%,  are  residential.  Gas is
offered for sale to residential  customers on a "firm" basis,  and to commercial
and industrial customers on a "firm" or "interruptible" basis. "Firm" service is
offered  to  customers  under   schedules  or  contracts  which   anticipate  no
interruptions,  whereas  "interruptible"  service is offered to customers  under
schedules or contracts which anticipate and permit interruption on short notice,
generally in peak-load  seasons.  Gas is available at any time of the year on an
interruptible  basis,  if the  supply is  sufficient  and the  supply  system is
adequate.  The Company also participates in the interstate  markets by releasing
pipeline capacity or bundling pipeline capacity with gas for "off-system" sales.
An  "off-system"  customer  consumes  gas  at  facilities  located  outside  the
Company's service territories,  by connecting to the Company's facilities or one
of its transporter's facilities, at a point of delivery agreed to by the Company
and the  customer.  The  Company  purchases  its  natural  gas  for  sale to its
customers under long-term supply  contracts and short-term spot contracts.  Such
gas is transported under both firm and interruptible  transportation  contracts.
In  addition,  the  Company has  commitments  for the  provision  of gas storage
capability and peaking supplies.

For the year ended  December 31, 1999,  gas revenues  were $637.1  million,  and
operating income was $115.1 million.

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


                                        2

<PAGE>



SALES AND DISTRIBUTION
Gas sales and revenues for 1999 by class of customer are set forth below:
<TABLE>
<CAPTION>


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

FIRM
<S>                                                              <C>                       <C>                         <C>
Residential Heating..................................              35,348      $             339,643                     53.31
Residential Non-Heating..............................               2,828                     39,599                      6.22
Commercial/Industrial................................              17,330                    128,493                     20.17
                                                           --------------      ---------------------     ---------------------
Total Firm...........................................              55,506                    507,735                     79.70
                                                           --------------      ---------------------     ---------------------
Firm Transportation..................................               5,121                     10,429                      1.64
Transportation - Electric Generation.................              82,503                     15,150                      2.38
                                                           --------------      ---------------------     ---------------------
Total Firm Transportation............................              87,624                     25,579                      4.02
                                                           --------------      ---------------------     ---------------------
  Total Firm Gas Sales and Transportation............             143,130                    533,314                     83.72
INTERRUPTIBLE........................................               9,327                     32,825                      5.15
OFF-SYSTEM SALES.....................................              13,962                     31,833                      4.99
TRANSPORTATION.......................................               1,470                      6,351                      1.00
                                                           --------------      ---------------------     ---------------------
  Total Gas Sales and Transportation.................             167,889                    604,323                     94.86
OTHER RETAIL SERVICES................................                 N/A                     32,765                      5.14
                                                           --------------      ---------------------     ---------------------
  Total Sales and Revenues*..........................             167,889      $             637,088                    100.00
                                                           ==============      =====================     =====================
</TABLE>
-----------------------
*Excludes lost and unaccounted for gas.


Set  forth  below  is  information   concerning  certain  operating   statistics
applicable to the Company for the twelve months ended December 31:

<TABLE>
<CAPTION>

                                                                  1999                   1998                  1997
                                                           ------------------      -----------------     -----------------
<S>                                                              <C>                     <C>                  <C>
Revenues ($000)......................................              637,088                628,528               667,157
Net Income ($000)....................................               41,517                 34,373  *             41,198
Firm Gas Sales and Transportation (MDTH).............               60,627                 55,118                65,385
Transportation - Electric Generation (MDTH)..........               82,503                 40,614                     -
Other Deliveries (MDTH)..............................               24,759                 28,353                19,280
Residential heating customers........................              269,000                260,000               255,000
Degree Days, Cooler (Warmer) than Normal %...........               (10.0)                 (17.5)                   0.2
Capital Expenditures ($000)..........................              102,007                 74,583                79,187
</TABLE>
-----------------------
*Excludes non-recurring and special charges associated with the LIPA Transaction
   and KeySpan  acquisition.  - An MDTH is 10,000 therms (British Thermal Units)
   and reflects the heating content of approximately one million
   cubic feet of gas.  A therm reflects the heating content of approximately 100
   cubic feet of gas.




                                        3

<PAGE>



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

The yearly  variations in firm gas sales and  transportation  quantities is due,
primarily,  to variations in weather between the periods presented.  Measured in
annual  degree  days,  weather was 10% warmer than normal in 1999,  17.5% warmer
than normal in 1998 and 0.2% colder than normal in 1997.  After  normalizing for
weather, firm sales volumes increased by 3.7% in 1999, as compared to 1998. Firm
sales quantities,  after normalizing for weather, were approximately the same in
1998 as compared to 1997.

Transportation   volumes   related   to   electric   generation,   reflect   the
transportation of gas to the Parent's electric generating  facilities located on
Long Island.  The Company has been reporting  these sales since its inception in
May 1998.

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

SUPPLY AND STORAGE

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

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

PEAK-DAY CAPABILITY. The design criteria for the Company's gas system assumes an
average  temperature  of 0(0)F for peak-day  demand.  Under such  criteria,  the
Company  estimates that the  requirements to supply its firm gas customers would
amount to  approximately  683 MDTH of gas for a peak-day  during  the  1999/2000
winter season and that the gas supplies available to the

                                        4

<PAGE>



Company on such a peak-day amounts to approximately  745 MDTH. For the 2000/2001
winter season, the Company estimates that the peak-day requirements would amount
to approximately 712 MDTH and that the gas supplies  available to the Company on
such a peak day amounts to approximately 732 MDTH. The 1999/2000 winter peak-day
throughput to the Company's  customers was 642 MDTH,  which  occurred on January
17, 2000, at an average temperature of 9 degrees Fahrenheit, representing 86% of
the Company's per day  capability at that time.  The Company had  sufficient gas
available  to meet the  requirements  of firm gas  customers  for the  1999/2000
winter  season,  and  projects  that it also will  have  sufficient  gas  supply
available  to meet  such  requirements  for the  2000/2001  winter  season.  The
Company's firm gas peak-day capability is summarized in the following table:



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

Pipeline.................................        263                      35
Underground Storage......................        294                      40
Peaking Supplies.........................        188                      25
                                                 ---                      --
    Total................................        745                     100
                                            ================        ===========

PIPELINES.  The Company  purchases  natural gas for sale to its customers  under
contracts  with  suppliers  located in domestic and Canadian  supply  basins and
arranges for its transportation to the Company's facilities under firm long-term
contracts  with  interstate  pipeline  companies.   For  the  1999/2000  winter,
approximately  74% of the  Company's  natural  gas  supply  was  available  from
domestic sources and 26% from Canadian sources.  The Company has available under
firm   contract  263  MDTH  per  day  of   year-round   and  seasonal   pipeline
transportation  capacity  to its  facilities  in the New York City  metropolitan
area.  Major providers of interstate  pipeline  capacity and related services to
the Company include:  Transcontinental  Gas Pipe Line  Corporation  ("Transco"),
Texas  Eastern   Transmission   Corporation  ("Texas  Eastern"),   Iroquois  Gas
Transmission System ("Iroquois"),  Tennessee Gas Pipeline Company ("Tennessee"),
and CNG Transmission Corporation ("CNG").

STORAGE.  In order to meet higher winter demand,  the Company also has long-term
contracts  with Transco,  Texas  Eastern,  Tennessee,  CNG, and Honeoye  Storage
Corporation,  for  underground  storage  capacity  of 22,534 MDTH for the winter
season, with 294 MDTH per day, maximum deliverability.

PEAKING  SUPPLIES.  In addition to the pipeline and storage supply,  the Company
supplements  its winter supply with peaking  supplies which are available on the
coldest  days of the  year to  enable  the  Company  to  economically  meet  the
increased requirements of its heating customers.  The Company's peaking supplies
include gas provided by the  Company's  liquefied  natural gas ("LNG") plant and
under peaking  supply  contracts with four  cogeneration  facilities/independent
power producers located in its franchise areas. For the 1999/2000 winter season,
the Company has the capability to provide a maximum  peak-day supply of 188 MDTH
on extremely cold days. The LNG plant has

                                        5

<PAGE>



storage capacity of approximately 568 MDTH and peak-day  throughput  capacity of
103 MDTH, or 14% of peak-day supply. The Company has contract rights with Trigen
Services Corporation, Brooklyn Navy Cogeneration Partners, LP, Nissequogue Cogen
Partners and the New York Power  Authority to purchase  peaking  supplies with a
maximum daily capacity of 85 MDTH and total  available  peaking  supplies during
the winter season of 2,869 MDTH.

GAS SUPPLY  MANAGEMENT.  The Company  and the  Parent's  other gas  distribution
subsidiary,  The Brooklyn Union Gas Company ("Brooklyn  Union"),  (collectively,
the Company and Brooklyn Union are referred to as the "Gas  Companies")  entered
into an agreement with Coral Energy  Resources,  L.P., a subsidiary of Shell Oil
Company  ("Coral").   Coral  assists  the  Gas  Companies  in  the  origination,
structuring,  valuation and execution of energy-related  transactions. A sharing
agreement exists between gas ratepayers and the Gas Companies for off-system gas
transactions.  The Gas Companies'  share of the profits on such  transactions is
then shared with Coral.  The Gas Companies  also share in revenues  arising from
certain transactions initiated by Coral.

GAS COSTS. Gas costs for 1999 were $284.9 million and reflect warmer than normal
weather during the year. Variations in gas costs have little impact on operating
results of the  Company  since its  current  gas rate  structure  includes a gas
adjustment  clauses  whereby  variations  between  actual gas costs and gas cost
recoveries  are  deferred  and  subsequently   refunded  to  or  collected  from
customers.

                           REGULATION AND RATE MATTERS

Gas  utility  companies  may be  subject  to  either or both  state and  federal
regulation.  In general,  state public utility  commissions,  such as the NYPSC,
regulate the provision of retail  services,  including the distribution and sale
of  natural  gas  to   consumers.   FERC   regulates   interstate   natural  gas
transportation and has jurisdiction over certain wholesale natural gas sales.

                                NYPSC REGULATION

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

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

                                        6

<PAGE>



Union of Long Island has been providing a  transportation  service option to all
its customers in compliance with that NYPSC requirement.

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

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

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

The Company  currently is operating  under a three-year rate plan. The rate plan
applies to the period  December 1, 1997 through  November  30,  2000.  Under the
plan, if the Company's  earned return on common equity devoted to its operations
exceeds 11.10%,  it must credit back to certain  customers 60% of earnings up to
100 basis  points above the 11.10% and 50% of any earnings in excess of a 12.10%
return.  Both  a  customer  service  and  a  safety  and  reliability  incentive
performance  program became  effective on December 1, 1997, with maximum pre-tax
return on  equity  penalties  of 40 and 12 basis  points,  respectively,  if the
Company fails to achieve  certain  performance  standards in these areas. At the
conclusion  of its rate plan on November 30,  2000,  the Company or the NYPSC on
its own motion, may initiate a proceeding to revise the rates and charges of the
Company.

