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U.S. Securities and Exchange Commission

SECURITIES AND EXCHANGE COMMISSION

(Release No. 35-27795, 70-9957)

KeySpan Corporation, et al.

Supplemental Order Granting Authority To Expand the Activities of Captive Insurance Company

February 3, 2004

KeySpan Corporation ("KeySpan"), a registered holding company under the Public Utility Holding Company Act of 1935, as amended ("Act"), and its subsidiary, KeySpan Insurance Company ("KIC") (collectively, "Applicants"), both of Brooklyn, New York, have filed with the Securities and Exchange Commission ("Commission"), under sections 9(a), 10, 12(b) and 13(b) of the Act and rules 45 and 54 under the Act, a post-effective amendment ("Application") to a previous application-declaration. The Commission issued a notice of the Application on December 5, 3003 (Holding Co. Act Release No. 27771).

Applicants ask to expand the authority granted to KeySpan by order dated April 24, 2003 (Holding Co. Act Release No. 27669) ("Captive Order"). In the Captive Order, the Commission authorized KeySpan to organize a subsidiary to engage in activities associated with a captive insurance company. In accordance with the Captive Order, KeySpan formed KIC to provide certain insurance services to KeySpan and its subsidiaries ("KeySpan System"). Applicants request authority for KIC to expand the insurance it provides to include property, boiler and machinery "all risk" insurance services for the KeySpan System.

The Captive Order authorized KeySpan to organize a captive insurance company that would reinsure certain commercial insurance bought by the KeySpan System from commercial insurance companies. In particular, KIC is authorized to provide to the KeySpan System automobile liability, workers' compensation and general liability insurance coverage. In addition, KIC is authorized to provide general liability and workers' compensation insurance to its principal contractor under an Owner's Controlled Insurance Program ("OCIP"). The contractor provides scheduled gas main construction and maintenance to the KeySpan System. Except for the general liability and workers' compensation insurance provided to the principal contractor under OCIP, KIC does not intend to extend or provide to any non-affiliated company any insurance services, unless otherwise expressly authorized by the Commission. Currently, KIC assumes the risk of the more predictable loss layer from the commercial insurers for automobile and general liability losses and for workers' compensation. Commercial insurance continues to be purchased for "unpredictable" losses above the predictable loss layers for automobile and general liability and for workers' compensation from various commercial insurance companies. To the extent that KIC procures insurance at a lower cost than could be obtained through traditional insurers, the savings in the premiums flow through ratably to the KeySpan System companies through the operation of the allocation methodology used to establish premiums.

Applicants propose that KIC offer property, boiler and machinery "all risk" insurance services to the KeySpan System. KeySpan currently insures these property-related risks through the traditional, commercial insurance market. It has various deductibles ranging from $100,000 on common structures to $2,500,000 on the KeySpan System's power generation units. It purchases limits up to $2 billion from the commercial insurance market. Due to the state of the commercial insurance market, KeySpan has not been able to obtain coverage below the minimum $100,000 deductible. KeySpan says that this has created a burden for some of the smaller KeySpan System companies that do not want to expose themselves to such a large self-insured retention.

KIC could be utilized, Applicants state, to provide property-related coverage with smaller self-insured retentions to those KeySpan System companies that do not have such a large capacity for risk. KIC will allocate premiums to the KeySpan system companies according to property values associated with those companies. Therefore, the KeySpan System companies with the smallest asset values and the smallest risk under a property program will pay the smallest premium. KeySpan regularly reports the current market value of its property to the commercial insurers it utilizes in its current insurance program, and KIC will use that information to determine the percentage each system company is responsible for and charge each system company that percentage of the whole. KIC will allocate the property value-based premiums at KeySpan System company locations down to a level of a $10,000 deductible. This added service would not increase costs to the KeySpan System because such costs are currently, and would continue to be, paid through operating expenses, Applicants state. There would be no additional staffing requirements for KeySpan System companies. To the extent that KIC can provide insurance at a lower cost than that which could be obtained through traditional insurers, the savings will continue to flow through ratably to the KeySpan System companies through the allocation methodology used to establish premiums.

KeySpan will file a certificate of notification under rule 24 on a semi-annual basis describing the following: 1) a summary for the reporting period of each KeySpan system company's premium payments to KIC under the allocation methodology used to establish premiums organized by line of insurance coverage provided by KIC; 2) for the first three years of KIC's operations, a statement of actual savings achieved by the KeySpan system as a result of KIC's operations during the period; and 3) a copy of KIC's income statement and balance sheet, including any notes.

The proposed transaction is subject to rule 54, which provides that in determining whether to approve an application that does not relate to an "exempt wholesale generator" ("EWG") or "foreign utility company" ("FUCO") as defined by the Act, the Commission shall not consider the effect of the capitalization or earnings of any EWG or FUCO that 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 September 30, 2003, KeySpan's "aggregate investment," as defined in rule 53(a)(1), in EWGs and FUCOs was approximately $1,072,582,000. With respect to rule 53(a)(1), the Commission determined by order dated December 6, 2002 (Holding Co. Act Release No. 27612 ("Rule 53(c) Order")) that KeySpan's investments in EWGs and FUCOs in an aggregate amount of up to $2.2 billion is allowed and would not have the adverse effects set forth in rule 53(c). 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.

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. The authority requested would not, by itself, or even considered in conjunction with the effect of the capitalization and earnings of KeySpan's EWGs and FUCOs, have a material adverse effect on the financial integrity of the KeySpan system or an adverse impact on KeySpan's public-utility subsidiaries, their customers, or the ability of state commissions to protect the public-utility customers. KeySpan's consolidated capitalization ratio and its retained earnings have improved since the date of the Rule 53(c) Order.

KeySpan's investments in EWGs and FUCOs have increased from approximately $896 million as of September 30, 2002, to approximately $1.07 billion as of September 30, 2003. These investments, in the aggregate, have been profitable for all quarterly periods from December 31, 2000, through September 30, 2003. As of September 30, 2002, the most recent period for which financial statement information was evaluated in the Rule 53(c) Order, KeySpan's consolidated capitalization consisted of 33.03% common equity and 66.97% debt (including long and short-term debt and preferred stock). As of September 30, 2002, the most recent period for which financial statement information was evaluated in the rule 53(c) Order, KeySpan's consolidated capitalization consisted of 38.67% equity and 61.33% debt (including long and short-term debt and preferred stock). These ratios comply with the Commission's requirement that KeySpan's common equity will be at least 30% of its capitalization. KeySpan's average consolidated retained earnings increased from approximately $439 million as of September 30, 2002, to approximately $605 million as of September 30, 2003. Therefore, the capitalization and earnings attributable to KeySpan's investments in EWGs and FUCOs since the date of the Rule 53(c) Order have not had an adverse impact on KeySpan's financial integrity.

No other state or federal agency, other than this Commission, has jurisdiction over the authority requested. The fees, commissions and expenses incurred or to be incurred in connection with the Application are estimated not to exceed $10,000.

Due notice of the filing of this Application 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. Based on the facts in the record, the Commission finds that, except as to those matters over which jurisdiction has been reserved, the applicable standards of the Act and rules are satisfied and that no adverse findings are necessary.

IT IS ORDERED, under the applicable provisions of the Act and the rules under the Act, that, except as to those matters over which jurisdiction has been reserved, 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, pursuant to delegated authority.


Margaret H. McFarland
Deputy Secretary


http://www.sec.gov/divisions/investment/opur/filing/35-27795.htm

Modified: 02/10/2004