PIPELINES AND FIELD SERVICES

Our Pipelines and Field Services operations had their best year ever, setting operating income records in both businesses,

adding contract volumes for transporting and processing natural gas and signing agreements that will allow us to build a major pipeline expansion to bring significant volumes of new natural gas to the market.

PIPELINES — BUILDING FOR GROWTH:

Our pipeline operations are driving new growth while maintaining outstanding system performance. In 2005, we continued to improve our system reliability, with runtimes for our compressors up 3 percent and total system throughput up 6 percent. We completed the installation of, and placed into service, several projects on our existing pipelines to improve capacity and increase operating income. More significantly, we are moving forward on two new major pipeline projects:

• CARTHAGE TO PERRYVILLE
  This project is a major pipeline expansion that will connect new domestic natural gas supplies in East Texas to markets in the Midwest and Northeast. When finished, the $400 million pipeline will consist of 172 miles of 42-inch diameter pipe from Carthage, Texas, to our Perryville Hub in Northeast Louisiana. It will connect multiple East Texas receiving points with our Perryville Hub and four new interstate pipeline interconnections, and will create approximately 1 billion cubic feet per day (Bcf/d) of capacity. We expect this pipeline to be in service next year.
• SOUTHEAST SUPPLY HEADER
  In partnership with Duke Energy, we have begun development of a new pipeline project that will link natural gas supply from east Texas and north Louisiana basins to the growing U.S. southeast and northeast markets. The proposed pipeline, estimated to be approximately 270 miles, would provide about 1 Bcf/d of pipeline capacity and connect our Perryville Hub to Duke’s partially owned Gulfstream system in southwest Alabama. This would create a new interconnection with major interstate pipelines serving the Eastern Seaboard and give customers an important alternative to offshore supply, which can be vulnerable to weather-related service disruptions. Based on the positive response we’ve received from potential shippers, we are working to sign definitive long-term agreements. The new line could be in service as early as the third quarter of 2008.

FIELD SERVICES — STRENGTHENING OUR SYSTEM:

Our Field Services operations had an outstanding year, successfully negotiating contracts with customers on eight major projects that we estimate will provide $8.5 million in annual operating income. In addition, average daily volumes were up 10 percent, and we added 383 new wells. The gas gathering system had about 1 Bcf/d throughput, a 25 percent increase in volumes over the past two years, and had a compressor runtime of 98.6 percent. Field Services also invested record capital in 2005 to build incremental gathering, processing and treating facilities that allow gas from increased drilling activity to reach the market. ServiceStar, our remote well monitoring and measurement service, added 40 new customers to our system and 2,536 new monitoring points, a 39 percent increase over 2004.

Both our Field Services and Pipeline Services employees continued to build on their already impressive safety record. Field Services once again improved its performance, while Pipeline Services received an American Gas Association Leader in Accident Prevention Award and is eligible for two Southern Gas Association safety awards – 1 million hours worked without a lost-time accident and two years without a recordable incident.

DYNAMIC MARKETS, NEW OPPORTUNITIES:

Looking ahead, we continue to improve our work processes to offset the increasing costs associated with new pipeline integrity and public awareness programs. Last year, we began implementing changes to the way we plan and schedule work activities. When fully implemented by the second quarter of 2006, these changes should save us more than $1 million annually.

Our challenge is to continue offering customers flexibility, outstanding service and economic value while managing rising operating and maintenance costs due primarily to increased regulatory requirements.

Longer term, we expect market dynamics to continue allowing us to expand. Drilling activity in all basins along our system remains strong, providing Field Services opportunities to build, own and operate new facilities. Our focus for the pipeline business is to become a major participant in moving supply from the Rocky Mountains, Barnett Shale, Bossier Sand and Fayetteville Shale areas to the Midwest, Southeast and Northeast markets. Our Carthage to Perryville and Southeast Supply Header pipelines will link these supplies to these markets while positioning our Perryville Hub as one of the industry’s major supply and market hubs. Additionally, we are exploring the development of a new 800-mile pipeline that would connect the Texas Panhandle to eastern U.S. markets. Called the Mid-Continent Crossing, this line would be capable of delivering 1.2 Bcf/d and would complement our other new pipelines. This project could be in service as early as the fourth quarter of 2008.