As part of the settlement agreement approved by the NYPSC in connection with its
approval  of the  KeySpan  Acquisition  (the  "Stipulation"),  the  Company  and
Brooklyn Union are subject to certain affiliate transaction  restrictions,  cost
allocation and financial  integrity  conditions and a code of conduct  governing
affiliate relationships.



                                        7

<PAGE>



                               FEDERAL REGULATION

NATURAL GAS COMPANIES.  The Federal Energy  Regulatory  Commission  ("FERC") has
jurisdiction  to regulate  certain  natural  gas sales for resale in  interstate
commerce, the transportation of natural gas in interstate commerce,  and, unless
an exemption  applies,  companies  engaged in such  activities.  The natural gas
distribution  activities  of the  Company  and certain  related  intrastate  gas
transportation  functions are not subject to FERC jurisdiction.  However, to the
extent that the Company sells gas for resale in interstate commerce,  such sales
are subject to FERC jurisdiction and have been authorized by the FERC.

                              ENVIRONMENTAL MATTERS

OVERVIEW

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

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

                      REMEDIATION OF CONTAMINATED PROPERTY

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


                                        8

<PAGE>



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

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

In 1998 the DEC notified  the Company that the Sag Harbor and Rockaway  Park MGP
sites owned by the Company would require remediation under the State's Superfund
program.  Accordingly, the Sag Harbor and Rockaway Park sites became the subject
of one Administrative Consent Order ("ACO"),  between the Company and the DEC in
March 1999. Four other MGP sites, Bay Shore,  Glen Cove,  Halesite and Hempstead
are the subject of a second  ACO,  which the  Company  executed  with the DEC in
September  1999.  Field  investigations  and,  in some cases,  interim  remedial
measures,  are  underway or  scheduled to occur at each of these sites under the
supervision of the DEC and the New York State Department of Health.

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

Thus, the eleven sites discussed above are currently the subject of ACOs between
the  Company  and the DEC.  The final end uses for  these  sites and  therefore,
acceptable  remediation  goals  have not yet been  determined.  The  Company  is
required to prepare a feasibility  study for the  remediation of each such site,
based on cleanup levels derived from risk analyses  associated with the proposed
or anticipated  future use of the  properties.  The schedule for completing this
phase  of the work  under  the ACOs for the  identified  sites  discussed  above
extends through 2001.

The  Company  has  recently  identified  eight  additional  sites  to  the  DEC,
Brooklyn/Kings County Lighting, Brooklyn (New Utrecht Avenue), Glenwood Landing,
Riverhead, Inwood, Saltaire, Southold and East Hampton. The Company has not been
requested to conduct site investigation activity by the DEC at these eight sites
and is currently  unable to determine  what,  if any,  additional  costs will be
incurred to remediate these eight sites.


                                        9

<PAGE>



It is also  possible,  based on future  investigation,  that the  Company may be
required to undertake  investigation and potential  remediation efforts at other
currently unknown former MGP sites.  However, the Company is currently unable to
determine whether or to what extent such additional costs may be incurred.

The  Company  believes  that  in  the  aggregate,   the  accrued  liability  for
investigation  and remediation of the MGP sites  identified above are reasonable
estimates  of  likely  cost  within a range of  reasonable,  foreseeable  costs.
Accordingly,  the  Company  presently  estimates  the  cost  of its  MGP-related
environmental  cleanup  activities will be $76.7 million;  which amount has been
accrued  by  the  Company  as  its  current  best   estimate  of  its  aggregate
environmental  liability  for known sites.  As previously  indicated,  the total
MGP-related  costs  may be  substantially  higher,  depending  upon  remediation
experience,  selected end use for each site, and actual environmental conditions
encountered.

The  Company's  NYPSC  approved  rate plan  provides  for the  recovery  of such
investigation  and  remediation  costs.  At December 31,  1999,  the Company has
reflected a regulatory  asset of $77.4 million.  Expenditures  incurred  through
December 31, 1999 by the Company with respect to  MGP-related  activities  total
$5.3 million.

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

EMPLOYEE MATTERS

On  December  31,  1999,  the  Company had 626  employees.  Of that  total,  529
employees are covered under collective bargaining agreements;  452 employees are
represented by Local 1049 of the International Brotherhood of Electrical Workers
(the "IBEW") and 77 employees are represented by Local 1381 of the IBEW.

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

ITEM 2.  PROPERTIES

Information  with  respect  to the  Company's  material  properties  used in the
conduct of its business is set forth in, or incorporated by reference in, Item 1
hereof. Except where otherwise specified, all

                                       10

<PAGE>



such  properties  are owned or, in the case of certain rights of way used in the
conduct of its gas distribution  business,  held pursuant to municipal consents,
easements or long-term  leases by the Company or the Parent.  In addition to the
information  set forth  therein  with  respect  to  properties  utilized  by the
Company,  the  Parent  owns or  leases  a  variety  of  office  space  used  for
administrative  operations.  The Parent then allocates applicable lease costs to
its various  affiliates  including  the  Company.  In the case of leased  office
space, the Parent anticipates no significant  difficulty in leasing  alternative
space at  reasonable  rates  in the  event of the  expiration,  cancellation  or
termination of a lease.

ITEM 3.  LEGAL PROCEEDINGS

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

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

Not required.


                                     PART II

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

KeySpan Corporation is the holder of record of all 100 shares of common stock of
the Company.

ITEM 6.  SELECTED FINANCIAL DATA

Not required

                                       11

<PAGE>



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

Current  period  results of operations  are reported for the year ended December
31,  1999.  In 1998 the  Company  changed  its fiscal  year end from March 31 to
December 31. Therefore,  results of operations for the period ended December 31,
1998 reflect the nine month transition period April 1, 1998 to December 31, 1998
(the "Transition Period").

Due to the change in the  Company's  fiscal year in 1998,  results of operations
for the year ended December 31, 1999 and for the Transition Period are not truly
comparable.  As  mentioned,  results of  operations  for the  Transition  Period
reflect  results for the period  April 1, 1998 through  December 31, 1998.  As a
result,  the Transition Period does not reflect earnings from gas heating-season
operations  for the months of January  through  March.  The  Company  realizes a
significant  portion of its earnings during the months of January through March,
due to the large percentage of gas heating sales to total gas sales.

Since the  reporting  periods are not truly  comparable,  we have  provided,  in
addition to the  discussion  of the results of operations  between  periods that
follows,  a discussion of operating results for the year ended December 31, 1999
compared to the full twelve months ended  December 31, 1998.  The intent of this
additional  disclosure  is to  provide  an  explanation  of  the  variations  in
operating results between two comparable  twelve month periods.  (See "Review of
Operations - Comparable Twelve Month Comparison".)

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

REVIEW OF HISTORICAL RESULTS
----------------------------

EARNINGS SUMMARY

Earnings for 1999 were $41.5  million,  compared to a loss of $12.9  million for
the  Transition  Period.  Earnings for the fiscal year ended March 31, 1998 were
$33.8 million.  The significant increase in earnings for 1999 as compared to the
Transition period, is primarily due to the fact that earnings for the Transition
Period do not include earnings from heating season operations (months of January
through March) when the Company  realizes the majority of its earnings.  For the
months of January  1998 through  March 1998,  the Company  realized  earnings of
$39.5 million.  Further, during the Transition Period, the Company: (i) incurred
special  charges  associated  with  the  KeySpan  Acquisition  of  $2.2  million
after-tax,  and  (ii)  incurred  charges  amounting  to $5.6  million  after-tax
associated with an early retirement program initiated by the Parent. (See Note 9
to the Financial

                                       12

<PAGE>



Statements,  "Tax Benefits and Costs Related to the LIPA Transaction and Special
Charges" for further details of these charges.)

The  decrease in earnings  for the  Transition  Period as compared to the fiscal
year  ended  March  31,  1998 is  also  due to the  absence  of  heating  season
operations,  for the  months of January  through  March,  during the  Transition
Period.

REVENUES

The increase in revenues of $280.5 million,  or 79%, in 1999, as compared to the
Transition  Period,  reflects primarily revenues from gas heating sales. For the
months of January  1999  through  March 1999,  revenues  were $268.3  million or
approximately  40% of total gas  distribution  revenues for the entire year. The
Transition Period,  which reflects the period April 1, 1998 through December 31,
1998, does not include revenues from heating season operations for the months of
January through March.

Revenues for the Transition  Period decreased by $289.0,  or 45%, as compared to
the fiscal year ended March 31, 1998,  and  reflects,  primarily,  the fact that
revenues for the Transition  Period do not include  revenues from heating season
operations for the months of January through March.

OPERATING EXPENSES

Operating  expenses were $522.0  million in 1999,  and $331.8 million and $523.0
million  for the  Transition  Period  and  fiscal  year  ended  March 31,  1998,
respectively.  The  increase  in 1999 as compared  to the  Transition  Period of
$190.2  million,  or 57%,  is due,  primarily  to the  difference  in  reporting
periods.  The  decrease  in  operating  expenses  for the  Transition  Period as
compared to the fiscal  year ended  March 31, 1998 of $191.2  million or 37%, is
due, primarily to the shorter reporting period.

PURCHASED GAS

Variations in gas costs have little  impact on operating  results as the current
gas rate structure includes a gas adjustment clause pursuant to which variations
between actual gas costs and gas cost  recoveries are deferred and  subsequently
refunded to, or collected from  customers.  Comparative  variations  between the
reported  periods  are  due to  changes  in gas  volumes  and  prices,  and  the
differences in the reporting periods.





                                       13

<PAGE>



OPERATIONS AND MAINTENANCE EXPENSE

Operations  and  maintenance  expense  was $120.6  million  in 1999,  and $109.1
million and $107.2 million for the Transition Period and fiscal year ended March
31, 1998,  respectively.  The increase in operations and maintenance  expense in
1999 as compared to the Transition Period of $11.5 million, or 11%, is primarily
due to the  difference  in reporting  periods.  The increase in  operations  and
maintenance  expense for the Transition period compared to the fiscal year ended
March  31,  1998 is  primarily  due to a  before-tax  charge  of  $8.7  million,
associated with an early retirement  program initiated by the Parent.  Excluding
this  charge,  operations  and  maintenance  expense for the  Transition  Period
decreased  by $6.8  million or 6% as compared to the fiscal year ended March 31,
1998 due to the shorter reporting period.

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

OTHER OPERATING EXPENSES

Variations  between the  reported  periods  for  depreciation  and  amortization
expense  reflects  gas  utility  property  additions  in  all  periods  and  the
differences in the reporting periods.  Further,  for the fiscal year ended March
31, 1998,  depreciation  and  amortization  expense  includes  $11.2  million of
expense associated with the amortization of certain regulatory assets. Operating
taxes  include  state and local  taxes on utility  revenues  and  property.  The
applicable property base and tax rates generally have increased in all periods.

