KeySpan Corp, et al.; Rel. No. 35-27776 / December 18, 2003

KeySpan Corporation ("KeySpan"), a registered holding company and KeySpan's directly owned public utility subsidiaries The Brooklyn Union Gas Company d/b/a KeySpan Energy Delivery New York ("KEDNY"); KeySpan Gas East Corporation d/b/a KeySpan Energy Delivery Long Island ("KEDLI"); KeySpan Generation LLC ("KeySpan Generation"); and KeySpan's public utility subsidiaries indirectly owned through KeySpan New England LLC ("KeySpan New England"), Boston Gas Company d/b/a KeySpan Energy Delivery New England ("Boston Gas"), Essex Gas Company d/b/a KeySpan Energy Delivery New England ("Essex Gas"), Colonial Gas Company d/b/a KeySpan Energy Delivery New England ("Colonial Gas"), and EnergyNorth Natural Gas, Inc. d/b/a KeySpan Energy Delivery New England ("ENGI" and the direct and indirect utility subsidiaries, together, "Utility Subsidiaries"); KeySpan's nonutility subsidiaries ("Nonutility Subsidiaries"): KeySpan Energy Corporation ("KEC") and its subsidiaries; KeySpan Insurance Company; KeySpan Electric Services LLC; KeySpan Engineering and Survey, Inc.; KeySpan Exploration & Production LLC; 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, and KeySpan Energy Development Corporation and its nonutility subsidiaries, all located in Brooklyn, New York, except for KeySpan New England, Boston Gas, Essex Gas, Colonial Gas and ENGI, which are located in Waltham, MA, (Utility Subsidiaries and the Nonutility Subsidiaries are together "Subsidiaries," and along with KeySpan are collectively referred to as "Applicants") have filed with the Securities and Exchange Commission ("Commission") an application-declaration ("Application") under sections 6(a), 7, 9(a), 10, 12(b), 12(f), and 13(b) of the Public Utility Holding Company Act of 1935, as amended ("Act"), and rules 42, 43, 44, 45, 46, 53, 54, 90, and 91 under the Act. The Commission issued a notice of the Application on November 20, 2003 (HCAR No. 27766).

I. Introduction

By order dated November 7, 2000 (HCAR No. 27269), as corrected by order issued on December 1, 2000 (HCAR No. 27281) (together, "Merger Order"), KeySpan was authorized to acquire all of the issued and outstanding common stock of Eastern Enterprises ("Eastern" now known as KeySpan New England)¹ and EnergyNorth Inc. ("Mergers"). KeySpan now directly or indirectly owns the following seven public utility companies: (i) KEDNY, which distributes natural gas at retail to residential, commercial and industrial customers in the New York City boroughs of Brooklyn, Staten Island and Queens; (ii) KEDLI, which distributes natural gas at retail to customers in New York State located in the counties of Nassau and Suffolk on Long Island and the Rockaway Peninsula in Queens County; (iii) KeySpan Generation, which owns and operates electric generation capacity located on Long Island all of which is sold at wholesale to the Long Island Power Authority ("LIPA") for resale by LIPA to its approximately 1.1 million customers; (iv) Boston Gas, which distributes natural gas to customers located in Boston and other cities and towns in eastern and central Massachusetts; (v) Essex Gas, which distributes natural gas to customers in eastern Massachusetts to customers; (vi) Colonial Gas, which distributes natural gas to customers located in northeastern Massachusetts and on Cape Cod; and (vii) ENGI, which distributes natural gas to customers located in southern and central New Hampshire, and the City of Berlin located in northern New Hampshire. Together, KEDNY and KEDLI serve approximately 1.66 million customers. Together, Boston Gas, Colonial Gas and Essex Gas serve approximately 768,000 customers. ENGI serves approximately 75,000 customers.

II. General Request

Applicants request authorization to engage in the financing transactions set forth below through December 31, 2006 ("Authorization Period").

(i) issuance by KeySpan of common stock, long-term debt; preferred stock, preferred or equity-linked securities (including units with incorporated options, warrants and/or forward equity purchase contracts or provisions that are exercisable or exchangeable for or convertible into common stock);

(ii) issuance by KeySpan of short-term debt;

(iii) issuance of up to 13 million shares of KeySpan common stock under KeySpan's direct stock purchase and dividend reinvestment plan, certain incentive compensation plans and certain other employee benefit plans;

(iv) the entering into by KeySpan and its Subsidiaries of hedging transactions;

(v) the issuance of intra-system advances and guarantees ("Guarantees"), and performance guarantees ("Performance Guarantees") by KeySpan to or on behalf of Subsidiaries of KeySpan;

(vi) the issuance of intra-system advances, Guarantees, Performance Guarantees and, to the extent not exempt under rule 52, by the Nonutility Subsidiaries to or on behalf of other Nonutility Subsidiaries;

(vii) issuances of short-term debt securities by the Utility Subsidiaries, to the extent not exempt under rule 52;

(viii) the ability of the Nonutility Subsidiaries to pay dividends out of capital or unearned surplus;

(ix) the right of KeySpan to acquire directly or through Subsidiaries the securities of one or more corporations, trust, partnerships, limited liability companies or other entities ("Intermediate Subsidiaries") in order to, among other things, facilitate the acquisition, holding and/or financing of KeySpan's nonutility investments;

(x) the authority for KeySpan to engage, directly or through Subsidiaries, in preliminary development activities ("Development Activities") and administrative and management activities ("Administrative Activities") in each case related to KeySpan's permitted nonutility investments;

(xi) the authority for KeySpan and its Nonutility Subsidiaries to undertake internal reorganizations of then existing and permitted Nonutility Subsidiaries and businesses;

(xii) the authority for KeySpan and the Subsidiaries to make investments in exempt wholesale generators ("EWGs"), as that term is defined in section 32 of the Act, and foreign utility companies ("FUCOs"), as that term is defined in section 33 of the Act, up to an aggregate amount not to exceed $3.0 billion;

(xiii) the authority for KeySpan and the Subsidiaries to organize and/or acquire the equity securities of one or more additional corporations, trusts, partnerships or other entities organized to serve the purpose of facilitating financings ("Financing Subsidiaries");

(xiv) the authority for the Nonutility Subsidiaries to provide services and sell goods to each other at fair market prices determined without regard to cost in exemption from section 13(b) and rules 90 and 91; and

(xv) issuances by KeySpan and its Subsidiaries of common stock, preferred stock, preferred and equity-linked securities, long-term debt and short-term debt to refund, replace, repurchase or refinance existing securities, to the extent not exempt under rule 52.

