SECURITIES AND EXCHANGE COMMISSION

(Release No. 35-27937; 70-9699)

KeySpan Corporation, et al.

Supplemental Order Authorizing Tax Allocation Agreement

January 14, 2005

KeySpan Corporation ("KeySpan"), a registered holding company, and KeySpan's directly and indirectly owned public utility subsidiaries: The Brooklyn Union Gas Company and its subsidiaries d/b/a KeySpan Energy Delivery New York; KeySpan Generation LLC and its subsidiaries; Boston Gas Company and its subsidiaries ("Boston Gas") d/b/a KeySpan Energy Delivery New England; KeySpan Gas East Corporation and its subsidiaries d/b/a KeySpan Energy Long Island; Essex Gas Company and its subsidiaries ("Essex Gas") d/b/a KeySpan Energy Delivery New England; Colonial Gas Company ("Colonial Gas") d/b/a KeySpan Energy Delivery New England; and EnergyNorth Natural Gas, Inc. and its subsidiaries ("ENGI") d/b/a KeySpan Energy Delivery New England (the direct and indirect utility subsidiaries, together, "Utility Subsidiaries"); and KeySpan's nonutility subsidiaries ("Nonutility Subsidiaries"): KeySpan Energy Corporation and its subsidiaries ("KEC"); KeySpan Insurance Company; KeySpan Electric Services LLC; KeySpan Engineering & Survey, Inc.; KeySpan Exploration and Production LLC; KeySpan Corporate Services LLC; KeySpan Utility Services LLC; KeySpan New England LLC and its subsidiaries; KSNE LLC and its subsidiaries ("KSNE"); KeySpan-Ravenswood, LLC; KeySpan Services, Inc. and its subsidiaries; KeySpan Energy Trading Services LLC; KEDC Holdings Corp. and its subsidiaries, all located in Brooklyn, New York, except for KSNE, Boston Gas, Colonial Gas, Essex Gas and ENGI, which are located in Waltham, Massachusetts (collectively, "Applicants"), have filed with the Securities and Exchange Commission ("Commission") a post-effective amendment ("Declaration"), under section 12(b) of the Public Utility Holding Company Act of 1935, as amended ("Act") and rules 45 and 54 under the Act, to a previously submitted application-declaration. The Commission issued a notice of that application-declaration on September 21, 2000 (Holding Co. Act Release No. 27234).

The Utility Subsidiaries, KEC and KeySpan New England, LLC (the "Intermediate Holding Companies"), and the Nonutility Subsidiaries are collectively referred to this order as "Subsidiaries."

KeySpan registered as a holding company on November 8, 2000, upon its acquisition of all of the issued and outstanding common stock of Eastern Enterprises ("Eastern") (now known as KeySpan New England, LLC) and its indirect acquisition of EnergyNorth Inc. (collectively, the "Mergers"). The Mergers were approved by an order of the Commission dated November 7, 2000 (KeySpan Corporation, et al., Holding Co. Act Release No. 27271), as corrected by the order issued on December 1, 2000 (KeySpan Corporation, et al., Holding Co. Act Release No. 27287) (collectively, the "Merger Order").

By order dated November 8, 2000 (KeySpan Corporation, et al., Holding Co. Act Release No. 27272) as corrected by an order dated December 1, 2000 (KeySpan Corporation, et al., Holding Co. Act Release No. 27286) (collectively the "Financing Order"), the Commission, among other things, reserved jurisdiction over KeySpan's proposal for implementation of an agreement for the allocation of consolidated taxes among KeySpan and its subsidiaries following the Mergers. In an order issued on December 18, 2003 (KeySpan Corp, et al., Holding Co. Act Release No. 27776), the Commission authorized KeySpan to engage in various financing transactions through December 31, 2006 (the "Present Financing Order").

In the application underlying the Financing Order (the "Financing Application"), KeySpan stated that the proposed tax allocation agreement provides for retention by KeySpan of certain payments for tax losses that have been generated by KeySpan, in those circumstances where losses were incurred in connection with the acquisition debt stemming from the Mergers, rather than the allocation of such losses to Subsidiaries without payment as would otherwise be required by rule 45(c)(5) under the Act. KeySpan has now filed, as an exhibit to this Declaration, a revised tax allocation agreement (the "Tax Allocation Agreement"). The Applicants request release of jurisdiction over implementation of the Tax Allocation Agreement.

KeySpan initially issued approximately $2.2 billion of commercial paper under a commercial paper program in order to finance the Mergers, which was replaced with long-term debt following the closing of the Mergers (the "Acquisition Debt"). The aggregate annual interest expense on the Acquisition Debt is approximately $165 million. Applicants state that because KeySpan and its consolidated subsidiaries file a consolidated income tax return, the interest expense on the Acquisition Debt will offset the group's consolidated taxable income and therefore reduce the overall tax liability of the group. Applying a hypothetical 35% tax rate to the estimated consolidated taxable income of the group, the interest expense on the Acquisition Debt would reduce the group's tax liability by approximately $57 million per year.¹

Applicants state that the Tax Allocation Agreement will have the effect of assigning the tax benefit associated with the interest expense on the Acquisition Debt to the entity that is legally obligated for its payment - KeySpan. At the same time, in accordance with rule 45(c)(2), the portion of the consolidated tax allocated to any of KeySpan's subsidiaries will not exceed the "separate return tax" of such subsidiary (the "separate return limitation"). Thus, the proposed Tax Allocation Agreement will not have the effect of shifting a larger portion of the group's tax liability to any member of the group than such company would otherwise pay on a separate return basis.