OTHER INCOME AND DEDUCTIONS

Other  income  and  deductions  for the  Transition  Period  primarily  reflects
non-recurring special charges associated with the KeySpan Acquisition. (See Note
9 to the  Financial  Statements,  "Tax  Benefits  and Costs  Related to the LIPA
Transaction and Special Charges.")

Other income and  deductions  for the fiscal year ended March 31, 1998 primarily
reflects a charge associated with certain benefits earned by officers of LILCO.






                                       14

<PAGE>



INTEREST EXPENSE

The increase in interest  expense in 1999 as compared to the Transition  Period,
is due to the increased  reporting  period.  The level of debt  outstanding  has
generally remained constant in all periods reported.

INCOME TAXES

Income tax expense  reflects the level of pre-tax  income in all periods and for
1999,  an  adjustment  to  deferred  tax expense and current tax expense for the
utilization  of a previously  deferred net operating  loss ("NOL")  carryforward
recorded in 1998. In the Transition Period, the Company recorded,  as a deferred
tax asset,  a benefit of $19.7  million  for the NOL  carryforward.  The Company
estimated that the entire benefit from the NOL  carryforward  from 1998 would be
realized in the  Parent's  consolidated  1999  federal  income tax  return,  and
accordingly,  applied the NOL benefit in its 1999 federal tax provision. Pre-tax
income and the related  deferred  income tax expense for the  Transition  Period
were affected by charges related to the KeySpan  Acquisition and charges related
to the  early  retirement  program.  (See  Note 2 to the  Financial  Statements,
"Income Tax.")


                                       15

<PAGE>



REVIEW OF OPERATIONS - COMPARABLE TWELVE MONTH COMPARISON

As previously  mentioned,  due to the change in the Company's fiscal year end in
1998 results of operations  for 1999 are not truly  comparable to the results of
operations for the Transition Period. For comparative purposes we have presented
selected financial information for the entire twelve month period ended December
31, 1998, excluding special charges, compared to 1999.

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

                                                       (IN THOUSANDS OF DOLLARS)
                                                       -------------------------


                                            Year Ended       Twelve Months Ended
                                          December 31, 1999    December 31, 1998
----------------------------------------    -------------       ----------------
Revenues                                     $    637,088    $       628,528
Cost of gas                                       284,924            279,023
Revenue taxes                                      30,448             29,968
----------------------------------------------------------------------------
Net Revenues                                      321,716            319,537
----------------------------------------------------------------------------
Operations and maintenance                        120,628            132,471
Depreciation and amortization                      32,801             28,965
Operating taxes                                    53,185             48,558
----------------------------------------------------------------------------
Total Operating Expenses                          206,614            209,994
----------------------------------------------------------------------------
Operating Income                             $    115,102    $       109,543
                                             ============    ===============
Net Income                                   $     41,517    $        37,130
                                             ============    ===============
Firm gas sales (MDTH)                              55,506             51,003
Firm transportation (MDTH)                          5,121              4,115
Transportation - Electric Generation (MDTH)        82,503             40,614
Other sales (MDTH)                                 24,759             28,353
Warmer than normal                                  10.0%              17.5%
============================================================================
NET REVENUES

Net revenues in 1999 remained relatively constant as compared to net revenues in
1998.  Generally,  net  revenues  associated  with  firm  sales  additions  were
partially offset by rate reductions associated with the KeySpan Acquisition.

Firm sales  quantities,  normalized for weather  variations,  increased by 3.7%,
contributing  over $11  million  to net  revenues.  Firm  sales  additions  were
generated on Long Island from the addition of new gas  customers  and oil to gas
conversions. Long Island has a very low natural gas saturation rate

                                       16

<PAGE>



and significant  gas-sales growth  opportunities  remain available.  The Company
estimates that only 28% of one and two-family homes on Long Island currently use
natural gas for space heating,  while 28% of the multi-family  market and 69% of
the  commercial  market use gas for space  heating.  In this service  area,  the
Company will seek growth  through the  expansion of its  distribution  system as
well  as  through  the  conversion  of  residential  homes  and the  pursuit  of
opportunities to grow multi- family, industrial and commercial markets.

Partially  offsetting the benefits derived from gas sales  additions,  were rate
reductions associated with the KeySpan Acquisition.  In 1998 the Company reduced
its rates to core customers by $12.2 million annually effective February 5, 1998
and by an additional $6.3 million annually  effective May 29, 1998. For the year
ended December 31, 1999, rate reductions impacted revenues by approximately $7.4
million as compared to 1998.

Also  contributing  to the  variation in  comparative  net margins in 1999 was a
decrease in certain  regulatory  incentives  earned by the Company,  offset,  in
part, by revenue benefits associated with colder weather.

SALES, TRANSPORTATION AND OTHER VOLUMES

Comparative  firm  gas  sales  volumes  increased  by 8.8% in  1999,  due to the
increase in normalized firm sales, as discussed  above, and the benefits derived
from colder weather in 1999 as compared to 1998. Firm gas transportation volumes
increased  in 1999,  as a result of natural  gas  deregulation  initiatives.  At
December 31, 1999,  approximately  5,000 residential,  commercial and industrial
customers,  with annual requirements of approximately 5,400 MDTH, or 7.7% of the
Company's annual firm gas system  requirements,  purchased their gas supply from
sources  other than the Company.  The  Company's net margins are not affected by
customers  opting to  purchase  their gas  supply  from  sources  other than the
Company,  since  distribution  rates  charged to  transportation  customers  are
essentially  the  same as  those  charged  to  sales  customers.  (See  Item 7A.
Quantitative and Qualitative  Disclosures  About Market Risk for a discussion of
competitive issues facing the Company.)

Transportation   volumes   related   to   electric   generation,   reflect   the
transportation of gas to the Parent's electric generating  facilities located on
Long Island.  The Company began reporting these sales since its inception in May
1998. Net revenues from these volumes are marginal.

Other sales volumes include on-system  interruptible  volumes,  off-system sales
volumes (sales made to customers outside of the Company's service territory) and
related transportation.




                                       17

<PAGE>



OPERATING EXPENSES

Comparative  operations  and  maintenance  expense  decreased  in 1999 by  $11.8
million, or 8.9%. During the year, the Company realized  significant  reductions
in  operations  and  maintenance  expense  reflecting,  primarily,  the benefits
derived from cost reduction measures and operating  efficiencies employed during
the past few years. Such measures  included,  but were not limited to, the early
retirement  program  completed  in 1998.  The Company  intends to  continue  its
on-going cost  containment  initiatives  and anticipates  further  reductions in
operations  and  maintenance   expenses  in  2000.  In  addition,   the  Company
discontinued  providing  non-safety related appliance repair services on July 1,
1999,  further  reducing  operating  expenses.   Another  Parent  subsidiary  is
currently providing these services.

The  increase  in  depreciation  and  amortization  expense  reflects  continued
property  additions and  amortization  of  previously  deferred  merger  related
expenses. As provided for in the Stipulation Agreement, which in effect approved
the KeySpan Acquisition,  the Company, for ratemaking purposes, deferred certain
merger related costs at the time of the merger.  These costs are being amortized
over a ten year period. (See Gas Distribution - Rate Matters for further details
on the Stipulation Agreement.) Further,  operating taxes which include state and
local taxes on property have increased as the  applicable  property base and tax
rates generally have increased.

NET INCOME

Net Income increased in 1999 by $4.4 million,  or 11.8% due primarily to the net
result of the aforementioned items and lower interest expense.

LIQUIDITY, CAPITAL EXPENDITURES AND FINANCING, AND DIVIDENDS

LIQUIDITY

The increase in cash flow from  operations in 1999 as compared to the Transition
Period, primarily reflects the significant positive cash flows that are realized
from revenues  generated  during a heating  season.  Approximately  75% of total
annual gas revenues are realized during the heating season  (November 1 to April
30) as a result of the large  proportion of heating sales  compared to total gas
sales.  Results from  gas-heating  season  operations  for the months of January
through  March  are  not  reflected  in the  Transition  Period,  as  previously
explained.  Further, cash flow from operations in 1999 reflects the utilization,
in 1999, of a $19.7 million NOL which reduced current income tax payments.

The Company does not maintain a cash balance.  All cash  generated from billings
to  customers  for gas  service is  maintained  by the  Parent's  corporate  and
administrative subsidiary. Further, all

                                       18

<PAGE>



payments to third parties for Company payables, including labor, are made by the
Parent's corporate and administrative  subsidiary on behalf of the Company. (See
Note 7 to the Financial  Statements,  "Related Party Transactions".) The Company
records as a note receivable from or note payable to the Parent's  corporate and
administrative   subsidiary  the  difference  between  the  cash  received  from
customers  compared to third party  payments.  At December 31, 1999, the Company
had  a  note  payable  of  $258.1   million  to  the  Parent's   corporate   and
administrative  subsidiary.  In addition, at December 31, 1999 the Company had a
current  intercompany  accounts  receivable  balance of $43.4  million  from the
Parent's  corporate  and  administrative   subsidiary,   approximating  interest
payments on the Company's allocated share of the promissory notes for the twelve
months  ended  December  31,  1999.  (See  Note  5 to the  Financial  Statements
"Long-Term Debt" for additional information on the promissory notes.)

CAPITAL EXPENDITURES AND FINANCING

Capital Expenditures
Capital  expenditures  were $102.0  million in 1999 and were  primarily  for the
renewal and  replacement  of mains and services and for the expansion of the gas
distribution system on Long Island.  Capital expenditures for 2000 are estimated
to be at the same level as 1999. The amount of capital  expenditures is reviewed
on an  ongoing  basis  and can be  affected  by  timing,  scope and  changes  in
investment opportunities.

Financing
In December 1999, the Company and the Parent jointly filed a shelf  registration
statement  with the  Securities  and  Exchange  Commission  in  anticipation  of
issuing, from time to time, up to $600 million of Medium Term Notes. These notes
will be issued by the Company and  unconditionally  guaranteed by the Parent. On
February 1, 2000,  the Company issued $400 million 7.875 % Notes due February 1,
2010,  the net  proceeds  of which  were used to  replace  $397  million  of the
Company's portion of the promissory notes due LIPA which had previously  matured
in June 1999. (See Note 5 to the Financial  Statements,  "Long-Term  Debt" for a
further  discussion of this financing and the associated  repayment of a portion
of the promissory notes.)

DIVIDENDS

Pursuant to NYPSC's  orders dated  February 5, 1998 and April 14, 1998 approving
the KeySpan Acquisition, the Company's ability to pay dividends to the Parent is
conditioned  upon the  Company  maintaining  a capital  structure  with debt not
exceeding 58% of total capitalization.  In addition, the level of dividends paid
may not be increased from current levels if a 40 basis point penalty is incurred
under the customer service performance program. At the end of the Company's rate
year,  November  30,  1999,  the  ratio  of debt  to  total  capitalization  was
approximately 47%.