III. Financing Parameters

Applicants request authorization to engage in a variety of financing transactions, credit support arrangements and other related transactions, as more fully discussed below, during the Authorization Period for which the specific terms and conditions are not at this time known. Applicants state that the following general terms ("Financing Parameters") would be applicable, where appropriate, to the financing transactions requested:

A. Effective Cost of Money on Financings

Applicants state that the effective cost of capital on debt and preferred or equity-linked financings will not exceed competitive market rates available at the time of issuance for securities having the same or reasonably similar terms and conditions issued by similar companies of reasonably comparable credit quality; provided that in no event will the effective cost of capital on (i) long-term debt borrowings exceed 500 basis points over the comparable term U.S. Treasury securities and on (ii) short-term debt borrowings exceed 500 basis points over the comparable term London Interbank Offered Rate ("LIBOR").

B. Maturity

Applicants state that the maturity of indebtedness will not exceed 50 years and that preferred stock or preferred or equity-linked securities (other than perpetual preferred stock) will be redeemed no later than 50 years after its issuance, unless converted into common stock.

C. Issuance Expenses

Applicants state that the underwriting fees, commissions or other similar remuneration paid in connection with the non-competitive issue, sale or distribution of securities would not exceed the greater of (i) 7% of the principal or total amount of the security being issued or (ii) issuance expenses that are generally paid at the time of the pricing for sales of the particular issuance, having the same or reasonably similar terms and conditions issued by similar companies of reasonably comparable credit quality.

D. Use of Proceeds

Applicants state that the proceeds from the sale of securities in external financing transactions will be used for general corporate purposes including (i) the financing of the capital expenditures of the KeySpan system; (ii) the financing of working capital requirements of the KeySpan system; (iii) the acquisition, retirement or redemption under rule 42 of securities previously issued by KeySpan or its Subsidiaries or as otherwise authorized by Commission; (iv) direct or indirect investment in companies authorized under the Act or Commission rule, or by Commission order (including EWGs or FUCOs) or in a separate proceeding; and (v) other lawful purposes. Applicants represent that no financing proceeds will be used to acquire a new subsidiary unless the financing is consummated in accordance with a Commission order or an available exemption under the Act.

E. Common Equity Ratio

Applicants state that KeySpan and each Utility Subsidiary will each maintain common equity (as reflected in the most recent annual or quarterly financial statement of each entity, as the case may be, adjusted to reflect changes in capitalization since the included balance sheet date) of at least 30% of its consolidated capitalization by considering common equity, preferred stock, long-term debt and short-term debt ("30% Test") at all times during the Authorization Period. As of September 30, 2003, the common equity of each Utility Subsidiary and of KeySpan on a consolidated basis is as follows:

F. Investment Grade Ratings

Applicants state that apart from securities issued for the purpose of funding money pool operations, KeySpan and the Utility Subsidiaries will not issue any other securities in reliance upon this Order, unless (i) the security to be issued, if rated, is rated investment grade; (ii) all outstanding securities of the issuer, that are rated,² are rated investment grade; and (iii) all outstanding securities of KeySpan, the top-level registered holding company, that are rated, are rated investment grade ("Investment Grade Condition"). For purposes of this provision, a security will be deemed to be rated "investment grade" if it is rated investment grade by at least one nationally recognized statistical rating organization, as that term is used in paragraphs (c)(2)(vi)(E), (F) and (H) of rule 15c3-1 under the Securities Exchange Act of 1934. Applicants request that the Commission reserve jurisdiction over the issuance by KeySpan and the Utility Subsidiaries of any securities that are not able to meet the Investment Grade Condition.

IV. Current Financial Condition

Applicants state that all outstanding long-term debt securities of KeySpan and each of the Utility Subsidiaries that are rated, are rated investment grade. The ratings are as follows:

V. Description of Specific Financings

A. KeySpan External Financing

Applicants request that KeySpan be authorized, through the Authorization Period, to issue and sell up to an aggregate amount of $3.0 billion of common stock, preferred stock, preferred and equity-linked securities, long-term debt securities, other than for refinancing, refunding or replacement of outstanding securities ("Long-Term Financing Limit"). Applicants also request that KeySpan be authorized to issue common stock to third parties in consideration for the acquisition by KeySpan or a Nonutility Subsidiary of equity or debt securities of a company being acquired through a Commission order, applicable rule, or exemption under the Act.

In addition to the $3.0 billion authorization under the Long-Term Financing Limit, Applicants propose that KeySpan issue up to $1.3 billion of short-term debt during the Authorization Period ("Short-Term Financing Limit").

1. Common Stock

a) General

Applicants request that KeySpan sell or otherwise issue³ common stock in any one of the following ways: (i) through underwriters or dealers; (ii) through agents; (iii) directly to a limited number of purchasers or a single purchaser; or (iv) directly to employees (or to trusts established for their benefit), and shareholders. Applicants request that issuances of common stock under KeySpan's employee benefit plans and stock purchase and dividend reinvestment plans not count towards the Long-Term Financing Limit, but that these securities be limited to 13 million shares as described below in V.A.1.(c).

Applicants state that if underwriters are used in the sale of the securities, the securities would be acquired by the underwriters for their own account and may be resold from time to time in one or more transactions, including negotiated transactions, at a fixed public offering price or at varying prices determined at the time of sale. The securities may be offered to the public either through underwriting syndicates (which may be represented by a managing underwriter or underwriters designated by KeySpan) or directly by one or more underwriters acting alone. Applicants state that the securities may be sold directly by KeySpan or through agents designated by KeySpan from time to time and that if dealers are utilized in the sale of any of the securities, KeySpan would sell the securities to the dealers as principals. Any dealer may then resell these securities to the public at varying prices to be determined by the dealer at the time of resale. The aggregate price of the common stock being sold through any underwriter or dealer shall be calculated based on either the specified selling price to the public or the closing price of the common stock on the day the offering is announced. Applicants state that if common stock is being sold in an underwritten offering, KeySpan may grant the underwriters an over-allotment option permitting the purchase from KeySpan of additional shares at the same price then being offered solely for the purpose of covering over-allotments.

