SECURITIES AND EXCHANGE COMMISSION

(Release No. 35-27709; 70-9699)

KeySpan Corporation, et al.

Supplemental Order Authorizing Nonutility Money Pool

August 7, 2003

KeySpan Corporation ("KeySpan"), a registered holding company and KeySpan's nonutility subsidiaries ("Nonutility Subsidiaries" and together, "Applicants"): KeySpan New England LLC ("KeySpan New England") and its nonutility subsidiaries; KeySpan Energy Corporation ("KEC") and its nonutility subsidiaries; North East Transmission Co., Inc.; ACJ Acquisition LLC; KeySpan Insurance Company; KeySpan Electric Services LLC; KeySpan Engineering and Survey, Inc.; KeySpan Exploration & Production LLC; KeySpan Technologies Inc.; KeySpan MHK, Inc.; KeySpan Corporate Services LLC ("KCS"); KeySpan Utility Services LLC; KSNE LLC; KeySpan-Ravenswood LLC ("Ravenswood"); KeySpan Services, Inc. and its nonutility subsidiaries; KeySpan Energy Trading Services LLC, all located in New York, New York; and KeySpan Energy Development Corporation and its nonutility subsidiaries, located in Waltham, Massachusetts, have filed with the Securities and Exchange Commission ("Commission") a post-effective amendment ("Amendment") under section 12(f) of the Public Utility Holding Company Act of 1935, as amended ("Act"), and rule 53 under the Act to a previously filed application-declaration ("Application"). The Commission issued a notice of the underlying application on October 20, 2000 (HCAR No. 27257).

I. Nonutility Money Pool

By order dated November 7, 2000 (HCAR No. 35-27271),¹ KeySpan was authorized to acquire Eastern Enterprises ("Merger Order"). In the Merger Order, the Commission reserved jurisdiction over the retention of the certain nonutility companies ("KSI Subsidiaries") and KeySpan's creation of a nonutility money pool ("Nonutility Money Pool"). The Commission issued an order on April 24, 2003 (HCAR No. 27670) authorizing KeySpan to retain the KSI Subsidiaries upon the reduction of certain nonconforming activities over the next five years. Now, Applicants request that the Commission release of jurisdiction over the establishment and operation of the Nonutility Money Pool.

Applicants request authority to contribute surplus funds and to lend and extend credit to the Nonutility Subsidiaries through the Nonutility Money Pool. Funds may be made available through surplus treasury funds of KeySpan and other Nonutility Money Pool participants ("Internal Funds") and short-term borrowings authorized in separate applications by KeySpan or the Nonutility Subsidiaries made available for lendings through the Nonutility Money Pool ("External Funds"). KeySpan will prioritize funds available for loans through the Money Pools to the Utility Money Pool first, and then to the Nonutility Money Pool. Funds not required by the Nonutility Money Pool to make loans (with the exception of funds required to satisfy the Nonutility Money Pool's liquidity requirements) would ordinarily be invested in one or more short-term investments, including: (1) interest-bearing accounts with banks; (2) obligations issued or guaranteed by the U.S. government and/or its agencies and instrumentalities, including obligations under repurchase agreements; (3) obligations issued or guaranteed by any state or political subdivision, provided that the obligations are rated not less than "A" by a nationally recognized rating agency; (4) commercial paper rated not less than "A-1" or "P-1" or their equivalent by a nationally recognized rating agency; (5) money market funds; (6) bank certificates of deposit; (7) Eurodollar funds; and (8) other investments that are permitted by section 9(c) of the Act and rule 40 under the Act.

Nonutility Money Pool participants that borrow will borrow pro rata from each company that lends, in the proportion that the total amount loaned by each lending company bears to the total amount then loaned through the Nonutility Money Pool. On any day when both Internal Funds and External Funds, with different rates of interest, is used to fund loans through the Nonutility Money Pool, each borrower will borrow pro rata from each fund source in the Nonutility Money Pool in the same proportion that the amount of funds provided by that fund source bears to the total amount of short-term funds available to the Nonutility Money Pool.