                                       19

<PAGE>



GAS DISTRIBUTION - RATE MATTERS

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

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

ENVIRONMENTAL MATTERS

The Company is subject to various  federal,  state and local laws and regulatory
programs  related  to  the   environment.   Ongoing   environmental   compliance
activities,  which  have  not  been  material,  are  charged  to  operation  and
maintenance  activities.  The Company  estimates  that the remaining cost of its
manufactured gas plant ("MGP") related  environmental cleanup activities will be
approximately  $76.7  million  and has  recorded  a related  liability  for such
amount.  Further,  as of December 31, 1999,  the Company has expended a total of
$5.3 million. (See Note 6 to the Financial Statements, "Contractual Obligations,
Contingencies and Fair Values.")

YEAR 2000 ISSUES

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

The Company has spent a total of approximately  $4.2 million to address the Year
2000  issue.  While the Year 2000  Project  is  virtually  complete,  some minor
expenses  will be incurred  for the  continued  review of systems to monitor for
Year  2000  abnormalities.  The  largest  portion  of the Year  2000  costs  was
attributable  to  the  assessment,   modification,   and  testing  of  corporate
information  technology ("IT") supported  computer software and in-house written
applications. The Company's

                                       20

<PAGE>



implementation  of the Year 2000 Project did not directly result in delaying any
IT projects.  The Company's cash flow from operations and cash on-hand have been
sufficient to fund the Year 2000 Project expenditures.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is subject to various risk  exposures and  uncertainties  associated
with its operations.  The most significant contingency involves the evolution of
the  gas  distribution  industry  toward  a  more  competitive  and  deregulated
environment.  Most  important to the  Company,  is the  evolution of  regulatory
policy as it pertains to the Company's  fixed charges  associated  with its firm
gas purchase  contracts  related to its  historical gas merchant role. Set forth
below is a description of this exposure and an explanation as to how the Company
has sought to reduce this risk.

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

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

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

As  required  by the  NYPSC's  policy  statement,  the  Company  filed  a  joint
restructuring proposal (with the Parent's other gas utility subsidiary, Brooklyn
Union)  with the  NYPSC in  October  1999.  The  filing  offers a  comprehensive
restructuring plan designed to (i) provide a significant  impetus toward exiting
the gas  supply  business  and (ii)  present  the NYPSC with an  opportunity  to
realize  its  vision  of a  competitive  unbundled  gas  supply  market  for all
customers within the transitional time frame of three to seven years.  Under the
proposal the Company would continue to be the provider of last

                                       21

<PAGE>



resort  during the  transition  period.  The  restructuring  plan seeks to "jump
start" the migration of the mass customer market (especially the residential and
the small commercial and industrial  markets) from bundled utility sales service
to unbundled  transportation service,  accelerates the elimination of regulatory
cost burdens from the gas supply  market,  provides  protections  for low income
customers, and sets forth a plan to minimize potential strandable costs.

Currently,  the Company has  contracts  for the purchase of upstream  interstate
transportation,   storage  and  supply  with  annual  fixed  demand  charges  of
approximately  $104 million.  These  contracts have terms that range from one to
fourteen  years  and the  associated  demand  charges  through  the  term of the
contracts  are  approximately  $652  million.  The  Company  has  estimated  its
strandable  costs as the costs under these  contracts in excess of market value.
The Company has assumed  that,  if it were  necessary to assign the contracts to
third  parties,  the Company  could  recover the market value of the  underlying
assets.  Therefore,  the  difference  between the contract  costs and the market
value is the potential  "strandable"  costs.  The Company  estimates that, if it
would  continue to recover  demand  charges  for the next five  years,  then the
estimated potential  strandable costs for contracts that will not expire by 2005
and would not be needed to provide service to firm transportation customers will
be, on a present value basis, approximately $36 million.

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

The  Company  believes  that its  proposal  strikes  a balance  among  competing
stakeholder  interests in order to most  effectively make available the benefits
of the unbundled gas supply market to all  customers.  The Company  currently is
not able to determine the outcome of this proceeding and what effect, if any, it
may have on its operations.


                                       22

<PAGE>



ITEM 8. FINANCIAL STATEMENTS



                                  BALANCE SHEET
                            (IN THOUSANDS OF DOLLARS)
================================================================================

                                           December 31, 1999   December 31, 1998
================================================================================

ASSETS

CURRENT ASSETS
  Customer accounts receivable                 $    122,889         $   108,631
  Accounts receivable, intercompany                  43,405              32,637
  Other accounts receivable                         117,738              40,890
  Allowance for uncollectible accounts               (5,310)             (5,586)
  Gas in storage, at average cost                    72,741              70,957
  Materials and supplies, at average cost             5,507               7,095
  Other                                               1,445               1,562
                                                      -----               -----
                                                    358,415             256,186
                                                    -------            --------

PROPERTY
  Gas                                             1,393,533           1,305,716
  Accumulated depreciation                         (245,956)           (232,703)
                                                  ---------           ---------
                                                  1,147,577           1,073,013
                                                 ----------           ---------

DEFERRED CHARGES
  Regulatory assets                                 179,742             155,805
  Deferred income tax                                52,065             100,229
  Other                                                 373               1,614
                                                        ---               -----
                                                    232,180             257,648
                                                   --------             -------

TOTAL ASSETS                                   $  1,738,172         $ 1,586,847
                                               ============         ===========



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

                                       23

<PAGE>



                                  BALANCE SHEET
                            (IN THOUSANDS OF DOLLARS)
================================================================================

                                         December 31, 1999     December 31, 1998
================================================================================


LIABILITIES AND CAPITALIZATION

CURRENT LIABILITIES
  Current maturities of long-term debt        $   397,000          $   397,000
  Accounts payable and accrued expenses           142,481              100,715
  Taxes accrued                                     5,005                3,930
  Customer deposits                                 3,845                4,139
                                                    -----                -----
                                                  548,331              505,784
                                                  -------             --------

INTERCOMPANY ACCOUNTS PAYABLE, LONG-TERM          258,079              180,968
                                              -----------          -----------
DEFERRED CREDITS AND OTHER LIABILITIES
  Regulatory liabilities                           20,888               23,332
  Operating reserves and other                     81,896               86,175
                                                   ------               ------
                                                  102,784              109,507
                                                 --------             --------





CAPITALIZATION
  Premium on capital stock                        657,862              659,113
  Retained earnings                                (4,788)             (45,784)
                                                   -------             --------
    Total common shareholders' equity             653,074              613,329
  Long-term debt                                  175,904              177,259
                                                  -------              -------
Total Capitalization                              828,978              790,588
                                                ---------             --------

TOTAL LIABILITIES AND CAPITALIZATION          $ 1,738,172          $ 1,586,847
                                              ===========          ===========




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

                                       24

<PAGE>


<TABLE>
                                                STATEMENT OF INCOME
================================================================================
                                             (IN THOUSANDS OF DOLLARS)
<CAPTION>
                                                                                            Nine Months         Fiscal Year
                                                                     YEAR ENDED                Ended               Ended
                                                                  DECEMBER 31, 1999      December 31, 1998     March 31, 1998
-------------------------------------------------------------- ----------------------  --------------------- ------------------
<S>                                                                 <C>                    <C>                  <C>
REVENUES
Gas Distribution                                                  $   637,088       $        356,634      $       645,659
                                                                  -----------       ----------------      ---------------
OPERATING EXPENSES
Purchased gas                                                         284,924                150,622              299,469
Operations and maintenance                                            120,628                109,081              107,221
Depreciation and amortization                                          32,801                 18,260               38,584
Operating taxes                                                        83,633                 53,817               77,734
                                                                  -----------       ----------------      ---------------
Total Operating Expenses                                              521,986                331,780              523,008
                                                                  -----------       ----------------      ---------------
OPERATING INCOME                                                      115,102                 24,854              122,651
                                                                  -----------       ----------------      ---------------

OTHER INCOME AND (DEDUCTIONS)
Transaction related expenses (net of $7,517 income tax)                    -                 (2,128)                   -
Other                                                                    159                     72               (3,526)
                                                                  -----------       ----------------      ---------------
Total Other Income (Deductions)                                          159                 (2,056)              (3,526)
                                                                  -----------       ----------------      ---------------
INCOME BEFORE INTEREST CHARGES AND INCOME TAXES                       115,261                 22,798              119,125
                                                                  -----------       ----------------      ---------------
INTEREST CHARGES                                                       50,488                 41,058               52,409
                                                                  -----------       ----------------      ---------------
INCOME TAXES
           Current                                                    (25,146)                (4,408)               9,498
           Deferred                                                    48,402                 (1,961)              16,660
                                                                  -----------       ----------------      ---------------
Total Income Taxes                                                     23,256                 (6,369)              26,158
                                                                  -----------       ----------------      ---------------
NET INCOME (LOSS)                                                      41,517                (11,891)              40,558
Preferred stock dividend requirements                                       -                  1,056                6,743
                                                                   ----------        ---------------      ---------------
EARNINGS (LOSS) FOR COMMON STOCK                                 $     41,517       $        (12,947)     $        33,815
                                                                  ===========       ================      ===============
</TABLE>

<TABLE>
                                          STATEMENT OF RETAINED EARNINGS
                                             (IN THOUSANDS OF DOLLARS)
================================================================================
<CAPTION>
                                                                                             Nine Months         Fiscal Year
                                                                       YEAR ENDED               Ended               Ended
                                                                   DECEMBER 31, 1999      December 31, 1998     March 31, 1998
----------------------------------------------------------------  --------------------  --------------------- ------------------
<S>                                                                   <C>                      <C>              <C>
Balance at beginning of period                                 $        (45,784)      $               -         $ 120,275*
Net income for period                                                    41,517                       -            40,558
Net loss for period May 29, 1998 - December 31,1998                           -                 (44,728)                -
Deductions
  Cash dividends declared on common and  preferred stock                      -                   1,056            35,202
  Other                                                                     521                       -                 -
                                                                          -----                   -----             -----
Balance at end of period                                       $         (4,788)      $         (45,784)        $ 125,631*
                                                                ================       =================       ==============
</TABLE>

*Represents  allocated  equity of the former Long Island Lighting  Company's gas
operation. See Note 1b. "Summary of Significant Accounting Policies" for further
details regarding Retained Earnings.