Applicants state that public distributions may be through private negotiation with underwriters, dealers or agents as discussed above or effected through competitive bidding among underwriters. In addition, Applicants request that sales be made through private placements or other non-public offerings to one or more persons. Applicants state that these common stock sales would be with terms and conditions, at rates or prices and under conditions negotiated or based upon, or otherwise determined by, competitive capital markets.

b) Acquisitions

Applicants also request that KeySpan be authorized to issue common stock to third parties in consideration for the acquisition by KeySpan or a Nonutility Subsidiary of equity or debt securities of a company being acquired through a Commission order, applicable rule, or exemption under the Act. Applicants state that the KeySpan common stock to be exchanged in this type of transaction may be purchased on the open market under rule 42, or may be original issue.⁴

c) Direct Stock Purchase and other Employee Benefit Plans

Applicants propose, from time to time during the Authorization Period, for KeySpan to issue and/or acquire in open market transactions, or by some other method which complies with applicable law and Commission interpretations then in effect, up to 13 million shares of KeySpan common stock ("Benefit Plan Limit") under KeySpan's current or any future direct stock purchase and dividend reinvestment plan, certain incentive compensation plans, and certain other employee benefit plans. Applicants propose that any shares of common stock acquired by KeySpan on the open market during the Authorization Period under a rule 42 exemption, that were originally issued under the Benefit Plan Limit shall no longer count against the Benefit Plan Limit until the shares are reissued.

2. Preferred Stock and Preferred and Equity-linked Securities

Applicants request that KeySpan issue preferred stock in addition to preferred securities and or equity-linked securities up to the Long-Term Security Limit. Applicants request authority for KeySpan to issue preferred stock, preferred securities including trust preferred securities, convertible preferred securities, such as, debt or preferred securities that are convertible or exchangeable, either mandatorily or at the option of the holder, into common stock of KeySpan, common stock of the Subsidiaries, KeySpan indebtedness, or forward purchase contracts for common stock.

Applicants state that preferred or equity-linked securities may be issued in one or more series with rights, preferences, and priorities as may be designated in the instrument creating each series. Dividends or distributions on preferred or equity-linked securities will be made periodically and to the extent funds are legally available for this purpose, but may be made subject to terms that allow the issuer to defer dividend payments or distributions for specified periods. Applicants state that preferred or equity-linked securities may be convertible or exchangeable into shares of common stock or other indebtedness and may be issued in the form of shares or units. Applicants request that the conversion of equity-linked securities and the subsequent issuance of other securities as a direct result of the conversion (or the performance of forward purchase contracts), to the extent that no additional financing proceeds are realized, would not be counted against the Long-Term Financing Limit.⁵ Applicants state that preferred stock and preferred or equity linked securities may be sold directly or indirectly through underwriters or dealers in connection with an acquisition similar to that described for common stock, above.

3. Long-Term Debt

Applicants request that KeySpan issue unsecured, long-term debt securities subject to the Long-Term Financing Limit through the Authorization Period. At September 30, 2003, KeySpan had approximately $4.92 billion of long-term debt obligations outstanding.⁶ Long-term debt securities may be comprised of bonds, notes, medium-term notes, debentures, or similar unsecured securities under one or more indentures ("KeySpan Indenture") or long-term indebtedness under agreements with banks or other institutional lenders. Any long-term debt security would have such designation, aggregate principal amount, maturity, interest rate(s) or methods of determining the same, terms of payment of interest, redemption provisions, sinking fund terms, terms for conversion into any other security of KeySpan or the Subsidiaries and other terms and conditions as KeySpan may determine at the time of issuance.

Applicants state that the maturity dates, interest rates, redemption and sinking fund provisions, tender or repurchase and conversion features, if any, with respect to the long-term securities of a particular series, as well as any associated placement, underwriting or selling agent fees, commissions and discounts, if any, will be established by negotiation or competitive bidding, subject to the Financing Parameters. Applicants further state that borrowings from banks and other financial institutions will be pari passu with debt securities issued under the KeySpan Indenture and the short-term credit facilities. Specific terms of any borrowings will continue to be determined by KeySpan at the time of issuance and will comply in all regards with the Financing Parameters.

4. Short-Term Debt

Applicants request authority for KeySpan to have outstanding, at any one time during the Authorization Period, up to $1.3 billion of short-term debt ("Short-Term Financing Limit"), which may include institutional borrowings, commercial paper ("Commercial Paper") or bid notes and short-term debt issued under the KeySpan Indenture or otherwise. Applicants state that the authorization for short-term debt is in addition to the Long-Term Financing Limit.

Short-term debt shall include any debt securities with a maturity term of one year or less. KeySpan may sell Commercial Paper, from time to time, in established domestic Commercial Paper markets. Applicants state that Commercial Paper would be sold to dealers at the discount rate or the coupon rate per annum prevailing at the date of issuance for Commercial Paper of comparable quality and maturities sold to Commercial Paper dealers generally. Applicants expect that the dealers acquiring Commercial Paper from KeySpan will re-offer it at a discount to corporate and institutional investors. Applicants expect Institutional investors to include commercial banks, insurance companies, pension funds, investment trusts, foundations, colleges and universities, and finance companies.

KeySpan may, without counting against the Short-Term Financing Limit set forth above, maintain back-up lines of credit (regardless of the maturation term for such back-up credit) in connection with a Commercial Paper program in an aggregate amount not to exceed the amount of authorized short term debt. In no event will the amount of borrowings under such lines of credit plus the amount of Commercial Paper outstanding exceed $1.3 billion in the aggregate.

B. Utility Subsidiary and Nonutility Subsidiary Financing

1. Utility Subsidiaries

Applicants request authority for the Utility Subsidiaries to issue short-term debt, including Commercial Paper and credit lines, and to loan and borrow funds from the utility money pool⁷ during the Authorization Period, in the following aggregate principal amounts ("Utility Financing Limit"):

Applicants state that the Utility Financing Limit is in addition to the Long-Term Financing Limit and the Short-Term Financing Limit. Applicants also request authority for the Utility Subsidiaries to refund, refinance or replace outstanding securities; provided that in no event will the aggregate principal amount of outstanding securities for each Utility Subsidiary exceed the amounts requested above. Applicants request authority for the Utility Subsidiaries to sell Commercial Paper, from time to time, in established domestic Commercial Paper markets. Commercial Paper would be sold to dealers at the discount rate or the coupon rate per annum prevailing at the date of issuance for Commercial Paper of comparable quality and maturities sold to Commercial Paper dealers generally. Applicants expect that the dealers acquiring commercial paper from Utility Subsidiaries will re-offer it at a discount to corporate and institutional investors. Applicants expect Institutional investors to include commercial banks, insurance companies, pension funds, investment trusts, foundations, colleges and universities and finance companies. Applicants request that the Utility Subsidiaries may, without counting against the limits set forth above, further maintain back up lines of credit in an aggregate amount not to exceed the amount of authorized Commercial Paper. Applicants request authority for the Utility Subsidiaries to set up credit lines for general corporate purposes in addition to credit lines to support Commercial Paper. The Utility Subsidiaries would borrow and repay under these lines of credit, from time to time, as it is deemed appropriate or necessary. Subject to the Financing Parameters, Applicants propose that each Utility Subsidiary may engage in other types of unsecured short-term financing as it may deem appropriate in light of its needs and market conditions at the time of issuance.

