NATURAL GAS DISTRIBUTION

Our gas distribution business turned in another solid year, adding 44,000 new customers.

This continued our record of expanding our customer base every year since 1992. While our customer base grew, higher natural gas prices made it difficult for some of our customers to pay their bills, leading to significantly higher bad debt expense. Operating income for the year was $175 million, down slightly from the previous year.

To improve financial performance, we are focused on enhancing our operating model, capturing growth in our service area and obtaining rate relief where necessary.

Consistent performance is THE result of continuous improvement:

In 2005, we made significant strides in improving efficiency, reliability and customer service by:

• Creating a single Customer Service organization through implementation of an automated system that will standardize our call centers and billing processes
• Completing our mobile data roll-out, which uses laptop computers in service trucks for more efficient dispatching and improved response times
• Signing long-term agreements with our affiliate, CenterPoint Energy Gas Transmission (CEGT), for gas transportation and storage in Arkansas and Oklahoma that will help provide price stability for customers
• Receiving federal regulatory approval of several long-term service agreements for pipeline capacity and transportation services with the Northern Natural Gas Company that, beginning in 2007, will save our Minnesota customers millions of dollars in annual gas costs over the next 15 years.

Maintaining the pace through rate relief:

We remain committed to achieving our allowed rate of return and will seek rate relief when the costs of providing service rises beyond our ability to offset them through operational improvements. Last year, we received rate relief in Texas and Minnesota. We also made some improvements in rate design. Our long-term goal for gas rates is to recover our fixed costs through a monthly customer charge and variable costs through volumetric charges. In our view, this will help foster proper energy conservation and efficiency objectives without negatively impacting the company’s ability to recover costs.

Award-winning year:

After replacing about 30,000 service lines in 35 Minnesota communities in only seven months, the North Metro Mayors Association recognized us with its Outstanding Business of the Year Award. The project was the result of a company and state investigation that determined a previous service line owner had improperly installed mechanical couplings on some of the lines.

We ranked second overall in the Midwest – and first in Price and Value and Customer Service – in the J.D. Power and Associates annual survey of natural gas utilities. The U.S. Environmental Protection Agency also recognized us as a Best Workplace for Commuters in Minneapolis.

In addition, we exceeded employee safety goals in our southern gas operations in recordable incidents, preventable vehicle collisions and lost-time incidents. In Minnesota, we reduced the recordable injury rate and lost-time injury rate.