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

                                       25

<PAGE>



                           STATEMENT OF CAPITALIZATION
                            (IN THOUSANDS OF DOLLARS)
================================================================================

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

COMMON SHAREHOLDERS' EQUITY
  Common stock - $0.01 par value, 100 shares
   outstanding                                    $         -    $          -
  Premium of capital stock                             657,862        659,113
  Retained earnings                                     (4,788)       (45,784)
                                                        -------       --------
TOTAL COMMON SHAREHOLDERS' EQUITY                      653,074        613,329
                                                      ---------       --------


ALLOCATED PROMISSORY NOTES
  Debentures
       7.30% Series due July 15, 1999                  397,000        397,000
       8.20% Series due March 15, 2023                 175,904        177,259
                                                       -------        -------
                                                       572,904        574,259
  Less: Current Maturities                             397,000        397,000
                                                  ------------    -----------
  Total Allocated Promissory Notes                     175,904        177,259
                                                       -------        -------
TOTAL CAPITALIZATION                              $    828,978    $   790,588
                                                  ============    ===========







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

                                       26

<PAGE>

<TABLE>
                                              STATEMENT OF CASH FLOWS
                                             (IN THOUSANDS OF DOLLARS)
================================================================================
<CAPTION>
                                                                                         Nine Months        Fiscal Year
                                                                     YEAR ENDED             Ended              Ended
                                                                    DECEMBER 31,         December 31,        March 31,
                                                                        1999                 1998               1998
---------------------------------------------------------------- -------------------  ------------------ ------------------
<S>                                                                 <C>                  <C>                <C>
OPERATING ACTIVITIES
Net Income (Loss)                                              $       41,517      $      (11,891)     $      40,558
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH
     PROVIDED BY (USED IN) OPERATING ACTIVITIES
   Depreciation and amortization                                       32,801              18,260             38,584
   Deferred income tax                                                 48,402              (1,961)            16,660
CHANGES IN ASSETS AND LIABILITIES
   Accounts receivable and accrued revenues                          (102,150)            (13,253)             1,371
   Materials and supplies, fuel oil and gas in storage                   (196)            (53,810)            (2,873)
   Accounts payable and accrued expenses                               42,841             (18,983)            (1,974)
   Special deposits                                                       335              19,704            (12,165)
   Other                                                              (38,654)              3,443                427
                                                               --------------      --------------      -------------
Net Cash Provided by (Used in) Operating Activities                    24,896             (58,491)            80,588
                                                               --------------      --------------      -------------

INVESTING ACTIVITIES
Capital expenditures                                                 (102,007)            (59,683)           (78,897)
Transaction related adjustments                                             -              30,620                  -
                                                                      -------              ------             -------
Net Cash (Used in) Investing Activities                              (102,007)            (29,063)           (78,897)
                                                               --------------       --------------      -------------

FINANCING ACTIVITIES
Intercompany accounts payable - long-term                              77,111              86,885                  -
Issuance of common stock                                                    -                   -              2,505
Issuance of long-term debt                                                  -                   -             13,140
Repayment of long-term debt                                                 -                   -             (9,868)
Repayment of preferred stock                                                -                   -               (154)
Dividends paid                                                              -              (1,056)           (35,202)
                                                               --------------      --------------      -------------
Net Cash Provided by (Used in) Financing Activities                    77,111              85,829            (29,579)
                                                               --------------      --------------      -------------
Net (Decrease) Increase in Cash and Cash Equivalents             $          -      $       (1,725)     $     (27,888)
                                                               ==============      ==============      =============
Cash and cash equivalents at beginning of period                            -               1,725             29,613
Net (Decrease) Increase in cash and cash equivalents                        -              (1,725)           (27,888)
                                                               --------------      --------------      -------------
Cash and Cash Equivalents at End of Period                       $          -      $            -      $       1,725
                                                               ==============      ==============      =============
</TABLE>

The amount of  interest  and federal  income tax paid  during the above  periods
approximates the amounts in the respective Statement of Income. Cash equivalents
are short-term  marketable  securities purchased with maturities of three months
or less that were carried at cost which approximates fair value.


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

                                       27

<PAGE>



NOTES TO THE FINANCIAL STATEMENTS

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A.  ORGANIZATION

KeySpan  Gas  East  Corporation,  d/b/a  Brooklyn  Union  of  Long  Island  (the
"Company")  is a wholly owned  subsidiary of KeySpan  Corporation  d/b/a KeySpan
Energy (the "Parent"),  the successor to Long Island Lighting Company ("LILCO"),
as a result of a transaction with the Long Island Power Authority  ("LIPA") (the
"LIPA Transaction") and following the acquisition (the "KeySpan Acquisition") of
KeySpan Energy Corporation ("KSE"). The Company was formed on May 7, 1998 and on
May  28,  1998  acquired  substantially  all of the  assets  related  to the gas
distribution  business of LILCO immediately prior to the LIPA Transaction.  (See
Note 8, "Sale of LILCO Assets,  Acquisition  of KeySpan Energy  Corporation  and
Transfer of Assets and  Liabilities  to the Parent".)  The Company  provides gas
distribution  services to  customers  in the Long Island  counties of Nassau and
Suffolk and the Rockaway  peninsula of Queens county and owns  substantially all
of the gas distribution assets formerly owned by LILCO.

B.  BASIS OF PRESENTATION

As noted, the Company commenced  operations on May 28, 1998. Prior thereto,  the
gas  distribution  operations  of  LILCO  were  included  as part of its gas and
electric  operations.  At the time of the LIPA  transaction,  the Company ceased
being an  integrated  part of  LILCO's  operations,  and  became a  wholly-owned
subsidiary of the Parent. Assets and liabilities were transferred to the Company
at approximately equal amounts, and consequently,  the accompanying December 31,
1998 Statement of Retained  Earnings  reflects no opening balance.  In September
1998,  the Company  changed  its fiscal  year end from March 31 to December  31.
Therefore, financial statements presented herein include the year ended December
31, 1999,  the nine month  period  April 1, 1998 through  December 31, 1998 (the
"Transition Period"), and the fiscal year ended March 31, 1998.

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

Certain  income and expense  accounts  common to both  LILCO's gas and  electric
operations prior to the LIPA Transaction have been allocated/determined based on
the following  basis,  which is consistent with the methodology  utilized by the
State of New York Public Service Commission ("NYPSC") to establish rates.


                                       28

<PAGE>



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

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

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

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

Certain common assets which were previously part of LILCO's  operations prior to
May 28, 1998 have been  transferred  to other  affiliates  of the Company  (e.g.
common  plant,  inventory,  etc.).  Income and expenses  related to these assets
prior  to May  28,  1998  have  been  allocated  in the  accompanying  financial
statements.  After May 28,  1998,  the  Company has been  charged by  affiliated
companies  for the use of these  assets,  resulting in an  operating  expense of
$14.4 million for the twelve months ended December 31, 1999 and $9.2 million for
the nine months ended December 31, 1998.

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

C.  ACCOUNTING FOR THE EFFECTS OF RATE REGULATION

The Company's  accounting  records are maintained in accordance with the Uniform
System of Accounts prescribed by the NYPSC. The Company's  financial  statements
reflect the  ratemaking  policies and actions of these  regulators in conformity
with generally accepted accounting principles for rate-regulated enterprises.

The Company is subject to the  provisions  of Statement of Financial  Accounting
Standards  ("SFAS")  No. 71,  "Accounting  for the  Effects of Certain  Types of
Regulation".  This statement  recognizes the ability of regulators,  through the
ratemaking process, to create future economic benefits and

                                       29

<PAGE>



obligations affecting rate-regulated companies. Accordingly, the Company records
these  future  economic  benefits  and  obligations  as  regulatory  assets  and
regulatory liabilities, respectively.

The following table presents the Company's net regulatory assets at December 31,
1999 and December 31, 1998.
                                                       (IN THOUSANDS OF DOLLARS)
================================================================================
                                        December 31, 1999      December 31, 1998
                                        -----------------      -----------------
Regulatory Assets
   Property taxes                                 $  40,348      $       14,108
   Environmental costs                               77,416              82,294
   Postretirement benefits other than pensions       48,553              48,614
   Costs associated with the KeySpan Acquisition     13,425              10,789
                                                     ------              ------
Total Regulatory Assets                           $ 179,742      $      155,805
Regulatory Liability                                 20,888              23,332
                                                     ------              ------
Total Net Regulatory Assets                       $ 158,854      $      132,473
================================================= =========        ============

The  regulatory  assets  above are not  included  in the  Company's  rate  base.
However,  the Company  records  carrying  charges on the  property tax and costs
associated  with the KeySpan  Acquisition  deferrals.  The Company  also records
carrying charges on its regulatory  liability.  The remaining  regulatory assets
represent,  primarily,  costs for which expenditures have not yet been made, and
therefore, carrying charges are not recorded. The Company anticipates recovering
these costs in its gas rates  concurrently  with future  cash  expenditures.  If
recovery is not concurrent with the cash  expenditures,  the Company will record
the  appropriate  level of carrying  charges.  The Company  estimates  that full
recovery of its regulatory assets will not exceed 15 years.

Rate  regulation is undergoing  significant  change as regulators  and customers
seek lower  prices for  utility  service and greater  competition  among  energy
service  providers.  In the event  that  regulation  significantly  changes  the
opportunity for the Company to recover its costs in the future, all or a portion
of the Company's  regulated  operations  may no longer meet the criteria for the
application  of SFAS No. 71. In that event,  a write-down of all or a portion of
the Company's  existing  regulatory  assets and liabilities could result. If the
Company had been unable to  continue to apply the  provisions  of SFAS No. 71 at
December 31, 1999, the Company would have applied the provisions of SFAS No. 101
"Regulated  Enterprises - Accounting for the  Discontinuation  of Application of
FASB  Statement  No. 71". The Company  estimates  that the  write-off of its net
regulatory  asset could  result in an  after-tax  charge to net income of $103.3
million,  which would be classified as an  extraordinary  item. In  management's
opinion, the Company will be subject to SFAS No. 71 for the foreseeable future.


                                       30

<PAGE>



D.  REVENUES

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

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

The Company's  utility tariff contains a weather  normalization  adjustment that
largely offsets  shortfalls or excesses of firm net revenues  (revenues less gas
costs and revenue taxes) during a heating  season due to variations  from normal
weather.

 E. UTILITY PROPERTY - DEPRECIATION AND MAINTENANCE

Property is stated at original cost of construction,  which includes allocations
of  overheads,   including  taxes,  and  an  allowance  for  funds  used  during
construction.  Mass properties  associated with gas operations,  such as meters,
are accounted for on an average unit cost basis by year of installation.

Depreciation  is  provided on a  straight-line  basis in amounts  equivalent  to
composite rates on average depreciable  property.  The cost of property retired,
plus the cost of removal less salvage,  is charged to accumulated  depreciation.
The cost of repair and minor  replacement  and renewal of property is charged to
maintenance expense. The composite rates on average depreciable property were as
follows:
                  Period                                      Rate
                  ---------                                   ----
         Year Ended December 31, 1999                         2.06%
         Nine Months Ended December 31, 1998                  1.53%
         Fiscal Year Ended March 31, 1998                     2.06%


F. INCOME TAX
In  accordance  with SFAS No.  109,  "Accounting  for Income  Taxes" the Company
provides deferred income taxes on all differences  between tax and book bases of
assets and liabilities at the current tax rate.