2. Nonutility Subsidiaries

Applicants request authority for Nonutility Subsidiaries to borrow and lend funds through the operation of the KeySpan nonutility money pool, approved by order dated August 7, 2003 (HCAR No. 27709). Applicants state that short-term financings undertaken by Nonutility Subsidiaries that are not exempt under rule 52, but are otherwise authorized in this Application, will be included in the aggregate Short-Term Financing Limit and subject to the Financing Parameters.

C. Guarantees and Intra-system Advances

KeySpan requests authorization to enter into Guarantees, Performance Guarantees, obtain letters of credit, enter into expense agreements or otherwise provide credit support with respect to the obligations of its Subsidiaries as may be appropriate or necessary to enable the Subsidiaries to carry on in the ordinary course of their respective businesses in an aggregate principal amount not to exceed $4.0 billion outstanding at any one time (excluding obligations exempt under rule 45) ("Guarantee Financing Limit"). For example, Applicants contemplate that during the Authorization Period, KeySpan will enter into Guarantees, performance Guarantees, obtain letters of credit, enter into expense agreements or otherwise provide credit support with respect to the obligations of its Subsidiaries in connection with transactions that are anticipated to involve generation expansion projects.

Applicants state that the Guarantee Limit is in addition to the Long-Term Financing Limit, the Short-Term Financing Limit and the Utility Financing Limit. Included in this amount are existing intra-system Guarantees and support provided by KeySpan as of June 30, 2003, which are expected to remain in place. Applicants request authority for KeySpan to charge each Subsidiary a fee for each Guarantee provided on its behalf that is not greater than the cost, if any, of obtaining the liquidity necessary to perform the Guarantee for the period of time the Guarantee remains outstanding. Any Guarantees or other credit support arrangements outstanding at the end of the Authorization Period will continue until expiration or termination in accordance with their terms.

Applicants request that KeySpan's guarantee authority include the ability to guarantee debt. Applicants state that the debt guaranteed will comply with the Financing Parameters or be exempt. To the extent that a Guarantee issued is of a security issued under the authority granted in this Application, Applicants request that the issuance will count only against the applicable limitation related to the underlying obligation in order to avoid a double count.

Applicants also request authorization for the Nonutility Subsidiaries to enter into Guarantees, Performance Guarantees, obtain letters of credit, enter into expense agreements and otherwise provide credit support with respect to other Nonutility Subsidiaries, in an aggregate principal amount not to exceed the Guarantee Financing Limit. The Nonutility Subsidiary providing any credit support may charge its associate company a fee for each Guarantee provided on its behalf that is not greater than the cost, if any, of obtaining the liquidity necessary to perform the Guarantee for the period of time the Guarantee remains outstanding.

Applicants state that certain of the Guarantees referred to above may be in support of the obligations of Subsidiaries which are not capable of exact quantification because they are subject to varying quantification. In these cases, KeySpan will determine the exposure under these Guarantee for purposes of measuring compliance with the Guarantee Financing Limit by appropriate means including estimation of exposure based on loss experience or projected potential payment amounts. Applicants state that estimates will be made in accordance with GAAP and that these estimations will be reevaluated periodically.

D. Refunding, Replacing, Repurchasing or Refinancing Outstanding Securities

Applicants request authorization to refund, repurchase (through open market purchases, tender offers, or private transactions), replace or refinance (together, "Refinancing") their respective debt or equity securities outstanding during the Authorization Period through the issuance of similar or any other types of securities authorized in this Application. Applicants state that in no case, will Refinancing cause any applicable financing limit to be exceeded.

Applicants request that the amount of a Refinancing that is equal to the then existing outstanding aggregate principal amount of securities to be refinanced not be counted against the securities' applicable financing limit. Only securities issued to finance the additional costs associated with the Refinancing will be counted against the applicable financing limit. The securities issued in the Refinancing may be issued to finance costs incurred due to redemption premiums, costs of acquisition or retirement of the securities, costs of issuance, or other similar costs including the costs expended to acquire securities on the open market under rule 42 and the subsequent costs to reissue the securities. Applicants state that any Refinancing of securities outstanding during the Authorization Period will be undertaken through the issuance of similar or any other securities of the types authorized in this Application and will be subject to the Financing Parameters.

E. Financing Risk Management Devices

1. Interest Rate Risk.

Applicants request authority to enter into, perform, purchase, and sell financial instruments intended to reduce or manage the volatility of interest rates, including but not limited to interest rate swaps, caps, floors, collars and forward agreements. Applicants state that hedges may also include issuance of structured notes (i.e., a debt instrument in which the principal and/or interest payments are indirectly linked to the value of an underlying asset or index), or transactions involving the purchase or sale, including short sales, of U.S. Treasury or U.S. governmental agency obligations or LIBOR based swap instruments ("Hedge Instruments"). Applicants state that the transactions would be for fixed periods and stated notional amounts. Applicants state that they would employ interest rate derivatives as a means of prudently managing the risk associated with any of its outstanding debt issued under this authorization or an applicable exemption by, in effect, synthetically (i) converting variable rate debt to fixed rate debt, (ii) converting fixed rate debt to variable rate debt, and (iii) limiting the impact of changes in interest rates resulting from variable rate debt. Applicants assert that in no case will the notional principal amount of any interest rate swap exceed the face value of the underlying debt instrument and related interest rate exposure. Applicants state that transactions will be entered into for a fixed or determinable period and that they will not engage in speculative transactions. Applicants state that they will only enter into agreements with counterparties ("Approved Counterparties") whose senior debt ratings, as published by a national recognized rating agency, are greater than or equal to "BBB-," or an equivalent rating.

