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U.S. Securities and Exchange Commission

SECURITIES AND EXCHANGE COMMISSION

(Release No. 35-27942; 70-10274)

KeySpan Corporation

Supplemental Order Authorizing Maintenance of Certain Guarantees

January 28, 2005

KeySpan Corporation ("KeySpan"), a combination gas and electric registered public utility holding company, Brooklyn, NY, has filed a post-effective amendment ("Declaration") to a declaration, previously filed with the Securities and Exchange Commission ("Commission") under sections 6(a) and 7 of the Public Utility Holding Company Act of 1935, as amended ("Act") and rule 54 under the Act. The Commission issued a notice of the Declaration on December 16, 2004 (HCAR No. 27926).

KeySpan states that it is a diversified registered public utility holding company. KeySpan directly or indirectly owns seven public utility companies in New York and Massachusetts.1 KeySpan also directly or indirectly owns various nonutility subsidiaries through which KeySpan engages in energy related nonutility activities.

By order dated December 18, 2003 (HCAR No. 27776) ("Financing Order"), the Commission authorized KeySpan and its subsidiaries to engage in a program of external and intrasystem transactions including, among other things, to engage in certain types of credit support arrangements through December 31, 2006 ("Authorization Period"). The Financing Order authorized KeySpan to enter into guarantees ("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).

KeySpan plans to divest its nonutility subsidiaries WDF, Inc. ("WDF"), and its subsidiaries, Binsky & Snyder, LLC ("Binsky") and its subsidiaries and Binsky and Snyder Service, LLC ("Binsky Service" and, collectively "KSI Nonutilities"), which are owned indirectly by KeySpan Services, Inc. ("KSI"). KeySpan states that the divestiture transactions will involve the continued maintenance of certain existing Guarantees by KeySpan in favor of the KSI Nonutilities that were previously issued in accordance with the Financing Order ("KSI Nonutilities Guarantees"). KeySpan expects to sell these KSI Nonutilities to certain nonaffiliated third parties.

In connection with these proposed divestitures, KeySpan states that the terms of the KSI Nonutilities Guarantees would not change in any respect. No new guarantees and indemnities would be issued in connection with any proposed KSI divestiture transaction. KeySpan states that the KSI Nonutilities Guarantees would remain in place only for an interim period until the completion of a project and the expiration of any associated warranty period in accordance with contractual obligations. KeySpan states that the original aggregate value of the issued KSI Nonutilities Guarantees was approximately $405.7 million. KeySpan states that the presently outstanding aggregate exposure of the KSI Nonutilities Guarantees has been substantially reduced and as of December 31, 2004 is approximately $191.1 million.

KeySpan states that each of the KSI Nonutilities Guarantees have varying terms, and in certain cases the term has no date certain but is set to expire upon completion of the associated work project. In any event, KeySpan states that none of the KSI Nonutilities Guarantees, including any associated warranty period, are expected to terminate later than the dates set forth below:

WDF

March 31, 2011

Binsky

June 30, 2007

Binsky Services

February 28, 2007

KeySpan asserts that it is in the best interests of KeySpan and its shareholders to maintain the KSI Nonutilities Guarantees in place after the proposed divestiture of the KSI Subsidiaries. KeySpan states that the KSI Subsidiaries, in the aggregate, have incurred losses before income taxes of approximately $2.7 million for the year ended December 31, 2003. For the nine months ended September 30, 2004, the aggregate losses attributable to the KSI Subsidiaries incurred by KeySpan was approximately $12.7 million. In addition, in connection with the preparation of third quarter financial statements, KeySpan states that it conducted an evaluation of the carrying value of goodwill recorded on its books with respect to the KSI Subsidiaries. KeySpan records goodwill on purchased transactions, representing the excess of acquisition cost over the fair value of net assets acquired. As prescribed in SFAS 142 "Goodwill and Other Intangible Assets", KeySpan is required to compare the fair value of a reporting unit to its carrying amount, including goodwill. KeySpan states that this evaluation is required to be performed at least annually, unless facts and circumstances indicate that the evaluation should be performed at an interim period during the year.

Based upon the results through September 30, 2004 experienced by the KSI Subsidiaries and KeySpan management's opinion that it was likely that the KSI Subsidiaries would be sold in the coming months, KeySpan's management concluded that KeySpan was required under paragraph 28 of SFAS 142, to evaluate the goodwill recorded with respect to the KSI Subsidiaries in connection with the preparation and review of its financial statements for the quarter. KeySpan states that, as a result of this interim evaluation, KeySpan recorded a non-cash goodwill impairment charge related to the KSI Subsidiaries of approximately $66.3 million in September 2004.

KeySpan states that, based on the historical operating performance and KeySpan's operating projections for the KSI Subsidiaries, KeySpan reasonably believes that if it were to retain these businesses, the risk of potential future losses, in the aggregate, could exceed KeySpan's exposure from the maintenance of the KSI Nonutilities Guarantees should it be required to perform under them. In addition, based on this operating performance, KeySpan also states that it believes that it is necessary to keep the KSI Nonutilities Guarantees in place for the KSI Subsidiaries in order to maximize the value received for each company upon divestiture.

KeySpan states that it currently meets all of the conditions of rule 53(a) except for clause (1). At September 30, 2004, KeySpan's "aggregate investment," as defined in rule 53(a)(1), 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, was approximately $ 1,129,251,000. However, KeySpan states that it is authorized under the Financing Order to invest in EWGs and FUCOs up to $3 billion. In addition, KeySpan states that it 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. KeySpan states that none of the circumstances described in rule 53(b) has occurred and that the capitalization and earnings attributable to KeySpan's investments in EWGs and FUCOs has not had an adverse impact on KeySpan's financial integrity. KeySpan states that its EWG and FUCO investments have been profitable, in the aggregate, for all quarterly periods from December 31, 2000 through September 30, 2004.

KeySpan states that the fees, commissions and expenses paid or incurred or to be incurred in connection with this Declaration are estimated at $10,000. Other than Commission approval, KeySpan states that no other federal or state regulatory approvals are required for the KSI divestiture transactions.

Due notice of the filing of this Declaration 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, 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 jurisdiction is released and the Declaration, as amended, be permitted to become effective immediately, subject to the terms and conditions contained in rule 24 under the Act.

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


Margaret H. McFarland
Deputy Secretary


Endnotes


http://www.sec.gov/divisions/investment/opur/filing/35-27942.htm

Modified: 02/18/2005