                                       31

<PAGE>



G.  RECENT ACCOUNTING PRONOUNCEMENTS

In June 1999, the Financial  Accounting Standards Board ("FASB") issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective  Date of SFAS No. 133." SFAS No. 137 defers the effective  date of
SFAS No. 133 to fiscal years  beginning  after July 15,  2000.  The Company will
therefore, adopt SFAS No. 133 in the first quarter of fiscal year 2001. SFAS No.
133 establishes  accounting and reporting  standards for derivative  instruments
and for hedging activities. It requires that an entity recognize all derivatives
as either  assets or  liabilities  in the  statement of  financial  position and
measure those  instruments  at fair value.  As of December 31, 1999, the Company
did not have any derivative financial instruments.


NOTE 2. INCOME TAX

The Company will file a consolidated federal income tax return for calendar year
1999 with the  Parent.  A tax  sharing  agreement  between  the  Parent  and its
subsidiaries  provides for the allocation of a realized tax liability or benefit
based upon separate return  contributions of each subsidiary to the consolidated
taxable income or loss in the consolidated income tax return.

In 1998,  the  Company  incurred a tax net  operating  loss  ("NOL") for federal
income  tax  purposes  of $56.4  million  for the period  May 29,  1998  through
December 31, 1998,  which can be carried forward for twenty years or until 2017.
In  accordance  with SFAS No. 109 - "Accounting  For Income  Taxes," the Company
believed  that it was more  likely  than not that the tax  benefit  of this loss
would be  realized.  Therefore,  in 1998 a deferred  tax asset and a related tax
benefit  for the tax  effect  of the NOL  carryforward  of  $19.7  million  were
recorded.

The Company estimates that the benefit associated with the NOL carryforward from
1998 of $19.7 million will be realized in the Parent's consolidated 1999 federal
income tax return.  Accordingly,  the NOL benefit has been  applied in 1999 as a
reduction to the Company's current federal income tax provision.











                                       32

<PAGE>



Income tax expense (benefit) is reflected as follows in the Statement of Income:
<TABLE>

                                                       (IN THOUSANDS OF DOLLARS)
----------------------------------------------------------------------------------------------------
<CAPTION>
                                                                Nine Months
                                          Year Ended               Ended           Fiscal Year Ended
                                       December 31,1999      December 31, 1998      March 31, 1998
----------------------------------------------------------------------------------------------------
<S>                                         <C>                 <C>                     <C>
Current  income tax                   $      (25,146)    $          (4,408)    $           9,498
Deferred  income tax                          48,402                (1,961)               16,660
--------  ----------                          ------                -------               ------
                                              23,256                (6,369)               26,158
                                              ------                -------               ------
Current - transaction related (1)                  -               235,722                     -
Deferred - transaction related (2)                 -              (243,239)                    -
----------------------------------            ------              ---------               ------
                                                   -                (7,517)                    -
                                              ------                -------               ------
Total  income tax (benefit)           $       23,256     $         (13,886)    $          26,158
----------------------------------------------------------------------------------------------------
</TABLE>

(1)   Primarily  represents income taxes associated with the sale of assets (the
      "Transferred Assets") to the Company by LIPA, which taxes were paid by the
      Company,  partially  offset by tax  benefits  recognized  upon  funding of
      postretirement benefits.
(2)   Primarily  represents  the  deferred  federal  income  taxes  necessary to
      account for the difference  between the carryover basis of the assets sold
      to the Company for financial  reporting purposes and the new increased tax
      basis.



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

                                                       (IN THOUSANDS OF DOLLARS)
--------------------------------------------------------------------------------
                                     December 31, 1999        December 31, 1998
--------------------------------------------------------------------------------
Benefits of tax loss carryforwards                 -       $           19,700
Property related differences                  91,571                  122,284
Property taxes                               (24,410)                 (15,020)
Other items - net                            (15,096)                 (26,735)
                                             -------                  -------
Net deferred tax asset               $        52,065       $          100,229
                                     ---------------       ------------------













                                       33

<PAGE>



The following is a  reconciliation  between reported income tax and tax computed
at the statutory rate of 35%:
<TABLE>
<CAPTION>
                                                                                   (IN THOUSANDS OF DOLLARS)
----------------------------------------------------------------------------------------------------------------
                                                                                Nine Months          Fiscal Year
                                                            Year Ended             Ended                Ended
                                                            December 31,         December 31,          March 31,
                                                                1999                 1998                1998
----------------------------------------------------------------------------------------------------------------
<S>                                                         <C>                  <C>                 <C>
Computed at the statutory rate                   $            22,671 $             (9,022)$            23,350
Adjustments related to:
      Net benefit from LIPA Transaction (1)                        -               (5,677)                  -
      Tax credits                                                  -                    -                (263)
      Excess of book over tax depreciation                         -                    -               3,313
      Other items - net                                          585                  813                (242)
------------------------------------------------ ------------------- -------------------- -------------------
         Total income tax (benefit)              $            23,256 $            (13,886)$            26,158
                                                 =================== ==================== ===================
         Effective income tax rate                               36%                  N/A                 39%
-------------------------------------------------------------------------------------------------------------
</TABLE>

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


NOTE 3.  POSTRETIREMENT BENEFITS

PENSION PLANS:  Company  employees are members of a defined benefit pension plan
covering  substantially all former LILCO employees.  Benefits are based on years
of service and compensation. Pension costs are allocated to the Company; related
pension  obligations  and assets are not  allocated  separately  to the Company.
Pension  expense charged to the Company for the year ended December 31, 1999 was
$1.4 million.  Pension  expense charged to the Company for the nine months ended
December 31, 1998 and for the fiscal year ended March 31, 1998 was $11.7 million
and  $6.0  million  respectively.  Pension  expense  for the nine  months  ended
December 31, 1998 includes approximately $8.7 million for a Parent company early
retirement program.

                                       34
<PAGE>

The calculation of net periodic pension cost for the plan follows:

<TABLE>
<CAPTION>
                                                                                               (IN THOUSANDS OF DOLLARS)
                                                  Year Ended             Nine Months Ended        Fiscal Year Ended
                                               December 31, 1999         December 31, 1998          March 31, 1998
------------------------------------------ -------------------------  ------------------------ ------------------------
<S>                                                 <C>                        <C>                     <C>
Service cost, benefits earned
    during the period                      $           21,770  $                 15,608 $                 21,114
Interest cost on projected
   benefit obligation                                  63,837                    41,341                   56,379
Return on plan assets                                (216,208)                  (45,792)                (196,300)
Special termination charge  (1)                             -                    57,500                        -
Net amortization and deferral                         137,227                       380                  147,713
                                                      -------                       ---                  -------
Total pension cost                         $            6,626  $                 69,037 $                 28,906
------------------------------------------ ------------------  ------------------------ ------------------------
</TABLE>
(1) Parent company early retirement plan completed in December 1998.


                                       35






<PAGE>



The following  table sets forth the pension plans' funded status at December 31,
1999 and December 31, 1998.  Plan assets  principally are common stock and fixed
income  securities.  Company  employees  account  for  approximately  15% of the
employees participating in the plan.
<TABLE>
<CAPTION>
                                                                           (IN THOUSANDS OF DOLLARS)

                                                     December 31, 1999             December 31, 1998
------------------------------------------------ ------------------------  -------------------------
<S>                                                       <C>                         <C>
Change in benefit obligation:
   Benefit obligation at beginning of period     $          (998,473) $                (825,159)
   Service cost                                              (21,770)                   (15,608)
   Interest cost                                             (63,837)                   (41,341)
   Amendments                                                (33,739)                         -
   Actuarial gain (loss)                                     129,600                   (101,202)
   Special termination benefits  (1)                               -                    (57,500)
   Benefits paid                                              66,324                     42,337
                                                              ------                     ------
Benefit obligation at end of period                         (921,895)                  (998,473)
------------------------------------------------ -------------------  -------------------------
Change in plan assets:
   Fair value of plan assets at beginning of period          936,329                    919,100
   Actual return on plan assets                              216,208                     45,792
   Employer contribution                                      17,375                     13,500
   Benefits paid                                             (66,324)                   (42,063)
                                                             -------                    -------
Fair value of plan assets at end of period                 1,103,588                    936,329
------------------------------------------------ -------------------  -------------------------
   Funded status                                             181,693                    (62,144)
   Unrecognized net (gain) from past experience
     different from that assumed and from
     changes in assumptions                                 (325,977)                   (58,701)
   Unrecognized prior service cost                            82,274                     54,234
   Unrecognized transition obligation                          3,163                      4,138
                                                               -----                      -----
Net accrued pension cost                                    $(58,847)                 $ (62,473)
------------------------------------------------ -------------------  -------------------------
</TABLE>
(1) Parent company early retirement plan completed in December 1998.


<TABLE>
<CAPTION>

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

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

                                       36
<PAGE>

INFORMATION ON THE LILCO SUPPLEMENTAL PLAN
The  Supplemental  Plan in effect  prior to May 28, 1998  provided  supplemental
death and  retirement  benefits  for  LILCO  officers  and other key  executives
without   contribution  from  such  employees.   The  Supplemental  Plan  was  a
non-qualified  plan under the  Internal  Revenue  Code of 1986,  as amended (the
"Code").  For the fiscal year ended March 31,  1998, a charge of $31 million was
recorded  relating  to  certain  benefits  earned  by former  officers  of LILCO
relating  to the  termination  of their  annuity  benefits  earned  through  the
supplemental  retirement  plan and other  executive  retirement  benefits.  This
charge,  which was not recovered from ratepayers,  resulted from the application
of  certain  provisions  in the  employment  contracts  of LILCO  officers.  The
Company's share of this charge was  approximately $6 million and is reflected in
other income and deductions in the Statement of Income.

OTHER   POSTRETIREMENT   BENEFITS:   Company   employees   are   members   of  a
noncontributory defined benefit plan under which is provided certain health care
and life insurance benefits for all former LILCO retired  employees.  The Parent
and,  prior to the  KeySpan  Acquisition,  LILCO had been  funding a portion  of
future benefits over employees' active service lives through Voluntary  Employee
Beneficiary  Association  ("VEBA") trusts.  Contributions to VEBA trusts are tax
deductible, subject to limitations contained in the Code.

Other  postretirement  costs  are  allocated  to  the  Company;   related  other
postretirement  obligations  and  assets  are not  allocated  separately  to the
Company.  Other postretirement expense charged to the Company for the year ended
December 31, 1999 was $2.3 million.  Other postretirement expense charged to the
Company  for the nine  months  ended  December  31, 1998 and for the fiscal year
ended March 31, 1998 was $2.0 million and $6.7 million, respectively.