2. Anticipatory Hedges

In addition, Applicants request authorization to enter into interest rate hedging transactions with respect to anticipated debt offerings ("Anticipatory Hedges"), subject to certain limitations and restrictions. Applicants state that Anticipatory Hedges would only be entered into with Approved Counterparties, and would be utilized to fix and/or limit the interest rate risk associated with any new issuance through (i) a forward sale of exchange-traded Hedge Instruments ("Forward Sale"), (ii) the purchase of put options on Hedge Instruments ("Put Options Purchase"), (iii) a Put Options Purchase in combination with the sale of call options Hedge Instruments ("Zero Cost Collar"), (iv) transactions involving the purchase or sale, including short sales, of Hedge Instruments, or (v) some combination of a Forward Sale, Put Options Purchase, Zero Cost Collar and/or other derivative or cash transactions, including, but not limited to, structured notes, caps and collars, appropriate for the Anticipatory Hedges. Anticipatory Hedges may be executed on-exchange ("On-Exchange Trades") with brokers through the opening of futures and/or options positions traded on the Chicago Board of Trade, the opening of over-the-counter positions with one or more counterparties ("Off-Exchange Trades"), or a combination of On-Exchange Trades and Off-Exchange Trades. Applicants state that they will determine the optimal structure of each Anticipatory Hedge transaction at the time of execution and that they may decide to lock in interest rates and/or limit its exposure to interest rate increases.

3. Accounting Standards

Applicants state they will comply with Statement of Financial Accounting Standards ("SFAS") 133 ("Accounting for Derivative Instruments and Hedging Activities"), SFAS 138 ("Accounting for Certain Derivative Instruments and Certain Hedging Activities") or any other standards relating to accounting for derivative transactions as are adopted and implemented by the Financial Accounting Standards Board ("FASB"). The Hedge Instruments and Anticipatory Hedges will qualify for hedge accounting treatment under the current FASB standards in effect and as determined at the date the Hedge Instruments or Anticipatory Hedges are entered into.

F. Direct Stock Purchase and Dividend Reinvestment Plan, Incentive Compensation Plans and other Employee Benefit Plans

Applicants propose that KeySpan, from time to time during the Authorization Period, issue and/or acquire in open market transactions, or by some other method which complies with applicable law and Commission interpretations then in effect, up to thirteen million shares of KeySpan common stock under KeySpan's current or any future direct stock purchase and dividend reinvestment plan, certain incentive compensation plans and certain other employee benefit plans. Applicants request that any shares of common stock acquired by KeySpan on the open market during the Authorization Period under rule 42 that were originally issued under this 13 million issuable shares limitation shall no longer count against the 13 million issuable shares limitation until the shares are reissued.

G. Payment of Dividends out of Capital or Unearned Surplus by Nonutility Subsidiaries

Applicants request authority for the Nonutility Subsidiaries to pay dividends from time to time, out of capital and unearned surplus (including revaluation reserve), to the extent permitted under applicable corporate law. Applicants state that, without further approval of the Commission, no Nonutility Subsidiary will declare or pay any dividend out of capital or unearned surplus if that Nonutility Subsidiary derives any material part of its revenues from sales of goods, services, electricity or natural gas to any of the Utility Subsidiaries or if at the time of the declaration or payment such Nonutility Subsidiary has negative retained earnings.

H. Development and Administrative Activities

Applicants request authority for KeySpan and the Subsidiaries to engage in preliminary development activities ("Development Activities") and administrative and management activities ("Administrative Activities") in connection with future investments in exempt wholesale generators ("EWGs"), foreign utility companies ("FUCOs"), as those terms are defined in sections 32 and 33 of the Act, and in subsidiaries permitted under rule 58 ("Rule 58 Subsidiaries"). Applicants state that Development Activities will be limited to due diligence and design review; market studies; preliminary engineering; site inspection; preparation of bid proposals, including in connection, posting of bid bonds; application for required permits and/or regulatory approvals; acquisition of site options and options on other necessary rights; negotiation and execution of contractual commitments with owners of existing facilities, equipment vendors, construction firms, power purchasers, thermal "hosts," fuel suppliers and other project contractors; negotiation of financing commitments with lenders and other third-party investors; and any other preliminary activities as may be required in connection with the purchase, acquisition or construction of facilities or the securities of other companies.

Applicants further request authority to form new subsidiary companies organized for the sole purpose of engaging in Development Activities. Development Activities will be designed to eventually result in a permitted nonutility investment.

Applicants propose that to the extent a Subsidiary for which amounts were expended for Development Activities and Administrative Activities becomes an EWG, FUCO, or Rule 58 Subsidiary, the amount expended will cease to be Development Activities or Administrative Activities and then be considered as part of the "aggregate investment" allowed by Commission order and/or the applicable provisions under the Act. In the case of Rule 58 Subsidiaries, the aggregate investment will then count against the limitation on such aggregate investment under rule 58. In the case of EWGs and FUCOs, the aggregate investment will then be transferred from the investment limitation for Development Activities or Administrative Activities and instead count against the limitation on EWG and FUCO aggregate investment requested below. Applicants propose that, should the Development Activities or Administrative Activities fail to lead to a permitted nonutility investment, the expenditures will not be counted against the "aggregate investment" allowed by Commission order and/or the applicable provisions under the Act with respect to EWG, FUCO, or Rule 58 Subsidiaries. Additionally, in the event that the Development Activities or Administrative Activities fail to lead to a permitted nonutility investment, any new subsidiaries formed for the purposes of engaging in Development Activities or Administrative Activities shall be dissolved as soon as reasonably practicable.

I. Financing Subsidiaries

KeySpan and the Subsidiaries request authorization to organize and/or acquire the equity securities of one or more additional corporations, trusts, partnerships or other entities organized to serve the purpose of facilitating financings ("Financing Subsidiaries"). Applicants state that the formation and acquisition of a limited use subsidiary may allow KeySpan and the Subsidiaries to secure more favorable financing terms, at lower costs than may otherwise be available. In addition, Applicants state that the interposition of a Financing Subsidiary can serve to isolate the risks associated with debt securities issuances thereby providing further benefit to the KeySpan system.

Specifically, Financing Subsidiaries may be organized to issue to third parties, long-term debt, short-term debt, preferred securities (including but not limited to trust preferred securities), equity-linked securities, and/or other securities that are authorized or exempt and then transfer the proceeds to KeySpan or the Subsidiaries. Applicants request authorization for KeySpan and, to the extent not exempt under rule 52, Subsidiaries to issue debentures and other evidence of indebtedness ("Financing Debt") to any Financing Subsidiary to evidence the transfer of financing proceeds by a Financing Subsidiary to its parent company. The principal amount, maturity and interest rate on any Financing Debt will be designed to parallel the amount, maturity and interest or distribution rate on the securities issued by a Financing Subsidiary in respect of which the Financing Debt is issued. Each of the Subsidiaries also requests authorization to enter into an expense agreement ("Expense Agreement") with its respective Financing Subsidiary, under which it would agree to pay all expenses of the Financing Subsidiary. Applicants state that any affiliate transactions entered into by a Financing Subsidiary in connection with an Expense Agreement would be conducted at fair market value without regard to cost, and therefore, Applicants request an exemption under section 13(b) from the at cost standards of rules 90 and 91 for KeySpan and the Subsidiaries to enter into these transactions.