Applicants state that unless the relief requested in this Declaration is granted, KeySpan would not be able to retain, or share in, the tax benefit (i.e., the reduction in the group's income tax liability) that is associated with the interest it pays on the Acquisition Debt. Rather, under rule 45(c), the benefit of the interest expense would have to be allocated to other members of the group.

Applicants state that the Acquisition Debt was not incurred to fund investments in KeySpan's Subsidiaries, but instead to acquire the equity of Eastern Enterprises. The Acquisition Debt represents indebtedness of KeySpan. Further, Applicants state that KeySpan cannot, without the approval of the commissions having jurisdiction over rates of the Utility Subsidiaries, recover in rates of the Utility Subsidiaries any costs, including the interest on the Acquisition Debt, associated with the Mergers. Moreover, KeySpan's ability to pay interest on the Acquisition Debt, as well as to pay common dividends, is largely dependent upon its receipt of dividends from subsidiaries. Currently, KeySpan is not projecting any change in its dividend policy and therefore expects its dividend payout rate to continue to improve over the forecast period. The projected dividends will be paid from current and retained earnings of the Subsidiaries, as allowed by rule 46, or as otherwise authorized in the Present Financing Order.

Finally, applicants maintain that because the amount of tax allocated to the Utility Subsidiaries will remain subject to the separate return limitation, the Tax Allocation Agreement will have no impact on the rates or revenue requirements of the Utility Subsidiaries. Applicants assert that the proposed Tax Allocation Agreement is consistent with the policies and purposes of section 12 of the Act.

KeySpan states, for purposes of rule 54, that it is in compliance with all requirements of rule 53(a), except clause (1). In the Present Financing Order, the Commission, among other things, authorized KeySpan to invest in exempt wholesale generators ("EWGs") and foreign utility companies ("FUCOs"), as defined in sections 32 and 33 of the Act, respectively, so that KeySpan's aggregate investment (as defined in rule 53(a)(1)(i)) in EWGs and FUCOs, would not exceed $3 billion ("EWG/FUCO Financing Limit"). As of September 30, 2004, KeySpan's "aggregate investment," as defined in rule 53(a)(1), in EWGs and FUCOs was approximately $1,129,251,000.

Although KeySpan's aggregate investment exceeds the 50% "safe harbor" limitation contained in rule 53, KeySpan's aggregate investment is below the EWG/FUCO Financing Limit authorized in the Financing Order. In addition, KeySpan states that it has complied and will comply with the record-keeping requirements of rule 53(a)(2), the employee limitation under rule 53(a)(3) and the requirements of rule 53(a)(4) concerning the submission of copies of certain filings under the Act to retail regulatory commissions. Finally, none of the circumstances described in rule 53(b) has occurred or is continuing.

As of September 30, 2003, the most recent period for which the financial statement information was evaluated in the Present Financing Order, KeySpan's consolidated capitalization consisted of 38.67% equity and 61.33% debt. As of September 30, 2004, KeySpan's consolidated capitalization consisted of 42.36% equity and 57.64% debt. Therefore, KeySpan maintains that there has been no material adverse impact on KeySpan's consolidated capitalization resulting from its investments in EWGs and FUCOs since the issuance of the Financing Order.

Fees and expenses to be incurred in connection with the proposed transaction are estimated to be $10,000. Applicants maintain that no other state or federal commission, other than this Commission, has jurisdiction over the proposed transaction.

Due notice of the filing of the underlying application-declaration 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 the applicable standards of the Act are satisfied and that no adverse findings are necessary.

IT IS ORDERED, that jurisdiction is released over implementation of the Tax Allocation Agreement.

IT IS FURTHER ORDERED, under the applicable provisions of the Act and rules under the Act, that the Declaration be permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act; provided that KeySpan must file annually under rule 24 on or before November 30 of each calendar year: (1) a detailed analysis provided in tabular form that describes the Acquisition Indebtedness by issue, amount and maturity date (for example, as applicable, the table would show the issuer, interest rate, type/name of security, CUSIP number, issue date, maturity, and principal amount of each component of the Acquisition Indebtedness) and describes any repayment or refinancing of Acquisition Indebtedness; and (2) detailed tax work sheets showing the allocation of the consolidated tax group's Federal income tax liability among the KeySpan consolidated group.

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

Endnotes

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¹ The group is comprised of KeySpan and all of its subsidiaries that, from time to time, may be included in any consolidated, combined or unitary federal income tax return filed by KeySpan in accordance with the applicable provisions of the Internal Revenue Code of 1986, as amended.