                                       37
<PAGE>

Net  periodic   other   postretirement   benefit  cost  included  the  following
components:
<TABLE>
                                                                                              (IN THOUSANDS OF DOLLARS)
<CAPTION>
                                                                            Nine Months
                                                  Year Ended                   Ended              Fiscal Year Ended
                                               December 31, 1999         December 31, 1998          March 31, 1998
------------------------------------------ -------------------------  -----------------------  ------------------------
<S>                                                <C>                     <C>                        <C>
Service cost, benefits earned
     during the period                     $         12,317  $                 7,047  $                 12,204
Interest cost on accumulated post-
     retirement benefit obligation                   29,867                   17,950                    27,328
Return on plan assets                               (63,049)                 (14,305)                   (6,164)
Special termination charge (1)                            -                    2,397                         -
Net amortization and deferral                        29,885                  (14,934)                  (10,468)
                                                     ------                  -------                   -------
Other postretirement (benefit) cost        $          9,020  $                (1,845) $                 22,900
------------------------------------------ ----------------  -----------------------  ------------------------
</TABLE>
(1) Parent company early retirement plan completed in December 1998.



                                       38


<PAGE>



The following table sets forth the plan's funded status at December 31, 1999 and
December 31,  1998.  Plan assets  principally  are common stock and fixed income
securities.  Company  employees  account for  approximately 15% of the employees
participating in the plan.
<TABLE>
                                                                                (IN THOUSANDS OF DOLLARS)
<CAPTION>
                                                        December 31, 1999         December 31, 1998
---------------------------------------------------  ------------------------  ------------------------
<S>                                                         <C>                       <C>
Change in benefit obligation:
   Benefit obligation at beginning of period         $       (491,055) $               (358,941)
   Service cost                                               (12,317)                   (7,047)
   Interest cost                                              (29,867)                  (17,950)
   Plan participants' contributions                               152                         -
   Amendments                                                   7,256                         -
   Actuarial gain (loss)                                       84,437                  (114,960)
   Special termination benefits (1)                                 -                    (2,397)
   Benefits paid                                               21,275                    10,240
                                                               ------                    ------
Benefit obligation at end of period                          (420,119)                 (491,055)
---------------------------------------------------  ----------------  ------------------------
Change in plan assets:
   Fair value of plan assets at beginning of period           372,470                   108,165
   Actual return on plan assets                                63,049                    14,305
   Employer contribution                                          296                   250,000
   Plan participants' contribution                                152                         -
   Benefits paid                                              (21,275)                        -
                                                              -------                    ------
Fair value of plan assets at end of period                    414,692                   372,470
---------------------------------------------------  ----------------  ------------------------
   Funded status                                               (5,427)                 (118,585)
   Unrecognized net (gain) loss from past  experience
     different from that assumed and from changes in
     assumptions                                              (85,957)                   27,557
   Unrecognized prior service cost                             (7,113)                      166
                                                               ------                       ---
Accrued benefit cost                                 $        (98,497) $                (90,862)
---------------------------------------------------  ----------------  ------------------------
</TABLE>
(1) Parent company early retirement plan completed in December 1998.


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

                                       39
<PAGE>

The measurement of plan  liabilities  also assumes a health care cost trend rate
of 6% annually.  A 1% increase in the health care cost trend rate would have the
effect of increasing the  accumulated  postretirement  benefit  obligation as of
December 31, 1999 by $56.7  million and the net periodic  health care expense by
$5.8  million.  A 1%  decrease in the health care cost trend rate would have the
effect of decreasing the  accumulated  postretirement  benefit  obligation as of
December 31, 1999 by $46.7  million and the net periodic  health care expense by
$4.8 million.

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


NOTE 4. CAPITAL STOCK

COMMON STOCK:  Currently the Company has 100 shares of authorized  common stock.
On May 28,  1998,  pursuant  to the LIPA  Transaction  and upon the  transfer of
assets to the Company,  the Company's  common equity was initially  established.
The Company  issued 100 shares of common  stock at $0.01 per share to the Parent
and recorded $659.1 million as the Parent's  investment on May 28, 1998.  Since,
for accounting purposes, the Company commenced operations on May 29, 1998 it had
no retained earnings as of that date. Retained earnings,  therefore, at December
31, 1998 reflect  earnings for the period May 29, 1998 through December 31, 1998
only.

NOTE 5. LONG-TERM DEBT

PROMISSORY  NOTES:  In  accordance  with the LIPA  Agreement,  the Parent issued
promissory notes to LIPA which  represented an amount  equivalent to the sum of:
(i) the principal amount of 7.30% Series  Debentures due July 15, 1999 and 8.20%
Series  Debentures  due March 15, 2023  outstanding at May 28, 1998, and (ii) an
allocation of certain of the Authority  Financing  Notes.  The promissory  notes
contain identical terms as the debt referred to in items (i) and (ii) above. The
Parent then allocated  $574.3 million of these  promissory notes to the Company,
which represented the 7.30% Series Debentures due July 15, 1999 and an allocated
portion of the 8.20% Series Debentures due March 15, 2023. The debt allocated to
the  Company  contains  the same  terms as the 7.30%  Series  and  8.20%  Series
Debentures.

On June 15, 1999 the Parent, in accordance with the LIPA Agreement, extinguished
its obligation  under the  promissory  note to LIPA relating to the 7.30% Series
Debenture due July 15, 1999.  The Parent's  obligation  for these  debentures of
$411.5  million  consisted  of the  principal  amount of $397  million and $14.5
million of interest accrued and unpaid.  On February 1, 2000, the Company issued
$400 million of 7.875 % Medium Term Notes due February 1, 2010. The net proceeds
from the

                                       40

<PAGE>



issuance  of  these  notes  were  used to  repay  the  Parent  for its  costs in
extinguishing  the  promissory  notes as  indicated.  The carrying  value of the
remaining promissory note at December 31, 1999 was $175.9 million.

In 1999,  the Company  transferred  certain  investments  and related assets and
liabilities  to the  Parent.  As part of this  reorganization,  $1.4  million of
promissory  notes were  transferred to the Parent.  The  investments and related
assets were immaterial.

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

NOTE 6. CONTRACTUAL OBLIGATIONS, CONTINGENCIES AND FAIR VALUES

LONG-TERM  DEBT: In addition to the Company's  allocated share of the promissory
notes due LIPA, the Company,  as well as certain other affiliates of the Parent,
is jointly and severally obligated for each of the promissory notes due LIPA. At
December  31,  1999,  the total  remaining  balance  of these  promissory  notes
amounted to $602.4 million, of which $175.9 was allocated to the Company.

LEASE  OBLIGATIONS:  The Parent allocates  applicable lease costs to its various
affiliates.  Lease costs  allocated  to the Company  amounted to $5.3 million in
1999 reflecting, primarily, lease costs for corporate facilities, land, computer
equipment,  vehicles  and power  operated  equipment.  Lease  costs for the nine
months ended December 31, 1998 were $4.5 million.

FIXED  CHARGES  UNDER FIRM  CONTRACTS:  The  Company has  entered  into  various
contracts  for gas delivery,  storage and supply  services.  The contracts  have
remaining  terms  that  cover  from  one to  fourteen  years.  Certain  of these
contracts  require  payment of annual demand charges in the aggregate  amount of
approximately $104 million.  The Company is liable for these payments regardless
of the level of service  it  requires  from third  parties.  Such  charges  are,
currently, recovered from utility customers as gas costs. In response to a NYPSC
policy statement  regarding gas industry  restructuring,  the Company  estimated
that,  if it were to continue  to recover  the demand  charges for the next five
years,  then the estimated  strandable costs (contract costs above market value)
for  contracts  that will not  expire by 2005 and would not be needed to provide
service to firm  transportation  customers  will be, on a present  value  basis,
approximately  $36 million.  For purposes of this  calculation,  the Company has
assumed  that,  if it exited the merchant  function and if it were  necessary to
assign the  contracts to third  parties,  the Company  could  recover the market
value of the underlying assets.  Therefore,  the difference between the contract
costs and the market value is the potential "strandable" costs.


                                       41

<PAGE>



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

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

In 1998 the DEC notified  the Company that the Sag Harbor and Rockaway  Park MGP
sites owned by the Company would require remediation under the State's Superfund
program.  Accordingly, the Sag Harbor and Rockaway Park sites became the subject
of one Administrative Consent Order ("ACO"),  between the Company and the DEC in
March 1999. Four other MGP sites, Bay Shore,  Glen Cove,  Halesite and Hempstead
are the subject of a second  ACO,  which the  Company  executed  with the DEC in
September  1999.  Field  investigations  and,  in some cases,  interim  remedial
measures,  are  underway or  scheduled to occur at each of these sites under the
supervision of the DEC and the New York State Department of Health.

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

Thus, the eleven sites discussed above are currently the subject of ACOs between
the  Company  and the DEC.  The final end uses for  these  sites and  therefore,
acceptable  remediation  goals  have not yet been  determined.  The  Company  is
required to prepare a feasibility  study for the  remediation of each such site,
based on cleanup levels derived from risk analyses  associated with the proposed
or anticipated  future use of the  properties.  The schedule for completing this
phase  of the work  under  the ACOs for the  identified  sites  discussed  above
extends through 2001.

The  Company  has  recently  identified  eight  additional  sites  to  the  DEC,
Brooklyn/Kings County Lighting, Brooklyn (New Utrecht Avenue), Glenwood Landing,
Riverhead, Inwood, Saltaire,

                                       42

<PAGE>



Southold and East  Hampton.  The Company has not been  requested to conduct site
investigation  activity by the DEC at these eight sites and is currently  unable
to determine what, if any,  additional costs will be incurred to remediate these
eight sites.

It is also  possible,  based on future  investigation,  that the  Company may be
required to undertake  investigation and potential  remediation efforts at other
currently unknown former MGP sites.  However, the Company is currently unable to
determine whether or to what extent such additional costs may be incurred.

The  Company  believes  that  in  the  aggregate,   the  accrued  liability  for
investigation  and remediation of the MGP sites  identified above are reasonable
estimates  of  likely  cost  within a range of  reasonable,  foreseeable  costs.
Accordingly,  the  Company  presently  estimates  the  cost  of its  MGP-related
environmental  cleanup  activities will be $76.7 million;  which amount has been
accrued  by  the  Company  as  its  current  best   estimate  of  its  aggregate
environmental  liability  for known sites.  As previously  indicated,  the total
MGP-related  costs  may be  substantially  higher,  depending  upon  remediation
experience,  selected end use for each site, and actual environmental conditions
encountered.

The  Company's  NYPSC  approved  rate plan  provides  for the  recovery  of such
investigation  and  remediation  costs.  At December 31,  1999,  the Company has
reflected a regulatory  asset of $77.4 million.  Expenditures  incurred  through
December 31, 1999 by the Company with respect to  MGP-related  activities  total
$5.3 million.

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

FAIR VALUE OF FINANCIAL  INSTRUMENTS:  Long-term  debt  allocated to the Company
consists of publicly traded Debentures,  the fair value of which is estimated on
quoted market prices for the same or similar issues. The Debentures are included
in the promissory notes to LIPA. As previously  indicated,  there is no maturing
long-term debt within the next five years.