The amount of securities issued by any Financing Subsidiary to third parties will be included in the applicable overall external financing limitation, authorized for the immediate parent company of such Financing Subsidiary. However, to avoid double counting, the amount of Financing Debt issued by a parent company to its Financing Subsidiary will not be counted against the applicable external financing limitation. Applicants request that securities issued by any Financing Subsidiary to third parties be exempt under rule 52 (and therefore reportable on Form U-6B-2) only if the securities, if issued directly by the parent company of such the Financing Subsidiary, would be exempt under rule 52. Applicants propose that KeySpan or a Subsidiary may, if required, guarantee or enter into support or expense agreements in respect of the obligations of Financing Subsidiaries.

VI. EWG/FUCO Investment Authority

Applicants request authorization for KeySpan to increase its "aggregate investment", as that term is defined in rule 53, in EWG and FUCOs to $3.0 billion ("EWG/FUCO Limit") outstanding at any one time during the Authorization Period. Applicants state that the EWG/FUCO Limit represents approximately 496% of KeySpan's average consolidated retained earnings for the four quarters ended September 30, 2003.

At September 31, 2003, applicants state that the consolidated amount of KeySpan's current aggregate investment in existing EWGs and FUCOs was as follows:

Applicants state that this total amount, represents approximately 177% of KeySpan's average consolidated retained earnings, as defined in rule 53, of $605.3 million for the four quarters ending at September 30, 2003.

Applicants state that the 2002 Order authorized KeySpan to make investments in an aggregate amount of up to $2.2 billion in EWGs and FUCOs. Applicants state that $2.2 billion represented approximately 440% of KeySpan's average consolidated retained earnings for the four quarters ended September 30, 2002. Applicants now request authority for KeySpan and the Subsidiaries, directly or indirectly, to invest up to $3.0 billion in EWGs and FUCOs during the Authorization Period.

The principal reason for the requested increase in the amount of aggregate investments KeySpan and the Subsidiaries can directly or indirectly make in EWGs and FUCOs is based on announced and unannounced intentions to either build new electric generation facilities through existing or newly formed EWG subsidiaries or to purchase existing EWGs or generating facilities from third parties through either auctions or direct negotiations. To date, KeySpan has announced plans to:

1. Develop an additional 250 MW of generation at the site of KeySpan-Ravenswood, LLC. The aggregate investment in this project is estimated to be $350 million, of which approximately $230 million has already been invested.

2. Develop approximately 500 MW of generation in connection with projects on Long Island, New York. The aggregate investment in these projects is estimated to be $375 million.

3. Develop, invest in or acquire other generation facilities or EWGs or FUCOs as opportunities become available.

A. Capitalization and Other Financial Measures

Applicants assert that increasing KeySpan's aggregate investment amount in EWGs and FUCOs to up to $3.0 billion will not adversely affect the financial soundness of KeySpan's holding company system nor will it be a risk to utility consumers. Applicants state that KeySpan's current investment in its operating EWGs have contributed positively to earnings.

B. Investment Review Procedures.

Applicants state that KeySpan has in place a number of formal project review procedures in order to evaluate various EWG or FUCO investments. Investments are evaluated against a number of investment criteria including (i) economic viability of the project, (ii) political and regulatory risk, and (iii) strategic fit within the KeySpan system.

C. Economic Viability of the Project.

Applicants state that KeySpan's analysis of the economic viability of the project includes an analysis of the overall industry environment in which the project will operate (i.e., progress towards privatization and/or restructuring, depending on where the project is located), the ability of the project to produce electricity at or below long-run marginal costs in the competitive region, and the credit worthiness of potential power purchasers and other project counterparties. Applicants state that the economic viability analysis also examines construction risk, commercial risk and financial risk and appropriate methods by which to mitigate these risks such as through offtake contracts, construction contracts with appropriate levels of milestone dates and liquidated damages provisions applicable to the contract, and non-recourse financing.

D. Risk Mitigation Measures

1. Political and Regulatory Risk.

Applicants state that KeySpan's analysis of political and regulatory risks involves careful review of changing political and regulatory regimes as well as long-term economic stability in the region. Applicants state that this analysis is a critical component of KeySpan's investment review and has always been a threshold level review in the analysis of non-U.S. investments. The analysis also includes review of permitting and environmental risks as well as legal risk associated with the ability to enforce contracts relating to the project and its financing. Applicants state that, with respect to foreign investments, KeySpan's review also includes analysis of the economic stability of the country, the government's commitment to private energy business, the extent to which there is a free market economy and the development of a local banking system, the legal and regulatory framework for private investment in electric or gas facilities, the local business support for long-term investment of private capital, currency conversion and repatriation, and mitigating risk in appropriate cases by partnering with other entities.

2. Operating Risk

Applicants state that KeySpan's due diligence review of operating assumptions relating to any project include an analysis of fuel supply and environmental effects by personnel with experience in the technology being evaluated, supplemented by the use of outside technical consultants. Other operating risks may be mitigated by equipment warranties and by casualty, business interruption, and other forms of insurance. Applicants further state that KeySpan's operating risk currently is mitigated through the use of an experienced operations and maintenance management team.

3. Construction Risk

Applicants state that KeySpan's construction risks are commonly mitigated by a combination of fixed-price contracts, milestones and performance guarantees (e.g., guaranteed efficiencies, capacities and completion dates), backed by appropriate levels of liquidated damages. Applicants state that creditworthiness and track record of the construction contractor is an important consideration in this regard.

4. Commercial Risks

Applicants state that the personnel of KeySpan's applicable Subsidiaries regularly conduct extensive investigations of the markets in which particular projects operate. With respect to an EWG, Applicants state that KeySpan or the applicable Subsidiary seeks to ensure that the EWG will be capable of producing electricity at competitive prices in a non-regulated environment. Appropriate system personnel will also assess the underlying economic parameters in specific markets to assure that there will be sufficient demand for the output of the EWG.

5. Financial Risks

Applicants state that KeySpan or its applicable Subsidiary will seek to mitigate the financial risks associated with any particular project in various ways. Applicants state that KeySpan or the Subsidiary will generally require sufficient quality in project contracts, creditworthy customers and merchant market participation that will allow a project to secure the maximum amount of permanent debt financing for the project that is available at reasonable cost. Applicants state that if non-recourse debt is chosen, the project will be secured solely by its assets, contracts, and revenues, and creditors will have no ability to seek repayment upon default from KeySpan. Applicants assert that this method of financing ensures that KeySpan's exposure to any EWG or FUCO will be limited to the amount of its equity commitment, and that the Utility Subsidiaries will bear no risk of a project's failure or financial distress. In addition to the non-recourse nature of project debt financing, Applicants assert that project debt is carefully structured to meet, or match, the characteristics of the particular project. Applicants commit that KeySpan will consider financing future EWG or FUCO investments with non-recourse debt to the extent practicable.