Borrowings from the Nonutility Money Pool require authorization by the borrower's chief financial officer or treasurer, or by a designee thereof. No party is required to effect a borrowing through the Nonutility Money Pool if it is determined that it could (and had authority to) effect a borrowing at lower cost directly from banks or through the sale of its own commercial paper. No loans through the Nonutility Money Pool will be made to, and no borrowings will be made by, KeySpan, KEC, KeySpan New England or any of KeySpan's exempt wholesale generators ("EWGs") and foreign utility companies ("FUCOs"), as defined in sections 32 and 33 of the Act.²

The cost of compensating balances, if any, and fees paid to banks to maintain credit lines and accounts by Nonutility Money Pool participants lending External Funds to the Nonutility Money Pool will initially be paid by the participant maintaining such line. A portion of these costs (or all of the costs in the event a Utility Money Pool participant establishes a line of credit solely for purposes of lending any External Funds obtained thereby into the Nonutility Money Pool) are allocated every month to the companies borrowing External Funds through the Nonutility Money Pool in proportion to their respective daily outstanding borrowings of External Funds.

If only Internal Funds make up the funds available in the Nonutility Money Pool, the interest rate applicable and payable to, or by, the participants for all loans of the Internal Funds will be the rates for high-grade unsecured thirty-day commercial paper sold through dealers by major corporations as quoted in The Wall Street Journal.

If only External Funds comprise the funds available in the Nonutility Money Pool, the interest rate applicable to loans of the External Funds will be equal to the lending company's cost for the External Funds (or, if more than one Nonutility Money Pool participant had made available External Funds on a given day, the applicable interest rate will be a composite rate equal to the weighted average of the cost incurred by the respective Nonutility Money Pool participants for the External Funds).

In cases where both Internal Funds and External Funds are concurrently borrowed through the Nonutility Money Pool, the rate applicable to all loans comprised of these "blended" funds will be a composite rate equal to the weighted average of (a) the cost of all Internal Funds contributed by Nonutility Money Pool participants (as determined according to the second-preceding paragraph above) and (b) the cost of all the External Funds (as determined according to the immediately preceding paragraph above). In circumstances where Internal Funds and External Funds are available for loans through the Nonutility Money Pool, loans may be made exclusively from Internal Funds or External Funds, rather than from a "blend" of these funds, to the extent it is expected that these loans would result in a lower cost of borrowings.

Each participant receiving a loan through the Nonutility Money Pool is required to repay the principal amount of the loan, together with all interest accrued thereon, on demand and in any event not later than one year after the date of the loan. The borrower may prepay all loans made through the Nonutility Money Pool without premium or penalty.

Applicants state that all contributions to, and borrowings from, the Nonutility Money Pool are exempt under to the terms of rule 52 under the Act,³ except contributions and extensions of credit by KeySpan, authorization for which is hereby requested. Applicants state that KeySpan shall undertake to file a post-effective amendment in this proceeding seeking approval to add any additional Nonutility Subsidiary to borrow from the Nonutility Money Pool.⁴

Operations of the Nonutility Money Pool, including record keeping and coordination of loans, will be handled by KCS under the authority of the appropriate officers of the participating companies. KCS will administer the Nonutility Money Pool on an "at cost" basis and will maintain separate records for each Money Pool. Surplus funds of the Utility Money Pool and the Nonutility Money Pool may be combined in common short-term investments, but separate records of the funds shall be maintained by KCS as administrator of the Money Pools, and interest thereon shall be separately allocated, on a daily basis, to each Money Pool in accordance with the proportion that the amount of each Money Pool's surplus funds bears to the total amount of surplus funds available for investment from both Money Pools.

II. Use of Proceeds

Proceeds of any short-term borrowings by the participants may be used by each such participant (i) for the interim financing of its construction and capital expenditure programs; (ii) for its working capital needs; (iii) for the repayment, redemption or refinancing of its debt and preferred stock; (iv) to meet unexpected contingencies, payment and timing differences, and cash requirements; and (v) to otherwise finance its own business and for other lawful general corporate purposes. The use of proceeds from the financings would be limited to use in the operations of the respective businesses in which the Subsidiaries are already authorized to engage.

III. Rule 53 Analysis

The proposed transaction is also subject to rule 54, which provides that in determining whether to approve an application which does not relate to any "exempt wholesale generator" ("EWG") or "foreign utility company" ("FUCO"), the Commission shall not consider the effect of the capitalization or earnings of any such EWG or FUCO which is a subsidiary of a registered holding company if the requirements of rule 53(a), (b) and (c) are satisfied.