                                       43

<PAGE>



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


(IN THOUSANDS OF DOLLARS)            Fair Value          Carrying Amount
------------------------------  -----------------      -------------------
DECEMBER 31, 1999              $        563,349        $       572,904
December 31, 1998              $        597,325        $       574,259
------------------------------  -------------------    -------------------


NOTE 7. RELATED PARTY TRANSACTIONS

The Company engages in various  transactions  with affiliates of the Parent.  In
addition,  all cash  collected from the Company's gas customers is collected and
held by the Parent's  corporate  and  administrative  subsidiary.  Further,  all
payments to third parties for Company payables, including labor, are made by the
Parent's corporate and administrative  subsidiary on behalf of the Company.  The
Company is also  obligated to reimburse the Parent for the  Company's  allocated
share of principal and interest on the promissory notes due to LIPA. At December
31, 1999 and December 31, 1998 the Company had a current  intercompany  accounts
receivable  balance  of $43.4  million  and  $32.6  million  from  the  Parent's
corporate and administrative subsidiary,  approximating interest payments on the
Company's allocated share of long-term debt for the year ended December 31, 1999
and the nine months ended December 31, 1998.

The balance of  intercompany  accounts  payable  amounted to $258.1  million and
$181.0  million at December 31, 1999 and December 31, 1998,  respectively.  This
balance  reflects,   primarily,   the  Company's  allocated  pension  and  other
postretirement liability due to the Parent and natural gas purchases.

The Company incurs expenses related to services it provides to affiliates of the
Parent.  These  expenses  are offset by  intercompany  billings  to the  various
affiliates of the Parent for which the Company provides such services.  Billings
to various  affiliates  of the Parent  amounted to $3.6 million and $2.0 million
for the year ended  December  31, 1999 and the nine months  ended  December  31,
1998,   respectively.   These  billings  reduced   operations   expense  in  the
accompanying Income Statement.


                                       44

<PAGE>



NOTE 8. SALE OF LILCO ASSETS,  ACQUISITION  OF KEYSPAN  ENERGY  CORPORATION  AND
TRANSFER OF ASSETS AND LIABILITIES TO THE PARENT

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

Moreover,  all of LILCO's outstanding  long-term debt as of May 28, 1998, except
for its 1997 Series A Electric  Facilities  Revenue  Bonds due  December 1, 2027
which were assigned to the Parent,  was assumed by LIPA. In accordance  with the
LIPA Transaction, the Parent issued promissory notes to LIPA amounting to $1.048
billion which  represented an amount  equivalent to the sum of (i) the principal
amount of 7.30% Series  Debentures due July 15, 1999 and 8.20% Series Debentures
due March 15, 2023  outstanding  as of May 28, 1998,  and (ii) an  allocation of
certain of the Authority Financing Notes. The promissory notes contain identical
terms to the  debt  referred  to in  items  (i) and  (ii)  above.  (See  Note 5,
"Long-Term Debt" for additional information.)

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

NOTE 9. TAX  BENEFITS  AND COSTS  RELATED TO THE LIPA  TRANSACTION  AND  SPECIAL
CHARGES

In  1998,  the  Company  recognized  tax  benefits  of  $7.5  million  primarily
reflecting (a) the deferred  federal  income taxes  necessary to account for the
difference  between the carryover basis of the Transferred  Assets for financial
reporting  purposes and the new increased tax basis and (b) certain  credits for
financial reporting  purposes,  including tax benefits recognized on the funding
of postretirement benefits, partially offset by income taxes associated with the
sale of the Transferred

                                       45

<PAGE>



Assets  to the  Company  by LIPA,  which  taxes  were  paid by the  Company.  In
addition,  the Company incurred an after-tax charge of $5.6 million for an early
retirement  program  initiated by the Parent in December 1998. (The  before-tax,
early  retirement  charge of $8.7  million has been  recorded  as an  operations
expense.)

NOTE 10.  SUMMARY OF QUARTERLY INFORMATION (UNAUDITED)

The  following  is a table of financial  data for each quarter of the  Company's
year ended December 31, 1999.
<TABLE>
<CAPTION>

                                                                          (IN THOUSANDS OF DOLLARS)
                                      Quarter Ended    Quarter Ended   Quarter Ended  Quarter Ended
                                         3/31/99          6/30/99         9/30/99        12/31/99
-----------------------------------------------------------------------------------------------------
<S>                                       <C>               <C>           <C>             <C>
Operating revenues                   $     268,302    $      99,971    $    72,956    $    195,859
Operating income  (loss)             $      78,989    $       9,844    $   (12,594    $     38,863
Net income (loss)                    $      42,930    $      (2,184)   $   (15,163)   $     15,934
-----------------------------------------------------------------------------------------------------
</TABLE>

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

                                 Quarter Ended   Quarter Ended     Quarter Ended
                                      6/30/98         9/30/98          12/31/98
--------------------------------------------------------------------------------
Operating revenues                $     104,772     $    71,760    $  180,102
Operating income                  $       2,406     $       265    $   22,183
Net income (loss)                 $      (4,119)    $    (10,787)  $    3,015
Earnings (loss) for common stock  $      (5,175)    $    (10,787)  $    3,015
--------------------------------------------------------------------------------



                                       46

<PAGE>


REPORT OF ARTHUR ANDERSEN LLP, INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholder of KeySpan Gas East Corporation
     d/b/a KeySpan Energy:

We have audited the accompanying  Balance Sheet and Statement of  Capitalization
of KeySpan  Gas East  Corporation  (a New York  corporation  and a wholly  owned
subsidiary of KeySpan Corporation) as of December 31, 1999 and December 31, 1998
and the related  Statements of Income,  Retained Earnings and Cash Flows for the
year ended  December 31, 1999,  the nine months ended  December 31, 1998 and the
fiscal  year  ended  March  31,  1998.   These  financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audit.

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

As discussed in Note 1(B) to the accompanying financial statements, prior to May
28, 1998, the Company was part of the integrated gas and electric  operations of
Long Island Lighting Company.  Therefore,  the accompanying  Statement of Income
for the fiscal year ended March 31,  1998 and the period  April 1, 1998  through
May 28, 1998 (which period is included in the  accompanying  Statement of Income
for the nine months  ended  December  31,  1998) are based upon  allocations  of
certain revenues and expenses relating to such integrated operations.

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

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

ARTHUR ANDERSEN LLP

January 27, 2000
New York, New York



                  SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS

                            (IN THOUSANDS OF DOLLARS)


<TABLE>
<CAPTION>
                        Column A                              Column B          Column C        Column D      Column E
----------------------------------------------------------------------------------------------------------------------
                                                                               Additions
----------------------------------------------------------------------------------------------------------------------


                                                                                                              Balance
                                                             Balance at        Charged to                        at
                                                              Beginning        Costs and       Deduction       End of
                      Description                             of Period         Expenses          (1)          Period
--------------------------------------------------------  -----------------  --------------  -------------- ------------
<S>                                                           <C>               <C>             <C>           <C>
TWELVE MONTHS ENDED DECEMBER 31, 1999
Deducted from asset accounts:
Allowance for doubtful accounts                           $     5,586        $    4,413      $    4,689     $   5,310
NINE MONTHS ENDED DECEMBER 31, 1998
Deducted from asset accounts:
Allowance for doubtful accounts                           $     7,726        $    5,593      $    7,733     $   5,586
TWELVE MONTHS ENDED MARCH 31, 1998
Deducted from asset accounts:
Allowance for doubtful accounts                           $     8,168        $    4,852      $    5,294     $   7,726
--------------------------------------------------------  -----------------  --------------  -------------- ------------
</TABLE>

(1) UNCOLLECTIBLE ACCOUNTS WRITTEN OFF, NET OF RECOVERIES.
                                       47
<PAGE>



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

None.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Not required

ITEM 11.  EXECUTIVE COMPENSATION

Not required

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Not required

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Not required

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

1.         FINANCIAL STATEMENTS

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

              Report of Independent Public Accountants

              Statement of Income for the year ended December 31, 1999, the nine
              months ended  December  31,  1998,  and the fiscal year ended
              March 31, 1998.

              Statement of Retained  Earnings  for the year ended  December  31,
              1999, the nine months ended December 31, 1998, and the fiscal
              year ended March 31, 1998.

              Balance Sheet at December 31, 1999 and December 31, 1998.

                                       48

<PAGE>




              Statement of  Capitalization at December 31, 1999 and December 31,
              1998.

              Statement of Cash Flows for the year ended  December 31, 1999, the
              nine months  ended  December  31,  1998,  and the fiscal year
              ended March 31, 1998.

              Notes to Financial Statements

2.            FINANCIAL STATEMENTS SCHEDULES

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

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

3.       EXHIBITS

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

         *3.1     Certificate of Incorporation  of the Company  effective May 7,
                  1998, Amendment to Certificate of Incorporation of the Company
                  effective   May   27,1998,   Amendment   to   Certificate   of
                  Incorporation of the Company effective October 26, 1998.

         *3.2     ByLaws of the Company In Effect on May 7, 1998.

          4.1     Indenture,  dated December 1, 1999,  between  KeySpan Gas East
                  Corporation,  the  Registrants,  KeySpan  Corporation  and the
                  Chase  Manhattan  Bank,  as  Trustee,  with the respect to the
                  issuance of Medium-Term Notes, Series A, (filed as Exhibit 4-a
                  to  Amendment  No. 1 to Form S-3  Registration  Statement  No.
                  333-92003-01)

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





                                       49

<PAGE>



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

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

          *27    Financial  Data Schedule on Schedule U-T for the fiscal year
                 ended December 31, 1999

* Filed herewith

4.   REPORTS ON FORM 8-K

None

                                       50

<PAGE>



                                   SIGNATURES



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



                                             KEYSPAN GAS EAST CORPORATION
                                             d/b/a Brooklyn Union of Long Island




April 14, 2000                                By: /s/ Anne C. Jordan
                                                  ------------------
                                                  Anne C. Jordan
                                                  Vice President and Chief
                                                  Financial Officer




April 14, 2000                                By: /s/ Paul R. Nick
                                                  ----------------
                                                  Paul R. Nick
                                                  Controller and Chief
                                                  Accounting Officer


                                       51
<PAGE>



Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this  report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacities indicated on April 14, 2000.


     /s/Anne C. Jordan                Vice-President and Chief Financial Officer
     -------------------
        Anne C. Jordan                  (Principal financial officer)



     /s/Paul R. Nick                 Controller and Chief Accounting Officer
     -------------------
        Paul R. Nick                    (Principal accounting officer)




            *                        Director
     -----------------------
      Wallace P. Parker Jr.




             *                       Director
     -----------------------
      George B. Jongeling




     By: /s/Anne C. Jordan
     ---------------------
        ATTORNEY-IN-FACT


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