6. Legal Risks

Applicants state that legal risks will be addressed by active participation in contract development and careful review of any investment by legal counsel. Legal reviews address regulatory and permitting risks, environmental risks, the adequacy and enforceability of guarantees or other contractual undertakings of third parties, the status of title to property, and the obligations inherent in the financing arrangements.

E. Strategic Fit

Applicants state that KeySpan is particularly sensitive to ensuring that its independent energy investments contribute to its overall strategic growth plan building upon KeySpan's strengths and resources to achieve broad corporate objectives within budgeting and expenditure guidelines. Moreover, Applicants state that KeySpan focuses its development efforts to technologies/industries with which it has existing competencies such as electric generation and the transmission and distribution of electricity and gas. Initially, at the conceptual stage in the assessment of a proposed project or acquisition, Applicants state that KeySpan or its applicable Subsidiary, will make a preliminary determination of whether the project is consistent with strategic initiatives and whether the project's risks and rewards ratio will be acceptable. If deemed consistent with these objectives, then KeySpan's or its applicable Subsidiary's market assessment, project development, environmental and engineering personnel, supplemented by outside resources with expertise in areas such as legal finance and accounting ("Development Team"), are responsible for the preparation of a business concept document ("Pro Forma") for the project.

The Pro Forma must address at minimum the description of the business, a preliminary market assessment, a technical analysis, initial finance analysis, critical success factors, risks, estimated development costs, and exit strategies. Upon completion of the Pro Forma, the Development Team, and management review it and make a determination that the project is consistent with strategic objectives, and, given identified risks, has the requisite earnings potential to merit further review through detailed due diligence. Applicants state that the Development Team performs detailed project due diligence and risk assessment, using advisors, engineers, environmental consultants, accountants, tax advisors, attorneys, and investment bankers, as appropriate, to evaluate the project. The Pro Forma is then updated and a business case is developed. This business case, along with the results of the due diligence and risk assessment process performed in connection with the development of the business case, forms the basis upon which KeySpan or the applicable Subsidiary's management approves of the proposed investment in the project.

Applicants state that the business case is a comprehensive identification and analysis of the strategic, market, operational, and financial components of the project. In addition to an assessment of the project, it also identifies an exit strategy and initial project implementation steps. Its scope is driven by size, complexity and risk associated with the project. Upon completion of the business case, a summary of the findings as well as a recommendation on whether, and if so, how to proceed is presented to management.

Applicants state that, upon approval, the investment will be assessed against pre-approved investment criteria to determine the level of additional approvals, if any, that may be required. Depending on the magnitude of the investment in a project, Board of Directors' approval may be necessary. Thus, each potential investment must be reviewed and approved by a number of managers, senior officers and, as appropriate, the Board of Directors within the KeySpan System who focus their review not only on the questions of whether a particular project satisfies KeySpan's investment criteria and is reasonably anticipated to generate earnings commensurate with risk, but also on the question of whether the project is likely to aid in achieving KeySpan's long-term overall strategic objectives.

VII. Intermediate Subsidiaries

Applicants propose that KeySpan create and/or acquire, directly or indirectly, the securities of one or more Intermediate Subsidiaries including corporations, trusts, partnerships, limited liability companies or other entities. Applicants state that Intermediate Subsidiaries will be organized exclusively for the purpose of acquiring and holding the securities of, or financing or facilitating KeySpan's investments in, other direct or indirect nonutility investments. Applicants also request authority for Intermediate Subsidiaries to engage in Development Activities and Administrative Activities.

Applicants state that an Intermediate Subsidiary may be organized, among other things, (i) to facilitate the making of bids or proposals to develop or acquire an interest in any EWG, FUCO, exempt telecommunications company ("ETC"), or other Nonutility Subsidiary which, upon acquisition, would qualify as a Rule 58 Subsidiary; (ii) to facilitate closing on the purchase or financing of an acquired company; (iii) to effect an adjustment in the respective ownership interests in a business held by the KeySpan system and non-affiliated investors; (iv) to facilitate the sale of ownership interests in one or more acquired Rule 58 Subsidiary, ETC, EWG or FUCO; (v) to comply with applicable laws of foreign jurisdictions limiting or otherwise relating to the ownership of domestic companies by foreign nationals; (vi) to limit KeySpan's exposure to U.S. and foreign taxes; (vii) to further insulate KeySpan and the Utility Subsidiaries from operational or other business risks that may be associated with investments in nonutility companies; or (viii) for other lawful business purposes.

Applicants state that investments in Intermediate Subsidiaries may take the form of any combination of the following: (i) purchases of capital shares, partnership interests, member interests in limited liability companies, trust certificates or other forms of voting or non-voting equity interests; (ii) capital contributions; (iii) open account advances without interest; (iv) loans; and (v) Guarantees issued, provided or arranged in respect of, the securities or other obligations of any Intermediate Subsidiaries.

Applicants state that funds for any direct or indirect investment in any Intermediate Subsidiary will be derived from KeySpan's available funds. No additional financing authority is sought under this heading. Applicants request that to the extent that KeySpan provides funds directly or indirectly to an Intermediate Subsidiary which are used for the purpose of making an investment in any EWG, FUCO, or a Rule 58 Subsidiary, and to the extent these funds are not expenditures in Development Activities, the amount of the funds will be included in KeySpan's "aggregate investment" in EWGs, FUCOs and Rule 58 Subsidiaries.¹⁰

VIII. Internal Reorganization of Existing Investments

Applicants request authority for KeySpan to engage in internal corporate reorganizations to better organize Nonutility Subsidiaries and investments. Applicants request authority to sell or to cause any Subsidiary to sell or otherwise transfer (i) Nonutility Subsidiaries businesses, (ii) the securities of Nonutility Subsidiaries engaged in some or all of these businesses or (iii) nonutility investments which do not involve a Nonutility Subsidiary (i.e. less than 10% voting interest) to a different Subsidiary. Applicants also request authority to acquire the assets of nonutility businesses, Nonutility Subsidiaries or other then existing investment interests. Alternatively, transfers of these securities or assets may be effected by share exchanges, share distributions or dividends followed by contribution of these securities or assets to the receiving entity.¹¹

IX. Exemption From Section 13(b)

Applicants request authority for Nonutility Subsidiaries to provide other Nonutility Subsidiaries with (i) operations and management services ("O&M Services"); (ii) administrative services ("Administrative Services"); and (iii) consulting services ("Consulting Services"). These services are referred to collectively as "Affiliate Services."