KeySpan currently meets all of the conditions of rule 53(a) except for clause (1). At June 30, 2003, KeySpan's "aggregate investment," as defined in rule 53(a)(1), in EWGs and FUCOs was approximately $1,034,075,000. Applicants state that by order dated December 6, 2002, HCAR No. 35-27612, the Commission authorized KeySpan to investment in EWGs and FUCOs in an aggregate amount of up to $2.2 billion. In addition, Applicants assert that KeySpan has complied, and will continue to comply, with the record-keeping requirements of rule 53(a)(2), the limitation under rule 53(a)(3) of affiliate utility company personnel rendering services to KeySpan's EWGs or FUCOs and the requirements of rule 53(a)(4) concerning the submission of copies of certain filings under the Act to retail rate regulatory commissions. None of the circumstances described in rule 53(b) has occurred.

Applicants state that there has been no adverse impact on KeySpan's consolidated capitalization resulting from KeySpan's investments in EWGs and FUCOs. Applicants state that as of June 30, 2003, KeySpan's consolidated capitalization consisted of 39.78% equity and 60.22% debt and KeySpan's EWG and FUCO investments, in the aggregate, have been profitable for all quarterly periods from December 31, 2000 through June 30, 2003. In addition, at June 30, 2003, KeySpan's senior unsecured debt was rated "investment grade" by all the major rating agencies.

Applicants state that all of KeySpan's direct or indirect investments in EWGs and FUCOs are segregated from the public utility subsidiaries and that none of the public utility subsidiaries provide financing for, extend credit to, or sell or pledge its assets directly or indirectly to any EWG or FUCO in which KeySpan owns any interest. Applicants assert that KeySpan does not, and will not, seek recovery in the retail rates of any public utility subsidiaries for any failed investment in, or inadequate returns from, an EWG or FUCO investment.

Finally, Applicants state that investments in EWGs and FUCOs will not have any negative impact on the ability of the public utility subsidiaries to fund operations and growth. Applicants state that KeySpan's public utility subsidiaries currently have financial facilities in place that are adequate to support their operations.

Fees, commissions and expenses to be incurred, by Applicants, directly or indirectly, in connection with these activities are approximately $5,000. Applicants state that no state or

federal commission, other than this Commission, has jurisdiction over the transaction proposed in the Amendment.

Due notice of the filing of this Application, as amended, has been given in the manner prescribed in rule 23 under the Act, and no hearing has been requested of, or ordered by, the Commission. On the basis of the facts in the record, it is found that the applicable standards of the Act and rules under the Act are satisfied, and that no adverse findings are necessary.

IT IS ORDERED, under the applicable provisions of the Act and rules under the Act, that the Application, as amended, be granted and permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act.

For the Commission, by the Division of Investment Management, under delegated authority.

¹ The Merger Order was modified by two supplemental orders on December 4, 2000 (HCAR Nos. 27286 and 27287.)

² KeySpan's EWGs are Ravenswood and KeySpan-Glenwood Energy Center, LLC and KeySpan-Port Jefferson Energy Center, LLC, both indirect subsidiaries of KEC. KeySpan's FUCOs include Finsa Energeticos, S. de R.L. de C.V. and Phoenix Natural Gas Limited, both indirect subsidiaries of KEC. The EWGs and FUCOs will participate in the Nonutility Money Pool as lenders only.

³ Applicants state that the securities issued under the Nonutility Money Pool are solely for the purpose of financing the existing business of the respective Nonutility Subsidiary and the interest rates and maturity dates of the debt securities issued are designed to parallel the effective cost of capital of the associate companies participating and issuances of debt to an energy related company under the Nonutility Money Pool arrangements will comply with the rule 58 provision set forth in rule 52(b).

⁴ Applicants request authority to include the full participation in the Nonutility Money Pool of Nonutility Subsidiaries which KeySpan recently received authority to acquire or is the subject of a pending application before the Commission under S.E.C. File No. 70-10126. Applicants request to add Bard, Rao & Athanas Consulting Engineers, Inc., which KeySpan received authority to acquire by order dated August 5, 2003 (HCAR No. 27708). Applicants also request authority to add Rimbey Pipe Line Co. Ltd. to the Nonutility Money Pool upon Commission approval of the pending application in S.E.C. File No. 70-10126.

http://www.sec.gov/divisions/investment/opur/filing/35-27709.htm