Applicants state that O&M Services would include, for example, development, engineering, design, construction and construction management, pre-operational start-up, testing and commissioning, long-term operations and maintenance, fuel procurement, management and supervision, technical and training, administrative support, market analysis, consulting, coordination and any other managerial, technical, administrative or consulting required in connection with the business of owning or operating facilities used for the generation, transmission or distribution of electric energy and/or natural gas (including related facilities for the production, conversion, sale or distribution of thermal energy) or coordinating their operations in the power market.

Applicants state that Administrative Services would include, for example, corporate and project development and planning, management, administrative, employment, tax, legal, accounting, engineering, consulting, marketing, utility performance and electric data processing services, and intellectual property development, marketing and other support services.

Applicants state that Consulting Services would include, for example, providing the Nonutility Subsidiary with technical capabilities and expertise primarily in the areas of electric power generation, transmission and distribution and ancillary operations.

Applicants state that Affiliate Services would generally be performed by Nonutility Subsidiaries for associate Nonutility Subsidiaries at cost. However, the Nonutility Subsidiaries request an exemption pursuant to section 13(b) from the at-cost standards of rules 90 and 91, for the Affiliate Services in any case in which the Nonutility Subsidiary purchasing services is:

X. Rule 54 Analysis

Applicants state that KeySpan complies with all sections of rule 53(a) except for clause (1). Applicants state that at September 30, 2003, KeySpan's "aggregate investment," as defined in rule 53(a)(1), in EWGs and FUCOs was approximately $1.072 billion, which is greater than 50% of its consolidated retained earnings, which were $605 million at the same time period. However, Applicants point out that in the 2002 Order, KeySpan's was authorized to invest in EWGs and FUCOs in an aggregate amount of up to $2.2 billion, and that their investments are within this limitation. In addition, 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 with respect to capitalization, there has been no material adverse impact on KeySpan's consolidated capitalization resulting from KeySpan's investments in EWGs and FUCOs.

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 state 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. The public utility subsidiaries currently have financial facilities in place that are adequate to support their operations.

XI. Rule 24 Certificates

Applicants propose that with respect to KeySpan, the reporting systems of the Securities Exchange Act of 1934, as amended (the "1934 Act") and the 1933 Act be integrated with the reporting system under the Act consistent with the authority granted in the Prior Financing Orders. Applicants propose that the portion of the 1933 Act and 1934 Act reports containing or reflecting disclosures of transactions occurring pursuant to the authorizations granted in this proceeding will be incorporated by reference into this proceeding through rule 24 certificates of notification. The rule 24 certificates will also contain all other information required by rule 24, including the certification that each transaction being reported on had been carried out in accordance with the terms and conditions of and for the purposes represented in this Application. The rule 24 certificates will be filed within 60 days after the end of the first three calendar quarters and within 90 days after the end of the fourth calendar quarter, in which transactions occur.

Applicants state that rule 24 certificates will contain the following information:

Applicants estimate that fees and expenses arising out of the activities in this Application are $10,000 Applicants state that no state or federal commission, other than this Commission, has jurisdiction over the proposed transactions.

Due notice of the filing of the Application has been given in the manner prescribed by rule 23 under the Act, and no hearing has been requested of or ordered by the Commission. Based on the facts in the record, the Commission finds that, except as to the matter over which jurisdiction has been reserved, the applicable standards of 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, except as to those matters over which jurisdiction has been reserved, the Application be granted and permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act; and

IT IS FURTHER ORDERED, that jurisdiction be reserved over the issuance by KeySpan and the Utility Subsidiaries of any securities that are not able to meet the Investment Grade Condition.

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

Endnotes:

¹ KeySpan New England has succeeded to Eastern's ownership interests in Boston Gas, Essex Gas, Colonial Gas and ENGI and the nonutility subsidiaries owned by Eastern, (i) is successor of Eastern with respect to its commitments and authorizations set forth by order dated November 8, 2000 (HCAR No. 27272) as corrected by order dated December 1, 2000 (HCAR No. 27286) (together, "2000 Financing Order") and (ii) is an exempt holding company under section 3(a)(1) of the Act as stated in the Merger Order.

³ Applicants request that the authority to issue common stock also includes authorization to contribute common stock to current or future employee benefit plans to satisfy current or future capital funding obligations.

⁴ Applicants state that this common stock may be registered under the Securities Act of 1933, as amended ("1933 Act"), or if the common stock is not registered, then it would be subject to resale restrictions under Rule 144 under the 1933 Act.

⁵ Applicants state, for example, that in May 2002, KeySpan completed an offering of 9.2 million publicly traded equity-linked securities units. The aggregate offering price was $460 million. Each unit consists of a 6-year term, 8.75% senior unsecured note with a principal amount of $50, and a forward stock purchase contract to purchase $460 million of KeySpan common stock (based on a range of prices between $35.30 and $42.36) in May 2005. Applicants state that both the issuance of the note and the forward stock purchase contract portion (including the execution thereof) of the equity-linked units were issued and accounted for under KeySpan's Prior Financing Orders. Applicants state that because of the above, the conversion of the forward stock purchase contracts into KeySpan common stock in May 2005 shall not be counted against the $ 3.0 billion Long-Term Financing Limit.

⁶ Applicants state that KeySpan has been authorized to issue long-term debt under the 2000 Financing Orders and by order dated December 6, 2002 (HCAR. No. 27612) ("2002 Financing Order") (collectively, "Prior Financing Orders").

⁷ The Commission authorized the Utility Money Pool in the 2000 Financing Order.

⁸ Applicants state that the dollar limitations set forth do not include certain presently outstanding push-down debt resulting from the Merger in the following amounts: $700 million to Boston Gas, $100 million to Colonial Gas, $100 million to Essex Gas, and $150 million to ENGI.

⁹ Applicants state that this amount represents existing investment in KeySpan Ravenswood.

¹⁰ Applicants request that if the Intermediate Subsidiary is merely a conduit, the aggregate investment will not "double count" both the conduit investment and the investment in the EWG, FUCO, Rule 58 subsidiary or other approved investment.

¹¹ In the event that proxy solicitations are necessary with respect to the internal corporate reorganizations, Applicants will seek the necessary Commission approvals, if any, through the appropriate filing of a declaration and/or application.

SECURITIES AND EXCHANGE COMMISSION

(Release No. 35-27776; 70-10129)